Supply Chain of Southwest Airlines

Southwest Airlines

Organizational Profile

Southwest Airlines is a discount airline in the United States, and is one of the industry leaders as the #3 in market share (Portillo, 2012). The company has a large network of flights around the U.S. Recently, it is has turned its back on the discount carrier model and begun to price more in line with industry norms (Martin, 2013). The company faces the same supply chain issues as any other airline. As a service entity, staffing is a major input. The company's biggest commodity worry is fuel, which is a major cost driver. There have also been recent issues with respect to parts and maintenance, which are also elements of the company's supply chain, especially with respect to the procurement of good parts (Ferrari, 2009).

Business Strategy and Structure

As noted, Southwest operates as a discount carrier in the airline business. It has recently shifted away from this strategy, focusing more on a more conventional business model. Procurement has not changed much with this shift. The company's structure is broken down by task. The tasks include supply chain management, maintenance and human resources, all of which are part of the supply chain for critical inputs. There are other functional departments as well, but finance and marketing for example have little to do with the company's supply chain, other than the impact that Finance has on fuel price hedging.

Current Supply Chain Performance

Southwest has no issues with the procurement of fuel. The biggest issue is with the price of fuel. Fuel hedging is important aspect of the business, as it helps to support the strategy by leveling out the cost of this key input. Sometimes, the company can make a profit on its hedges. Hedging is, however, a financial task and one that while critical to the supply chain is not part of the normal procurement process (Velotta, 2012). Likewise, another key input is human resources, but that department handles the issue independent of normal procurement channels, predominantly by building the employer brand of the company.

Southwest bears responsibility for procurement of in-flight items like food, but also of the tools and supplies needed for maintenance. Ferrari (2009) notes that Southwest has had difficulties a few years ago with respect to ensuring proper supply chain management. The Federal Aviation Authority (FAA) sued Southwest for potentially using unauthorized parts, which indicates a serious breakdown in the supply chain. This issue was serious enough to ground 10% of the company's fleet. Forced to make changes to its supply chain system, Southwest now finds itself having a more difficult time achieving cost competitiveness.

Patterns of Change in the Supply Chain

The observable pattern in the supply chain for Southwest is that it has been forced to use authorized suppliers whose parts meet the FAA's specs. The company was breaking the law in not doing that before. The result of this is that Southwest has needed to implement tighter controls on its procurement to ensure full compliance with the law.

Key Issues in the Supply Chain

There are a few key issues in the supply chain. The first is to ensure that suppliers are providing goods to FAA spec. The second is to ensure that fuel comes in at a price that facilitates cost competitiveness. A third issue is to analyze aircraft needs over the next 5-10 years, since there is a substantial lag time on new aircraft.

Competitor Analysis

The major competitors are American/U.S. Airways, United/Continental, and Delta, along with Alaskan, JetBlue and some other small carriers. Most competitors operate a similar business model, and compete with each for business in the domestic U.S. market.

Key Competitors

All major competitors are key competitors

Competitor Supply Chain Performance

The competitors appear to have no major supply chain issues. Two have recently completed or are in the process of completing mergers, which could create some supply chain issues, but could also create greater economies of scale in purchasing, something that could improve supply chain performance.

Strategic Considerations

Southwest is basically being forced out of the discount space. The company will need to match the supply chain capabilities of its competitors in order to remain competitive. It needs to continue its good track record with fuel hedging to lower the price of that key input. Further, Southwest needs to ensure that aircraft availability in the future aligns with its growth plans.