E&M: how to choose your supplier December 1999

Aviation Strategy is in the process of reviewing three key Engineering and Maintenance (E&M) Management issues: organisation and outsourcing; supplier selection and negotiation; and establishing the contract and performance measurement. Outsourcing was covered in the October issue, and in this article we are focusing on supplier selection.

Today, the market is seeing more and more long–term contracts, with airlines recognising the benefits of stability of supply, ensured availability, predictability of cash flows and a reduction of purchasing costs. Since such contracts are necessarily very complex, management needs to ensure that:

• A comprehensive selection process is carried out that identifies the right partner for the airline’s needs; and
• A fair, practical and rigorous contract is established that sets out the right foundations for working together in a constructive and "win–win" relationship.
• The selection process and subsequent development of a long–term contract are key to protecting E&M cost–effectiveness and performance. It should consist of the following four elements.

Statement of requirements

The statement of requirements is a vital document and it has many purposes. First, it provides the basis for the supplier’s commercial offer. Hence, it must be explicit about the scope and detail of services required and the responsibilities of each party. This leads to the second purpose — creating a level playing field for the selection process and offer evaluation.

Cost comparisons are only realistic if the offers are made on a like–for–like basis. And there are a myriad number of ways that different base assumptions can lead to an apples and orange comparison. Examples include:

• For inventory support: the service level expected from consignment stocks, the inclusion/ exclusion of loan items from flying hour rates, the items covered (expendables, repairables, rotables), the BER hurdle
• For airframe maintenance: the man–hours per defect included in the fixed price, the inclusion/exclusion of AD/SB modifications, the maintenance schedule being priced, tasks included/ excluded
• Pricing: length of contract, escalation rates
• Fleet, maintenance and scheduling policies: aircraft utilisation, average flight length, night=stop locations, frequency of rotation through main operating base

Creating a fair and detailed comparison of the economic cost of different tenders can be a nightmare. A third important role of the statement of requirements is for the airline to communicate its strategic objectives. In effect, the airline is beginning to set out its expectations for the relationship, for service performance and for the contracting process. For example, the airline might:

• Believe strongly in performance incentives and penalties;

• Have specific passenger service policies that impact E&M requirements (for instance, giving passengers refunds for delays over a certain length);
• Set out certain non–negotiable items (for example, supplier must have, or must establish, line maintenance capability at airport X).

Finally, the statement should describe the selection process and in particular set out the milestones for receipt of offers, the likely decision dates, the appropriate contact point for questions and communications, the evaluation/selection team members and the primary steps.

List of suppliers

This is the most straightforward step. Although plenty of competition exists, most serious players have a well–established sales force and therefore the main contenders will be known to the airline. A main question is the geographic scope of suppliers to be considered and this will depend on the services being contracted out. Wide–body airframe heavy maintenance can be and is sub–contracted to suppliers on the other side of the world (witness Air New Zealand’s client list). However, component support suppliers are likely to have a base at least in the same continent.

Other factors will also ensure a certain amount of pre–selection. Examples will include established expertise on type, hangar access/availability at the main hub, and market reputation. Another influential guideline is often the prior experience of the airline’s Technical Director and Chief Engineer. The E&M world is a relatively small and close–knit, and past performance is often key to a supplier’s future success.

Supplier evaluation

First, the airline must establish and understand what its key decision criteria are likely to be. Then and only then can the selection team set about capturing, understanding and documenting all the information about suppliers that is relevant to the airline’s own customised decision criteria.

Ultimately, this discipline will provide a framework and the rationales for making fair comparisons, sound trade–offs and a robust, well–understood final selection.The first step is defining and agreeing a list of selection criteria, which are summarised in the box above.

Usually, the selection process has three distinct phases. First there is an initial screening where the list of suppliers is thinned out to a more manageable short–list. The second phase is then to conduct a much more detailed examination of the offers. It is here that the evaluation of the commercial offers is completed to ensure a fair comparison and that there are no hidden costs. Also, the airline should now visit the supplier facilities to:

• Meet the managers and staff who will be the daily interface (not the sales force);
• Review the degree of systems and process sophistication;
• Get a feel for management capabilities and approach (can–do versus bureaucracy); and
• Understand the role, influence and ability of the Quality group.

Finally, the supplier’s customers should be interviewed. And not just those contacts recommended by the salesman. Investigate recent contract wins and losses — find out why the supplier was not selected.

Having collated the information, the selection team and the airline’s executive management need a process and mechanism for examining, understanding and evaluating the decision. Multiple techniques exist, but most revolve around scoring and ranking suppliers in a controlled and transparent manner.

This detailed examination may reveal the one ideal and outstanding supplier alternative — with no weaknesses. Again,experience shows that there is no one ideal solution. The airline should then enter a final selection stage.

Final selection

It is always wise to keep at least two suppliers in the game at this stage, even if there is one outstanding candidate. A sense of competition is necessary and advisable because inevitably, negotiations are still required:

• To establish the best and final offers; and
• To include specific clauses or commitments that will resolve and address those issues that have been identified as weaknesses.

It is at this stage when more complex and difficult issues generally have to be addressed by the airline and supplier together. It is possibly the first experience for the senior management personnel of both parties to see and experience how the other works.

The final choice may by now be straightforward. If not, and there remain two strong candidates, then there will be extended debate. The science and discipline of a process ends and judgement comes into its own.

And once the choice is made — then comes the difficult part, the contract. How it is framed and negotiated will help determine the success of that relationship. This will be covered in the last of the three articles on E&M management.