Changing Suppliers is More Than the Cost of Their Parts

In an unprecedented move stemming from the crash of Air France flight 447 on June 1st and despite their being no black box evidence for the cause of the crash, the European Aviation Safety Agency (EVSA) ordered all airlines with A330 and A340 planes in their fleets to voluntarily remove their Thales speed sensors and replace them with sensors from Goodrich. Within the next two weeks, this directive is expected to be mandatory. Planes typically have 3 speed sensors, 2 of which are now supposed to be Goodrich sensors. This directive affects about 200 airplanes from various airlines that currently have the Thale sensors. About 70% of the airlines already use Goodrich as a supplier, but the others do not. Airbus is paying for the new sensors, but there are many other hidden costs.

This situation highlights the challenges to procurement of supply risk management and forced change and illustrates the switching costs of changing suppliers. Suddenly, some procurement departments will have to work with a new supplier of a critical part. One wonders whether they have a process in place to handle this type of sudden changed directive from outside the company. While Goodrich's reputation is good, there are still many business activities associated with a new supplier and/or a new part that need to take place. Even though Airbus is paying for the part, there are other costs such as installation and testing. Driven by a shotgun marriage, procurement will need to form a productive business relationship with a new supplier and ensure that the new part meets and operates within its requirements. Airline procurement departments will need to contend with an additional challenge -- Goodrich is reported to be experiencing its own production and supply issues now as it is facing ramped up production and new customers in urgent need of the parts. Had there not been these issues, EVSA may have ordered that all speed sensors be supplied by Goodrich and in effect, forcing the airlines into a sole source relationship.

Another cost of swapping out the Thales speed sensors is that each airplane requires a brief test flight with the new sensors, an operational challenge requiring scheduling of over 200 test flights on airplanes currently in use. Scheduling pilots and flights might impact passenger travel, adding to the cost. Before the EVSA directive, airlines were in the midst of swapping out old Thales sensors for newer models and conducting test flights in response to the Air France crash.

One assumes (or hopes) that both the manufacturers and the airlines do supply risk planning. Boeing and Airbus do risk planning, though in the case of Boeing's Dreamliner, maybe not that effectively. I'd be curious to know how effective the supply risk planning has been in this case and if procurement, in particular, at the airlines already had a process in place to handle this type of situation.

- Sherry Gordon

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