BUS612: Advanced Project Procurement

BUS612: Advanced Project Procurement.

Week 1 – Assignment

Article Review

Read the assigned article from this week’s readings.  Consider yourself as a project manager at American Airlines, and John MacLean is your project sponsor. Describe at least two examples related to supply chain management, and justify the reasoning for the selection of these examples. Describe how these example projects can improve profitability of American Airlines. Submit a two- to three-page paper, excluding the title and reference pages.  Use concepts from the text for purchasing links to profitability and your knowledge of project management to support your views. Your paper should be formatted in APA style as outlined in the Ashford Writing Center.     
Carefully review the Grading Rubric for the criteria that will be used to evaluate your assignment.

Article:

This is your captain speaking

The past three years have been challenging for American Airlines, prompting a push from procurement for value creation. John MacLean, vice-president of purchasing and transportation, explains how the function has coped

Winter 2009-2010

INTERVIEW: JOHN MACLEAN

By Nick Martindale

American Airlines operates out of 250 cities in over 40 countries and, along with its American Eagle and AmericanConnection affiliate brands, makes an average of 3,300 flights a day including 37 non-stop departures from Europe to the US. In recent years, the airline industry has been affected more than most by the twin horrors of soaring fuel prices and the subsequent economic downturn, which has imposed considerable pressure on American Airlines’ procurement department to deliver additional value and even move into the territory of generating revenue in a sector famous for small profit margins. All of this activity has played out against a backdrop of mounting government and international pressure for more environmentally friendly methods of operating and a turbulent global market. CPO Agenda caught up with vice-president of procurement and transformation John MacLean, who is responsible for the procurement of $4.5 billion in goods and services for the airline and oversees relationships with its 3,900 suppliers from his base at the company’s headquarters in Fort Worth, Texas. He talked about how the function has fared with the challenges of recent years and those that lie ahead.

The past three years have been particularly difficult for procurement. How have you coped?

Our focus has been on three categories: cash management, risk mitigation and what we call value creation. We’ve done a lot more training with our staff on what to look for in terms of risk mitigation so we’ve been out benchmarking against other companies. Second, we do a lot more monitoring of suppliers in terms of their financial health and their production schedules. Third, we’ve also changed processes when we’re making awards to introduce a whole new module about the risk mitigation aspect.

What kind of systems do you have in place to monitor suppliers that could be at risk of failure?

Within my purchasing and transportation department I have my own finance organisation that watches suppliers all the time in terms of public data. We’ve put all of our employees through training to help them get ahead of the public records, so we look for things such as layoffs, closings or suppliers being late in terms of shipments as indicators. We also find that companies are more than happy to say that they’re in good shape but their competitors are not. We will try and help those suppliers that we think are strategic to our needs when they get into trouble, so if they need us to change the frequency that they get paid we will do that. We’ve bought inventory on their behalf and they’ve processed that for us, we’ve levelled out the production schedules so they don’t have layoffs and, in some cases, we’ve told them they’re too high-risk so we’re going to dual-source. Often they’re happy to do that so they don’t put us in jeopardy.

Have you come under pressure to improve working capital? If so, how have you balanced this with the above?

Our focus, frankly, has been on our own needs. Capital expenditure projects have been deferred and we’re always looking to stretch payables when we can. Everybody is trying to reduce inventory and that puts a lot of pressure on the supplier but for our own cash needs we have to do that. The fourth category is that we’ve gone through our various facilities to look at what assets we can sell. That’s not buildings, but assets such as equipment and tooling.

How have you gone about cutting costs, both within the department and across the airline as a whole?

We talk more about value creation than cost cutting. Procurement is known for cutting costs and focusing on price and we’re trying to get away from that. We have a very robust process that starts with putting everybody in our department through what we call value training. We help them to understand that it’s not only cost; it’s also cash management, capital, logistics costs and speed, and the opportunity in some cases to generate revenue. Cost cutting is still probably two-thirds of what we do but we’re trying to create more value with suppliers as well.

How has that translated into your relationships with suppliers?

They’re very pleased that we don’t only look at price but at how they can do things differently. A lot of times it’s the logistics area: we find ways to move products either more quickly or through a better route. Those that we intend to provide more volume to we’ll offer new contracts or find new products and services that they can participate in. But clearly we have suppliers that are struggling and they find it isn’t in their best interests.

In terms of your own resources, have you found yourself under pressure to do more with less?

We’ve all had to do some downsizing and procurement is no different. We’ve relied on three things to try to help us through this resource constraint. One is that we try to use technology so we have a series of catalogues – I think we’re up to 50 now – where internal employees can order items themselves so that we never have to touch it, and we’re using electronic requests for proposals and reverse auctions, which also speeds things up. The second thing we’ve done is outsourcing. Historically we’ve had our own staff who went out and stayed with suppliers for some time when they were working on major projects but now we’ve outsourced that, so when we don’t have a lot of projects it’s immediate downsizing and when we do it’s immediate resourcing. The third one is something we call integrated suppliers, which is where we bring some of the suppliers on to our property to do some of the work that we would typically do. One example is in the print area but we have three or four of those.

Have you found that you’re able to influence areas that previously would have been out of reach for procurement?

There are new things that we buy today that we were not involved with in the past. We now manage all the transportation and customs for the company, we manage all the energy needs – not only fuel but electricity and natural gas as well – and we’re heavily involved in in-flight entertainment. We’re also more integrated with parts of the company that we would have been three to five years ago. We’re involved with the training of pilots and buying the simulators and all the charts they need. We’re also involved in some of our subsidiaries more than we have been in the past, such as our regional American Eagle scheme, our AAdvantage [frequent flyer] programme and our American Airlines publication. The third way in which we cover a broader role today is the focus on the carbon footprint and energy. As a result of the hurricanes – Katrina and Rita – we now have a business resumption planning process and, because of the price of jet fuel, we’re very involved in how hedging gets done and what disclosures need to be made.

What kind of strategy do you have regarding fuel?

Historically, we’ve been very good at buying fuel. We buy it at the refinery, transport it ourselves and manage the fuel at the airport. But going forward we need to be very good at three aspects. One is the risk mitigation for the business resumption. We all need to do a better job to understand our vulnerability when a major catastrophe happens. Second, we’ve spent a lot of time educating the legislature on how the price of jet fuel and crude oil gets set. We’re very active ourselves in the hedging market, which we do with our Treasury. We have authority from the board to hedge up to 50 per cent, so we’re constantly hedging one to two years out. The CFO makes the final decision but Treasury and procurement do all the analysis and recommendations. The third one is this whole notion of alterative energy. We have at least three projects that are in the pipeline right now. At LAX Airport in Los Angeles, we’re working with a company that wants to take grass and tree clippings and convert that into gasoline for use in the equipment that runs around the airport. We’re working with another fi rm that is focused on converting coal into jet fuel and another that’s working on converting certain types of grasses that grow in the mid-west and the west into jet fuel.

Aside from fuel, what are the other core categories for you?

One of our big buys is all of the parts and materials that we need to keep of all the aircraft operating. Every 12 to 18 months, every aeroplane gets a complete overhaul where they take everything inside the aeroplane out and rebuild it. On our international flights we provide food and beverages and at the airports there are a lot of services such as people to fuel or clean the aeroplanes. We buy all the energy for the company and then we have all the usual corporate products such as office supplies, printers and so on. We also get to buy three or four unusual things: simulators, caviar and Godiva chocolates, for example.

Have you had to put strategic initiatives and longer-term aspirations on hold to focus on the current situation?

Although we have dampened our enthusiasm for capital projects, we are investing in the company in places where we absolutely need to. An example of that is we are working on a 10-year plan to replace our largest fleet of aeroplanes – which is 300 aircraft called the MD-80 – with Boeing 737800s and are replacing 20 or 30 aeroplanes a year. We’ve announced that we’re going to buy the Boeing 787 and we’ve just selected the GE next generation wide body engine for that. That won’t show up until 2014 for us but we’re working on that today.

Recently, you’ve moved into revenue generation, a new role for procurement. What does this involve?

We’re never going to be a big player in the revenue stream but we can help out a bit. We have developed products with suppliers and negotiated royalties if they sell that to other companies. We’ve been involved in generating ad revenue where suppliers pay to put their name on our cups and napkins inside the aeroplane. In the entertainment area there are ad revenues so we’re often negotiating the right to have that ability to advertise on it. We have also purchased jet fuel and resold it and make a profi t, but it’s very airport-specifi c. There has to be suffi cient storage and distribution outlets and it has to be a competitive landscape where we can buy the fuel at a price that’s diff erent to other airlines at that airport. Then then we have to have a supplier that’s willing to participate with us. It’s only a handful of markets that we’re able to do this in.

What are the main challenges and opportunities for procurement over the next few years?

All of those things that are in the newspapers – social responsibility, energy and the environment – are going to create a shift in global sourcing. A perfect example for us in the US and for Europe as well is that the more you put in a cap-and-trade policy or an energy tax, the more it’s going to shift business away from our own domestic markets to Asia if other parts of the world such as China are not participating. What’s that going to do in terms of the cost structure and sourcing decisions? How is that going to change supply and demand? Those chapters have yet to be written but it’s clearly going to change how we do things and where we buy things.

Does that uncertainty affect your long-term decision-making?

We are less likely to go long on a contract. Three years is about all the tolerance we have in our sourcing decisions until we see how this is going to play out. Our contracts have more provisions in terms of energy and social responsibility than they have had in the past and we need to do a better job at getting all of our commodity managers to read more about the global economy. We need to be much better at appreciating how the world dynamics are going to change. Could getting involved in these kinds of issues help procurement in the longer-term? As a profession we have a long way to go. There’s a wide margin in terms of how integrated and how broad the role of procurement and transportation is from one company to another. I tell my people that they can have the greatest idea on the planet – the greatest cost savings or logistics improvement project – but if they can’t sell that to a supplier or internal customers, then it won’t go anywhere. In a lot of companies, the procurement and supply management function doesn’t appreciate how important it is to have marketing skills and to be able to speak the language of either production or finance to sell them on ideas.

How has the procurement function at American Airlines changed since you joined back in 1992?

We’ve made a lot of changes. We have measurements today that we never used to, we do recruiting on campus here every year; we’re very focused on diversity – 45 per cent of the people in procurement are minorities and 55 per cent are women; we have 12 training modules today that we put everybody through and had no training back in 1992. We’re very into supplier involvement in our products, and having them work with our engineers and marketing people. We have gone through the supply base rationalisation process – from 17,000 suppliers, today we’re down to about 3,500 – so what we do today is supplier optimisation. One of the things I’m particularly proud of is the change in focus. The reason why we’re in more areas of the company than we have historically been is that we provide a service to an internal customer rather than demanding they come to procurement to get something purchased. That mindset really makes a difference in how we approach our job.

FACTFILE
AMERICAN AIRLINES AT A GLANCE● Founded in 1929 when The Aviation Company was created to acquire other young airlines. It became American Airways in 1930 and American Airlines in 1934

● CEO: Gerard Arpey (appointed 2003)

● Headquarters: Fort Worth, Texas

● One of the largest airlines in the world, contributing more than $150 billion a year to the US economy. Its network covers North America, the Caribbean, Latin America, Europe and the Pacific

● Combined fleets number more than 900

● Carried 98 million passengers in 2007, equal to one-third of the US population. It flies around 270,000 a day and handles more than 300,000 pieces of luggage

● American Airlines has nearly 82,000 employees worldwide and American Eagle around 13,000

● Placed an order in October 2008 for 42 fuel-efficient Boeing 787-9 Dreamliners, with rights to acquire an additional 58. The initial 42 will be delivered between 2012 and 2018 and the additional 58 between 2015 and 2020, if optioned

● Founding member of the oneworld alliance, an amalgamation of 10 leading world carriers and 20 affiliate airlines linking nearly 700 communities worldwide. The alliance celebrated its 10th anniversary in 2009 and Arpey is currently chairman of the governing board

 Teague, P. (2009). John MacLean, supply chain manager of the year.Purchasing, 138(10), 12. Retrieved from the ProQuest database.

BUS612: Advanced Project Procurement

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