A Case Study of Pratt and Whitney Aircraft’s Commercial Spares Planning

This case study, which can be used as a teaching case, deals with jet engine spare parts planning at Pratt and Whitney Aircraft Company, a division of United Technologies Corporation. The case includes background on the company’s history and an overview of their jet engine manufacturing operations. The primary focus of the case is on the application and evaluation of forecasting models for demand planning within an ERP system environment. An Excel-based decision support system (DSS), which is available from the authors upon request, enables the evaluation of alternative time series forecasting models for a variety of jet engine spare parts. The DSS workbook replicates the many features and options available in SAP’s forecasting system, which has been purchased by Pratt and Whitney. INTRODUCTION Larry Hosey, Manager for PW2000 engine spares at Pratt & Whitney, quickened his pace to attend the planning meeting for the commercial jet engine spares business. He was meeting with John Doyle and Greg Campagnano, his counterparts responsible for the JD8D and PW4000 jet engine spares. There had been a number of recent changes in the business and new procedures needed to be developed for managing this complex function. During the meeting, the following comments were put forward: John Doyle: “Our commercial spare parts division is a make-to-stock business and our ability to support the customer depends heavily upon having material available off the shelf. Our customer catalog advertises a seven-day leadtime on the majority of our parts, so the expectation is that our customer can get his orders filled within that time frame. It is then incumbent upon us to make sure that we have the right amount of inventory on the shelf to support that seven-day lead-time. The recent events of the airline industry have put an even enhanced burden upon us to try to come up with the best forecast possible.” Greg Campagnano: “We have close to 22,000 parts that need routine forecasting. About two-thirds are forecasted based upon historical sales data using simple time series models, with the rest done manually. Manually forecasted parts are typically very expensive items or with very low demand. For example, we have one turbine case that has a current list price of over a million dollars. Therefore, we try to approach these types of items on as much of a “Just-In-Time” basis as we can. There are a number of factors influencing demand for those parts, and we solicit information both internally and externally from customers to help us do the planning for those items. A major input A Case Study of Pratt and Whitney Aircraft’s Commercial Spares Planning Mabert, Son & Campbell Communications of the IIMA 12 2006 Volume 6 Issue 3 to the forecasting process involves gathering data from the customers. We conduct planning and forecasting conferences with the major customers, the major operators and shops, whereby we sit down with them and discuss what their parts needs are, what they see changing, and it is very helpful to us.” Larry Hosey: “The Spare Parts supply chain starts with a forecast which is done on a part number level. This forecast is input into the SAP system, which generates an MRP schedule to our internal producers, which we call module centers because they each make a module of the engine and the parts that go into it. The module centers then select internal or external suppliers to do the work for them. These manifest themselves into deliveries to a distribution center, located in Georgia, which is then responsible for all of the commercial spare parts throughout the world. Generally the leadtime involved in creating these parts ranges anywhere from two weeks to about nine months – that’s a considerable span. Also, there are considerable differences on the types of parts that are stored, and the costs of the storage of the parts. Because we forecast 22,000 individual parts, in 2003 we implemented an APO system-bolt on to SAP, which we purchased. It is going to afford us the opportunity to have a bit more flexibility relative to how we model our time series demand, because many of our parts are based on the demand history. In an attempt to improve our forecast, the APO tool provides us about 36 statistical models, which is far more than we use today. Right now we’re at the infancy stage of how to use them and which of 22,000 parts fits best with which model. That’s one of the efforts we’ve got afoot, trying to classify parts in such a way as to understand how best to use the tool we have in place.” While commercial spares are sourced from both internal P&W and external suppliers, all stock was consolidated outside Atlanta (GA) at a single location for rapid shipment to customers worldwide. A 95% service rate had been established for the business, but there was significant pressure to be effective and minimize spares inventory investment levels. With over 22,000 items in the division’s catalog that Pratt & Whitney commercial spares business supplied, planning for the appropriate stocking level to meet customer demand was challenging. For most items, a seven-day delivery lead-time was specified for stock items. For very low demand and expensive items (above $1 million), a thirty-day lead-time was targeted. COMPANY HISTORY AND BACKGROUND Frederick Rentschler established the Pratt & Whitney Aircraft Company in July 1925 to design and build aircraft engines. The Pratt and Whitney Tool Company, in Hartford, Connecticut provided startup money, factory space, and even a name for the new company. Six months after formation, the new company produced the Wasp engine, which included a number of important advances for the Navy. The Wasp and its successor, the Hornet, were utilized extensively in Navy aircraft for many years and dominated the civil market. By the early 1930s, Pratt & Whitney Company was building the Twin Wasp. This engine powered many fighters, bombers, and transports of the period. As WWII progressed, technology advanced and more powerful engines became common. Pratt & Whitney produced both the Twin Wasp and the Double Wasp R-2800, which powered much of the U.S. fighter and transport fleet as well as many British planes. While the jet engine was developed during WWII, Pratt & Whitney had spent the war years focusing exclusively on its piston engines. By 1945 it was far behind competitors who had been developing jet engines. In 1952 P&W introduced the J57 turbojet in a B-52 bomber. The commercial version of the J57—the JT3 engine— powered Boeing's first jet transport, the 707, and the Douglas DC-8. Over the next four decades a number of new jet engine designs (JT8D, JT9D, PW2000, PW4000, V2500, GP7000 and PW6000) were added to the division’s product offerings to support the commercial aviation industry. By the mid 1990s, Pratt and Whitney had over 15,000 installed commercial jet engines serving close to 500 domestic and foreign customers. Pratt & Whitney today, a division of United Technologies Corporation, is a large American aircraft engine manufacturer, with their engines widely used in both civil and military aircraft. Commercial air giants Boeing and Airbus are Pratt & Whitney's largest airframers. They serve P&W’s airline customers worldwide. P&W has several commercial engine families including the JT8D, the JT9D, the PW2000, the PW4000 and the PW6000. Their A Case Study of Pratt and Whitney Aircraft’s Commercial Spares Planning Mabert, Son & Campbell Communications of the IIMA 13 2006 Volume 6 Issue 3 military offerings include engines for the F/A-22, the F-15, the F-16, the C-17, and the Joint Strike Fighter currently being developed. Pratt & Whitney, General Electric and Rolls-Royce are the primary players in the market, with Pratt & Whitney being more successful in the wide-body aircraft like the Boeing 777 and the Airbus 330. General Electric enjoys a significant lead in the narrow-body market supporting such planes as the Boeing 737, with RollsRoyce producing engines for both markets. Today’s commercial aviation industry is faced with a number of competitive concerns, including significant price competition, a need for more efficient engines, and a significant amount of over capacity. The 9/11 tragedy significantly changed the operating characteristics of the aviation industry. Many new planned orders have been cancelled. Numerous airlines have lost billions of dollars a year over the last decade with many major airlines like United Airlines and US Airways going into Chapter 11 bankruptcy. With higher fuel bills, the need to reduce operating costs led to calls by management for even better engines. However, this will not occur quickly. The manufacturing of aircraft engines is technologically intensive and subject to lengthy and costly development cycles. It can cost as much as $1.5 to $2 billion to bring a new engine design to commercial viability. The P & W division has three sources of revenue. The first is from the initial sale of the engine for application in airplane families like the Boeing 747 or the Airbus 320 or military jets. An engine can cost several hundred thousand, depending on size, type and a variety of other factors. Some engines like the JT8D have been in service for over three decades, while the PW6000 just entered into service near the end of 2005. The second revenue source is the engine overhaul and component repair services that take place with these expensive assets. This revenue source is relatively small. A third source of significant revenue is the after-market support from replacement part sales used in overhauls and repairs. This third multi-billion dollar revenue source for P&W is known as the ‘spares’ business.