Dr.

Chapter Page

1. Section 1 3

a. Current Situation 3

b. Strategy Map 9

c. Work Breakdown Structure 10

d. Productivity 11

2. Section 2 14

a. Current SIPOC 14

b. Improvements that Could Be Made 14

c. House of Quality/Needs Analysis/FMEA 29

3. Section 3 31

a. Changes that Will Be Made 31

b. Improved SIPOC 32

4. Section 4 33

a. Change Controls 33

b. Organizational Impact 35

c. Improvement Tracking 36

References 38

Section 1

Current Situation

UTC Aerospace Systems is the largest aerospace systems provider in the world. It was created through the merger of Hamilton Sundstrand and Goodrich in 2012 (UTC Aerospace Systems, 2015a). The company consists of eight strategic business units, and for the purpose of this case study, we will be focusing on the Aero structures business unit. Within the Aero structures business unit, we will be focusing on commercial Aftermarket.

Aero structures specialize in the “design, manufacture, integration and support of [aircraft engine] nacelles” (UTC Aerospace Systems, 2015b). This includes thrust reversers and pylons for both large and regional aircraft. Aero structures Aftermarket’s customers include airline operators; maintenance, repair, and overhaul (MRO) operators, and third-party brokers.

Aero structures were part of the legacy Goodrich business. United Technologies (UTC) acquired Goodrich in 2012 and merged it with Hamilton Sundstrand (UTC Aerospace Systems, 2015a). The UTC acquisition has brought major changes to Aero structures in terms of business goals and expectations. Goodrich focused heavily on margins, EBIT, and customer service. Although UTC cares about those three objectives, they also place heavy emphasis on cash flow and inventory turns. Inventory turns has been a particular area of opportunity for the entire Aero structures business unit, but especially for commercial Aftermarket. Roughly half of commercial Aftermarket’s sales come from out of production programs with traditionally slow moving inventory. Historical inventory performance for out of production programs does not align well with UTC’s inventory turns goals, and this has become a major challenge for Aftermarket’s leadership team (Aftermarket – Aero structures, 2015).

Aero structures’ commercial Aftermarket is headquartered in Chula Vista, CA. Two major spares warehouses are operated out of Chula Vista, CA and Toulouse, France (Aero structures Aftermarket, 2015a). The company also operates nine maintenances, repair, and overhaul (MRO) facilities in Chula Vista, CA; Foley, AL; Atibaia, Brazil; Toulouse, France; Prestwick, Scotland; Istanbul, Turkey; Dubai, UAE; Singapore; and Tianjin, China (Aero structures Aftermarket, 2015a). The nine MROs are some of commercial spares’ largest customers.

Figure 1. Aero structures Aftermarket Global Footprint

(Aero structures Aftermarket, 2015a)

Aero structures Aftermarket supports a variety of both in-production and out-of-production programs. In-production programs receive spare parts by having the production line support slightly more production on a part level basis than is needed to complete the bill of material for the scheduled number of production units. Out-of-production programs have significantly slower moving inventory and longer lead times due to these parts being made on an as-needed basis rather than in addition to the production line (Aftermarket – Aero structures, 2015).

Figure 2. Global Capabilities

(Aero structures Aftermarket, 2015a)

UTC engages in continuous inventory monitoring at each spares service center and aims to satisfy daily customer (UTAS, 2014). UTC has to look across multiple functional areas to achieve its inventory reduction goals. Shipping, distribution, maintenance services, and inventory services are some of the areas the company has evaluated in its efforts to increase supply chain efficiency. UTC has established standardized shipping timelines to get parts from inventory to the customer. Shipping timelines are based of availability, processing requirements, physical pull requirements, and item transportation. UTC has applied shipping timelines to prioritize and meet customer requirements:

Table 1. Shipping Particulars

(UTAS, 2014)

In addition to the aforementioned timelines, to limit unnecessary movement and reduce wasted time/warehouse space, UTC announced its intent to establish several regional material distribution sites (UTC Aerospace Systems, 2015c). Jim Patrick, the vice-president of Commercial Aviation Customer Service noted that processing materials through regional distribution centers would enhance customer service by allowing airline and MRO sites to maintain lower inventory costs (UTC Aerospace Systems, 2015c). Locations closer to the customer better support responsiveness and can be mutually beneficial as quick movement reduces the amount of overall inventory held at UTC spare parts facilities while the customer gets its parts with lower lead time. The company utilizes production requirements and historical usage rates to take action on inventory whose resale/replacement value is less than the cost of maintaining them in inventory (UTCAR, 2014). UTAS competitors vary in size and capability, but its top competitors are Honeywell and Parker Hannifin (Aero web, 2015). Both competitors have international distribution centers; however, UTC’s distribution center initiative will eclipse Honeywell and Parker Hannifin distribution operations in capability, quantity, and proximity to operating locations.

UTC’s airline customers are also reducing their overall stock through its Comprehensive Accessory Repair Exchange (CARE) program which offers total repair and inventory support services (UTC Aerospace Systems, 2015d). Overall stock reduction is achieved through the reutilization/repair of parts, extending the life cycle of the part and reducing the requirement to manufacture/store new parts. Also, taking on inventory management gives UTC control of the entire parts movement process through actually equipping the aircraft with the requisite part.

When a part clears the UTC Part Production Approval Process, it has to meet support requirements commensurate with the servicing term. This means, there must be a way to partner with UTC’s IT platforms to validate and track part origin. If the UTC manufacturing segment cannot comply, an alternate supplier will be selected. For those that comply, manufacturing is based on production requirements provided by UTC. Incorporating the expected functionality/capabilities of the distribution centers that are underway, UTC will follow a standardized procurement, inventory, customer process (UTC Aerospace Systems, 2011). Internally, UTC identifies demand requirements in aggregate, then to each distribution center, and then down to the customer. UTC first identifies and validates the need for a particular part and procures it from the manufacturer. Distribution centers are geographically collocated with the warehousing function. Location, mode of transportation, and timeline are considered when sending the part to the appropriate distribution center. If the part is not immediately required by the customer, it is put into stock and the total time in storage is recorded and utilized with other warehousing metrics to continuously improve demand forecasting when UTC does another issue to its distribution centers in aggregate (UTC Aerospace Systems, 2011). If the part is immediately required, it bypasses stock and goes to the customer. If UTC anticipates not being able to satisfy customer demand from stock or the part will not flow from UTC initial organic manufacturing segment in time, it will utilize other procurement options. UTC has a history of engaging in joint ventures to satisfy manufacturing demand. It has partnered with Pratt & Whitney, MTU Aero Engines, and Japanese Aero Engines in the International Aero Engines collaboration to support V2500 engines for the Airbus A320 aircraft family (Aeroweb, 2015). Supply and demand data are used for forecasting analysis with partnerships as well. Through organic or joint effort, UTC finally ships the end-item to the customer.

Figure 3. Manufacturer, inventory/inventory improvement, customer delivery process.

(UTC Aerospace Systems, 2011)

Strategy Map

The strategy map is a visualization process diagram designed to communicate the objectives of an organization’s strategy in such a way that company stakeholders can align, understand and help accomplishing the objectives. The Aftermarket business strategically created the strategy map as a road map or a guideline towards accomplishing the business objectives. The primary goal is to grow shareholder return on investment. The primary means of doing this are by growing EBIT and improving cash flow. Aero structures Aftermarket strives to be the customer’s first choice. They aim to do this by investing in their people, their processes, and their products.

Figure 4. Strategy Map

Work Breakdown Structure

Customer Account Executives (Customer Service) handle any customer orders and quotes that the customer doesn't enter on our customer portal.  They also handle any questions or changes customers need made to the order or that our distribution center needs changed (Aerostructures Aftermarket, 2014).

The Inventory Planning Team creates all of the forecasts and planning settings for our ERP system, which is SAP.  They look at historical consumption as well as any insights from our business development and technical teams.  What they enter into SAP drives requisitions for Procurement (Aerostructures Aftermarket, 2014).

Procurement takes the requisitions in SAP, sources them, issues purchase orders, and tracks the parts until the suppliers deliver.  They also expedite and slide orders to account for deviations from the original inventory plan.  Procurement also quotes suppliers for customer quotes when the Pricing team does not have enough historical data to price on their own.  Procurement handles any issues after a purchase like quality notifications (discrepant parts), bill questions (invoicing issues), and contract issues (Aerostructures Aftermarket, 2014).

The Pricing team prices all of our parts and customer quotes.  They use historical cost data from Procurement and a complexity model to determine pricing.  Parts that need to be priced every year tend to follow a program escalation for subsequent years. The team also provides analytical work to help our Business Development Team pitch deals to customers (Aerostructures Aftermarket, 2014).

The Business Development Directors are our sales team.  They work to bring new business primarily by working long-term contracts with our customers and negotiating major unit sales (Aerostructures Aftermarket, 2014).

The Majors & AMP group handles our new and ratable major’s units.  Most engine nacelles can be divided into 6 or 7 major sections, so this is what is meant by "a major".  This is in contrast to the Customer Account Executives, Inventory Planners, Procurement, and Pricing, all of whom focus on piece parts.  Our Majors Administrator authorizes the purchase of major units from the production line, which includes budgeting and inventory planning.  AMP stands for Asset Management Program, which is a pool of used ratable major units which airlines can lease when they have emergency situations. Customers can also plan to lease a unit while their units are being repaired (Aerostructures Aftermarket, 2014).

The Fleet Hours Agreement (FHA) team handles our FHA agreements.  One of the long-term agreements the Business Development Directors negotiate with customers are FHA agreements.  This is when an airline pays a certain hourly rate for every hour each airplane covered by the agreement flies.  In exchange for this, they get spare piece parts for "free" and we have contractual obligations as to how quickly we have to send them parts.  These were previously discussed as CARE agreements because that is what UTC Aerospace Systems as a whole call them. CARE/FHA contracts can also cover repair work (Aero structures Aftermarket, 2014).

The Contracts & Warrant group reviews all proposed customer contracts to ensure our business is protected from a legal standpoint.  They also review and process any warranty claims from customers (Aero structures Aftermarket, 2014).

Productivity

Productivity is a common measure of how well an entity is utilizing its resources and the most basic of formula is to divide outputs by inputs (Jacobs & Chase, 2014). The purpose of our project being to identify new inventory reduction strategies for commercial Aftermarket, the productivity measures that will be used should be inventory measures. Inventory productivity can be defined as the amount of sales and gross profit dollars an inventory investment generates over a given period of time, usually a year. The main productivity measures that will be used are the most basic measures of inventory productivity and these are inventory turnover and gross margin return on investment (GMROI).

According to the Council of Supply Chain Management (CSCM), the inventory turnover metric measures how many times a company’s inventory has been sold (turned over) during a period of time, usually twelve months (Gilmore, 2009). It will be obtained by dividing the cost of goods sold by the average inventory value. Both these figures would be obtained from the ERP system.

This metric is good for this project because it gives a lot more insight on the effect of inventory holdings than only sales volume or inventory levels as it relates sales to inventory investment. A sales volume of $1,000,000 a year on an average inventory of $500,000 for instance is one thing, but on an average inventory of $200,000 is quite another. Though the sales volume may be the same, in the first case inventory is turned over twice while it is turned over five times in the second (HURLBUT, 2006).

Another effective productivity measure that will be used in this project is gross margin return on investment (GMROI). It represents the amount of gross profit earned for every dollar of the average inventory investment and is calculated by dividing gross profit dollars by the average inventory investment. Gross margin return on investment indicates the amount of gross margin dollars generated by inventory investment to pay for other business expenses, such as payroll, utilities, rents, etc.

Another metric which will be used to measure productivity for this study is Days Inventory Outstanding (DIO). It will be calculated by taking Aerostructures inventory levels for a given period, dividing by total revenue, and then multiplying by the number of days in the period. This measures how many days of sales the company holds in inventory on average (Gilmore, 2009).

The customer service level will also be used as a measure of productivity. This will measure how often Aerostructures has nacelles when customers want them. It is obtained by dividing the number of nacelles shipped by the promised date by the total number of nacelles ordered. It is a very important measurement because if the company does not have what its customers want, when they want it, they will probably look for it elsewhere (Schreibfeder, 2013).

Productivity measures are used to make sure that the firm makes the best use of its resources but they are relative measures and as such they have to be compared to something else in order to make them meaningful. To this effect, the productivity measures sighted above will be compared by measuring them over time. We would compare the values to those of other periods.

Section 2

SIPOC

Based on the work breakdown of the organization, the current state SIPOC would be as follows:

Figure 5. Current SIPOC

Improvements that Could Be Made

Regional distribution sites. One of UTC’s goals is to enhance service and support for key programs like the Boeing 787, Airbus A350, and A320NEO. The regional distribution centers will help achieve that goal for UTC’s customers in Europe, Asia, the Americas, and the Middle East with the intent to supplement inventories of fully provisioned fleets with an end-state of lowering inventory costs at MRO sites (UTC Aerospace Systems, 2015c). The Netherlands is the first operational site in Europe. UTC is not openly discussing the specifics of other planned distribution center locations at this time, so the Netherlands site will be used as a benchmark for location and functionality.

The Netherlands is a strategic location because it is a solid technology and manufacturing hub hosting companies such as Bombardier, GE Aviation, Mitsubishi Aircraft, and CAE (NAG, 2015). The location has high-quality infrastructure, which allows for smooth and responsive multi-modal material movement (David, 2013). Specifically, material can reach Europe’s major markets within 24 hours. The infrastructure that surrounds the Maastricht Airport facilitates high-volume MRO activity (NAG, 2015) and is seen as a multi-modal gateway to Europe.

Inventory reduction strategies. The cornerstone of any inventory reduction strategy is minimizing the mismatch between supply and demand. The Netherlands distribution center goal is to help reduce inventory at MRO locations throughout Europe using a multifaceted approach: managing cycle inventory, aggregation, and basic cross-docking.

With a well-managed cycle inventory, UTC can cross-dock much of its predictable demand. Shipping from manufacturer with a brief stop at the Netherlands distribution center to transfer aggregated products to their final destination will increase efficiency by reducing the physical inventory stored in the Netherlands warehouse. This reduced capacity requirement for predictable demand can make room for critical items with less predictable demand rates.

For critical, low-demand items and safety inventory that are typically on every MRO’s shelf, the distribution center can reduce overall inventory by aggregating those items and utilizing same-day fast mode of transportation for filling customer orders. Although fast transportation is expensive, demand is low and there is a greater likelihood of achieving overall savings by decreasing the number of item redundancies across MRO inventories and decreasing inventory quantity (Chopra et al., 2012). UTC can utilize integer replenishment policies to help manage cycle inventory and order costs to secure the right timing for satisfying forecasted demand over a specified time period (Chopra et al., 2012). This tailored approach to maintaining and transporting spares results in less inventory on MRO shelves while securing same-day critical spare part provision when needed.

Figure 6. Utilizing distribution center for aggregate cross-docking/storage for item throughput.

To aid in inventory reduction, it is important for UTC to know the lead-time standard deviation for each of their spares and identify the cost of failing to satisfy demand. Additionally, the on-hand order replenishment frequency may not reduce overall inventory, but can help reduce inventory costs depending on how frequently inventory reviews occur. All variables and the associated numbers depicted below are representative of actual UTC part pushes using data for an actual UTC part, in this case a hose. For a hose with a 10-week replenishment lead time and review cycle, the distribution center may need to maintain 5-6 hoses in aggregate safety stock for an average demand of 100-140 hoses during lead-time to ensure that 95% of demand is met when UTC maintains a monthly review interval.

Table 2. Replenishment lead time/review interval to manipulate required inventory

If UTC halved the lead-time, the Netherlands distribution center would need to maintain 4-5 hoses in safety stock to cover demand for 50-90 hoses for their European MROs.

Table 3. Replenishment lead time/review interval to manipulate required inventory; halved review replenishment lead time

Additionally, if the review interval were halved instead of lead-time, 5-6 hoses would be required in aggregate safety stock in order to support the 100-120 hoses in demand.

Table 4. Replenishment lead time/review interval to manipulate required inventory; halved review interval

Finally, in a scenario with both the replenishment lead-time and review interval halved, 4 hoses would need to be maintained as safety stock inventory.

Table 5. Replenishment lead time/review interval to manipulate required inventory; halved replenishment lead-time/halved review interval

The manner in which inventory is monitored and the replenishment lead-time associated with a part can affect the amount of overall inventory maintained in UTC’s system. UTC should mandate that each warehouse and distribution center comply with standard inventory review processes/procedures. In addition to each facility being able to take advantage of more efficient inventory levels, UTC will have a standardized comparison/evaluation model against which each facility can be measured. UTC can identify the risk/cost associated with not satisfying demand and the risk/cost associated with overstock to support aggregate inventory reduction decisions.

Behavioral Approach/Managerial Alignment. For distribution center utilization to work for UTC globally, management must ensure that incentives are based on an aggregate reduction in physical inventory or inventory cost and be clear about that goal. If each warehouse is evaluated on its sell-in throughput, cash flow, or physical inventory/cost during a short evaluation period, teams may resort to inefficient ways to reduce inventory so their results look good to management (Chopra et al., 2012). For example, a team may outsource its warehousing function and buy back parts when MROs require them because the cash flow looks better in the short term even though over a 2-3 year period the total cost of outsourcing may be substantially greater than maintaining that inventory. This can result in larger requirement variability and deter the ability to accurately forecast demand (Chopra et al., 2012). In cases where short-term results are evaluated, subject matter experts and their management must partner together to educate and advise their executives on what true gains and total savings look like. It is important for each stage in the supply chain to know its role in the larger picture so that the actions of each distribution center and spares team are aligned with UTC’s larger goals.

Demand Planning. Aerostructures Aftermarket currently bases its inventory planning on historical consumption. The Inventory Planning group utilizes software that displays up to ten years of historical consumption data. It is up to the planner to determine the proper ratio of emphasis on certain time periods to determine the forward looking forecast based on historical consumption (Aerostructures Aftermarket, 2014). For all intents and purposes, the current inventory forecasting methods do not incorporate sales forecasting or demand planning.

Neglecting to incorporate demand planning into inventory forecasting is a significant area of opportunity for Aerostructures Aftermarket. Kuppe (2010) describes:

One of the most common mistakes is to rely on a historical perspective for forecasting and not have adequate reach into the demand side of the business. For this reason, the first step in improving forecast accuracy is to improve the reach of the demand planning process. For most manufactures, this means the demand forecasting process should be extended as far out to the point of sale as practical so that a more complete demand signal can be captured. All stakeholders in the forecasting process should be brought into the demand planning process, including internal sales teams, outside rep firms, distributors and key customers.

Supporting a demand planning strategy should be flowed down to the entire sales side of the business.

Demand planning could be implemented with little increase to headcount. The Business Development Directors (sales team) could have acquiring market intelligence added to their list of responsibilities. Since the Business Development Directors work with customers to negotiate contracts, majors, and bundle packages, they are already uniquely positioned with the customer to get access to market intelligence. In addition to selling, it would be the Business Development Directors’ responsibility to understand what the customer is doing in terms of fleet planning and scheduled maintenance. This information would then be flowed back to headquarters to a new market intelligence team.

The market intelligence team would be responsible for compiling all of the information gathered by the Business Development Directors and using it to identify data analytics patterns. These patterns would be flowed to the current Inventory Planning group for incorporation into the inventory planning forecasts.

Using demand planning should improve forecast accuracy and reduce overall inventory (Kuppe, 2010). Past performance is not necessarily indicative of future performance, so higher safety stock levels are used to account for the variation between historical consumption based forecasting and current customer demand. By improving forecast accuracy through demand planning, safety stock levels could be lowered, which will reduce overall inventory. Improved fill rates lead to better customer service, which could also increase sales.

Although fill rate would increase and net inventory would decrease, there are some resources required to implement this strategy. By placing the majority of the intelligence acquisition on the Business Development Directors, we believe this strategy could be implemented with as little as a two headcount increase. Two analytically-focused team members would be needed to compile the data attained by the Business Development Directors, perform data analytics works, and share the results with the Inventory Planning team. We believe the inventory reduction and potential increase in sales offset this minor headcount increase.

Vendor Managed Inventory (VMI). VMI is a collaborative commerce initiative where suppliers are authorized to manage the buyer's inventory of stock-keeping units. It integrates operations between suppliers and buyers through information sharing and business process reengineering (Yuliang Yaoa, 2007). While there can be more to it than this, at a minimum it entails the vendor (supplier) determining when to replenish and how much to replenish a customer’s inventory. With VMI, the vendor creates orders for their customers based on demand information that they receive from the customer (Murphy,Jr & Knemeyer, 2014). The vendor and customer may be bound by an agreement which determines inventory levels, fill rates, and costs. The terms of the agreement may also be that the vendor entirely manages the customer’s inventory in such a way as to improve the customers supply chain performance by avoiding situations of stock shortage.

As was stated earlier, Aerostructures aftermarket supports a variety of both in-production and out-of-production programs. In-production programs receive spare parts by having the production line support slightly more production on a part level basis than is needed to complete the bill of material for the scheduled number of production units. Out-of-production programs have significantly slower moving inventory and longer lead times due to these parts being made on an as-needed basis rather than in addition to the production line. As such, the company would benefit a lot from VMI arrangements with suppliers of out-of-production program parts as the inventory levels for this program are highest and move slower. VMI initiatives could also be engaged for in-production program parts but greater emphasis should be on out-of-production program parts.

Operationally, VMI could take different forms at Aerostructures aftermarkets. Some of which are;

· Suppliers could regularly show up at its facilities, physically review inventory levels, immediately replenish with inventory they have with them (actually physically stock the inventory in Aerostructures aftermarket’s warehouses);

· Suppliers could also show up at Aerostructures aftermarket’s facilities, physically review inventory levels, and then place orders for replenishment inventory that will be delivered at a later date. Depending on delivery method, the supplier may do the physical restocking, or may leave it for Aerostructures warehouse personnel to do;

· Aerostructures Aftermarket could periodically (trimestral, quarterly etc) provide its suppliers with current inventory levels. The suppliers will then review inventory levels and create replenishment orders that will then be shipped to Aerostructures aftermarkets;

· Suppliers could be given direct access to Aerostructures Aftermarket’s inventory system and can get real-time information related to on-hand levels, open orders, forecasts, production schedules, etc. They then make replenishment decisions based on this data and ship orders to Aerostructures Aftermarket;

· Supplies could provide an on-site inventory planner that works full-time at Aerostructures Aftermarket’s facilities managing the inventory which it supplies;

· Suppliers could also leases space within Aerostructures Aftermarket’s facilities and run their own warehouse and inventory planning operation with their own employees from within the customer’s facility.

One of the benefits of VMI to Aerostructures Aftermarket is that because the suppliers will be responsible for supplying when the parts are needed, the need to hold significant safety stock will be removed. The lower inventories for the company could in turn potentially lead to significant cost savings. Aerostructures Aftermarket could also benefit from reduced purchasing costs arising from the fact that its purchasing department would have to spend less time on calculating and producing purchase orders and the need for purchase order corrections/reconciliation would be eliminated under VMI. Cost saving would also arise from reduced warehouse costs as lower inventories would reduce the need for warehouse space and other warehouse resources (Murray, 2013).

Aerostructures Aftermarket would however have to consider the potential problems with VMI. Depending on the VMI arrangement, it would be giving up control of certain aspects of its business and it may also be providing the suppliers with access to business information which it considers to be confidential. The suppliers could also sell or share Aerostructures Aftermarket business information with competitors (Piasecki, 2012). One other potential drawback of this strategy is that it would become more difficult for Aerostructures Aftermarket to change suppliers once VMI has been implemented.

Cross Functional Collaboration. Cross-functional or inter departmental collaboration could be defined as interaction between two or more departments that is fostered by effective communication in the form of meetings, conference calls, and emails. Such collaboration and exchange of information between the departments of an organization would help to establish effective interdepartmental relationships as well as possibilities for better decision making. It can also improve the performance of employees in an organization (Monczka et al., 2011). Cross-functional collaboration, if it is well implemented and managed, can have positive effects on the inventory management of Aerostructures Aftermarket. It can yield tremendous benefits as collaboration between the purchasing, customer service, and the engineering departments would permit purchasing to have a better understanding of the materials that are needed and to select the right supplier(s) to acquire these materials. It would also make for a better understanding of the quantity of materials needed as well as an idea of the market price of the goods and the time when it would be needed. All of these will enable the procurement of the right quality of parts in appropriate quantities at the right price and right time.

Third-Party Broker. Currently all of Aerostructures Aftermarket’s inventory is stored in its own warehouses. This gives the company complete control over its inventory, but it also means that all of their inventory is reflected in their financials. A potential solution from an inventory financial standpoint, would be to sell inventory to a broker who can only sell the inventory back to Aerostructures Aftermarket.

This strategy is essentially a hybrid among distributor, consignment, and VMI strategies (Jacob, 2014). Aerostructures Aftermarket would sell its inventory at cost to a broker who is under contract to sell exclusively back to Aerostructures Aftermarket for a nominal fee of roughly 15%. This fee would cover the broker holding Aftermarket’s inventory for an unspecified amount of time as well as the Broker’s overhead of operating a warehouse and shipping and receiving goods from Aftermarket’s distribution centers (Jacobs, 2014). This strategy would eliminate Aerostructures Aftermarket’s inventory, because the Broker would own the inventory, not Aftermarket. The exclusivity agreement would safeguard Aftermarket from having the Broker sell directly to Aftermarket’s customers.

By selling incoming inventory immediately at cost, Aerostructures Aftermarket would rid itself of the negative cash flow associated with carrying inventory (Jacobs, 2014). When Aftermarket makes a sale, the goods would be shipped back from the Broker and immediately cross docked to the end customer, so there would also be no inventory when the product is recalled from the Broker. By having zero negative impact to cash flow from slow moving inventory, Aftermarket should improve its cash flow figures, a financial metric that receives significant corporate scrutiny.

There are two notable downsides to this strategy. First, by paying the Broker a 15% mark up for their services, Aerostructures Aftermarket’s EBIT and margins will decrease. Here is an example of the financials for a $1,200 part with a 6x mark up. Overhead for traditional inventory is assumed at 2% while broker inventory overhead is assumed at 1%.

Table 6. Traditional Inventory vs. Broker Inventory

In this example, Aerostructures Aftermarket is seeing $168 reduction in EBIT and a 2.4% decrease in margins, which partially offsets the cash flow improvements by never having inventory on the books for this part.

The other downside to this strategy is that customer fulfillment times will be increased. Rather than shipping directly from Aftermarket’s own distribution center, which can offer same-day shipments for orders placed in the morning, the goods will first have to be shipped from the Broker to Aftermarket’s distribution center and then cross docked to the customer. This will increase the fastest order fulfill time from same-day to two-day, which could negatively impact customer service.

It is important to note that this strategy is more of a game with financial numbers and statements than it is actually solving the root problem. By immediately selling inventory to the Broker, there is no inventory on the books. This improves cash flow, but we are taking a hit on EBIT, margins, and order fulfillment time to accomplish this. We are also not addressing the true issue of why the inventory was over forecasted in the first place. One aspect of this strategy that is nice is that it could be applied on a program-by-program basis. Aerostructures Aftermarket could elect to pursue this strategy only on its oldest, slowest moving inventory programs where sell through is so slow that halting future purchases will not decrease inventory sufficiently in a reasonable amount of time.

House of Quality/Needs Analysis/FMEA

House of Quality is a quality tool that is used to ensure customer preferences are incorporated into business decision making. The tool is a matrix that associates customer preferences with business objectives and compares our performance to our competitors (Jacobs & Chase, 2014). Our House of Quality shows are customers are looking for parts in stock with outstanding quality and a reasonable price. Our customers also expect good customer service. This is compared to our business processes of inventory turns, EBIT and margins, quality inspection, and employee training. We compared ourselves to a modestly priced, modestly inventory competitor and to a low cost, low inventory competitor.

Figure 7. House of Quality

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Section 3

Changes that Will Be Implemented

UTC has already announced its intention to move forward with regional distribution centers, and operations in the Netherlands are already underway. UTC will execute smart supply chain management by taking advantage of the opportunities inherent in managing stock in aggregate. This choice supports the elimination of redundancies within UTC’s overall inventory and reduces the transportation cost that would have been associated with moving the original quantity of inventory to each MRO. Cross-docking will be utilized to reduce handling, streamline movement to the customer, and minimize inventory holding. For items that UTC does have to warehouse, it will leverage lead-time and inventory review intervals to minimize the amount of safety stock that must be maintained in order to satisfy 95% customer demand.

Finally, Aerostructures Aftermarket will implement demand planning into their organizational structure. The Business Development Directors will be responsible for attaining market intelligence from their customers regarding overhaul cycles and repair plans. This information will be passed onto the new Market Intelligence Team, which will be responsible for compiling market intelligence data and passing analytical findings onto the Inventory Planning team. Thorough market intelligence will increase the robustness of our inventory forecasting and enable us to support customers better with less inventory (Kuppe, 2010). The improved customer service and inventory reductions will offset the nominal two-person headcount increase.

The changes we will not be implementing are VMI and the third-party broker. As discussed earlier, in-production programs are supported by the production line, so VMI would not significantly improve our inventory on these programs. The volume on out-of-production programs is so low that suppliers will either be unwilling to negotiate with us or will seek such a significant cost premium that a VMI program would not be cost effective. The third-party broker would not be wise because it will unnecessarily reduce EBIT and margins, reduce customer service by no longer supporting same-day shipping, and truly does not solve the problem.

Improved SIPOC

Our improved SIPOC reflects the additions of demand planning and more global distribution centers.

Figure 8. Improved SIPOC

Section 4

Controls

It is challenging for organizations to align with new policies/procedures, so UTC should add the new distribution and inventory control procedures to its already robust policies and business rules. Utilizing some of the performance metrics detailed above will help the company gauge compliance on some of the more important processes. The aforementioned list of measures is not all-inclusive and should include locally-developed measures to enable managers to focus on additional areas they think are important. Augmenting standard measures with other measures from time to time encourages managers and the workforce to seek improvement and new solutions in more areas when they have mastered the critical metrics. Accountability applies for operations within UTC as well as for the business partners with which UTC engages. Transparency in UTC is essential and executives should create an environment where managers are comfortable openly addressing their issues and utilizing every resource at their disposal to fix them. Workers and managers must educate executives in understand indicators and what they mean for performance. This 3-tier partnership will help keep each stage of the supply chain away from functional goals and aligned with the company’s strategic goals and objectives, in this case, the overall reduction of inventory.

Cross functional collaboration, especially when it takes the form of meetings can either be big time wasters or the most effective tool for improvement (Institute of Management Accountants, 1994). Effective collaboration is highly dependent upon effective meetings in such cases. Poor communication is a major barrier to cross functional collaboration and innovative performance. The department heads and management have the preeminent roles in facilitating this collaboration and all team members have a responsibility to foster it as well. The management of Aerostructures Aftermarket would have to control the effectiveness of cross functional collaboration by setting clear and concise goals (which align with the overall goal of ameliorating inventory turns and cash flows) for such collaboration and communicating them to the department heads. The department heads will in turn be responsible for preparing and distributing memos and meeting minutes or notes that convey the subject of the cross functional collaborations. They will also follow up on the implementation of any decisions that result from the cross functional collaboration.

Demand planning will have a control to address reach functions’ participation. The Business Development Directors will have attaining market intelligence as one of their requirements on their performance reviews. The Market Intelligence team will have a health measure to track the accuracy of their market trend findings to actual customer behavior. Finally, the Inventory Planning team will be expected to sustain their 95% fill rate goal with a lower inventory budget. The implementation process will be controlled by having a test period where market trends are identified and then the market is observed to see if those trends play out. After success has been realized in this step, forecasting will change on a program-by-program basis starting with smaller programs so any hiccups will have minimal impact. Once success is realized on our selected smaller programs, the new forecasting method will be rolled out to our largest programs.

Organizational Impact

Our most notable organizational impact will be in the company’s financial performance. Assuming a current inventory of approximately $160,000,000, a 10% inventory reduction would save the firm $16,000,000 in inventory reductions (Walther, 2015). Assuming a 10% cost of capital, this $16,000,000 inventory reduction could also lead to a $1,600,000 in working capital savings. This would lead to a total impact of $17,600,000 in cash flow improvement (Walther, 2015). Since cash flow is one of UTC’s most regarded financial measures, this would be a significant improvement to report to corporate.

In terms of organizational structure, the creation of the Market Intelligence team would cause a modest two-person headcount increase. Although operating additional warehouses may cause an increase in overhead, UTC plans to allocate those costs across all its aerospace business units, which will significantly decrease the cost bore by Aerostructures Aftermarket.

Improvement Tracking

UTC’s new policies will be partnered standardized way to measure their efficiency and effectiveness. It is important for the company to track both inbound and outbound delivery performance to ensure item movement is happening on schedule. In addition to being on schedule, UTC must measure fill rate because customers cannot get what the company does not have. Order fulfillment and perfect order fulfillment allows UTC to evaluate whether it is meeting the movement times detailed in the customer receipt timelines as well parcel out reasons why timeliness was not achieved. The firm will also need to ensure that it is minimizing inventory by maximizing opportunities for cross-docking. Tracking the number and pathway of intermediate locations will aid UTC in its evaluation of cross-docking utilization. The company should scrutinize parts that are maintained in inventory to include the number of days it is on the shelf before it is pulled to ship to the customer. This will support the demand-based feedback loop detailed early in this paper to support better forecasting. Finally, evaluating the CARE utilization rate for total repair (UTC Aerospace Systems, 2015d) will support overall stock reduction by extending the life cycle of current stock and reducing the new-part replenishment requirement.

Table 7. Performance Measures

(Jacobs et al., 2014)

The improvement of cross functional collaboration and attaining market intelligence will be tracked by becoming a part of the department’s performance review process. “Performance profiling can even be used to improve innovation and cross-functional teamwork” (Kerns, 2001). Employees will have to rate themselves and will be rated by their leader on their effort to promote cross functional collaboration. The Business Development Directors will also be rated on how much market intelligence they attain from customers. The Market Intelligence team will have a health measure metric that measures the accuracy of the market trends they identify, and the Inventory Planning group will be expected to maintain fill rate while decreasing their inventory budgets.

References

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Part production approved?

Yes, met UTC Production Part rqmts

Meets support rqmts (IT, tracking, validation)

No, supplier disapproved

Parts shipped to distribution center

Parts available for customer

Ship part to customer/servicing agency

No, new requisition

Part not immediately required, go to stock

Part immediately required by customer

Track item warehousing timeline for demand data

Change inventory level IAW demand

Part is require IAW drmand data

No, do not procure part

Order entry

Consumption forecasting

Order fulfillment

Sourcing

Manufacture parts

Manufacturing

Netherlands Distribution Center

Cross Dock

Store

Ship to Europe MRO1

Ship to Europe MRO2

Ship to Europe MRO3

Ship to Europe MRO1

Ship to Europe MRO2

Ship to Europe MRO3

Attain market intelligence

Aggregate demand planning

Order entry

Market analytics

Order fulfillment

Sourcing

Manufacture parts

Customer

Requirements

Importance to customer

Technical

Characteristics

Inventory TurnsEBIT & MarginsInspectionsEmployee Training

Competitive Evaluation

X = Us

A = Competitor A

B = Competitor B

Parts in stock9xABX

Fair price8xXAB

Quality parts received10oBXA

Customer Service8oBAX

89107

Increase 0.5 Turn13% EBIT increase & 65% gross margin0 significant escapes90% skills matrix score

BXXX

AAAA

XBBB

Importance Weight

Target Values

Technical Evaluation

5

4

3

2

1