Manufacturing Best Practices in a Services Environment

When John MacLean joined American Airlines as CPO, the procurement function was essentially a tactical, order-placing model, with no defined strategy. A few different factors necessitated the need for a strategic roadmap.

The Department of Transportation measures the airline by whether or not its 3,400-plus flights per day arrive and depart within 15 minutes of their scheduled times. This translates to about 1.1 million flights per year; daily, it means accommodating 105 million passengers and 650 aircraft flying three to four flights. As MacLean points out: “It takes a lot of services to keep them flying.”

To achieve the supply management function’s current strategic state, MacLean devised a roadmap comprised of:

A value statement. Essentially, this statement — as with most organizations’ supply chain value statements — dictates that supply management will create value.

Department training. MacLean implemented staff training on skills development (reverse auctions, negotiation and so on); business (including ethics and supplier diversity); and applications (AAPICS, COGNOS, Ariba).  

Education. Currently, about 95 percent of American Airlines’ supply management staff holds college degrees (48 percent with bachelor’s, and 42 percent with master’s degrees). To keep the pipeline of educated supply chain talent populated, the procurement function even has its own LinkedIn group. Here, supply management students can start interacting with the organization even before they interview.

A value strategy. “We don’t have buyers; we have commodity managers,” MacLean explained. Each commodity manager has a value strategy for everything they buy, which includes some typical elements: a market study, supplier study and needs study.

Supply chain optimization. When MacLean joined American Airlines, it had more than 17,000 suppliers. Today, it hovers around 4,000. “That seems like a lot,” he conceded. “But, the suppliers of jet fuel aren’t providing us with Godiva chocolates, too.” Part of his supply chain optimization strategy is horizontal and vertical expansion of existing suppliers when possible, as well as supplier consolidation.

Strategic sourcing. A fairly typical seven-step sourcing process is in place at American Airlines.

Business unit strategy. Business units include maintenance & engineering (M&E), flight (pilots and crew), marketing and airport services. All are supported by the purchasing and transportation function. MacLean makes it a point to get involved early in these business units’ meetings versus their outcomes being “thrown over the wall.” He ensures his team is involved in the creation of these other departments’ strategies.

Combined, this strategic roadmap has generated some impressive measurements: value savings of 8.25 percent; fuel delays of only .02 percent; and diversity spend of $370 million.

It has also contributed to the organization’s 2011 placmeent of the largest aircraft order in aviation history, exceeding $40 billion. All departments were involved in those negotiations, including procurement and finance. As a result of the cohesiveness of these departments’ processes, it took American Airlines three weeks to put in place three massive contracts — a task that could easily take up to a year under different circumstances.

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