Negotiation in Procurement and Supply

Procurement and supply are critical business functions in the value chain of every large business. In particular, these functions are essential for supporting primary operations in the aviation industry through enabling the uninterrupted performance of aircraft, as well as the provision of high-quality products and services to customers. Inflight products are one of the most important product categories in the aviation business; they include a wide range of items from consumables and drinks to safety items, giveaways, and inflight entertainment sets. Given that the product category is much diversified and deals with the changing customer demand, the procurement and supply process for it becomes very complex unless being efficiently analyzed and planned by a procurement representative. Hence, this document presents a sourcing plan for inflight products offered by Etihad Airways as a part of their services. The sourcing plan focuses on explaining the roles of procurement and supply in evaluating stakeholder preferences, techniques for improving added value, list of possible contract inclusions, measures for effective supplier selection, and aspects that might require further negotiation. It argues that all of these issues are equally important in building effective relationships.

Roles of Procurement and Supply for Selected Product

Globally, the inflight service industry is considered vast and complex; some business executives even consider it one of the most complex supply chain models in the world. The industry serves approximately two billion passengers annually with large international airlines operating between 500 and 1,000 takeoffs and landings on a daily basis. Such large aircraft as A380 or 787 Boeing might require thousands of items to be loaded onboard before a takeoff; the demand might vary and include consumables and toilet paper, as well as safety signs and newspapers. Another complexity is that food items mostly should be delivered fresh, while some inflight equipment for the crew and passengers should be recyclable. Considering the multitude of cabin configurations, the preferences of individual airline companies for different inflight services and the frequency of the equipment being used on board, the complexity of procurement and logistics for inflight products becomes evident.

For understanding the role of procurement and supply in managing various inflight product categories with the view to addressing the aforementioned complexity issues, it is important to evaluate how different stakeholders influence possible sourcing decisions. From this perspective, the following stakeholder groups should be included in the sourcing plan:

Airlines. In the inflight services supply chain, airlines take the responsibility of designing onboard services, which results in actual estimations of consumables and equipment that should be served onboard. Typically, airlines’ decisions drive the largest part of the overall supply chain cost.

Caterers. This stakeholder group comprises two subgroups, with the first one being responsible for meals cooking and the second one being responsible for the loading equipment and food on board after tray and trolleys are assembled. It is argued that caterers find themselves in the most unusual and difficult position in the overall supply chain since they depend on both suppliers and airlines simultaneously.

Suppliers. This stakeholder group supplies the inflight industry with raw products and equipment. Suppliers can participate in the inflight product supply chain in two ways: either by supplying a product or equipment chosen by the airline or by selling products directly to caterers (Lin, 2017). In the first case, product specifications, amounts, and prices should be defined and negotiated by the airline. Meanwhile, in the second case, caterers purchase products that were aligned with the airline representatives during the recent menu design session.

Logistic service partners. This stakeholder group comprises service provider companies with previous profound experience in the inflight supply chain, including firms such as Kuehne & Nagel, Schenker, and DHL. These companies are experienced in moving large amounts of goods all over the world, often using large containers for transportations purposes. The importance of this group for the inflight supply chain is the improved management of the materials flow from the aircraft to the flight kitchen or storage sector.

Passengers. This stakeholder group represents the last stage of the inflight product value chain; also, it is critical for the overall supply chain performance. As specified by Etemad-Sajadi, Way, and Bohrer (2016), the perceived pre-flight and in-flight service quality are distinct aspects of the overall airline service influence. They have both mediate and direct impact on the customer satisfaction. Hence, customers provide important feedback to airlines and initiate improvements in the overall supply chain.

Considering that stakeholder inputs from all identified groups are essential for the optimization of procurement and supply strategies, the following part of the sourcing plan reviews critical techniques that target improvement from the perspective of each group.

Techniques for Improving the Added Value

To improve the added value of the overall supply chain, it is required to review and optimize the performance of its critical elements. Previous section of the sourcing plan identified that performance of the inflight product supply chain depends on five primary stakeholders: airlines, caterers, suppliers, logistic service providers, and passengers. Considering recent trends in procurement and supply chain management, each group could initiate several improvement efforts to enhance the inflight service quality, excluding passengers who are the end customers. These improvements are categorized as follows:

Airlines. The onboard service design undertaken by airlines as a part of the inflight product procurement and supply considers multiple parameters. They include the time and length of flight, passenger habits depending on their ethnicity, cultural preferences, or travel destinations, seat class, estimated budget, cost of labor and its availability on different board configurations, and many other variables. From his business experience, Alemany (2014) observed that recently, airlines had been preoccupied with addressing each of those variables in too much detail, supporting his counterargument with reported 90% of airline travelers preferring economy class, thus having very strict and defined requirements for inflight services. For instance, he argued that the economy class travelers would be primarily concerned with the on-time performance, seat and leg comfort, and check-in speed while paying little attention to the logos printed on the aircraft equipment and variety of food offered onboard (Alemany, 2014). Considerably, airlines fail to achieve economies of scale by focusing on the poorly rationalized decisions for the sake of competitive advantage and brand performance (Han, Hyun, & Kim, 2014). Hence, from the procurement and supply perspective, a possible way for the added value is to increase focus on the procurement rationalization and products standardization based on the recent consumption trends, classifying service scope per seat class or end destination. In practice, it could be achieved through merged operations where major carriers would conduct the same scope of onboard design in the MENA region. In line, several optimized solutions for the overall supply chain model will be developed.

Caterers. The nature of catering service for the inflight product supply chain requires high responsibility and proficient client management skills. However, caterers usually appear in the most challenging position for the whole supply chain, given that being a customer of their suppliers, they are unable to choose specific products as normally they are communicated and planned by airlines. In the meanwhile, caterers are accountable for all food and equipment served onboard even if they are the property of individual airlines, excluding the opportunity of using the same inflight products for two different airlines.

A common technique used for mitigating associated procurement and supply issues suggests expanding storage and logistic areas. Nevertheless, this approach is currently criticized because of the ever growing space of the catering unit (Lagat, 2013). For this reason, caterers should improve their contribution to the value chain by the standardization of the food recipes and harmonization of equipment used in the economy class while referring to the previous remark on the relevant customer’s preferences. Hence, caterers should utilize strategies for the continuous improvement of the process through the application of proven methods such as Lean or Six Sigma. Also, these efforts should be taken synchronously by all major caterers in the MENA region in order to achieve economies of scale (Alemany, 2014).

Suppliers. Suppliers are contributing to the optimization of the inflight product supply chain in two ways. In the first case, suppliers receive direct orders from the airline management and further deliver their goods to inflight kitchens that are operated by contracted caterers. In the second case, suppliers provide products according to the contract specifications. Suppliers can also take two approaches for the product manufacturing depending on the scope of agreed services. In the first case, suppliers provide airlines with standard products designed according to the airline’s specifications. They are manufactured in the plants or factories that deliver other products, as well. In the second case, manufacturers focus on producing a cycle of food items since they can supply large amounts of food at the lower costs than the inflight kitchen can.

The main complexity in the case of suppliers is that the equipment manufacturers are required to make separate shipment arrangement airline by airline. This situation causes the increase in costs of transportation and logistics services, as well as complexity and waste for the entire supply chain. In addition, it is reported that most equipment for the inflight industry is manufactured in Asia; thus, it might be not an optimal solution for airports located at the large distances from their supplier (Hepworth, 2014). Consequently, suppliers can contribute to the overall supply chain added value by optimizing routes and schedules, as well as eliminating some elements of their own supply chains. Taking sufficient time for the route planning and logistic network optimization will enable suppliers to minimize labor costs for the case of food supply and reducing the time of equipment delivery by shipping it directly to the airlines (Kanngieser, 2013).

Logistic service partners. Logistic service partners are concerned with improving logistic aspects of the inflight product supply chain. Sales (2016) admitted that these companies are particularly interested in the supply chain waste elimination. In other words, they should track the amount of non-consumable or non-disposable stock items, for example, crockery or glassware. The importance of paying significant attention to these issues is that stock items hold products of the highest value, thus keeping the highest amount of the airline’s capital. Hence, logistic service providers should act as advisors to the airline management by creating specialized teams that would assist airlines in explaining possible strategies for optimization and removing the amount of unused inventory.

Contract Inclusions

An important part of the relationship cultivation process in the inflight product supply chain is following terms and conditions of the contracts signed between major stakeholders. Strictly following contract terms ensures that all parties will be committed to delivering their services of high quality in the required amount and in the specified time. However, considering the overall complexity of the analyzed supply chain, it is advised to make contract-specific inclusions that would differentiate these agreements from standard contracts used by airlines for other purposes.

First of all, it is important to include a note on the quality of food and equipment supplied onboard. The utmost importance of such inclusion is explained by the responsibility of airlines before their passengers. These relationships can be violated if the quality of the inflight products is not satisfactory. Moreover, using inflight products of the poor quality could endanger the life of a passenger while being onboard. In its turn, such a situation can violate agreements between a client and the airline company (Amaruchkul, Cooper, & Gupta, 2011). Hence, a clear explanation of roles and responsibilities in the case of the poor product quality should be indicated for each party.

The second inclusion required for such contracts is outlining the procedure for handling increasing costs and optimizing related expenditures. Increased costs can emerge as a result of the supply chain waste generation, as well as due to the systemic mistakes and drawbacks of involved stakeholders (Pearce, 2013). Hence, it is important to make sure that increased costs are only compensated under the preliminary defined scope of services. In other words, all parties should understand the importance of following business rules agreed in the contract.

Finally, it is crucial to outline consequences of unethical practices performed by all stakeholders. The examples of such cases are violating initial agreements, failing to provide required services on time, and engaging in any forms of fraudulent activities. Contract inclusions of a kind should clearly state specific penalties that could be applied to unethical behavior. Meanwhile, it might be required to conduct the analysis of a legal base in order to regulate working relationships effectively at the international level.  

Selection of Effective Suppliers

The next stage of the sourcing plan is the supplier selection, which assumes that the airline management should follow a methodological approach in selecting best suppliers according to the distinct criteria. Rezaei, Fahim, and Tavasszy (2014) assert that suppliers in the airline industry should be selected with the help of a multi-phase approach, in which all bidders are first screened by qualification methods, as well as subjected to the further scrutiny.  The available literature discusses several approaches that could be used in both phases. For instance, Ferreira and Borenstein (2012) assert that the qualification phase could be executed with the help of either the categorical method or the cluster analysis. The similarity of those methods is explained by the supplier grouping approach, under which differences between suppliers in various groups is maximized, while the differences within the same group are minimized (Ferreira & Borenstein, 2012). The difference between two methods is the type of data used. While categorical analysis is qualitative, cluster analysis is quantitative and uses numerical scores (Rezaei et al., 2014). Another qualification method that can be used in such case is the data envelopment analysis, which evaluates the supplier performance based on the relative supplier efficiency rating that stems from the software-driven database. Also, a range of conjunctive, disjunctive, and lexicographical methods are no less important (Rezaei & Ortt, 2012).

The final supplier selection stage comprises linear weighting models, the total cost of ownership estimation, and mathematical programming scenarios. Several authors recognized the analytical hierarchy process as the most frequently used method that presents supplier selection process as a hierarchy of levels, in which smaller parts are structured and modeled (Chai, Liu, & Ngai, 2013; Chung, Wu, & Chiang, 2013). The total cost of ownership (TCO) approach can be used if all supply chain costs related to the procurement are quantified, including costs of the service, quality, administration, and communication. Finally, mathematical models can be used for providing a more precise problem formulation as an objective function, while using only quantitative criteria as the input information (Ferreira & Borenstein, 2012). Considering the variety of methods, an important aspect of using one of those methods is the appropriate definition of the input parameters that comprehensively characterize each supplier against the expected service delivery.

Negotiation Aspects

Selecting the appropriate model for the inflight product supply assumes negotiating critical aspects of the service provision. Previous analysis has shown that it is critical to consider the scope of caterer’s responsibilities given the active involvement of the airline management into catering services. Hence, it would be important to negotiate the scope of caterers’ responsibilities and the level of involvement required in the inflight kitchen services.

Another aspect is to negotiate on how suppliers will interact with the airline management given that two collaboration scenarios are possible. This negotiation might require analyzing the experience of other airline companies given that previous favorable experiences might be considered the model of supplier relationships (Abu Bakar, 2013). In the meanwhile, the approaches to the partnership are vast; they might require reaching consensus on several critical points, for example, communication and onboard service design.

Finally, negotiations will be required in evaluating costs of services performed under the scope of contracts signed between identified parties. Given that some suppliers might be used for service provision in different seat classes, they are likely to evaluate their services differently and prefer to cooperate under different contractual terms. In the meanwhile, it is required to maintain confidentiality while discussing specific services with other service providers in order to avoid potential conflicts of interest and endanger the loss of critical supplier (Mbadi, 2015).

Conclusion

This research aimed at evaluating the role of procurement and supply functions based on the case of the inflight product supply chain in Etihad Airways. Based on the analysis, it was concluded that the inflight product category is very complex and requires considering several stakeholders with the view to optimizing supply chain process and delivering quality services. In general, it was found that the supply chain operations should be sufficiently optimized to achieve economies of scale and reduce costs. In the meanwhile, this process becomes more complicated when the case of the contract adherence and appropriate supplier selection methodology arises, requiring having a highly experienced and talented procurement and supply team on the ground.