Aer Lingus Assess Supply Base the Supply

Aer Lingus

Assess Supply Base

The supply base is a function of the airport capacity, specifically the terminal and lanes leased specifically for the use of Aer Lingus jet and air plane usage in addition to the actual supply of jets/planes and the parts used to effectively repair and operate each unit. The supply base is assessed by assessing the supply chain for the airline. The supply chain is a function of all vendors that provide supply to Aer Lingus to maintain operational performance.

Functional capacity is the ability of the supply base to utilize full operating capacity to maximize profit through the efficient use of supply to drive performance. However, the supply base assessment can also be a method to pass-through costs. According to Chandler (2009), "Renaud recognizes that it's sometimes a matter of "sanding our folks out to suppliers to help them [avoid] costs." Mike Madsen couldn't agree more. "We're focused on reducing spend [and] reducing costs within our supply base" says Honeywell Aerospace's VP-Global Airlines Business. That means "partnering with our supply base to share some of the techniques we've developed, such as the Honeywell Operating System, so that they can become more efficient." (Chandler, 2009)

The Honeywell example of a complex supply base management system that contains more suppliers in earnest than does the supply base of Aer Lingus. The assessment of the supply base reveals Honeywell will experience more supply base risk than Aer Lingus due to the integrated nature of Honeywell's business and the multiple vendor supply chain the company relies. According to Aircraft Economics (2003), "Aer Lingus has concluded a deal with Airbus to supply a new European fleet. The refleeting exercise will mean the airline will operate a single fleet type for its European operation by the end of 2005 and add 15 new routes to its network by Summer 2005. The deal will also assist in the transformation of Aer Lingus to a low-fares airline. (Aircraft Economics, 2003)

The supply base assessment involves the inventory management and supply count in terms of units of supply, including aircraft and aircraft parts, such as engines and wings, etc. The cost per unit and the variable cost of operating the supply base per day as a function of monthly operating costs is the process of assessing the supply base. An additional example is provided by Aircraft Economics (2003), "Under the deal, Aer Lingus will acquire 17 A320 aircraft of which seven will be purchased outright and 10 will be leased from ILFC. The engine supplier for the new Airbus fleet is CFM." (Aircraft Economics, 2003)

Challenges of Supply Chain Management

As mentioned in the previous section, supply chain management is a vast and complex framework linking parts and necessary supplies to value proponents throughout the value chain. Value is created at every point along the supply chain to yield the final product, which is the supply modus required to generate income. According to Aircraft Economics, (2003), "Together with the six A321s and four A320s already in the fleet this will mean a total short-haul fleet of 27 Airbus aircraft. Options for a further 10 A320 aircraft are included in the deal. The move to a single aircraft type has been a key element in Aer Lingus's business strategy. It is hoped that it will bring significant cost-savings increased capacity and improved flexibility." (Aircraft Economics, 2003)

The management supply chain practices of Just in Time (JIT) and Total Quality Management (TQM) have been critical to firms that manage the supply chain through the manufacturing process. Firms either manage this process by directly managing the process of their suppliers or by administering these management techniques in their own manufacturing plants and factories to increase supply chain management accountability.

The challenges of managing the supply chain include ensuring that cost deviation is within a given variance. If variable costs have been controlled over the past 4 operating quarters to within 2 standard deviations of the mean, then the variance going forward will produce revenue estimates in-line with the operating standard deviation. Any increase in the variance will hurt operating profits as a function of supply chain mismanagement.

Managing multiple vendors is a cost prohibitive process when considering the cost to the managing firm for using in-house resources to track an operation that is not proprietary to the firm. Revenue is an outflow to ensure that the vendor is providing the necessary services to correlate with the necessary revenue numbers assigned to that particular supply chain process. According to Mangan & Martin (2005), "A key feature of the current business environment is the idea that supply chains compete, not companies (Christopher, 1992). Managing supply chains effectively is a complex and challenging task, as a result of the continuing trends of expanding product variety, short product life cycles, increased outsourcing, globalization of businesses, and continuous advances in information technology (Lee, 2002). In recent years supply chain management (SCM) has grown in acceptance." (Mangan, Martin, 2005)

Additionally, according to Mangan & Martin (2005), "... The area that was once considered to be only of minor concern to managers is now at the forefront of business planning. The discipline that had a difficult time getting the attention of senior managers in firms now has representatives in the top echelons of most organisations (Lancioni, 2000)." (Mangan & Martin, 2005) The importance of managing the supply chain is of increasing importance in times of rising inflation and lowered GDP forecasts. The PPI is a supply side indicator of rising prices, should the indicator continue to rise faster and at greater percentages than the CPI, the value derived from the complex challenge of managing the supply chain is expected to be exponential.

Environmental, Ethical, Corporate, & Social Responsibility in Assessment Process

The roles of these aforementioned ostensibly, "Goodwill" related organizational activities represent value delivered through a non-value facilitated organizational responsibility. Some may ask how is that so? Recently, the relative importance of these business responsibilities have pervaded into society as perception of corporate image is not perceived by financial managers as major drivers of sales in today's more liberal global consumer market.

Consumers are now more knowledgeable of the inherent risk to indigenous cultures and developing world societies that are subjected to corporate development initiatives to mine and develop natural resources needed in the delivery process in supply chain management. Activities where supply chain vendors are supporting gangs or militia's or poisoning the water supply due to manufacturing supply chain parts are no longer esoteric knowledge reserved solely to the educated.

Aer Lingus is subject to these responsibilities as a function of operating within the social parameters of a global environment. Boycott is a term that is not used often, but is still in practice when consumers deem practices to be disingenuous or of moral and ethical concern. The manner of voicing dissatisfaction at the companies purporting atrocities of varies degrees and varieties is to refuse doing business with the organization and voicing their opinion to others via blogs and word-of-mouth.

According to Siobhan (2003), "An interesting example of a cluster-like structure can be found in Ireland in TEAM, the maintenance and overhaul subsidiary of Aer Lingus. TEAM was officially launched as a separate company in 1991, having previously been the Maintenance and Engineering Department of the national airline. TEAM has moved towards structuring tasks on a workgroup/team basis as well. The approach has been to place emphasis on focused responsibility at all levels, and to foster team spirit within each business and sport unit. For example, in the Aircraft Overhaul business unit, four teams have been created: 'widebody overhaul', 'narrow body new technology overhaul', 'narrow body mature overhaul' and 'cabin interiors'. TEAM Aer Lingus is, therefore, a prime example of an organisation which has moved from a bureaucratic hierarchical form of structure to one which is more cluster-like in nature." (Brown, 2011)

These cluster-like units are also better able to manage responsibility of managing supply chain practices and are increasingly likely to generate positive Goodwill in the form of generative positive Public Relations for Corporate and Social Responsibility. Mergers and Acquisition activity also falls into this genre.

According to A Change of Direction (2011), "Notwithstanding the arguably increased procedural burden for parties, it remains the case that the majority of merger cases are cleared unconditionally and it is extremely rare for the Commission to block a merger outright. The last such case was Ryanair's proposed acquisition of Aer Lingus, prohibited by the Commission in 2007. The airline sector is, however, one which has been profoundly affected by the financial crisis." (A Change of Direction, 2011)

The social responsibility with regard to environmental stewardship from companies that deliver travelling services is facing increasing consumer and activist concern. According to Gray (2011), "Ryanair (airline)... was typically blunt last week when dismissing calls for environmental taxes on the aviation industry as the 'usual horseshit', lambasting British Airways over the fuel efficiency of its fleet and asserting that he was far too busy building his business to join a carbon emissions trading scheme. O'Leary's forthright comments might lead one to believe that the only green concern he has is the livery of Aer Lingus, against which Ryanair recently launched a hostile takeover bid. But the climate change debate is gathering momentum and the impact of air travel on the planet is increasingly coming under the spotlight. (Gray, 2006)

Purchasing as a Means to Manage Supply Chain Risk?

Procurement processes as an active means to reduce the risk in managing the supply chain is rather a common occurrence. The aviation industry relies on the natural resources that drive the production of aircraft parts and the cost of mining crude oil and the refining process to yield gas creates volatility, which in turn with supply/demand cycles, create constraints that spike prices making purchasing during certain periods, inopportune and potentially cost prohibitive.

According to Rathbone (2003), "Other than this local carrier, a number of international airlines service Ukraine, including British Airways, Lufthansa and Air France. Aer Lingus has just announced that it will fly in from Dublin via Manchester." (Rathbone, 2003) The supply chain risk in the case of Aer Lingus are mitigated by expanding routes to the current supply of manageable resources. By increasing the velocity in the use of resources under management, the supply chain risk is inherently lower due to the increase in projected revenue from the increase in traffic generation. The increase in profit enables the development of inventory supply houses to store such necessities as fuel either in pumping form or in derivatives management to take ownership of a fuel contract at a specified date where fuel is purchased at a cost lower than prevailing market.

According to Ireland: Competition and Price Regulations (2011), "Exclusive distribution agreements are sometimes allowed, depending on whether there is competition in the supply chain for a particular product. (Ireland: Competition and Price Regulations, 2011) The EU is against anti-competitive mergers, as is indicated in the previous section using the merger and acquisition reference. However, the supply chain risk can be mitigated should competition exist in the supply chain. Fuel is such a supply constraint and is subject to exclusive distribution agreements.

Aer Lingus as a nationalized airline (Carey, 1985), established a diverse line of businesses, which added to the supply chain risk. However, at the time, supply chain risk was not the demon it is today. Therefore, Aer Lingus was able to operate at a marginal profit as these additional business lines added value to a relatively flat airline operation.

According to Carey (1985), "The airline faces major fleet-replacement costs, and can't count on either the government or its airline operations to fund a new $500 million short-haul fleet. Aer Lingus plans to wring more out of the airline and find more ways to diversify in an effort to double profits, thus paying the costs of keeping Aer Lingus planes aloft without dragging down its other profit centers. "The onus of fleet replacement rests on Air Lingus itself," warns an official of the Irish Civil Aviation Division." (Carey, 1985)

Air Lingus' activities in multiple industries facilitated supply chain risk to unprecedented levels as the business diversified into unrelated industries by buying businesses in different areas. According to Carey (1985), "Aer Lingus hotel business, in 1976, the airline bought Dunfrey Hotels Corp. In the financial and commercial field, Aer Lingus has spun off its expertise in computerized reservations systems into Cara Data Processing, a unit that sells payroll and records systems to banks and retailers, communications equipment to the Irish phone company and hotel reservation systems in Asia. The purchase ate last year of Altek Automation Ltd., a British company that distributes Japanese robots, is Aer Lingus's first foray into the robotics and automated-systems business." (Carey, 1985)

Risks Arising from Procurement

In the case of Aer Lingus, the risk is ostensibly in the regulations that prevent procurement. The airline Ryanair did seek to purchase Aer Lingus in a hostile takeover bid for the competing Irish airline. The procurement of Aer Lingus by Ryanair is a method to consolidate the industry and obtain new routes and increase market share. However, the merger was blocked by a convening commission.

According to Onno, Goyder, Mes (2008), "To defend the merger, Ryanair had calculated that the efficiencies from combining the operations would amount to more than EUR 200 million per year, to be achieved by reducing the staff, reduce aircraft operational cost through its enhanced bargaining position, reducing maintenance costs by negotiating better contracts, obtaining better airport charges through negotiations, reducing ground operational cost and reducing distribution and advertising costs by shifting the sales model to a near 100% online sales model. In relation to the transfer of the aircraft delivery options to Aer Lingus the Commission also found that this is only the transfer of rent between the shareholders of Airbus or Boeing and the merged entity." (Onno, Goyder, Mes, 2008)

The risk of government intervention is inherent in the operations of oligopoly markets. Airlines and Telecommunications are prime examples of procurement risk to supply chain management. Such risk prevents companies that operate at the margin from potentially increasing revenue by increasing economies of scale and scope by procurement.