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Flevy Management Insights Case Study
Value Creation Initiative for Airline in Competitive Low-Cost Segment

There are countless scenarios that require Supply Chain Analysis. Fortune 500 companies typically bring on global consulting firms, like McKinsey, BCG, Bain, Deloitte, and Accenture, or boutique consulting firms specializing in Supply Chain Analysis to thoroughly analyze their unique business challenges and competitive situations. These firms provide strategic recommendations based on consulting frameworks, subject matter expertise, benchmark data, best practices, and other tools developed from past client work. Let us analyze the following scenario.

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Consider this scenario: A prominent low-cost airline is positioned in a fiercely competitive sector, facing the strategic challenge of enhancing Value Creation through comprehensive supply chain analysis.

Externally, the airline is combating a 20% increase in fuel prices and heightened competition that has eroded its market share by 5% in the past two years. Internally, inefficiencies in fleet management and route optimization have led to increased operational costs and decreased flight punctuality. The primary strategic objective is to fortify its competitive positioning by optimizing its supply chain and operational efficiency to improve profitability and customer satisfaction.

The airline industry is experiencing transformative shifts with digital innovation and changing consumer expectations driving competitive dynamics. A closer examination of the underlying issues suggests that the airline's slow adaptation to digital operational tools and a customer-first approach may be at the core of its stagnation.

Environmental Assessment

The airline industry is characterized by high volatility and intense competition. The evolving dynamics are significantly influenced by technology adoption, regulatory changes, and fluctuating fuel prices.

Examining the primary forces driving the industry reveals:

  • Internal Rivalry: Intense, with numerous low-cost carriers competing on price, route networks, and customer service.
  • Supplier Power: High, especially from aircraft manufacturers and fuel suppliers, impacting operational costs.
  • Buyer Power: Increasing, as customers have more choices and access to price comparison tools.
  • Threat of New Entrants: Moderate, due to high entry barriers including capital investment and regulatory approval.
  • Threat of Substitutes: Low to moderate, with alternatives like high-speed rail in certain regions.

Emergent trends include a shift towards sustainability, digitalization of operations for efficiency, and personalized customer experiences. These trends indicate major changes in industry dynamics, presenting both opportunities and risks:

  • Digitalization of operations offers the opportunity for improved efficiency and cost reduction but requires significant upfront investment in technology.
  • Increasing demand for sustainable travel options presents an opportunity to innovate but poses a risk for carriers slow to adapt.
  • The growing emphasis on customer experience opens avenues for differentiation but requires a cultural shift towards customer-centricity.

A PESTLE analysis highlights significant regulatory challenges across different markets, technological advancements in aircraft and consumer tech, and social shifts towards environmentally friendly travel options.

Learn more about Customer Service Customer Experience Cost Reduction

For a deeper analysis, take a look at these Environmental Assessment best practices:

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Internal Assessment

The airline boasts a strong brand in the low-cost segment, with a comprehensive route network, but faces challenges with fleet utilization and customer service consistency.

The 4DX Analysis underscores the critical gap between strategic goals and execution, particularly in digital transformation initiatives and customer experience enhancements. Aligning team efforts and focusing on high-impact activities could drive significant improvements.

An Organizational Structure Analysis reveals that the current hierarchical setup slows decision-making and innovation. Adopting a more agile structure could enhance responsiveness and foster a culture of continuous improvement.

The 4 Actions Framework Analysis suggests eliminating inefficiencies in route planning, reducing dependency on traditional fuel sources, raising the bar on customer service, and creating unique value propositions beyond price.

Learn more about Digital Transformation Continuous Improvement Value Proposition

Strategic Initiatives

  • Supply Chain Optimization and Fleet Modernization: This initiative aims to reduce fuel consumption and maintenance costs by investing in newer, more efficient aircraft and optimizing the supply chain. The expected value creation comes from lower operational costs and enhanced environmental sustainability. This will require capital investment and strategic partnerships with aircraft manufacturers.
  • Customer Experience Transformation: Enhancing digital touchpoints and personalizing the customer journey to improve satisfaction and loyalty. The source of value creation lies in differentiating the airline in a commoditized market, expected to drive revenue growth through increased customer retention. This initiative will require investment in digital platforms and training for customer-facing staff.
  • Operational Excellence through Digitalization: Implementing advanced analytics for route optimization and predictive maintenance to improve punctuality and reduce costs. The value creation comes from operational efficiency and improved service reliability. Resources needed include technology investment and analytics expertise.

Learn more about Supply Chain Customer Journey Value Creation

Supply Chain Analysis Implementation KPIs

KPIS are crucial throughout the implementation process. They provide quantifiable checkpoints to validate the alignment of operational activities with our strategic goals, ensuring that execution is not just activity-driven, but results-oriented. Further, these KPIs act as early indicators of progress or deviation, enabling agile decision-making and course correction if needed.

You can't control what you can't measure.
     – Tom DeMarco

  • Fuel Efficiency: Measures the effectiveness of fleet modernization and operational improvements.
  • Customer Satisfaction Score: Reflects the success of the customer experience transformation efforts.
  • On-time Performance: Indicates improvements in operational efficiency and route management.

These KPIs offer insights into the airline's progress towards operational excellence, customer satisfaction, and environmental sustainability. They will guide strategic adjustments and highlight areas for further improvement.

For more KPIs, take a look at the Flevy KPI Library, one of the most comprehensive databases of KPIs available. Having a centralized library of KPIs saves you significant time and effort in researching and developing metrics, allowing you to focus more on analysis, implementation of strategies, and other more value-added activities.

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Stakeholder Management

Successful implementation of strategic initiatives relies on the engagement and support of both internal and external stakeholders, including employees, technology partners, and regulatory bodies.

  • Employees: Essential for executing operational improvements and delivering an enhanced customer experience.
  • Technology Partners: Provide the systems and expertise needed for digital transformation.
  • Regulatory Bodies: Their regulations and policies will influence strategic decisions, especially regarding fleet modernization.
  • Customers: The beneficiaries of improved services and operational efficiency, providing valuable feedback.
  • Investors: Support the financial investment required for technology and fleet upgrades.
Stakeholder GroupsRACI
Technology Partners
Regulatory Bodies

We've only identified the primary stakeholder groups above. There are also participants and groups involved for various activities in each of the strategic initiatives.

Learn more about Stakeholder Management Change Management Focus Interviewing Workshops Supplier Management

Supply Chain Analysis Best Practices

To improve the effectiveness of implementation, we can leverage best practice documents in Supply Chain Analysis. These resources below were developed by management consulting firms and Supply Chain Analysis subject matter experts.

Supply Chain Analysis Deliverables

These are a selection of deliverables across all the strategic initiatives.

  • Supply Chain Optimization Plan (PPT)
  • Customer Experience Enhancement Roadmap (PPT)
  • Digital Transformation Framework (PPT)
  • Operational Efficiency Improvement Model (Excel)

Explore more Supply Chain Analysis deliverables

Supply Chain Optimization and Fleet Modernization

The strategic initiative of Supply Chain Optimization and Fleet Modernization was significantly bolstered by the application of the Resource-Based View (RBV) and Value Chain Analysis frameworks. The Resource-Based View, initially conceptualized to emphasize the importance of valuable, rare, inimitable, and non-substitutable resources, was pivotal in identifying the airline's unique assets that could be leveraged for competitive advantage. Similarly, Value Chain Analysis, a framework that dissects an organization's activities to identify areas of value creation and cost, provided a structured approach to optimizing operations.

Implementing these frameworks involved several steps:

  • The airline conducted a comprehensive inventory of its resources, including its fleet, to identify which assets were truly unique and capable of providing a sustainable competitive advantage.
  • Each activity within the supply chain was evaluated through Value Chain Analysis to pinpoint inefficiencies and areas where value could be maximized, particularly focusing on inbound logistics and operations.
  • Strategic partnerships were sought with aircraft manufacturers to access newer, more fuel-efficient planes that aligned with the airline's identified valuable resources.

The results of these implementations were transformative. By leveraging its unique resources, such as favorable lease agreements on strategic airport slots and a young, fuel-efficient fleet, the airline enhanced its competitive positioning. Value Chain Analysis led to a streamlined supply chain with improved operational efficiency, contributing to reduced costs and enhanced environmental sustainability.

Learn more about Competitive Advantage Value Chain Analysis Value Chain

Customer Experience Transformation

For the Customer Experience Transformation initiative, the airline utilized the Service-Dominant Logic (SDL) and Customer Journey Mapping frameworks. Service-Dominant Logic, which shifts the focus from goods to service and value co-creation between the organization and its customers, was instrumental in reorienting the airline's approach to customer service. Customer Journey Mapping provided a visual representation of every interaction a customer has with the airline, identifying key touchpoints for improvement.

The implementation of these frameworks was carried out as follows:

  • Workshops were organized with cross-functional teams to adopt a Service-Dominant Logic perspective, redefining the airline's service offerings as platforms for value co-creation with passengers.
  • Customer Journey Mapping was conducted for various customer segments, highlighting pain points and moments of truth that significantly impact customer satisfaction.
  • Based on insights from Customer Journey Maps, digital touchpoints, such as mobile app and website, were enhanced for a more personalized and seamless customer experience.

The adoption of SDL and Customer Journey Mapping significantly elevated the customer experience. The airline saw a marked improvement in customer satisfaction scores and loyalty metrics, as passengers appreciated the more personalized, seamless interactions and the airline's commitment to value co-creation.

Learn more about Customer Satisfaction Mobile App Customer Journey Mapping

Operational Excellence through Digitalization

In pursuing Operational Excellence through Digitalization, the airline applied the Theory of Constraints (TOC) and Lean Six Sigma methodologies. The Theory of Constraints, which focuses on identifying and addressing the single most limiting factor (constraint) in achieving a goal, was critical in pinpointing bottlenecks in operations. Lean Six Sigma, known for its dual emphasis on eliminating waste (Lean) and reducing variation in processes (Six Sigma), complemented TOC by providing a systematic approach to process improvement.

The frameworks were implemented in the following manner:

  • An analysis was conducted to identify the most significant constraints in the airline's operations, with particular attention to aircraft turnaround time and maintenance scheduling.
  • Lean Six Sigma projects were initiated to streamline processes and eliminate waste in identified areas of constraint, utilizing DMAIC (Define, Measure, Analyze, Improve, Control) methodology.
  • Continuous improvement teams were established to monitor processes and ensure that the improvements were sustained over time.

The implementation of the Theory of Constraints and Lean Six Sigma methodologies led to notable enhancements in operational efficiency. The airline experienced reductions in delays and cancellations, improved aircraft utilization, and a more responsive maintenance schedule, all contributing to higher on-time performance rates and customer satisfaction.

Learn more about Operational Excellence Process Improvement Six Sigma

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Key Findings and Results

Here is a summary of the key results of this case study:

  • Enhanced fuel efficiency and reduced operational costs through strategic fleet modernization and supply chain optimization.
  • Improved customer satisfaction scores due to a more personalized and seamless customer experience.
  • Increased on-time performance rates, reflecting improvements in operational efficiency and route management.
  • Strengthened competitive positioning by leveraging unique resources such as favorable lease agreements and a young, fuel-efficient fleet.
  • Established continuous improvement teams, ensuring sustained operational excellence and responsiveness.

The strategic initiatives undertaken by the airline have yielded significant improvements in operational efficiency, customer satisfaction, and competitive positioning. The adoption of frameworks such as the Resource-Based View, Value Chain Analysis, Service-Dominant Logic, and Customer Journey Mapping has effectively addressed the airline's strategic challenges. The focus on fleet modernization and supply chain optimization has directly contributed to enhanced fuel efficiency and reduced operational costs, a critical achievement given the external pressures of rising fuel prices and intense competition. However, while customer satisfaction scores have improved, the airline must continue to innovate and adapt to shifting consumer expectations, particularly in digital engagement and sustainability. The results in operational excellence through digitalization are commendable, yet the full potential of digital transformation in optimizing route management and predictive maintenance remains to be fully realized.

Given the transformative shifts in the airline industry, it is recommended that the airline further invests in digital innovation, particularly in data analytics for predictive maintenance and dynamic route optimization. Additionally, a deeper commitment to sustainability, beyond fuel efficiency, could enhance the airline's value proposition in a market increasingly driven by environmental concerns. Expanding partnerships with technology providers and exploring investments in alternative fuel sources could also fortify the airline's competitive edge. Finally, fostering a culture of continuous improvement and agility will be crucial in sustaining the gains achieved and in navigating future challenges.

Source: Value Creation Initiative for Airline in Competitive Low-Cost Segment, Flevy Management Insights, 2024

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