Sheet1MethodologiesPlanning LevelsKnowledge Application AreaOptim.docx

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Sheet2
Sheet3
UTC AEROSPACE SYSTEMS INVENTORY REDUCTION1

UTC AEROSPACE SYSTEMS INVENTORY REDUCTION4
Group 2: UTC Aerospace Systems Inventory Reduction
MGMT 651
Earl Stevens, Ayana Tuchscherer, Edwin Udeh, and Jason
Williams
Embry Riddle Aeronautical University

Table of Contents
ChapterPage
1. Section 13
a. Current Situation3
b. Strategy Map9
c. Work Breakdown Structure10
d. Productivity11
2. Section 2 14
a. Current SIPOC14
b. Improvements that Could Be Made14
c. House of Quality/Needs Analysis/FMEA29
3. Section 331
a. Changes that Will Be Made31
b. Improved SIPOC32
4. Section 433
a. Change Controls33
b. Organizational Impact35
c. Improvement Tracking36
References38
Section 1
Current Situation

UTC Aerospace Systems is the largest aerospace systems
provider in the world. It was created through the merger of
Hamilton Sundstrand and Goodrich in 2012 (UTC Aerospace
Systems, 2015a). The company consists of eight strategic
business units, and for the purpose of this case study, we will be
focusing on the Aero structures business unit. Within the Aero
structures business unit, we will be focusing on commercial
Aftermarket.
Aero structures specialize in the “design, manufacture,
integration and support of [aircraft engine] nacelles” (UTC
Aerospace Systems, 2015b). This includes thrust reversers and
pylons for both large and regional aircraft. Aero structures
Aftermarket’s customers include airline operators; maintenance,
repair, and overhaul (MRO) operators, and third-party brokers.
Aero structures were part of the legacy Goodrich business.
United Technologies (UTC) acquired Goodrich in 2012 and
merged it with Hamilton Sundstrand (UTC Aerospace Systems,
2015a). The UTC acquisition has brought major changes to
Aero structures in terms of business goals and expectations.
Goodrich focused heavily on margins, EBIT, and customer
service. Although UTC cares about those three objectives, they
also place heavy emphasis on cash flow and inventory turns.
Inventory turns has been a particular area of opportunity for the
entire Aero structures business unit, but especially for
commercial Aftermarket. Roughly half of commercial

Aftermarket’s sales come from out of production programs with
traditionally slow moving inventory. Historical inventory
performance for out of production programs does not align well
with UTC’s inventory turns goals, and this has become a major
challenge for Aftermarket’s leadership team (Aftermarket –
Aero structures, 2015).
Aero structures’ commercial Aftermarket is headquartered in
Chula Vista, CA. Two major spares warehouses are operated
out of Chula Vista, CA and Toulouse, France (Aero structures
Aftermarket, 2015a). The company also operates nine
maintenances, repair, and overhaul (MRO) facilities in Chula
Vista, CA; Foley, AL; Atibaia, Brazil; Toulouse, France;
Prestwick, Scotland; Istanbul, Turkey; Dubai, UAE; Singapore;
and Tianjin, China (Aero structures Aftermarket, 2015a). The
nine MROs are some of commercial spares’ largest customers.
Figure 1. Aero structures Aftermarket Global Footprint
(Aero structures Aftermarket, 2015a)
Aero structures Aftermarket supports a variety of both in-
production and out-of-production programs. In-production
programs receive spare parts by having the production line
support slightly more production on a part level basis than is
needed to complete the bill of material for the scheduled
number of production units. Out-of-production programs have
significantly slower moving inventory and longer lead times due

to these parts being made on an as-needed basis rather than in
addition to the production line (Aftermarket – Aero structures,
2015).
Figure 2. Global Capabilities
(Aero structures Aftermarket, 2015a)
UTC engages in continuous inventory monitoring at each spares
service center and aims to satisfy daily customer (UTAS, 2014).
UTC has to look across multiple functional areas to achieve its
inventory reduction goals. Shipping, distribution, maintenance
services, and inventory services are some of the areas the
company has evaluated in its efforts to increase supply chain
efficiency. UTC has established standardized shipping
timelines to get parts from inventory to the customer. Shipping
timelines are based of availability, processing requirements,
physical pull requirements, and item transportation. UTC has
applied shipping timelines to prioritize and meet customer
requirements:
Table 1. Shipping Particulars
Order Type
Shipping Timeline
AOG Orders
≤ 4 days
Critical/Work Stoppage

≤ 1 working day
Stock items
≤ 5 working days or listed lead time
Non-Stock Items
listed lead time
(UTAS, 2014)
In addition to the aforementioned timelines, to limit
unnecessary movement and reduce wasted time/warehouse
space, UTC announced its intent to establish several regional
material distribution sites (UTC Aerospace Systems, 2015c).
Jim Patrick, the vice-president of Commercial Aviation
Customer Service noted that processing materials through
regional distribution centers would enhance customer service by
allowing airline and MRO sites to maintain lower inventory
costs (UTC Aerospace Systems, 2015c). Locations closer to the
customer better support responsiveness and can be mutually
beneficial as quick movement reduces the amount of overall
inventory held at UTC spare parts facilities while the customer
gets its parts with lower lead time. The company utilizes
production requirements and historical usage rates to take
action on inventory whose resale/replacement value is less than
the cost of maintaining them in inventory (UTCAR, 2014).
UTAS competitors vary in size and capability, but its top
competitors are Honeywell and Parker Hannifin (Aero web,
2015). Both competitors have international distribution

centers; however, UTC’s distribution center initiative will
eclipse Honeywell and Parker Hannifin distribution operations
in capability, quantity, and proximity to operating locations.
UTC’s airline customers are also reducing their overall stock
through its Comprehensive Accessory Repair Exchange (CARE)
program which offers total repair and inventory support services
(UTC Aerospace Systems, 2015d). Overall stock reduction is
achieved through the reutilization/repair of parts, extending the
life cycle of the part and reducing the requirement to
manufacture/store new parts. Also, taking on inventory
management gives UTC control of the entire parts movement
process through actually equipping the aircraft with the
requisite part.
When a part clears the UTC Part Production Approval Process,
it has to meet support requirements commensurate with the
servicing term. This means, there must be a way to partner with
UTC’s IT platforms to validate and track part origin. If the
UTC manufacturing segment cannot comply, an alternate
supplier will be selected. For those that comply, manufacturing
is based on production requirements provided by UTC.
Incorporating the expected functionality/capabilities of the
distribution centers that are underway, UTC will follow a
standardized procurement, inventory, customer process (UTC
Aerospace Systems, 2011). Internally, UTC identifies demand
requirements in aggregate, then to each distribution center, and

then down to the customer. UTC first identifies and validates
the need for a particular part and procures it from the
manufacturer. Distribution centers are geographically
collocated with the warehousing function. Location, mode of
transportation, and timeline are considered when sending the
part to the appropriate distribution center. If the part is not
immediately required by the customer, it is put into stock and
the total time in storage is recorded and utilized with other
warehousing metrics to continuously improve demand
forecasting when UTC does another issue to its distribution
centers in aggregate (UTC Aerospace Systems, 2011). If the
part is immediately required, it bypasses stock and goes to the
customer. If UTC anticipates not being able to satisfy customer
demand from stock or the part will not flow from UTC initial
organic manufacturing segment in time, it will utilize other
procurement options. UTC has a history of engaging in joint
ventures to satisfy manufacturing demand. It has partnered with
Pratt & Whitney, MTU Aero Engines, and Japanese Aero
Engines in the International Aero Engines collaboration to
support V2500 engines for the Airbus A320 aircraft family
(Aeroweb, 2015). Supply and demand data are used for
forecasting analysis with partnerships as well. Through organic
or joint effort, UTC finally ships the end-item to the customer.
Figure 3. Manufacturer, inventory/inventory improvement,
customer delivery process.

(UTC Aerospace Systems, 2011)
Strategy Map
The strategy map is a visualization process diagram
designed to communicate the objectives of an organization’s
strategy in such a way that company stakeholders can align,
understand and help accomplishing the objectives. The
Aftermarket business strategically created the strategy map as a
road map or a guideline towards accomplishing the business
objectives. The primary goal is to grow shareholder return on
investment. The primary means of doing this are by growing
EBIT and improving cash flow. Aero structures Aftermarket
strives to be the customer’s first choice. They aim to do this by
investing in their people, their processes, and their products.
Figure 4. Strategy Map
Work Breakdown Structure
Customer Account Executives (Customer Service) handle any
customer orders and quotes that the customer doesn't enter on
our customer portal. They also handle any questions or changes
customers need made to the order or that our distribution center
needs changed (Aerostructures Aftermarket, 2014).
The Inventory Planning Team creates all of the forecasts and
planning settings for our ERP system, which is SAP. They look
at historical consumption as well as any insights from our

business development and technical teams. What they enter into
SAP drives requisitions for Procurement (Aerostructures
Aftermarket, 2014).
Procurement takes the requisitions in SAP, sources them, issues
purchase orders, and tracks the parts until the suppliers deliver.
They also expedite and slide orders to account for deviations
from the original inventory plan. Procurement also quotes
suppliers for customer quotes when the Pricing team does not
have enough historical data to price on their own. Procurement
handles any issues after a purchase like quality notifications
(discrepant parts), bill questions (invoicing issues), and contract
issues (Aerostructures Aftermarket, 2014).
The Pricing team prices all of our parts and customer quotes.
They use historical cost data from Procurement and a
complexity model to determine pricing. Parts that need to be
priced every year tend to follow a program escalation for
subsequent years. The team also provides analytical work to
help our Business Development Team pitch deals to customers
(Aerostructures Aftermarket, 2014).
The Business Development Directors are our sales team. They
work to bring new business primarily by working long-term
contracts with our customers and negotiating major unit sales
(Aerostructures Aftermarket, 2014).
The Majors & AMP group handles our new and ratable major’s
units. Most engine nacelles can be divided into 6 or 7 major

sections, so this is what is meant by "a major". This is in
contrast to the Customer Account Executives, Inventory
Planners, Procurement, and Pricing, all of whom focus on piece
parts. Our Majors Administrator authorizes the purchase of
major units from the production line, which includes budgeting
and inventory planning. AMP stands for Asset Management
Program, which is a pool of used ratable major units which
airlines can lease when they have emergency situations.
Customers can also plan to lease a unit while their units are
being repaired (Aerostructures Aftermarket, 2014).
The Fleet Hours Agreement (FHA) team handles our FHA
agreements. One of the long-term agreements the Business
Development Directors negotiate with customers are FHA
agreements. This is when an airline pays a certain hourly rate
for every hour each airplane covered by the agreement flies. In
exchange for this, they get spare piece parts for "free" and we
have contractual obligations as to how quickly we have to send
them parts. These were previously discussed as CARE
agreements because that is what UTC Aerospace Systems as a
whole call them. CARE/FHA contracts can also cover repair
work (Aero structures Aftermarket, 2014).
The Contracts & Warrant group reviews all proposed customer
contracts to ensure our business is protected from a legal
standpoint. They also review and process any warranty claims
from customers (Aero structures Aftermarket, 2014).

Productivity
Productivity is a common measure of how well an entity is
utilizing its resources and the most basic of formula is to divide
outputs by inputs (Jacobs & Chase, 2014). The purpose of our
project being to identify new inventory reduction strategies for
commercial Aftermarket, the productivity measures that will be
used should be inventory measures. Inventory productivity can
be defined as the amount of sales and gross profit dollars an
inventory investment generates over a given period of time,
usually a year. The main productivity measures that will be used
are the most basic measures of inventory productivity and these
are inventory turnover and gross margin return on investment
(GMROI).
According to the Council of Supply Chain Management
(CSCM), the inventory turnover metric measures how many
times a company’s inventory has been sold (turned over) during
a period of time, usually twelve months (Gilmore, 2009). It will
be obtained by dividing the cost of goods sold by the average
inventory value. Both these figures would be obtained from the
ERP system.
This metric is good for this project because it gives a lot more
insight on the effect of inventory holdings than only sales
volume or inventory levels as it relates sales to inventory
investment. A sales volume of $1,000,000 a year on an average
inventory of $500,000 for instance is one thing, but on an

average inventory of $200,000 is quite another. Though the
sales volume may be the same, in the first case inventory is
turned over twice while it is turned over five times in the
second (HURLBUT, 2006).
Another effective productivity measure that will be used in this
project is gross margin return on investment (GMROI). It
represents the amount of gross profit earned for every dollar of
the average inventory investment and is calculated by dividing
gross profit dollars by the average inventory investment. Gross
margin return on investment indicates the amount of gross
margin dollars generated by inventory investment to pay for
other business expenses, such as payroll, utilities, rents, etc.
Another metric which will be used to measure productivity for
this study is Days Inventory Outstanding (DIO). It will be
calculated by taking Aerostructures inventory levels for a given
period, dividing by total revenue, and then multiplying by the
number of days in the period. This measures how many days of
sales the company holds in inventory on average (Gilmore,
2009).
The customer service level will also be used as a measure of
productivity. This will measure how often Aerostructures has
nacelles when customers want them. It is obtained by dividing
the number of nacelles shipped by the promised date by the total
number of nacelles ordered. It is a very important measurement
because if the company does not have what its customers want,

when they want it, they will probably look for it elsewhere
(Schreibfeder, 2013).
Productivity measures are used to make sure that the firm makes
the best use of its resources but they are relative measures and
as such they have to be compared to something else in order to
make them meaningful. To this effect, the productivity measures
sighted above will be compared by measuring them over time.
We would compare the values to those of other periods.
Section 2
SIPOC
Based on the work breakdown of the organization, the current
state SIPOC would be as follows:
Figure 5. Current SIPOC
Supplier
Input
Process

Output
Customer
External Customer
Purchase order
Order entry
Sales order
Inventory Planning
Inventory Planning
Historical sales data
Consumption forecasting
MRP forecast
Purchasing
Inventory Planning
Requisitions
Sourcing
Purchase order
Manufacturing supplier
Purchase order
Manufacture parts
Finished goods
Distribution Center
Distribution Center
Stored goods
Order fulfillment

Fulfilled order
External Customer
Improvements that Could Be Made
Regional distribution sites. One of UTC’s goals is to enhance
service and support for key programs like the Boeing 787,
Airbus A350, and A320NEO. The regional distribution centers
will help achieve that goal for UTC’s customers in Europe,
Asia, the Americas, and the Middle East with the intent to
supplement inventories of fully provisioned fleets with an end-
state of lowering inventory costs at MRO sites (UTC Aerospace
Systems, 2015c). The Netherlands is the first operational site in
Europe. UTC is not openly discussing the specifics of other
planned distribution center locations at this time, so the
Netherlands site will be used as a benchmark for location and
functionality.
The Netherlands is a strategic location because it is a solid
technology and manufacturing hub hosting companies such as
Bombardier, GE Aviation, Mitsubishi Aircraft, and CAE (NAG,
2015). The location has high-quality infrastructure, which
allows for smooth and responsive multi-modal material
movement (David, 2013). Specifically, material can reach
Europe’s major markets within 24 hours. The infrastructure
that surrounds the Maastricht Airport facilitates high-volume
MRO activity (NAG, 2015) and is seen as a multi-modal
gateway to Europe.

Inventory reduction strategies. The cornerstone of any
inventory reduction strategy is minimizing the mismatch
between supply and demand. The Netherlands distribution
center goal is to help reduce inventory at MRO locations
throughout Europe using a multifaceted approach: managing
cycle inventory, aggregation, and basic cross-docking.
With a well-managed cycle inventory, UTC can cross-dock
much of its predictable demand. Shipping from manufacturer
with a brief stop at the Netherlands distribution center to
transfer aggregated products to their final destination will
increase efficiency by reducing the physical inventory stored in
the Netherlands warehouse. This reduced capacity requirement
for predictable demand can make room for critical items with
less predictable demand rates.
For critical, low-demand items and safety inventory that are
typically on every MRO’s shelf, the distribution center can
reduce overall inventory by aggregating those items and
utilizing same-day fast mode of transportation for filling
customer orders. Although fast transportation is expensive,
demand is low and there is a greater likelihood of achieving
overall savings by decreasing the number of item redundancies
across MRO inventories and decreasing inventory quantity
(Chopra et al., 2012). UTC can utilize integer replenishment
policies to help manage cycle inventory and order costs to
secure the right timing for satisfying forecasted demand over a

specified time period (Chopra et al., 2012). This tailored
approach to maintaining and transporting spares results in less
inventory on MRO shelves while securing same-day critical
spare part provision when needed.
Figure 6. Utilizing distribution center for aggregate cross-
docking/storage for item throughput.
To aid in inventory reduction, it is important for UTC to know
the lead-time standard deviation for each of their spares and
identify the cost of failing to satisfy demand. Additionally, the
on-hand order replenishment frequency may not reduce overall
inventory, but can help reduce inventory costs depending on
how frequently inventory reviews occur. All variables and the
associated numbers depicted below are representative of actual
UTC part pushes using data for an actual UTC part, in this case
a hose. For a hose with a 10-week replenishment lead time and
review cycle, the distribution center may need to maintain 5-6
hoses in aggregate safety stock for an average demand of 100-
140 hoses during lead-time to ensure that 95% of demand is met
when UTC maintains a monthly review interval.
Table 2. Replenishment lead time/review interval to manipulate
required inventory
Evaluating UTC Safety inventory for Periodic Review Policy

Input
Demand per period (week), R (hoses) =
10
Standard deviation of demand, sR =
1
Replenishment lead time, L (weeks)=
10
Review interval, T (weeks)=
4
Desired cycle service level =
0.95

Intermediate calculation
Periodic
Continuous
Mean demand during time T+L, RT+L =
140
100
SD of demand during time T+L, sT+L =
4
3
Result
Required safety stock inventory =
6
5

Order up to level, OUL =
146
Additional Safety Stock Required for Periodic
1
If UTC halved the lead-time, the Netherlands distribution center
would need to maintain 4-5 hoses in safety stock to cover
demand for 50-90 hoses for their European MROs.
required inventory; halved review replenishment lead time
Evaluating UTC Safety Inventory for Periodic Review Policy

Input
10
1
5
4
0.95

Periodic
Continuous
90
50
3
2
Result
5
4

95
1
Additionally, if the review interval were halved instead of lead-
time, 5-6 hoses would be required in aggregate safety stock in
order to support the 100-120 hoses in demand.
required inventory; halved review interval
Evaluating UTC Safety Inventory for Periodic Review Policy

Input
10
1
10
2
0.95

Periodic
Continuous
120
100
3
3
Result
6
5
126

0
Finally, in a scenario with both the replenishment lead-time and
review interval halved, 4 hoses would need to be maintained as
safety stock inventory.
required inventory; halved replenishment lead-time/halved
review interval
Evaluating UTC Safety inventory for Periodic Review Policy
Input

10
1
5
2
0.95

Periodic
Continuous
70
50
3
2
Result
4
4
74

1
The manner in which inventory is monitored and the
replenishment lead-time associated with a part can affect the
amount of overall inventory maintained in UTC’s system. UTC
should mandate that each warehouse and distribution center
comply with standard inventory review processes/procedures.
In addition to each facility being able to take advantage of more
efficient inventory levels, UTC will have a standardized
comparison/evaluation model against which each facility can be
measured. UTC can identify the risk/cost associated with not
satisfying demand and the risk/cost associated with overstock to
support aggregate inventory reduction decisions.
Behavioral Approach/Managerial Alignment. For distribution
center utilization to work for UTC globally, management must
ensure that incentives are based on an aggregate reduction in
physical inventory or inventory cost and be clear about that
goal. If each warehouse is evaluated on its sell-in throughput,
cash flow, or physical inventory/cost during a short evaluation
period, teams may resort to inefficient ways to reduce inventory

so their results look good to management (Chopra et al., 2012).
For example, a team may outsource its warehousing function
and buy back parts when MROs require them because the cash
flow looks better in the short term even though over a 2-3 year
period the total cost of outsourcing may be substantially greater
than maintaining that inventory. This can result in larger
requirement variability and deter the ability to accurately
forecast demand (Chopra et al., 2012). In cases where short-
term results are evaluated, subject matter experts and their
management must partner together to educate and advise their
executives on what true gains and total savings look like. It is
important for each stage in the supply chain to know its role in
the larger picture so that the actions of each distribution center
and spares team are aligned with UTC’s larger goals.
Demand Planning. Aerostructures Aftermarket currently bases
its inventory planning on historical consumption. The
Inventory Planning group utilizes software that displays up to
ten years of historical consumption data. It is up to the planner
to determine the proper ratio of emphasis on certain time
periods to determine the forward looking forecast based on
historical consumption (Aerostructures Aftermarket, 2014). For
all intents and purposes, the current inventory forecasting
methods do not incorporate sales forecasting or demand
planning.
Neglecting to incorporate demand planning into inventory

forecasting is a significant area of opportunity for
Aerostructures Aftermarket. Kuppe (2010) describes:
One of the most common mistakes is to rely on a historical
perspective for forecasting and not have adequate reach into the
demand side of the business. For this reason, the first step in
improving forecast accuracy is to improve the reach of the
demand planning process. For most manufactures, this means
the demand forecasting process should be extended as far out to
the point of sale as practical so that a more complete demand
signal can be captured. All stakeholders in the forecasting
process should be brought into the demand planning process,
including internal sales teams, outside rep firms, distributors
and key customers.
Supporting a demand planning strategy should be flowed down
to the entire sales side of the business.
Demand planning could be implemented with little increase to
headcount. The Business Development Directors (sales team)
could have acquiring market intelligence added to their list of
responsibilities. Since the Business Development Directors
work with customers to negotiate contracts, majors, and bundle
packages, they are already uniquely positioned with the
customer to get access to market intelligence. In addition to
selling, it would be the Business Development Directors’
responsibility to understand what the customer is doing in terms
of fleet planning and scheduled maintenance. This information

would then be flowed back to headquarters to a new market
intelligence team.
The market intelligence team would be responsible for
compiling all of the information gathered by the Business
Development Directors and using it to identify data analytics
patterns. These patterns would be flowed to the current
Inventory Planning group for incorporation into the inventory
planning forecasts.
Using demand planning should improve forecast accuracy and
reduce overall inventory (Kuppe, 2010). Past performance is
not necessarily indicative of future performance, so higher
safety stock levels are used to account for the variation between
historical consumption based forecasting and current customer
demand. By improving forecast accuracy through demand
planning, safety stock levels could be lowered, which will
reduce overall inventory. Improved fill rates lead to better
customer service, which could also increase sales.
Although fill rate would increase and net inventory would
decrease, there are some resources required to implement this
strategy. By placing the majority of the intelligence acquisition
on the Business Development Directors, we believe this strategy
could be implemented with as little as a two headcount increase.
Two analytically-focused team members would be needed to
compile the data attained by the Business Development
Directors, perform data analytics works, and share the results

with the Inventory Planning team. We believe the inventory
reduction and potential increase in sales offset this minor
headcount increase.
Vendor Managed Inventory (VMI). VMI is a collaborative
commerce initiative where suppliers are authorized to manage
the buyer's inventory of stock-keeping units. It integrates
operations between suppliers and buyers through information
sharing and business process reengineering (Yuliang Yaoa,
2007). While there can be more to it than this, at a minimum it
entails the vendor (supplier) determining when to replenish and
how much to replenish a customer’s inventory. With VMI, the
vendor creates orders for their customers based on demand
information that they receive from the customer (Murphy,Jr &
Knemeyer, 2014). The vendor and customer may be bound by an
agreement which determines inventory levels, fill rates, and
costs. The terms of the agreement may also be that the vendor
entirely manages the customer’s inventory in such a way as to
improve the customers supply chain performance by avoiding
situations of stock shortage.
As was stated earlier, Aerostructures aftermarket supports a
variety of both in-production and out-of-production programs.
In-production programs receive spare parts by having the
production line support slightly more production on a part level
basis than is needed to complete the bill of material for the
scheduled number of production units. Out-of-production

programs have significantly slower moving inventory and
longer lead times due to these parts being made on an as-needed
basis rather than in addition to the production line. As such, the
company would benefit a lot from VMI arrangements with
suppliers of out-of-production program parts as the inventory
levels for this program are highest and move slower. VMI
initiatives could also be engaged for in-production program
parts but greater emphasis should be on out-of-production
program parts.
Operationally, VMI could take different forms at Aerostructures
aftermarkets. Some of which are;
· Suppliers could regularly show up at its facilities, physically
review inventory levels, immediately replenish with inventory
they have with them (actually physically stock the inventory in
Aerostructures aftermarket’s warehouses);
· Suppliers could also show up at Aerostructures aftermarket’s
facilities, physically review inventory levels, and then place
orders for replenishment inventory that will be delivered at a
later date. Depending on delivery method, the supplier may do
the physical restocking, or may leave it for Aerostructures
warehouse personnel to do;
· Aerostructures Aftermarket could periodically (trimestral,
quarterly etc) provide its suppliers with current inventory
levels. The suppliers will then review inventory levels and
create replenishment orders that will then be shipped to

Aerostructures aftermarkets;
· Suppliers could be given direct access to Aerostructures
Aftermarket’s inventory system and can get real-time
information related to on-hand levels, open orders, forecasts,
production schedules, etc. They then make replenishment
decisions based on this data and ship orders to Aerostructures
Aftermarket;
· Supplies could provide an on-site inventory planner that works
full-time at Aerostructures Aftermarket’s facilities managing
the inventory which it supplies;
· Suppliers could also leases space within Aerostructures
Aftermarket’s facilities and run their own warehouse and
inventory planning operation with their own employees from
within the customer’s facility.
One of the benefits of VMI to Aerostructures Aftermarket is
that because the suppliers will be responsible for supplying
when the parts are needed, the need to hold significant safety
stock will be removed. The lower inventories for the company
could in turn potentially lead to significant cost savings.
Aerostructures Aftermarket could also benefit from reduced
purchasing costs arising from the fact that its purchasing
department would have to spend less time on calculating and
producing purchase orders and the need for purchase order
corrections/reconciliation would be eliminated under VMI. Cost
saving would also arise from reduced warehouse costs as lower

inventories would reduce the need for warehouse space and
other warehouse resources (Murray, 2013).
Aerostructures Aftermarket would however have to consider the
potential problems with VMI. Depending on the VMI
arrangement, it would be giving up control of certain aspects of
its business and it may also be providing the suppliers with
access to business information which it considers to be
confidential. The suppliers could also sell or share
Aerostructures Aftermarket business information with
competitors (Piasecki, 2012). One other potential drawback of
this strategy is that it would become more difficult for
Aerostructures Aftermarket to change suppliers once VMI has
been implemented.
Cross Functional Collaboration. Cross-functional or inter
departmental collaboration could be defined as interaction
between two or more departments that is fostered by effective
communication in the form of meetings, conference calls, and
emails. Such collaboration and exchange of information
between the departments of an organization would help to
establish effective interdepartmental relationships as well as
possibilities for better decision making. It can also improve the
performance of employees in an organization (Monczka et al.,
2011). Cross-functional collaboration, if it is well implemented
and managed, can have positive effects on the inventory
management of Aerostructures Aftermarket. It can yield

tremendous benefits as collaboration between the purchasing,
customer service, and the engineering departments would permit
purchasing to have a better understanding of the materials that
are needed and to select the right supplier(s) to acquire these
materials. It would also make for a better understanding of the
quantity of materials needed as well as an idea of the market
price of the goods and the time when it would be needed. All of
these will enable the procurement of the right quality of parts in
appropriate quantities at the right price and right time.
Third-Party Broker. Currently all of Aerostructures
Aftermarket’s inventory is stored in its own warehouses. This
gives the company complete control over its inventory, but it
also means that all of their inventory is reflected in their
financials. A potential solution from an inventory financial
standpoint, would be to sell inventory to a broker who can only
sell the inventory back to Aerostructures Aftermarket.
This strategy is essentially a hybrid among distributor,
consignment, and VMI strategies (Jacob, 2014). Aerostructures
Aftermarket would sell its inventory at cost to a broker who is
under contract to sell exclusively back to Aerostructures
Aftermarket for a nominal fee of roughly 15%. This fee would
cover the broker holding Aftermarket’s inventory for an
unspecified amount of time as well as the Broker’s overhead of
operating a warehouse and shipping and receiving goods from
Aftermarket’s distribution centers (Jacobs, 2014). This strategy

would eliminate Aerostructures Aftermarket’s inventory,
because the Broker would own the inventory, not Aftermarket.
The exclusivity agreement would safeguard Aftermarket from
having the Broker sell directly to Aftermarket’s customers.
By selling incoming inventory immediately at cost,
Aerostructures Aftermarket would rid itself of the negative cash
flow associated with carrying inventory (Jacobs, 2014). When
Aftermarket makes a sale, the goods would be shipped back
from the Broker and immediately cross docked to the end
customer, so there would also be no inventory when the product
is recalled from the Broker. By having zero negative impact to
cash flow from slow moving inventory, Aftermarket should
improve its cash flow figures, a financial metric that receives
significant corporate scrutiny.
There are two notable downsides to this strategy. First, by
paying the Broker a 15% mark up for their services,
Aerostructures Aftermarket’s EBIT and margins will decrease.
Here is an example of the financials for a $1,200 part with a 6x
mark up. Overhead for traditional inventory is assumed at 2%
while broker inventory overhead is assumed at 1%.
Table 6. Traditional Inventory vs. Broker Inventory
Traditional Inventory
Broker Inventory

Sales Revenue
$7,200.00
$7,200.00
Cost of Goods Sold
Broker buy back price
$1,380.00
Sell to broker price
($1,200.00)
Supplier purchase price
$1,200.00
$1,200.00

Overhead
$24.00
($1,224.00)
$12.00
($1,392.00)
Profit from Sales (EBIT)
$5,976.00
$5,808.00
Margin
83%
80.6%
In this example, Aerostructures Aftermarket is seeing $168
reduction in EBIT and a 2.4% decrease in margins, which
partially offsets the cash flow improvements by never having
inventory on the books for this part.
The other downside to this strategy is that customer fulfillment
times will be increased. Rather than shipping directly from
Aftermarket’s own distribution center, which can offer same-
day shipments for orders placed in the morning, the goods will
first have to be shipped from the Broker to Aftermarket’s

distribution center and then cross docked to the customer. This
will increase the fastest order fulfill time from same-day to two-
day, which could negatively impact customer service.
It is important to note that this strategy is more of a game with
financial numbers and statements than it is actually solving the
root problem. By immediately selling inventory to the Broker,
there is no inventory on the books. This improves cash flow,
but we are taking a hit on EBIT, margins, and order fulfillment
time to accomplish this. We are also not addressing the true
issue of why the inventory was over forecasted in the first
place. One aspect of this strategy that is nice is that it could be
applied on a program-by-program basis. Aerostructures
Aftermarket could elect to pursue this strategy only on its
oldest, slowest moving inventory programs where sell through
is so slow that halting future purchases will not decrease
inventory sufficiently in a reasonable amount of time.
House of Quality/Needs Analysis/FMEA
House of Quality is a quality tool that is used to ensure
customer preferences are incorporated into business decision
making. The tool is a matrix that associates customer
preferences with business objectives and compares our
performance to our competitors (Jacobs & Chase, 2014). Our
House of Quality shows are customers are looking for parts in
stock with outstanding quality and a reasonable price. Our
customers also expect good customer service. This is compared

to our business processes of inventory turns, EBIT and margins,
quality inspection, and employee training. We compared
ourselves to a modestly priced, modestly inventory competitor
and to a low cost, low inventory competitor.
Figure 7. House of Quality
o
o
o
x

Section 3
Changes that Will Be Implemented
UTC has already announced its intention to move forward with
regional distribution centers, and operations in the Netherlands
are already underway. UTC will execute smart supply chain
management by taking advantage of the opportunities inherent
in managing stock in aggregate. This choice supports the
elimination of redundancies within UTC’s overall inventory and
reduces the transportation cost that would have been associated
with moving the original quantity of inventory to each MRO.
Cross-docking will be utilized to reduce handling, streamline
movement to the customer, and minimize inventory holding.
For items that UTC does have to warehouse, it will leverage
lead-time and inventory review intervals to minimize the
amount of safety stock that must be maintained in order to
satisfy 95% customer demand.
Aerostructures Aftermarket will implement better cross
functional collaboration by incorporating or bringing together
different groups or functions within the organization to work
jointly, and often concurrently, on common business related
assignments like inventory turns. Practically, Aerostructures
Aftermarket should enhance close collaboration and maintain
communication flow and linkage between the company’s
operations, purchasing, and engineering departments. These
communication linkages would cover issues such as supplier

selection, determination of order quantities, performance
feedback, generation of material requirements, product design
support, locating technology sources, and sales/operations
plans. Aerostructures Aftermarket should also become active in
integrating the company’s supply management, engineering, and
its suppliers to develop new products and services. In this
regard, the organization would include suppliers early in
product design processes, as well as perform early evaluation of
supplier capabilities. Such collaboration may prove to be a
valuable resource for engineering staff especially when faced
with difficulties understanding the capabilities of suppliers, as
well as new and emerging technologies that are within reach of
current or new suppliers (Monczka et al., 2011).
Finally, Aerostructures Aftermarket will implement demand
planning into their organizational structure. The Business
Development Directors will be responsible for attaining market
intelligence from their customers regarding overhaul cycles and
repair plans. This information will be passed onto the new
Market Intelligence Team, which will be responsible for
compiling market intelligence data and passing analytical
findings onto the Inventory Planning team. Thorough market
intelligence will increase the robustness of our inventory
forecasting and enable us to support customers better with less
inventory (Kuppe, 2010). The improved customer service and
inventory reductions will offset the nominal two-person

headcount increase.
The changes we will not be implementing are VMI and the
third-party broker. As discussed earlier, in-production
programs are supported by the production line, so VMI would
not significantly improve our inventory on these programs. The
volume on out-of-production programs is so low that suppliers
will either be unwilling to negotiate with us or will seek such a
significant cost premium that a VMI program would not be cost
effective. The third-party broker would not be wise because it
will unnecessarily reduce EBIT and margins, reduce customer
service by no longer supporting same-day shipping, and truly
does not solve the problem.
Improved SIPOC
Our improved SIPOC reflects the additions of demand planning
and more global distribution centers.
Figure 8. Improved SIPOC
Supplier
Input
Process
Output
Customer
External Customer
Maintenance & fleet planning
Attain market intelligence

Customer planning data
Market Intelligence
Business Development Directors
Customer planning data
Market analytics
Market intelligence trends
Inventory Planning
External Customer
Purchase order
Order entry
Sales order
Inventory Planning
Inventory Planning
Historical sales data & market intelligence trends
Aggregate demand planning
MRP forecast
Purchasing
Inventory Planning
Requisitions
Sourcing
Purchase order
Purchase order
Manufacture parts

Finished goods
Global Distribution Centers
Global Distribution Centers
Stored goods
Order fulfillment
Fulfilled order
External Customer
Section 4
Controls
It is challenging for organizations to align with new
policies/procedures, so UTC should add the new distribution
and inventory control procedures to its already robust policies
and business rules. Utilizing some of the performance metrics
detailed above will help the company gauge compliance on
some of the more important processes. The aforementioned list
of measures is not all-inclusive and should include locally-
developed measures to enable managers to focus on additional
areas they think are important. Augmenting standard measures
with other measures from time to time encourages managers and
the workforce to seek improvement and new solutions in more
areas when they have mastered the critical metrics.
Accountability applies for operations within UTC as well as for
the business partners with which UTC engages. Transparency

in UTC is essential and executives should create an environment
where managers are comfortable openly addressing their issues
and utilizing every resource at their disposal to fix them.
Workers and managers must educate executives in understand
indicators and what they mean for performance. This 3-tier
partnership will help keep each stage of the supply chain away
from functional goals and aligned with the company’s strategic
goals and objectives, in this case, the overall reduction of
inventory.
Cross functional collaboration, especially when it takes the
form of meetings can either be big time wasters or the most
effective tool for improvement (Institute of Management
Accountants, 1994). Effective collaboration is highly dependent
upon effective meetings in such cases. Poor communication is a
major barrier to cross functional collaboration and innovative
performance. The department heads and management have the
preeminent roles in facilitating this collaboration and all team
members have a responsibility to foster it as well. The
management of Aerostructures Aftermarket would have to
control the effectiveness of cross functional collaboration by
setting clear and concise goals (which align with the overall
goal of ameliorating inventory turns and cash flows) for such
collaboration and communicating them to the department heads.
The department heads will in turn be responsible for preparing
and distributing memos and meeting minutes or notes that

convey the subject of the cross functional collaborations. They
will also follow up on the implementation of any decisions that
result from the cross functional collaboration.
Demand planning will have a control to address reach functions’
participation. The Business Development Directors will have
attaining market intelligence as one of their requirements on
their performance reviews. The Market Intelligence team will
have a health measure to track the accuracy of their market
trend findings to actual customer behavior. Finally, the
Inventory Planning team will be expected to sustain their 95%
fill rate goal with a lower inventory budget. The
implementation process will be controlled by having a test
period where market trends are identified and then the market is
observed to see if those trends play out. After success has been
realized in this step, forecasting will change on a program-by-
program basis starting with smaller programs so any hiccups
will have minimal impact. Once success is realized on our
selected smaller programs, the new forecasting method will be
rolled out to our largest programs.
Organizational Impact
Our most notable organizational impact will be in the
company’s financial performance. Assuming a current
inventory of approximately $160,000,000, a 10% inventory
reduction would save the firm $16,000,000 in inventory
reductions (Walther, 2015). Assuming a 10% cost of capital,

this $16,000,000 inventory reduction could also lead to a
$1,600,000 in working capital savings. This would lead to a
total impact of $17,600,000 in cash flow improvement (Walther,
2015). Since cash flow is one of UTC’s most regarded financial
measures, this would be a significant improvement to report to
corporate.
In terms of organizational structure, the creation of the Market
Intelligence team would cause a modest two-person headcount
increase. Although operating additional warehouses may cause
an increase in overhead, UTC plans to allocate those costs
across all its aerospace business units, which will significantly
decrease the cost bore by Aerostructures Aftermarket.
Improvement Tracking
UTC’s new policies will be partnered standardized way to
measure their efficiency and effectiveness. It is important for
the company to track both inbound and outbound delivery
performance to ensure item movement is happening on schedule.
In addition to being on schedule, UTC must measure fill rate
because customers cannot get what the company does not have.
Order fulfillment and perfect order fulfillment allows UTC to
evaluate whether it is meeting the movement times detailed in
the customer receipt timelines as well parcel out reasons why
timeliness was not achieved. The firm will also need to ensure
that it is minimizing inventory by maximizing opportunities for
cross-docking. Tracking the number and pathway of

intermediate locations will aid UTC in its evaluation of cross-
docking utilization. The company should scrutinize parts that
are maintained in inventory to include the number of days it is
on the shelf before it is pulled to ship to the customer. This
will support the demand-based feedback loop detailed early in
this paper to support better forecasting. Finally, evaluating the
CARE utilization rate for total repair (UTC Aerospace Systems,
2015d) will support overall stock reduction by extending the
life cycle of current stock and reducing the new-part
replenishment requirement.
Table 7. Performance Measures
Measure
Description
IB/OB Delivery performance
% orders shipped according to schedule
Fill rate by line item
% of line items filled
Order fulfillment lead time
Days from order placement to customer receipt
Perfect order fulfillment
% complete orders filled and shipped on time

ILOCs
# times items stop/cross-docked at intermediate location
Inventory days of supply
# days item is in inventory before pull
Forecast v Actual
Forecasted & actual demand at various time intervals
Asset turns
# times item is refurbished/reused
(Jacobs et al., 2014)
The improvement of cross functional collaboration and attaining
market intelligence will be tracked by becoming a part of the
department’s performance review process. “Performance
profiling can even be used to improve innovation and cross-
functional teamwork” (Kerns, 2001). Employees will have to
rate themselves and will be rated by their leader on their effort
to promote cross functional collaboration. The Business
Development Directors will also be rated on how much market
intelligence they attain from customers. The Market
Intelligence team will have a health measure metric that
measures the accuracy of the market trends they identify, and
the Inventory Planning group will be expected to maintain fill
rate while decreasing their inventory budgets.

References
Aerostructures Aftermarket (2014). 2014 SIPOC. Retrieved
from Aerostructures Aftermarket SharePoint
Aerostructures Aftermarket (2015a). Global Capabilities.
Retrieved from Aerostructures Aftermarket SharePoint
Aeroweb. (2015) United Technologies (NYSE: UTX)
competitors and competition. Retrieved on 15 Nov 15 from
https://www.bga-aeroweb.com/firms/Competitors/Competitors-
United-Technologies-UTC.html.
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Aftermarket SharePoint
Chopra, S; Meindl, P. (2012). Supply Chain Management (5th
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David, P. A. (2013). International logistics: The Management of
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l
Jacob, Y. (2014). Choosing a Distribution Model: Drop

Shipping vs Traditional Inventory. Retrieved from
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shipping-vs-traditional-inventory/
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Management (14th ed.). New York, NY: McGraw-Hill/Irwin.
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of-performance-profiling/
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Demand Planning? Retrieved from
http://www.sdcexec.com/article/10269177/how-to-measure-the-
success-and-roi-of-demand-planning
Monczka, R. M., Handfield, R. B., Giunipero, L. C., &
Patterson, J. L. (2011). Purchasing & Supply Chain
Management (5th ed.). Mason, OH: Joe Sabatino.
Murphy, P. R., r, & Knemeyer, A. M. (2014).
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Pearson Education, Inc.
Murray, M. (2013). Vendor Managed Inventory (VMI).
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http://logistics.about.com/bio/Martin-Murray-42684.htm
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Netherlands: opening the gateway to Europe. Retrieved on 28
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gateway-to-Europe_June2013.pdf.
Piasecki, D. (2012). Vendor-Managed Inventory (VMI): What is
it and When Does It Make Sense to Use It. Retrieved from
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http://www.inventoryops.com/articles/vendor_managed_invento
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Schreibfeder, J. (2013). www.microsoft.com/dynamics.
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to Boeing 787. Retrieved on 15 Nov 15 from
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ml
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managed inventory. Decision Support Systems, 663–674.
Part production approved?

Yes, met UTC Production Part rqmts
Meets support rqmts (IT, tracking, validation)
No, supplier disapproved
Parts shipped to distribution center
Parts available for customer
Ship part to customer/servicing agency
No, new requisition
Part not immediately required, go to stock

Part immediately required by customer
Track item warehousing timeline for demand data
Change inventory level IAW demand
Part is require IAW drmand data
No, do not procure part
Order entry
Consumption forecasting
Order fulfillment

Sourcing
Manufacture parts
Manufacturing
Netherlands Distribution Center
Cross Dock
Store
Ship to Europe MRO1
Ship to Europe MRO2

Ship to Europe MRO3
Ship to Europe MRO1
Ship to Europe MRO2
Ship to Europe MRO3
Attain market intelligence
Aggregate demand planning
Order entry
Market analytics
Order fulfillment

Sourcing
Manufacture parts
Customer
Requirements
Importance to customer
Technical
Characteristics
Inventory TurnsEBIT & MarginsInspectionsEmployee Training
Competitive Evaluation
X = Us
A = Competitor A
B = Competitor B
Parts in stock9xABX
Fair price8xXAB
Quality parts received10oBXA
Customer Service8oBAX
89107
Increase 0.5 Turn13% EBIT increase & 65% gross margin0
significant escapes90% skills matrix score

BXXX
AAAA
XBBB
Importance Weight
Target Values
Technical Evaluation
5
4
3
2
1

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