Reverse Logistics: Backwards Practices That Matter
Reverse Logistics: Backwards Practices that
Matter
RAYTHEON AIRCRAFT COMPANY
CASE STUDY
Site Visit Date: December 21, 2006
Site Visit Location: Wichita, Kansas
Site Visit Host:
•
Frank Neukirch, manager of warranty recovery
© 2007 APQC
Case Study—Raytheon Aircraft Company
Reverse Logistics: Backwards Practices That Matter
I. GENERAL OVERVIEW
Raytheon Aircraft Company (RAC), a division of the Raytheon Company, is the world’s
leading business and special-mission aircraft manufacturer. The $2.9 billion organization
provides aviation products and services for businesses, governments, and individuals. .
RAC employs more than 8,000 employees and maintains a network of more than 100
authorized service centers worldwide. The organization manufacturers and sells aircraft
ranging from single-engine propeller-driven planes to business jets. It generated $2 billion
in sales during 2006.
Raytheon Aircraft Parts Inventory and Distribution (RAPID), located in Dallas, is a wholly
owned subsidiary of RAC. It is a world-wide distributor of aircraft spare parts and is
chartered to support the Raytheon aircraft throughout their life cycles. 1 The RAPID retail
operation reports $300 million in revenue for 2006.
PSFweb is a business process outsourcing (BPO) firm that supports and serves RAPID’s
customers. The outsource provider uses a J.D. Edwards system for warehousing, which
has interface capability between the warehouse software and SAP. Nightly, the provider
downloads update information into SAP.
Early in 2006, RAC implemented its performance promise, which states: “At Raytheon
Aircraft Company, We Build Superior Quality Into Every Aircraft We Make. That’s A
Promise.
•
I am personally responsible for the quality of my work
•
I produce products and services that delight my customer in every respect
•
I continuously look for ways to improve quality
•
I hold myself and others accountable to our performance promise.”
As employees sign off on airplanes, they sign a promise certificate that says, “I am (name)
and I promise that I instituted the best quality that I could into this product.” The promise is
taken seriously. All employees from the president to all other levels make a performance
promise that becomes part of their annual performance metrics.
RAC currently has 900 aircraft under warranty, and warranties range from one to five years.
Fabricated-part warranties cover parts made by Raytheon, while purchase-part warranties
cover parts made by Raytheon’s suppliers. RAC typically offers a two-year purchase part
and a five-year fabricated parts warranty.
II. R EVERSE L OGISTICS S TRATEGY D ESIGN
RAPID developed a reverse logistics initiative to support customer-focused key
organizational goals. Goals to increase customer responsiveness and satisfaction,
minimize discrepancies, reduce cycle time, and improve product quality drive the initiative.
Results in these areas are achieved by effective reverse logistics processes, visibility and
traceability of returns, reverse supply chain velocity, and innovative practices.
RAC uses a Six Sigma approach to investigate and implement all process improvements.
This approach ensures that all aspects of the business are considered and decisions are
fact-based. A Six Sigma initiative to establish return avoidance practices, and product
improvement resulting from information gathered during the reverse process are also
becoming effective in meeting key organizational goals.
1
Source: www.raytheonaircraft.com (retrieved November 2006)
© 2007 APQC
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Case Study—Raytheon Aircraft Company
Reverse Logistics: Backwards Practices That Matter
General corporate management at RAPID works closely with customers and suppliers to
establish customer-focused policies and process accountability. A senior level RAPID
executive is accountable for returns policies, stakeholder relations and reverse logistics
strategy execution.
Catalyst for Change: A Rewrite of SAP
In 2000 RAC implemented SAP in airplane sales, parts distribution, and production activity
in the factory. Before implementation, it relied on home-grown systems; computers tracked
warranty activities, but the warranty information was not integrated with other parts of the
business. When the organization transitioned to SAP, the results were disastrous: Returns
processes were impossible to complete for a two-month period. The warehouse could not
process its usual volume of 500 receipts per week. Frank Neukirch, manager of warranty
recovery says, “We could do absolutely nothing. We struggled through 2000. We are still in
the recovery mode with some customers.”
In 2001, the organization had a change in leadership, and the new executives mandated an
SAP rewrite. RAC launched 19 Six Sigma projects to achieve the total overhaul of the
system. Front-line employees collaborated with SAP consultants to design the most
efficient and effective system possible.
The warranty recovery division made significant changes to SAP’s base product. Through
the re-write, the warranty recovery division achieved complete integration with the rest of
the organization.
III. ESTABLISHING A PHYSICAL REVERSE CHANNEL
RAPID receives $3 million in returns each year—about one percent of annual sales
revenue. The organization maintains an effective returns authorization process in which 95
percent of returned product is accompanied by a valid return authorization number. The 5
percent of returns that are not compliant with policy are tracked for customer follow-up and
training.
If established processes developed to facilitate the customer’s return are followed, cycle
time takes a minimum of six days. Return material authorizations are created within 24
hours of complaint, and a UPS ground shipping program moves return parts for receipt
within five days. However, due to customer activities in the returns process, return cycle
time averages 20 days.
Ninety percent of returned product is restocked and resold through the primary channel,
providing for 98 percent recovery of the total cost of goods sold (COGS). Ten percent is
remanufactured and sold through secondary channels. Sixty-five percent of asset recovery
is through supplier warranty programs owned by Raytheon Aircraft.
Organizational Structure
Warranty recovery is a hands-on, customer-related process. The manager of warranty
recovery reports to the director of maintenance and warranty programs, who then reports to
the president of global services, which is the customer support division. Warranty recovery
has dotted-line responsibility to the supply chain logistics organization.
The warranty recovery staff is all specialist-trained. The function’s Six Sigma projects no
longer require expert or Black Belt guidance—specialists lead the projects, and teams are
showing excellent results from their process improvement efforts.
The warranty recovery area manages two types of returns: warranty claims and core
returns, which are processed at a Wichita, Kan. Warehouse, and new part returns, which
are processed at a Dallas warehouse.
© 2007 APQC
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Case Study—Raytheon Aircraft Company
Reverse Logistics: Backwards Practices That Matter
Warranty Claims and Core Returns
Figure 1 shows the process flow of warranty recovery; the steps in the process are highly
linked, and every step is integrated through SAP.
Warranty Recovery Process Flow
Figure 1
Warranty credits are based on proof of purchase. Customers buy parts from RAPID to
satisfy their warranty claims, and because RAPID is completely integrated through SAP,
RAC can trace the original sales order and invoice. The credit is automated; customers are
credited within 24 to 48 hours of part receipt.
To simplify the credit process, RAC uses flat rates to credit the labor that is required for
aircraft repair. It captures various flat rates using an ever-expanding database. Warranty
recovery knows the exact disposition of each part that is settled on a warranty claim as it
flows back into the system. The group can track it at any point in the claims process.
Through SAP, the group knows whether the part is eligible for return and under what
conditions it can be returned. RAC has a warranty recovery program facilitated by SAP. For
example, if a supplier part fails, typing its serial number into the system will bring up the
associated supplier contract and the warranty period. The warranty claim includes the
original purchase order, and bringing up the purchase number gives the employee
information regarding the warranty claim. Information such as manufacturing date and
hours on the part is entered upon receipt of the part.
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Case Study—Raytheon Aircraft Company
Reverse Logistics: Backwards Practices That Matter
RAC allows a part to be repaired twice. The part is destroyed the third time it fails, whether
or not the cost is recoupable from the supplier. The division tracks repairs using parts’
serial numbers, which are logged in the system at each touch point.
Russ Baxter, the warranty hold area manager, oversees a warehouse that houses all of the
parts that are associated with warranty claims. Each week, the warehouse hold area
averages 500 receipts, and the warehouse ships 375 to 400 returned parts to suppliers for
recovery or to service centers for repair/overhaul. The stock room has four full-time
equivalents involved in receipts and five employees involved in warranty recovery activity.
Warranty recovery settles claims with customers using repaired and overhauled parts.
Customers are informed about this cost-cutting practice before their purchase of equipment
is complete, and they sign a document reflecting that they understand and agree. Repair is
typically 60 percent of the cost of a new part; an overhaul is 70 percent of the cost of a new
part.
The repair and overhaul business is highly regulated by the Federal Aviation Agency (FAA).
Every supplier that conducts an overhaul must provide a repair station certificate to the
FAA. Repairs must be documented from “cradle to grave.” Raytheon must authenticate
where it bought a part, how many hours the part has flown, and what type of repairs have
been performed on it.
Overhauling a part is much more difficult than repairing it because the mechanic must
restore the part to its original condition. Overhauling is more expensive than repair;
however, the FAA is less stringent about tracking an overhauled part than it is a repair, so
the cost of documentation is lower. For this reason, Raytheon has turned its attention from
repairing parts to overhauling them.
Some customers will not accept overhauled parts, preferring new parts as replacements.
Decisions are made on a case-by-case basis, but Raytheon typically provides new parts for
customers who experience early part failure with a new aircraft. The organization has a
hands-on approach to dealing with its customers—representatives take time to discuss
various aspects of customer purchases. For customers receiving new parts, the
administrative process is to sell them the new part and credit their account when the claim
is filed. The system will not accept a claim until Raytheon has received the part.
Warranty repairs must be conducted by one of 96 authorized service centers located
throughout the world. Ten of the centers are company-owned and the others are
independent. Raytheon conducts stringent audits of the service centers to ensure they
have the capability to work on the aircraft. Warranty recovery considers its authorized
service centers (in some cases, more so than the end user of the plane) to be its
customers. Some retail customers are fleet operators authorized to perform their own
maintenance. One customer, NetJets, uses both its own facilities and the authorized
service centers to do repairs.
Another main consideration for the warranty recovery process is returnable cores. When
customers install new products, they return the cores of the failed products and receive
deposit refunds. In 2006, RAC had 12,000 core returns, 60 percent of which were
associated with warranties. SAP automatically refunds the core deposit (upon receipt) and
tracks the warranty claim as it is paid.
The warehouse is unable to break cores down into their component parts, but some
suppliers accept the cores themselves. If cores are beyond economical repair, the suppliers
cannibalize them for parts.
Testing for Warranty Claims
The industry has a specification range in which acceptable parts must operate. At times,
the part operates at the lower end of acceptability in bench tests, but fails when used during
an airplane flight.
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Case Study—Raytheon Aircraft Company
Reverse Logistics: Backwards Practices That Matter
Warranty recovery tracks several measures and reports them monthly. It records various
causes of part failure including customer damage. It also tracks “no fault found” (incidents
when supplier testing finds no fault with a returned product), out-of-date (for supplier
warranty), and routine maintenance. Incidents of “no fault found” have the greatest negative
impact on RAC’s bottom line because suppliers will not issue credits for these parts.
If supplier no-fault-found notifications on a single part rise to 10 percent of the returns, the
manager of warranty recovery works with quality assurance to implement an in-house
testing program. If the supplier is correct and no fault is found, the part is returned to the
customer’s service center and the customer’s claim is denied. If testing does identify a
problem, the part is boxed with the test results included and sent to the supplier.
All aircraft parts are made to strict specifications; RAC and the supplier agree to the
specifications (and the testing procedures that will prove them up) before RAC completes
the purchase. When a no-fault-found is disputed, warranty recovery’s quality engineer
communicates directly with the supplier. He travels to the supplier location to calibrate the
testing equipment. The warranty recovery team sometimes travels with the engineer to the
supplier location to watch testing. Similarly, suppliers visit RAC to observe its tests.
Russ Baxter, the warranty hold manager, recalls an incident in which the supplier and RAC
disagreed about a no-fault-found. RAC discovered a leak; the testing methodology for this
part specified that air pressure was to be gradually increased. However, the supplier was
increasing the air pressure on the part so rapidly that a seal was expanding, stopping the
leak. The RAC team helped the supplier see that when its technicians increased the air
pressure more slowly, the seal did not close and leak remained.
In addition to supplier no-fault-found incidents, warranty recovery tracks the negative
impact of no-fault-found from the service centers. Some service centers return more parts
than others, so warranty recovery personnel determine whether their higher level of returns
are justified. The warranty hold area manager communicates directly with the service
center shop managers.
New Part Returns
Figure 2 is a high-level view of the new part return system. Parts are purchased from
RAPID’s parts facility. Some customers can enter their return request via a Web page
secured by a password, while retail customers call RAPID and speak with a customer
service representative. The representative enters the information in the SAP system with a
reference to the original invoice.
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Case Study—Raytheon Aircraft Company
Reverse Logistics: Backwards Practices That Matter
New Part Return Process Flow
Figure 2
The return is authorized within 24 hours; the warranty recovery office records both returns
and denials in SAP and notifies the customer via e-mail or fax. (Approvals command a 15
percent restocking fee, with a minimum charge of $50 and a maximum of $500.) A return
label accompanies authorized returns, and customers are instructed to ship them to the
Dallas warehouse within 30 days. RAC technicians inspect the returned parts. If the part is
acceptable, the return authorization is recorded, and the part returns to inventory. Within
two or three days of the receipt of an acceptable returned part, the customer is credited.
Because the documentation surrounding each return can be used for legal purposes, the
claims are accompanied by complete narratives.
Some claims are denied, and some parts such as color-coded or custom-made items are
not returnable. Some parts are returnable, but cannot be restocked. These include products
damaged in transit or as a result of faulty packaging, or expired inventory. Customers
receive credit, but the parts are destroyed. Parts that are returned without an 8130 (a
document that states where the part was produced) are also denied. Other parts must
remain sealed and are not returnable if the seal is broken. Denied parts are sent back to
the customer with a return ticket denying the claim.
Warranty recovery administrators work with freight carriers to prevent damage. Because
freight carriers give RAC 15 days to report damage, customers need to notify the
administrators within 10 days of receiving parts in damaged packaging. RAC then has five
days to submit a claim to the freight carriers.
Vendor-Owned Inventory
In October 2005, warranty recovery implemented a vendor-managed inventory (VMI)
program enabled by SAP. The vendor systems are completely integrated with RAC’s SAP
so that the process of supplying inventory is automated. RAC specifies the minimum level
of inventory that suppliers must provide, and it has established a Web portal through which
they can view their inventory. Any activity on their supplies creates a notification e-mail.
The suppliers receive daily reports on any parts that approach the specified minimums.
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Case Study—Raytheon Aircraft Company
Reverse Logistics: Backwards Practices That Matter
Once RAC uses the part, the supplier is paid automatically and a credit is issued based on
the warranty claim that is filed. Because RAC is going back to the suppliers directly for
recovery, the group can monitor quality. Warranty recovery communicates information to
procurement, notifying the buyers which suppliers are performing well.
IV. ENABLING PROCESSES AND OPERATING SYSTEMS
RAPID is 100 percent SAP-integrated. The system is fully integrated with all business
operating systems including inventory management, automated sales force, logistics, billing
and invoicing, and order entry. As noted in the previous section, RAPID makes full use of
customized features to manage returns and facilitate the reverse logistics process.
Returns processing reverse logistics activities at RAPID are facilitated with the use of bar
codes. Returns processing information/tools are Web-based (including returns procedures,
returns forms, returns authorizations, and claim tracking references).
Technology-Enabled Practices
Aircraft vary widely in the amount of warranty remaining. At the point of sale, the
organization calculates an accrual based on airplane model. Accruals are updated quarterly
so that the organization is constantly aware of the parts it needs to have on hand. RAC’s
business management organization is beginning to use Sitel Analytics to help it manage
warranties.
When RAC sells an aircraft, it sets up a contract in SAP. The contract includes the warranty
terms based on the airplane’s serial number. Every time that a claim is made on a specific
serial number, SAP links it to the contract. All accounting behind the contract is accessible
as the claim is settled.
Airplane owners can purchase a “Support Plus” program that covers routine maintenance
such as oil and wiper-blade changes. The plan is priced based on a cost per flight/hour. At
the end of the program, rebates are offered to customers who perform preventative
maintenance regularly and remain below a specified cost per flight/hour figure. Support
Plus is tracked in the same manner as other warranty types.
RAC has a closed-loop warranty system. One type of claim is “parts only,” an “out of box”
failure. If a customer opens a box to find a part that does not work, he sends it back
immediately before it is used on a warranty claim. A second type of claim is “parts and
labor.” The part is either original equipment or installed on the plane. Returning it involves
labor costs for removing and installing. A third claim is “labor only,” in which a mechanic
needs to adjust a part that remains installed. To control returns, RAC sets a dollar
threshold. If the cost of a used part is below, for example, $300, then the customer is not
required to send it back. (Customers must return all out-of-box failures.)
Since early 2006, the warranty recovery team measures the warranty claims for which it
fails to receive supplier recovery. The team knows the dollar value of the un-recovered
inventory, and it knows why its attempt to recover failed. The knowledge allows the team to
work with the suppliers to change the contracts. For example, a supplier may offer a oneyear warranty, and the record of part failures indicates that RAC needs a five-year
warranty. Suppliers have a Web site through which they can monitor their own quality so
that they can be proactive about correcting their failures.
RAC debits suppliers’ accounts when parts are returned, and it pays the warranty claim.
Suppliers have 30 days to adjudicate a warranty claim, after which time the purchase order
is canceled. Some suppliers claim that the immediate debit is punitive; however, managers
make the case that RAC has already invested in the warranty claim. Neukirch says “We do
not feel that it is right that we fund the quality problems that our suppliers are creating.”
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Case Study—Raytheon Aircraft Company
Reverse Logistics: Backwards Practices That Matter
IV. M EASUREMENT , R ESULTS ,
AND
C ONTINUOUS I MPROVEMENT
The warranty recovery program began in 1996. After one year, the team reported a $238
thousand recovery. In 2006, the program reported a recovery of $9 million. RAC has a
recovery rate of 67 percent on parts claims, which represents a best-practice level in the
aircraft industry. (Many aircraft companies take a higher production price and do not pursue
recovery.)The success of the program can be attributed to the complete integration
provided by SAP.
RAPID measures the following incidents associated with reverse logistics activities to
gauge the success of the reverse logistics strategy and ensure continuous improvement in
meeting key organizational goals:
•
customer received wrong part,
•
wrong part entered by customer,
•
damaged in shipment, and
•
out-of-box failures.
RAPID’s focus on customer satisfaction is a key contributor to the achievement of
organizational goals. The “performance promise” philosophy is driven from the top and
embedded in the RAPID culture. This philosophy involves a statement from every
employee regarding what he needs to do to satisfy the customer. Rewards and recognition
programs are key to employing the “my work is perfect” attitude. A “my work is perfect”
statement is signed off by each employee each time they deliver an aircraft or service.
Figure 3 is year-to-date (YTD) cumulative days-to-settle based on the date the claim was
submitted. The graph shows that for September, October, and November 2006, warranty
recovery reached its goal of settling the average claim within eight days of receiving the
part from the service center.
Year-to-Date (YTD) Cumulative Days to Settle
Figure 3
Figure 4 shows that turnaround times for claims are much faster when customers are
paying for labor only as opposed to paying for a part and waiting for it to be shipped. The
figure also shows that RAC is meeting its turnaround time for handling claims that require
parts but has not achieved its goal regarding turnaround times for labor-only claims. The
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Case Study—Raytheon Aircraft Company
Reverse Logistics: Backwards Practices That Matter
metric demonstrates the criticality of efficiently bringing the cores back into the system,
overhauling their parts, and retuning the parts to the shelves.
Year-to-Date (YTD) Cumulative Days to Settle
Figure 4
Figure 5 shows accumulated supplier-rejected warranty by model for 2006. Warranty
recovery uses this measure to track the types of aircraft on which it is seeing the greatest
rate of rejection. RAC is finding that, although it offers a five-year warranty on some of its
jets, parts suppliers offer a shorter-term warranty; therefore, RAC is not able to recoup its
losses on some of the warranty claims. The metric has prompted negotiations with
suppliers for better terms.
Accumulated Supplier-Rejected Warranty by Model (2006)
Figure 5
Figure 6 shows warranty recovery on cumulative purchased parts. It records the number of
parts that RAC has paid through its warranty program and the amount of recovery it has
been able to achieve from suppliers. In late 2006, the recovery rate stood at 67 percent.
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Case Study—Raytheon Aircraft Company
Reverse Logistics: Backwards Practices That Matter
2006 Warranty Recovery Cumulative Purchased Parts
(Standard Warranty & Spares)
Figure 6
The x-axis of the chart on Figure 7 lists reason codes for returns in 2004, 2005, and 2006.
The warranty recovery team monitors the chart for anomalies. In general, the chart shows
that returns are trending lower. The third reason code from the right is service center
returns. The spike denotes a change in policy: RAC loosened its mandatory stocking
requirements, enabling the service centers to return some products.
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Case Study—Raytheon Aircraft Company
Reverse Logistics: Backwards Practices That Matter
Figure 7
Figure 8 is a comparison of the number of returns and the number of parts shipments to
customers. The number “8201” refers to parts shipped out of the Dallas warehouse. New
product returns (“npr”) include both 8201 parts and parts shipped directly by the supplier to
the customer. The team is not happy with its current rate of returns (approximately 4
percent) and intends to create projects to lower the returns over which it has control.
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Case Study—Raytheon Aircraft Company
Reverse Logistics: Backwards Practices That Matter
Number of Returns versus Parts Shipped to Customers
Figure 8
IV. L ESSONS L EARNED
AND
L OOKING F ORWARD
If the warranty recovery team had to implement SAP over again, it would be more vocal in
insisting that it was not ready to make the transition. Neukirch says that RAC lost some
customers because of poor performance during SAP implementation—customers who will
never be recovered.
SAP requires discipline from every part of the organization. Because manufacturing has
deadlines for airplane delivery, it is sometimes tempted to skip a step that seems
unimportant at the time. However, no steps can be skipped because integration is so tight;
lack of information or erroneous information affects every part of the organization.
RAC is excellent at collecting metrics. In 2007, the warranty recovery team intends to
become better at using them. It will work in the Six Sigma framework to create projects that
act on the metrics.
Warranty recovery intends to form more business-to-business relationships based on SAP.
Suppliers—in particular, an avionics and an engine supplier that use SAP—can streamline
processes through system integration. The team also intends to become more integrated
with its service center. It should be able to bypass the crediting process by allowing the
service center to create a work order and receive the part free of charge.
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Case Study—Raytheon Aircraft Company