Airlines have a systematic and standard approach to procuring airplanes, fuel, repair and maintenance services and other important aspects required in running their businesses. The use of a suggested method of outsourcing is meant to make the airline cost-effective in procurement of jet fuels. In addition, it ensures that these companies get high value from the process and create healthy competition among the suppliers.
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In this approach, performance risk is shifted from the airline when purchasing jet fuel from a selected supplier. Delays in delivering jet fuel will be reduced when performance standards are introduced and applied. This paper examines how airlines can maximize the usefulness of practical guidelines that can be used to implement a performance-based contracting approach in their procurement process and the value the aviation industry will acquire in implementing this model.
The main supplier businesses that are related to the Aviation sector specialize in such activities as maintenance, repair and operating of airplanes, and they usually have a functional department that carries out its purchasing or outsourcing services. In many of these businesses, procurement processes determine the level of efficiency of the business (Walker & Brammer 2012). Businesses must thus manage their procurement strategies well whether they are outsourced or they have them as a purpose of their procurement department.
The global aviation industry has for a long time focused on economic objectives like cost containment, quality improvement and efficiency in growth, predominantly in its purchasing. The current economic climate has left organizations with pressure to draw more value from their service, including those in the aviation industry (Klatt 2015). They have to be innovative in order to keep up with the pace of the increasing competition from other airlines by being more effective. This report looks at the best practical guidelines that can be used to implement a performance-based contracting approach in an airline in the aviation industry.
The procurement process in any business begins when a need is identified, and it ends when it is serviced at the right time with the right cycle. In the aviation industry this could mean identifying a spare part, its model and number to acquire, the quantity of the spare part to acquire, identifying the quality standard of the spare part, identifying appropriate supplier, the lowest cost and the duration required to deliver. The procurement process is not completed until the spare part ends up in the storage room of the aviation business in the right specification and the payment is made.
Performance based contracting (PBC) is a new service model which shapes how companies view acquisition, operation and maintenance of capital equipment. It focuses on the outcome of the system reliability performance as compared to materials and labor involved in the maintenance. Thus, this model emphasizes on the aspects of acquisition to primarily be centered on the purpose of the work to be done, and the method or the manner in which it is done is immaterial (Walker & Brammer 2012).
Contractors are given the freedom to choose how quality levels are achieved in delivering goods or services that they have a contract to deliver. This service model focuses on the results of a contractor that will tie his payment, contact extensions or contract renewal. Contractors receive payments for goods and services that satisfy the performance standards. The contracts attract both monetary and non-monetary incentives and disincentives. The object of this model is the outcome of the procurement process. In the aviation industry performance-based contracting is referred to as power-by-the hour.
Industries that have applied performance-based contracting cite the following benefits to be associated with it:
- Increased likelihood that the procurement needs will be met.
- There is more focus on the final results rather than the process used to reach the end.
- The incentives provided induce innovation by suppliers.
- The performance risk is greatly reduced.
- Better results and value are made.
Despite the advantages that are associated with performance-based contracting by both the suppliers and companies, it has often been criticized, because unlike the traditional contacting models where there are detailed technical and operational specifics of a task, this model focuses on the outcomes (Walker & Brammer 2012). The danger in this shift of the prescriptive approach may serve to limit processes instead of requiring prescription like in engineering and construction. Further, the transfer of risk to suppliers works against them and may resist taking the customer’s business risks beyond their control.
Requirements for a successful performance-based contractor
A successful negotiator of a performance-based contract should possess such attributes as the ability to make sound and objective decisions. The individual should perceive the implication of the decisions he or she makes to the business, pay attention to details, be influential in negotiating contracts persuading others to accept their proposals into agreement (Vespermann & Wald 2011).
Such people must also have good communication skills to effectively express their information to others, and they must also have courtesy and be able to develop relationships since they will relate with other people of varied backgrounds in the course of contract negotiations. They must also be good at planning and evaluating so that they can organize work, set priorities and monitor the progress of the work. They should also cope well with identifying problems and determining accuracy and relevance of information in solving problems.
Steps in performance-based contracting
In order to successfully negotiate a contract to buy jet fuel for an airline, the following steps and activities are followed and undertaken. All these activities occur within different phases of the procurement process, and the management as well as the suppliers must be involved.
There should be an established and integrated solutions team. A multi-disciplinary team consisting of members from management, procurement and other functional areas in an airline is constituted (Walker & Brammer 2012). This team will consist of engineers, accounting offices and procurement personnel all working together with an aim to buy jet fuel. For each team member a role and responsibility is allocated depending on the functional department that they represent. Rules of conduct are developed. This integrated solution team has the responsibility of finding solutions for the organization.
After the formation of an integrated solutions team is done, the next step is where the description of the problem happens (Vespermann & Wald 2011). The team describes clearly what type of fuel they need for their airplanes. They will consider the current situation with fuel, link the objectives of this new acquisition of fuel to the airline’s mission and objectives. They also state what constitutes success of the procurement process. The fulfillment of the need must have a direct relationship with the goals of the airline.
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The next step is examining the private sector and public sector solutions. Once the results of the intended procurement of jet fuel have been documented, the integrated solutions team begins to look at the solutions that are available from potential suppliers in the public and private sector. They do this by conducting market research where they collect information on the available capabilities of the various solution providers (Klatt 2015). This is important because the airline must purchase the jet fuel/product that has the best value to solve the mission critical problem they are facing. The findings of the market research are then documented and used to write a statement of objectives.
A performance work statement (PWS) is then developed. With market findings well documented, the integrated solutions team begins to examine the requirements and develop performance standards work statement, performance requirements and quality assurance document by the competing suppliers (Vespermann & Wald 2011). In the process of coming up with this document there is an analysis of desired outcomes and what and when must be accomplished to satisfy the requirement. The following must be stated clearly in the PWS: desired outcomes, required service, performance standard, acceptable quality levels, the method to be used in monitoring and incentives to be given to the suppliers of the jet fuel for meeting standards.
It is decided how to measure and manage performance so that an airline company can have a standard of evaluating the qualities of an appropriate supplier (Walker & Brammer 2012). Here the integrated solutions team establishes a full vision of what constitutes the success of acquisition of jet fuel. The main objective is to build a measurement that will be used in the analysis of performance. The management decides on the overall success metrics that will be used. The integrated solutions team also considers the determinants it will use when it wants to award a contract to a supplier such, for example, their performance in providing jet fuels to airlines and letters of recommendations.
The right supplier must have the knowledge of performance-based contacting before they are awarded the contract. Due diligence is taken in selecting only those suppliers who can deliver the desired outcomes of the acquisition process. Risks must be assessed in awarding a contract to each of the contractors who had submitted their proposals. Issues of conflicts of interest must also be checked carefully. Finally, the supplier who turns out to be the most promising one is awarded the contract.
Post award phase
There is management of performance. Here, the integrated solutions team changes its role and assumes the role of reviewing the progress of procurement together with an additional member from the selected contractor. They regularly hold meetings that check the success metrics that had been set to determine the success of the supplier (Smith et al. 2013). They ask the questions as to whether the acquisition is achieving its cost, schedule and performance goals, if the contractor is meeting or exceeding performance goals and the arising issues that need to be solved. Also, this team determines the risks that have come and how they can be mitigated.
Attributes of a good supplier
When airlines are considering selecting the supplier of jet fuel, they must evaluate the following attributes, and the supplier must meet a specified number of minimum requirements to win the tenders (Vespermann & Wald 2011). Using performance-based contracting, the integrated solutions team chooses the best from a field of suppliers competing for the same solution contract. The best is not necessarily the cheapest or the one with a very long history of supplying jet fuel.
The performance-based evaluation criteria explores the history of a supplier, including visiting their former clients and finding out their levels of satisfaction with the supplier’s performance. This may include making site visits to the supplier’s premises to determine their ability to deliver or consulting with other airlines to understand where they outsource jet fuel from (Walker & Brammer 2012). The integrated solutions team evaluates the given supplier’s understanding of performance contracting model and through discussions they explain the incentive structure and pricing approach to the suppliers. This aspect is important in determining the level of awareness and knowledge regarding the suitability of a supplier.
A successful supplier must be capable of demonstrating their ability to supply the required good, which in this case is the jet fuel, at the right time and in the required quantity. Usually, past performance may be required since it may be used as demonstration of the ability of a supplier to deliver in the future. Past performance information may be derived through collaboration with other airlines. The selected supplier must also be willing to take the risks that are shifted to them using this process.
It can be seen that there are great opportunities in streamlining procurement in the aviation industry. When airlines adopt this performance-based contracting model, they start to have better and manageable acquisitions that will create a win-win situation both for them and the suppliers. The minimum supplier requirements should always be observed when choosing the company that wins the tender to supply the required machines, parts, fuel and other accessories required by airline companies.
Klatt, F 2015, Performance-based Specifications in Public Procurement: Exploring the Case of Germany, University of Twente, Enschede.
Smith, M, Saunders, R, Stuckhardt, L & McGinnis, J.M 2013, Best Care at Lower Cost: The Path to Continuously Learning Health Care in America, National Academies Press, Washington (DC).
Vespermann, J & Wald, A 2011, ‘Much Ado about Nothing?–An analysis of economic impacts and ecologic effects of the EU-emission trading scheme in the aviation industry’, Transportation Research Part A: Policy and Practice, vol. 45, no. 10, pp.1066-1076.
Walker, H & Brammer, S 2012, ‘The relationship between sustainable procurement and e-procurement in the public sector’, International Journal of Production Economics, vol. 140, no. 1, pp.256-268.