Features Procedures Safety & Training
You Need Spares

Everyone agrees that to maintain aircraft you need spare parts to
minimize down time. Everyone also agrees that if you are out in the
middle of nowhere, you need more spares. In other words, all operators
are agreed they need an inventory of spares. Unfortunately, no one
agrees about the optimum size for such an inventory. Consider this data
from the 2005 edition of HAI’s Annual Survey of Operating Performance.
This survey asked operators to provide an estimate of their spare parts
inventory. These are the results for operators with four to seven
helicopters:

• Average Inventory……$123,000 per helicopter

• Least Inventory ……….$3,500 per helicopter

• Most inventory ……….$2,000,000 per helicopter

One
reaction is to say "if each of these operators is keeping their
customers happy, who cares?" From an operations point of view this is
true. But from a maintenance management and financial point of view,
there is a huge difference – a difference of about $2.75 million per
year. This difference, which is incurred every year, is a direct
consequence of the cost of owning and managing the inventory. These
costs, which are usually expressed as a percentage of the value of the
spares inventory are shown in the accompanying table and discussed
below:

• Storage, distribution, security, record keeping and handling 4-9%/Year

• Insurance and taxes 1-4%/Year

Parts
require secure storage with climate control. They need to be insured
and, in many locations, there is a property tax levied on them as well.
Someone needs to maintain the records, make sure they get to where they
are needed and ensure that parts that can be overhauled or repaired are
sent out and returned to inventory. As an example of how not to do
this, consider the implications when the new maintenance manager at a
good-sized operator found several run-out RR 250-series engines in a
storage closet underneath stairs leading to a loft! Research shows that
this part of the cost of carrying inventory ranges from 5- 13% of the
value of the inventory per year.

• Obsolescence, recertification . . . . . . . . .2-5%/Year
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• Damage, spoilage and pilferage . . . . . . .1-4%/Year

Parts
that sit on the shelf can run out of calendar time and need to be
recertified, or they need to be upgraded to a later ‘dash’ number
through the application of a service bulletin. Sometimes the parts get
damaged by rust or an accident. And sometimes, parts develop “legs”. We
don’t like to think about these things, but they do happen,
notwithstanding our best efforts. One graphic example of what happens
to spares that sit on the shelf happened to one of our customers.
Recently, as part of an inspection, they needed new squibs for the
engine fire extinguishers bottles. The inventory printout showed they
had four on the shelf. But when they went to get them they found that
they were all out of calendar life! Total cost – four squibs, which
were no longer serviceable at $500 each, two new ones (at $500 each)
plus one extra down day! Another example is an operator that recently
got rid of the last of a fleet of aircraft they had been using since
1973. This year, they sold the spares inventory they had been using for
that aircraft and realized about $2.5 million from the sale. This
sounds good, until you realize those spares were on the books for $13
million. In short, this cost element, which runs from 3-9% of the value
of the inventory per year, is very real, even if you take good care of
the inventory.

• Cost of money . . . . . . .6-12%/Year

Each
time spare parts are bought, they cost money. If the spare part is put
on the aircraft, or resold to a customer, it helps the organization
earn revenues and profits. Thus, the cost of the spare part is easy to
justify. On the other hand, if the spare is put on the shelf, it earns
no revenues or profits and, until the part is put on an aircraft or
resold, ties up the money used to acquire it. This money comes either
from earnings or it is borrowed. In either case there is a cost
associated with it. If the money is borrowed the cost could be as low
as 6% or, if it comes out of earnings, it could be as high as 10-15%
per year, or an average of perhaps 12%. And if you doubt the impact of
this cost, recall the example of the organization that sold the $13
million of surplus spares from their inventory for $2.5 million.
Another way to look at this is that they lost over $10 million – money
that could have been used to buy more aircraft to generate profits.

Adding
all these expenses together, shows that the annual cost of carrying
inventory is 16-34% of the value of the inventory per year. For most
organizations, the average is about 25% per year. In other words, for
every $100,000 of spares inventory on the shelf, the annual costs are
about $25,000. What are the implications of this cost for operators?
Applying the 25% cost factor to the average inventory carried by the
average midsize operator ($123,000 per aircraft) yields a cost of $62
per flight hour at an average annual utilization of 500 hours. This
‘hidden’ cost probably equals the profit per flight hour for many
operators. In other words, careful management of your inventory can pay
big dividends. The accompanying table shows the impact on cost per hour
for inventory of changing utilization up or down by 100 hours per year,
as well as changing the inventory level by plus or minus 25%.

This
shows the cost of carrying the inventory ranges from a high of $96 per
flight hour (high inventory, low utilization) to a low of $38 per hour
(low inventory and high utilization). Put another way, eliminating a
substantial part of the inventory would allow these operators to
increase their profits significantly. What are some of the ways to
decrease inventory, or prevent it from building up in the first place?
First, start tracking actual usage very carefully. You will find that
about 10-20% of the line items in your inventory account for 80-90% of
the activity. Those are the ones you want for your inventory. The
others you probably don’t. Second, find out who has the parts, what are
their lead times and how fast can they get a part to you if you really
need it. Remember, overnight counter-to-counter and exchange charges
are probably a heck of a lot less than that 25% annual carrying cost –
particularly for a part that is not used frequently. Third, analyze
various maintenance tasks to determine how long you have from the time
the need is identified till the time the part is actually required for
installation. This will tell you how long you have to get the part from
whoever has it, or whether you really need it in inventory. And lastly,
strongly resist the urge to order two when only one is needed to fix
the problem.

Of course if you are out in the middle of nowhere
where parts are very hard to get (and in some remote locations in
Africa and Asia I have been told an AOG order can take over 30 days to
fill!) a large inventory is a ‘must have’ to keep flying. Just make
sure the cost of carrying that inventory is covered somewhere in the
price to the customer.

Put another way, in the words of a friend
of mine, a very successful operator, “if we don’t use a part within 120
days, I want to know why we have it in our inventory.” Wise words that
will help you avoid a major cash and profit drain.