SOUTHWEST AIRLINES TAKES OFF WITH BETTER SUPPLY CHAIN MANAGEMENT Case Study
I N T E R A C T I V E S E S S I O N : O R G A N I Z AT I O N S
SOUTHWEST AIRLINES TAKES OFF WITH BETTER SUPPLY CHAIN MANAGEMENT
Weather at our destination is 50 degrees with some broken clouds, but theyll try to have them fixed before we arrive. Thank you, and remember, nobody loves you or your money more than Southwest Airlines.
Crew humor at 30,000 feet? Must be Southwest Airlines. The company is the largest low-fare, highfrequency, point-to-point airline in the world, and largest overall measured by number of passengers per year. Founded in 1971 with four planes serving three cities, the company now operates over 500 aircraft in 68 cities, and has revenues of $10.1 billion. Southwest has the best customer service record among major airlines, the lowest cost structure, and the lowest and simplest fares. The stock symbol is LUV (for Dallass Love Field where the company is headquartered), but love is the major theme of Southwests employee and customer relationships. The company has made a profit every year since 1973, one of the few airlines that can make that claim.
Despite a freewheeling, innovative corporate culture, even Southwest needs to get serious about its information systems to maintain profitability. Southwest is just like any other company that needs to manage its supply chain and inventory efficiently. The airlines success has led to continued expansion, and as the company has grown, its legacy information systems have been unable to keep up with the increasingly large amount of data being generated. One of the biggest problems with Southwests legacy systems was lack of information visibility. Often, the data that Southwests managers needed were safely stored on their systems but werent visible, or readily available for viewing or use in other systems. Information about what replacement parts were available at a given time was difficult or impossible to acquire, and that affected response times for everything from mechanical problems to part fulfillment.
For Southwest, which prides itself on its excellent customer service, getting passengers from one location to another with minimal delay is critically important. Repairing aircraft quickly is an important part of accomplishing that goal. The company had $325 million in service parts inventory, so any solution that more efficiently handled that inventory and reduced aircraft groundings would have a strong impact on the airlines bottom line. Richard Zimmerman, Southwests manager of inventory management, stated that theres a significant cost when we have to ground aircraft because we ran out of a part. The long-term, cost-effective way to solve
that problem was to increase productivity and to ensure that our maintenance crews were supported with the right spare parts, through the right software application.
Southwests management started looking for a better inventory management solution, and a vendor that was capable of working within the airlines unique corporate culture. After an extensive search, Southwest eventually chose i2 Technologies, a leading supply chain management software and services company that was recently purchased by JDA Software. Southwest implemented the i2 Demand Planner, i2 Service Parts Planner, and i2 Service Budget Optimizer to overhaul its supply chain management and improve data visibility. I2 Demand Planner improves Southwests forecasts for all of the part location combinations in its system, and provides better visibility into demand for each part. Planners are able to differentiate among individual parts based on criticality and other dimensions such as demand volume, demand variability, and dollar usage. I2 Service Parts Planner helps Southwest replenish its store of parts and ensures that the right parts are in the right location
at the right time. The software can recommend the best mix of parts for each location that will satisfy the customer service requirements of that location
at the lowest cost. If excess inventory builds up in certain service locations, the software will recommend the most cost-efficient way to transfer that excess inventory to locations with parts deficits. I2 Service Budget Optimizer helps Southwest use its historical data of parts usage to generate forecasts of future parts usage.
Together, these solutions gather data from Southwests legacy systems and provide useful information to Southwests managers. Most importantly, Southwest can recognize demand shortages before they become problems, thanks to the visibility provided by i2s solutions. Southwests managers
Part Three Key System Applications for the Digital Age now have a clear and unobstructed view of all of the data up and down the companys supply chain. By using what-if analysis, planners can quantify the cost to the company of operating at different levels of service. Zimmerman added that i2 will help us lower inventory costs and keep our cost per air seat mile down to the lowest in the industry. Also, the solutions will help us ensure that the maintenance team can quickly repair the aircraft so that our customers experience minimal delays. The results of the i2 implementation were
CASE STUDY QUESTIONS
1 . Why is parts inventory management so important at Southwest Airlines? What business processes are affected by the airlines ability or inability to have required parts on hand?
2 . Why management, organization, and technology factors were responsible for Southwests problems with inventory management?
3. How did implementing the i2 software change the way Southwest ran its business?
4. Describe two decisions that were improved by implementing the i2 system.
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