AchievingSupplyAvailability intheFaceofHighlyUncertainDemand

ACaseStudyofSparePartsforMilitaryAviation

WilliamKillingsworth ExecutiveDirector,MITForumforSupplyChainInnovation 6November2008

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Itstoughtomakepredictions, especiallyaboutthefuture.

YogiBerra
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ThereAreSeriousChallenges inDemandForecasting forMilitaryAviationSpareParts

VeryLongProductionLeadTimesand AssociatedForecastHorizons UncertainOperatingEnvironments UncertainOperatingLevels UncertainImpactsofPoliticalProcessand PublicOpinion AdequacyofFundingforPurchases

ACaseStudy

ATypicalChallenge inProvidingSpareParts
AHelicopterBladeCostsRoughly$175,000; RecentDemandHasBeenRunningatRoughly22/Month; ProductionLeadTimeisRoughlyTwoYears; HowManyNeedtobeOrderedNowtoMeetLikelyDemand inMayof2010?(DontForgettoFactorintheForecastthe ElectionResultsofNovember2008!) IsThereAnythingThatCanBeDonetoDevelopAdaptability andProvideRiskMitigation?Whatmighthavebeendone in2000? 5

StepsintheAnalysis
IdentifyCurrentRoleofDemandForecastin SupplyPlanning;AreThereProblemsinthe Process? UnderstandStructureandDetailsofthe SupplyChain; DevelopStrategyforRiskMitigationand MinimizingImpactsofForecastError; AssessImpacts,CostsandBenefits
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TheRoleofForecastDemandintheSupplyProcess forAviationSpares
Assets Applicable to Repair Review

Repair Action Point

Repair Actions

Forecast Demands Historical Demands

+

Demands

Total Available Assets

Procurement Reorder Point

Procurement Buys

Total Net Assets

DataElementsUsedintheSupplyProcess
Assets Applicable to Repair Review Repair Action Point
Below Depot Requirements War Reserves Repair Lead Time Quantity Repair Safety Level Quantity One Month of Gross Demands Serviceable Stock on Hand Dues In from Repair Action Dues In from Procurement (RLT+1 Months) - Dues Out

Repair Actions

Forecast Demands

Historical Demands

Demands

Total Available Assets

On Hand Dues in Dues out - Serviceable Inv - Recoverable Unserv Inventory

Procurement Reorder Point

Below Depot Requirements War Reserves Safety Level Requirements ALT Requirements PLT Requirements Repair Cycle Requirement Procurement Cycle Requirements

Procurement Buys

Total Net Assets

Serviceable Stock on Hand Dues In From Repair Dues In From Procurement Recoverable Unserviceable Stock on Hand - Dues Out

Observations HowDoYouSpellTrouble?
Theorderingprocessisdrivenbyforecastdemand, typicallycalculatedasarollingtwentyfourmonth average; Recommendedbuysandoverhauleffortsareeach calculatedasthedifferenceoftwolargenumbers; Theorderingprocessisextremelysensitiveto forecasterrorandcommondataerrorssuchasthe productionleadtime; Shortagesandbackorders,andinsomecases, excessinventories,arenotuncommon.
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StructureofSupplyChain forAviationSpareParts
PROGRAM DEMANDS Component One Supply Chain Component 1 Tier 3 Tier 2 Tier 1 Orders Component Two Supply Chain Component 2 Tier 3 Tier 2 Tier 1 Orders Component Three Supply Chain Component 3 Tier 3 Tier 2 Tier 1 Orders Component Four Supply Chain Component 4 Tier 3 Tier 2 Tier 1 Orders Component Five Supply Chain Component 5 Tier 3 Tier 2 Tier 1 Orders Component Six Supply Chain Component 6 Tier 3 Tier 2 Tier 1 Orders Component Seven Supply Chain Component 7 Tier 3 Tier 2 Tier 1 Orders Component Eight Supply Chain Component 8 Tier 3 Tier 2 Tier 1 Orders Wholesale Maintenance Supply Programs Orders for Components C O M P O N E N T P A R T S Orders for Components Orders O F Components New Spares A L L O C A T I O N DUE IN SUPPLY CHAIN CONTROL CENTER ON HAND RECURRING DEMANDS CONUS Aircraft A L L O C A T I O N O F F I N A L P A R T S Inventory Inventory

Orders

SWA Inventory Aircraft

Europe Aircraft

Components Commercial Overhaul Orders for Components Orders

K, J, & H Inventory Aircraft

Components Depot Overhaul

Return to Overhaul

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Supply Chain Map for Blade Assembly (1 of 2)

Anodize

7(M) 490 (M) 100(M) 165(M) LowerTip 93(M) 7(A)

NoseCap

56(PA) Prime 180(M) Final Assembly 56(PA) TubeAssembly

56(PA) 56(PA)

Weights 87(M) 100(M)

HeatTreat& Mag Part

14(M) 200(M)
Notes: (A) Administrative Lead Times provided by supplier (calendar days) (M) Manufacturing Lead Times provided by supplier (calendar days) (PA) Prime Administrative Lead Times including dock to stock time (calendar days)

130(M) 10(A)

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Supply Chain Map for Blade Assembly (2 of 2)

14 (M) 14(M) 98(M) 7(A) 107(M) 5(A) Bracket 56(PA) 42(M) TieDown
Processing

81(M) 7(A)

Endcap 56(PA)

56(PA) 28(M) 56(PA) Strip

Prime 180(M) Final Assembly

28(M)

112(M) 7(A)

Notes: (A) Administrative Lead Times provided by supplier (calendar days) (M) Manufacturing Lead Times provided by supplier (calendar days) (PA) Prime Administrative Lead Times including dock to stock time (calendar days)

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LogicTools InventoryAnalyst
CreatingAPushPullBoundary

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KeyAssumptions
Thereareninecriticalitemsinthebladesupplychain(NoseCap, TwoTubeAssemblies,TipLower,EndCap,Strip,TieDown, Weight,Bracket) AllotheritemsarecategorizedasRemainingItems Thecostofthebladeis$175,790
TheOEMpays50%ofthatcostforthepartsneededtoassemblea blade,brokendownasfollows:
TheNoseCapandEndCapeachcomprise15%oftheOEMss costforthe entireblade ThetwoTubeAssembliesandtheTipLowereachcomprise10%oftheOEMs costfortheentireblade TheStrip,TieDown,Weight,andBracketeachcomprise5%oftheOEMs costfortheentireblade Theremaining20%isthecostoftheremainingitems

Firsttiersupplierspay50%oftheOEMscostforthepartsneededto assembletheirproducts
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StructureofIAModel
CommittedServiceTime

OEM New Spare

Govt

OEM Overhaul

CommittedServiceTime:750days
NoseCap: 0 16.2 0.127 0.127

Weights:

1.27

TubeAssy:

0.254

0.127

0.127

CommittedServiceTime:240days
NoseCap: 0 53.7 0.127 0.127

Weights:

197

142

TubeAssy:

28.2

20.7

0.127

CommittedServiceTime:30days
NoseCap: 0 53.7 0.127 23.1

Weights:

197

214

TubeAssy:

28.2

0.127

25.6

MovetoNewPerformanceCurve ThroughOptimization
Readiness or Supply Availability
OptimizationApproach: MovetoaNewCurve

CurrentApproach: Increase$toIncreaseReadiness

$Investment
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WorkingCapitalVs.CST
Demand Forecast Error = 6
Working Capital (Million) $50 $40 $30 $20 $10 $0 0 200 400 600 800 1000 1200 Maximum CST (Days)
Nostocking Stocking Stocking,OEMPLT=120days

ReductioninWorkingCapitalVs.CST NonStockingVs.IAOptimization
Demand Forecast Error = 6
$10.00 Change (Million) $8.00 $6.00 $4.00 $2.00 $0.00 ($2.00) 0 200 400 600 800 1000 1200

Maximum CST (Days)

NoStocking Stocking

Demand Forecast Error = 6

$20.00 Change (Million) $15.00 $10.00 $5.00 $0.00 ($5.00) 0 200 400 600 800 1000 1200

Maximum CST (Days)

NoChangeinPLT(180days)

PLTReducedto120days

InventoryAnalystConclusions
Increasingsafetystocklevelsinthe manufacturingsupplychaincanbothreduce leadtimesandreducetheamountofworking capitalinvestedtoachievedesiredservicetimes; Increasingsafetystocklevelsevenfortheone componentwiththegreatestleadtime producesnoteworthyresults; Increasingsafetystocklevelsfurthermore reducestheriskofshortagesandlongerlead timesintheeventofanunexpectedincreasein demand,aproblemthathasexistedforaviation spares.
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StrategyEvaluation UsingDynamicModeling

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StructureofSupplyChain forAviationSpareParts
PROGRAM DEMANDS Component One Supply Chain Component 1 Tier 3 Tier 2 Tier 1 Orders Component Two Supply Chain Component 2 Tier 3 Tier 2 Tier 1 Orders Component Three Supply Chain Component 3 Tier 3 Tier 2 Tier 1 Orders Component Four Supply Chain Component 4 Tier 3 Tier 2 Tier 1 Orders Component Five Supply Chain Component 5 Tier 3 Tier 2 Tier 1 Orders Component Six Supply Chain Component 6 Tier 3 Tier 2 Tier 1 Orders Component Seven Supply Chain Component 7 Tier 3 Tier 2 Tier 1 Orders Component Eight Supply Chain Component 8 Tier 3 Tier 2 Tier 1 Orders Wholesale Maintenance Supply Programs Orders for Components C O M P O N E N T P A R T S Orders for Components Orders O F Components New Spares A L L O C A T I O N DUE IN SUPPLY CHAIN CONTROL CENTER ON HAND RECURRING DEMANDS CONUS Aircraft A L L O C A T I O N O F F I N A L P A R T S Inventory Inventory

Orders

SWA Inventory Aircraft

Europe Aircraft

Components Commercial Overhaul Orders for Components Orders

K, J, & H Inventory Aircraft

Components Depot Overhaul

Return to Overhaul

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SharpIncreaseinDemand2003

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BaseCase:BladeInventories

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AlternativeCaseA: InventoriesWithStockingPolicy

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AlternativeCaseB:InventoriesWith StockingPolicy&OEMPLTReduction

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Summary&Conclusions
ForecastsAreAlwaysWrong; TheLongertheForecastHorizon,theWorse theForecast; HoldingInventoryofFinalGoodsisaVery ExpensiveWayofDealingwithUncertainty; PushPullBoundariesEnhanceAbilitiesto beAdaptiveandResponsiveandEfficiently MitigateRisksofForecastErrors
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QuestionsorComments?
BillKillingsworth billk@mit.edu

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