Supply Chain Management
7 Ways to Reach Your Airline Supply Chain Goals
November 3, 2022 |
The C2FO Team
Airline supply chains are hard to manage effectively, even without the repercussions of COVID-19 and factors such as inflation. How do leading airlines succeed?
At its core, supply chain management ensures that inventory reaches your customers at the right time and in the right quantities. This is a complex and involved process for most enterprises — but as an airline, you most likely face considerable challenges when optimizing your supply chain.
To begin with, air transportation is a capital-intensive industry subject to fuel price variations and high maintenance costs. Aviation companies also need to make continuous technology and fleet investments. This requires a fine balance for inventory and supply chain management: overstocking inventory can create a buildup of obsolete parts, while undersupplied companies face missed deliveries.
It’s also hard for airlines to gauge supply and demand amid pandemic recovery and uncertainties such as inflation, a looming recession, natural disasters and regional conflicts. Even as airlines rebound from COVID-19, suppliers and manufacturers continue to struggle with sourcing materials necessary for production.
Leading airlines are using a variety of strategies to navigate these challenges and achieve supply chain goals — which typically focus on supply chain efficiency, adaptability, profitability and customer satisfaction. If you’re seeking inspiration to improve your supply chain strategy, here are seven ways airlines are reaching their supply chain goals.
1. Using early payment programs to improve margins
According to McKinsey & Company, suppliers — such as maintenance and repair organizations, ground services and caterers — account for over 60% of an airline’s cost base. However, lowering these costs to improve margins is a strategy that’s easier said than done. As an airline, you usually have limited options when it comes to negotiating with suppliers because many cities have only one airport and just a few suppliers to choose from. Some costs, such as airport tariffs, are fixed.
Another option is for you to implement an early payment program for your supplier invoices. In exchange for faster invoice payments, many suppliers are willing to offer a discount. If you work in an airline’s finance department, this means paying less than your supplier’s full invoice amount if you pay before your agreed terms. The benefit for suppliers willing to offer discounts is a boost in cash flow, which might be much needed during inflationary periods. But for large enterprises like yours, over time, these discounts can reduce your costs and improve cash yield.
For example, Air France implemented C2FO’s Early Payment program in 2019. Through the program, the airline’s suppliers have the option to leverage the C2FO platform by choosing which outstanding invoices to request early payment on and setting a discount rate. Air France can then accept discount offers — lowering its costs — in return for delivering payments to suppliers in as little as 24 hours.
2. Building win-win supplier relationships
Air France’s decision to adopt an early payment program goes beyond improving margins. The airline is also motivated by building supplier relationships and strengthening the supply chain. During economic volatility, enterprises often extend payment terms to increase working capital. However, waiting 60 to 90 days, or more, for payment can put suppliers out of business. In a tightly knit supply chain, this hurts both suppliers and the airlines they serve.
Instead, mutually beneficial solutions such as early payment programs enable your airline to funnel low-cost liquidity into your supply chain. Airlines typically have more cash on hand than suppliers because they collect payment before providing a service instead of after. With sufficient working capital, you can give early payments to cash-hungry suppliers, creating a win-win relationship. This dynamic also strengthens other aspects of strong supply chain relationships, such as trust and communication.
One of Air France’s suppliers, Amarante International, now receives payment 30 days earlier than it was before leveraging C2FO. This gives the company the working capital needed to fulfill demand from Air France without relying on more expensive financing solutions.
3. Generating liquidity with flexible funding options
Flexible funding solutions, such as supply chain financing, also help you fuel your suppliers’ cash flow. This can be a good option if you have target financial metrics and want to preserve working capital while strengthening your supply chain. Supply chain financing, also called reverse factoring, uses a bank or third-party lender to finance payments on supplier invoices.
In a supply chain financing arrangement, suppliers receive early invoice payments directly from a lender rather than the airline. The airline then pays back the lender according to its agreed payment terms. This extends payment timelines for the airline to generate liquidity without compromising its supplier’s cash flow. For example, Boeing has used supply chain financing to finance payments to its US-based suppliers, giving the aircraft manufacturer more liquidity as the industry recovers from COVID-19.
You might consider supply chain financing if you don’t have enough working capital to fund early payment or prefer to preserve your cash. However, supply chain financing arrangements are often more complex and cumbersome than early payment programs. This is why C2FO created the Dynamic Supplier Finance (DSF) solution. DSF enables enterprises to preserve their cash while accessing funds from trustworthy financial partners, combining supply chain financing capabilities with dynamic discounting features. Paying suppliers early strengthens your supply chain, and DSF reduces the administrative burdens typical of traditional supply chain financing programs.
4. Leveraging technology to improve supply chain visibility
According to Seema Phull, CEO of ForeOptics, one of the key priorities of supply chain management today is understanding supply and demand risks. Airlines must be able to model risk scenarios — such as changes in customer demand or world events — to more accurately plan supply and demand. Emerging technologies give airlines the data needed to identify potential risk areas along their supply chains and make proactive backup plans.
To improve supply chain visibility, your airline can invest in solutions that illuminate where suppliers are (and aren’t) delivering goods in full and on time. You can also use technology to understand other factors, such as a supplier’s quality standards, costs, labor practices or sustainability initiatives.
Every airline has different challenges and levels of digital transformation for supply chain management. Leveraging technology to improve supply chain visibility often involves collaborating with third-party consultants or technology providers to build bespoke solutions that address your airline’s key visibility requirements.
5. Ensuring stability and resilience
While risks are inevitable, airlines can adapt to change by making their supply chains more agile. There are several strategies that you can implement to make your supply chain more resilient when natural disasters, recessions and other risks happen:
Forecasting demand with an enterprise resource planning solution helps minimize risks. Demand signals, such as customer sentiment, travel industry trends or geopolitics, can help you gauge purchase order volumes more accurately and plan for disruptions.
Building supplier relationships — which could involve strategies such as early payment programs — improve supply and demand transparency. Airlines and suppliers that work effectively together can build joint demand forecasts and collaboratively plan alternative solutions when risks emerge.
Diversifying suppliers, such as partnering with regionalized parts manufacturers, stabilizes airline supply chains. Centralizing suppliers can shut down your supply chain during unexpected risks such as natural disasters. However, you should avoid over-diversifying to keep processes simple and minimize added risk opportunities.
6. Helping suppliers deliver on time and in full
On time in full (OTIF) is a supply chain metric used to measure the proportion of fully fulfilled deliveries that ship on schedule. Ideally, a supplier’s OTIF rate should be around 95%. Airlines need suppliers to reach high OTIF targets to keep supply chains operating smoothly and to maintain customer satisfaction. This makes it one of the most important supplier metrics considered by airline procurement teams.
However, suppliers may struggle to maintain a high OTIF, especially during inflationary periods when their buyers prolong payment periods. Suppliers waiting for payments to clear accounts receivable are often left without the cash flow needed to fulfill demand, causing supply chain delays.
You can address this by supporting your suppliers with early payment programs, such as those implemented by Air France and United Airlines. By paying suppliers early in exchange for an invoice discount, these programs give suppliers the working capital needed to fulfill purchase orders on time, strengthening the entire supply chain.
7. Supporting supplier diversity and ESG goals
Environmental, social and governance (ESG) describes a company’s activities related to climate change and other environmental behaviors; social responsibility, diversity and inclusion; and governance behaviors such as leadership and compliance. ESG is becoming a more important factor in enterprise value and is now commonly considered by investors.
For many enterprises — not just airlines — ESG initiatives are considered “extras” rather than part of a core business strategy, especially during hard economic times. However, investing in ESG activities is an effective way to improve your supply chain stability and transparency. For example, suppliers that integrate green energy technologies such as solar panels can ensure supply chain continuity when energy prices rise.
Leading airlines recognize the value of ESG and are investing in ESG initiatives to support their supply chains. Delta Airlines has a comprehensive ESG strategy and invests in small, and minority- and women-owned businesses as part of its supplier diversity commitment. In 2022, Delta partnered with EcoVadis, a sustainability rating provider, to improve visibility into ESG behaviors along the airline’s supply chain.
As airlines recover from COVID-19 disruptions, other factors such as inflation and geopolitical instability are still impacting airline supply chains. The good news is that leading airlines are reaching their supply chain goals through a variety of strategies, from leveraging supply chain technology to prioritizing ESG.
Some airlines are also finding success with a simple and cost-effective strategy: strengthening supplier relationships and working capital through early payment programs.
Want more information about using early payments for supply chain management? Learn about C2FO’s working capital platform for enterprises.