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CAVU Café: Royboy’s Prose & Cons

*Note: The views expressed in CAVU Café: Royboy’s Prose & Cons blog are those solely of the writer and are not necessarily shared by the Aviation Suppliers Association or the Association’s staff, members, or Board of Directors.

 

   About Roy Resto

 

EXCHANGE PROGRAMS: THE CORE ISSUES

Have you ever noticed that in some firms the sales person with the biggest numbers is also the biggest violator of processes, procedures, and attention to detail? It seems this gets winked-at or conveniently overlooked since, after all, they are making the firm the most money. Typically, QA people are seen to roll their eyes at the mention of their names. On the other hand I have seen many firms where the biggest sales person follows procedures and details just like everyone else – the difference? You guessed it, the tone established by the Chief Executive, but don’t get me started! One type of transaction that demands everyone follow exact procedures and attention to details are for exchanges.


In this blog we’ll discuss:


·         Why exchange?

·         Outlining a simple exchange program.

·         Issues for Accredited companies regarding trace.

·         The most common types of Exchange Programs.

·         Best and Common practices to protect yourselves.

·         Commonly cited problems with exchange programs.

·         Accounting.


 

WHY EXCHANGE?


The central focus of what makes exchange programs attractive for airlines can be summed up in one word: spares (parts readily available to fix and maintain aircraft).  The issue of spares - the right amounts, locations, cost, inventory turnover, return on assets, and opportunity costs (for not having the parts), are among the most continually evolving policy issues at any airline. Airlines with policies to keep inventory levels as low as possible (spares) are typically the ones who find that exchange programs are effective ways to mitigate the costs of delays, cancellations, and AOG’s (Aircraft On the Ground; the plane can’t fly and is out of service until it’s fixed with the part) due to a lack of adequate spares. So how does a typical exchange program work?


OUTLINING A SIMPLE EXCHANGE PROGRAM:


An airline identifies an urgent need for a component. A new one costs $30,000 from the OEM, and to buy one on the aftermarket in overhauled condition would cost $8000. The lead time from the OEM is 3 months, and the lead time for the overhauled component is 4 weeks (while it is sent out to be overhauled). On the other hand, the airline has entered into an exchange program with a distributor. The lead time is one day, and the distributor immediately ships the component (which was already overhauled). The distributor’s shipped component then becomes the property of the airline, so it is shipped by the distributor with all the routine trace, Non-Incident Statement (NIS) Certification, and airworthiness documents. The airline then owes the distributor the unserviceable component that was removed from the aircraft, which is commonly called the ‘core’. The core then becomes the property of the distributor, so it must be accompanied by satisfactory trace and NIS documents. The distributor charges $800 plus the costs to have the core overhauled.

The advantage to the airline is that it got the component at a fraction of the cost, got it immediately, and managed to meet their target of keeping inventory low. In the absence of the exchange program, the airline would have to endure higher costs, longer lead time, or stock higher numbers of spare components.

Although it sounds favorable all around, the math models for a given airline do not always work out to favor exchange programs for certain components. This may be due to market conditions for the commodity, OEM influences, inventory strategies, aircraft/engine lease restrictions, or the peculiar operations the airline engages in.


ISSUES FOR ACCREDITED COMPANIES REGARDING TRACE


For accredited distributors, the expectation is that trace is always solid. But what about that core that is now the property of the distributor? The distributor must assure that it has standard trace and NIS documents from the airline. For some distributors this has been a weakness, and many times the issue is getting the airline to produce the documents. In this case, a good solution is that the distributor creates the documents for the airline and upon review the airline signs and returns the documents. I know more than a few airline employees which value that sort of assistance, uh-huh.


THE MOST COMMON TYPES OF EXCHANGE PROGRAMS


      ·         Cost-Plus: The arrangement I outlined in the simple example is a Cost-Plus model; that is, there is a basic exchange fee plus the ensuing fee to have the core overhauled. A common rule of thumb for the basic fee is that it’s 10% of the market rate of the airworthy component. In my previous example notice the market cost of an overhauled part is $8000, and the basic exchange fee is $800.

      ·         Flat Rate Exchange: In a flat rate exchange program, there is just one fee, and the cost of overhaul is calculated-in to that fee. This demands some experience on behalf of the distributor. Manufacturers and repair stations may be the biggest practitioners of the Flat Rate exchange since they are so intimately familiar with the product and parts pricing.


BEST AND COMMON PRACTICES TO PROTECT YOURSELVES


A written agreement between the parties for each exchange transaction is commonly practiced and for good reasons. It should address at a minimum the following issues:

      ·         Establish a unique Purchase Order or Repair Order.

      ·         The basic fee is spelled out.

      ·         The Serial Number and Part Number of the core that is to be returned.

      ·         The condition of the part is repairable.

      ·         The deadline for the return of the core.

      ·         Who is responsible for all the shipping costs?

      ·         Contingencies should be clearly addressed such as, but not limited to:

o   Penalties if the core is not returned by the agreed upon date, such as additional fee’s or conversion to an outright purchase (of the component that was initially provided) at the agreed upon price cited in the agreement.

o   Who pays for ‘over and above’ issues associated with overhauling the core component? For example what to do if the core was returned in repairable condition but the repair station declares the part BER (Beyond Economical Repair) for whatever reason.

o   Who pays for ‘uneven’ exchanges? For example, the part provided by the distributor had all the required service bulletins (and Airworthiness Directives, AD’s, in some cases) incorporated in the component, but the received core does not have these incorporated.

      ·         The content and type of documentation that should accompany the returned core.


COMMONLY CITED PROBLEMS WITH EXCHANGE PROGRAMS


Commonly cited problems with exchange programs include the following:

      ·         The airline or customer does not return the core. Most of the time the simple root cause is that the airline or customer failed to apply the required ‘attention to detail’. Depending on the level of procedural bureaucracy and computer automation at the airline, for example, not pressing the right buttons or following their processes and procedures will affect this. Regardless of the root cause, getting that core back may depend wholly on the follow-up system the distributor has in place; is it robust and does it provide conspicuous indicators of approaching deadlines?

      ·         The distributor does not follow-up on the details. Lack of attention to details could potentially include the following:

o   Tracking the due date for return of the core.

o   Tracking receiving inspection discrepancies, for example, the core was returned, but without the expected documentation.

o   For Cost-Plus exchanges, tracking the cost of the overhaul of the core and charging it back to the airline or customer.

o   If any of the agreement contingency issues previously mentioned kicks in, are these being tracked?


ACCOUNTING:


By now it should be obvious that exchanges are not simple buy or sell transactions. A single exchange may incur several invoices and costs which must also be carefully tracked. Add to this, common considerations such as Lines of Credit with the airline or customer and how to track and address those, and the accounting process could indeed get complicated really fast. How about inventory dedicated to exchange programs, how do you list and value it? Hmmm…


Over ‘n out


Roy “Royboy” Resto


www.AimSolutionsConsulting.com

Posted By Roy Resto | 4/6/2016 1:18:54 PM
 

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