07 August 2003

Q: We are a Middle East airline looking for ways of cutting costs and improving efficiency. One of them is to concentrate on our competency and outsource the rest. Supply management purchases, receives and stores items in our warehouses at headquarters, and then distributes them to our major destinations. How should we evaluate whether to outsource this division? Are there any companies in the UK or elsewhere that do this for airlines?

A: Javid Karim, group sourcing and contracts manager at bmi british midland, writes: Many airlines continue to experience cost pressures with improved revenues failing to materialise after 11 September 2001. This "burning platform" has raised the profile of many airline procurement departments, which are often charged with leading far-reaching change programmes to deliver better margins for struggling businesses. Arguably, the decision to outsource has never been more relevant.

However, the strategic decision to outsource requires careful consideration. Firms outsource for a variety of reasons, predominantely to focus on core activities, reduce total costs, convert fixed costs to variable costs and improve service. A key first step is to evaluate whether the supply function is considered a core competency of your airline. While many airlines have outsourced the traditional logistics chain, few have extended this principle to purchasing.

A significant element of any outsource decision must consider risk analysis. Risks you will encounter include the loss of core activities, being leveraged by suppliers, the loss of strategic flexibility, a fall in employee morale, a loss of coherence between current processes, and a loss of knowledge of the marketplace. Such risks must be assessed and counter balanced with any potential benefits before arriving at your decision.

Another aspect is the internal resources that must be dedicated to managing the outsourced organisation. "Firing and forgetting" current internal activities will not work in the long run. The cost of this resource must be factored in. Once the decision to outsource has been made, a detailed plan must be drawn up jointly by both organisations. Much thought must be given to contingency planning during the changeover phase.

Given this, there are often benefits to outsourcing the "right" elements of any business. The dedicated expertise, improved purchasing power, and undivided attention of a third party concentrating on what it knows best can deliver reduced costs and improved service levels.

There is no "blueprint" outsourcing process in the airline industry. Most of the best practice in this field originates from other industry sectors (such as automotive, financial services and the manufacturing sector).

With regards to organisations that could help you, certain aircraft repair agencies and original equipment manufacturers might be interested. Consultants AeroStrategy may also be able to assist (www.aerostrategy.net).

SMaug2003