Scm at Cathay Pacific

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“AVIATION SPARE PART SUPPLY CHAIN MANAGEMENT OPTIMISATION AT CATHAY PASIFIC AIRWAYS LIMITED” CASE STUDY GLOBAL LOGISTIC COURSE ASSIGNMENT Prof. Hiroshi Hoshino

Umurbek Osorkhan 2EC12056R QBS 10th 5 November 2012

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Company Overview Cathay Pacific Airways is an airline company founded on September 24th, 1946 by Roy Farrell and Sydney de Kantzow. Starting with a very limited schedule service, the company grew larger through multiple product innovations, technological investments such as the computerized reservation system and successful acquisitions. In 1986, Cathay Pacific went public and further expanded in Europe, North America, and China. The company employed over 25000 people worldwide, serviced over 43 destinations throughout Asia, Europe and North America, and carried more than 16.7 million passengers in 2006. 1. Why is good supply chain management of spare parts so critical for an airline? Supply chain management has become one of the crucial competitive advantage in today`s organizations. Finding opportunities in supply chain can make companies unique and different from competition. Today more and more companies are trying to manage their supply chain in an effective and efficient manner in order to provide better services at lower cost. Unlike other industries, the aviation industry known as highly regulated1 industry and the aviation spare parts 2 are very complex3, large amounts of money are invested in spare parts inventory and this has increased over the years. Because of these large amounts of money involved, there is great interest in cost savings, and even savings of a few percents only constitute large cost savings in absolute terms. This case study shows us how Cathay Pacific Airways successfully manage their supply chain in an optimal manner, despite some circumstances. According to the case study there were several points that good supply chain management of spare parts so critical for commercial airline operators. We can briefly describe them as stringent industry regulations, turnaround time and lead time, large number and expensive parts. Firstly, managing supply chain in aviation industry was so complex and challenging for all operators, and Cathay Pacific is no exception as reflected in the huge inventory carrying costs of US$350 million as of December 2005. In addition, dead and inactive stock made up 20% of Cathay Pacific’s annual supply chain expenses of US$250 million. Moreover, substantial resources are consumed with over 100 personnel in the inventory management department overseeing over 230,000 line items of aviation spare parts and over 600 supplier relationships. As I mentioned earlier aviation spare parts themselves were very complex and expensive. For instance in a single airplane there are over 1 million parts and components and the average cost of engine was $12 million. Another critical issue for the supply chain management in aviation industry was the tight regulation of the aviation industry, which is regulated by international and local authorities such as the US Federal Aviation Administration (FAA), the European Aviation Safety Agency (EASA) and the Civil Aviation Department of the Government of the Hong Kong (CAD). Airlines operators have to comply with different statutory regulations. For instance, they have to complete the deferrable repairs within the stipulated timeframe, suppliers of aeroplane spare parts are required to possess special legal certifications and formal protocols, as well as issues of reliability and safety.

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Because of safety issues the Aviation industry was regulated by international and local authorities such as FAA, EASA or some local regulatory bodies. 2

Spare parts are defined as components, assemblies, and equipment that are completely interchangeable with like items installed or in use, which are used, or can be used, to replace items removed during maintenance and overhaul. (Joseph D. Patton, 1984) 3

There were over 1,000,000...
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