United Airlines finds route to savings by decentralization

Gordon Graff -- Purchasing, 10/7/2004

For companies seeking to cut chemical procurement costs, the mantra these days is centralization. That certainly is the watchword at United Airlines, which has a single office that handles MRO-related chemical procurement for its 100-plus aircraft maintenance sites around the U.S. But when it comes to distributing chemicals to those sites, the company has found that decentralization can pay handsome dividends.

Under its standard distribution system, United usually has its suppliers ship chemicals to a central warehouse in San Francisco, and then reships the materials to its maintenance line stations at airports across the country. But about two years ago, United piloted a program under which suppliers shipping selected hazardous chemicals to the company were asked to send them directly to its largest line stations, bypassing the central warehouse. While the impetus for the program was to reduce potential safety and liability issues for United in the transportation of hazardous materials, the program had one additional benefit: it saved money.

According to Bud Darland, purchasing agent at the Chemicals Desk of United Airlines in Indianapolis, Ind., the revamped shipping system trimmed some $150,000 from United's chemical MRO spending in 2003. (The company's total chemical MRO spend is proprietary.) The savings, he says, stemmed from reduced transportation and labor costs, and lower negotiated prices obtained by its chemical supply contractors.

Maintaining United's fleet of more than 500 aircraft requires the use of "just about every chemical imaginable," says Darland. Among these materials, he adds, are hydraulic fluids, alcohols, acids, cleaners, paints, solvents, resins, greases and adhesives. Even hand soap for the lavatories is part of the roster. Darland says the processing of orders to service United's maintenance operation is a team effort, involving the support of several individuals at the Chemicals Desk, including Tammy Ramey, the purchasing coordinator. Shipment sizes vary from 3,800-gallon tankers to packages the size of toothpaste tubes or smaller. They are sent by ground freight or by air, depending on the size and urgency of the orders and the properties of the chemicals.

United's new distribution program, known as Chemicals Direct Ship (CDS), grew out of an effort by the company to enhance the safety of its handling of hazardous chemicals, which make up about 50% of the chemicals the company uses in its MRO operations. The program's key feature—bypassing the central distribution warehouse by sending chemicals directly to the line stations—is of great safety value, says Darland, "because you're reducing the handling of a hazardous material by the storekeeper who receives it, the person who stocks it, the person who packages it for shipment to another station, and the person who handles it on the airport ramp."

But the program's economic benefits are significant too, Darland continues. For one thing, he says, "we don't have to pay for shipping twice, since the supplier is only sending the material one way." Labor costs are also reduced, he adds, because of fewer hours spent by employees preparing shipments for transport and handling them en route to the line stations.

Savings are also realized, Darland says, because United's two chemical supply providers, who handle about 75-80% of the chemicals the company buys, are encouraged under the CDS program to negotiate lower prices from their own chemical suppliers and pass along any savings to United. In addition, those contractors—Andpak and the PRC-DeSoto division of PPG Aerospace—sometimes identify lower-priced alternatives to the currently purchased chemicals, Darland says. But those alternatives can only be used, he adds, if they meet United's specifications.

Although the CDS program only sends deliveries to the 26 United Airlines line stations with the most chemical usage, that is still a lot of chemicals to track. The big challenge faced by United's Chemicals Desk under the program, says Darland, is to match supply of chemicals to each station's needs. For each station, he explains, "the supplier reviews our on-hand inventory, our usage of each material, and the specific maximum and minimum levels required." The suppliers then increase or decrease orders of chemicals as needed in order to maintain a constant supply. Ideally, says Darland, "you'd like to be able to have a 30-day supply on hand of each chemical—no more, no less. In this way you minimize your overhead inventory costs."