SAP Procurement Solutions for Airlines
SAP procurement solutions includes SAP Ariba, SAP Fieldglass, and SAP S/4HANA based offerings for operational procurement, delivering a comprehensive suite for goods and services procurement and external workforce management. Being an airline procurement consultant, I have conducted numerous customer workshops globally for the past 8 years. The most asked question is often “what SAP solutions are right for the airline industry?”.
This blog post provides an overview of how SAP procurement solutions can be used to manage the Source to Pay process for an airline.
All airlines should have a digitalised procurement system: a workflow for traceability for all purchases, a supplier portal, a procure-to-pay process for payments and tools for spend analysis. Innovative companies go further, holding e-auctions for commodity categories and building collaborative platforms suppliers on performance management. Digital procurement automates repeatable tasks to boost efficiency and reduce costs; it equips stakeholders with real-time insights and analytics through artificial intelligence (AI) and easy-to-use online tools.
SAP offers a complete portfolio to support this digital procurement transformation for airlines; with SAP S/4HANA as a digital core, integrated with SAP Ariba, SAP Fieldglass, SAP Invoice Management by OpenText for SAP S/4HANA and SAP Analytics Cloud solutions to enable performance, speed, agility, visibility and control.
One of the main roles of a purchasing department is to manage an organization’s spending, deploying an effective annual buying plan, leveraging robust forecasting, market analysis, purchasing processes and cost reduction methodologies. It must ensure timely acquisition while being cost effective and minimizing risks. To achieve this, it is essential for procurement to be able to track and understand their cost categories in order to stay profitable in a highly competitive industry.
Top five costs for an airline are Fuel, Labour, Lease and Depreciation, Aircraft Maintenance and Airport Handling Charges. In general, 60 percent of an airline’s cost base goes to suppliers (Buying and Flying Next Generation Airline Procurement, McKinsey & Company 2017), while the remaining 40 percent comprises mainly of staff cost, aircraft acquisition/leasing and depreciation which is typically handled by finance without procurement involvement.
Airlines’ costs are generally divided into three categories: Direct Operating Costs, Semi-Direct Operating Costs and Indirect Operating Costs:
- Direct Operating Costs – Costs incurred as a direct result of the operation of a specific service or flight; relating to an airplane or the comfort of passengers during flight, landing and takeoff. This costs typically can be tied to a flight number.
- Semi-DirectOperating Costs – Sometimes also known as Indirect Cost; costs incurred for an aircraft or aircraft type level or stations level. These costs can be tied to an aircraft tail or registration number. These costs are allocated to the flight and route level.
- Indirect Operating Costs – Also known as Overhead costs; fixed costs for an airline operation like corporate office, management salaries etc. The process of budgeting is the same for corporate office. The allocation of corporate overhead is to all flights whereas station overheads are allocated to the flights of that station.
The diagram illustrates how each of the SAP procurement solutions can be used in each of the cost categories:
In an effort to identify long-term savings, organisation often turn to spend analysis, the process of assessing the who, what, when, where, why and how of an organisation’s expenditures. It is not always easy to map an organization spend especially in the case where spend data is obscured in disparate purchasing and payable systems, making it difficult to build effective sourcing strategies and identify saving opportunities.
SAP Ariba Spend Analysis solution gathers spend data from multiple source systems, classifies it according to company and industry standards and then enriches it with Dun & Bradstreet market intelligence to deliver insightful analysis of the buying behavior. It has more than 80 prepackage reports and opportunity searches across commodity, supplier, and organization categories. It provides visibility in the following:
- How much the company is spending among family of suppliers, including the top spend categories
- Where savings leak, prices vary, and purchasing overlaps
- Compare the company spend to that of the industry peer
- Supplier details including supplier linkages, financial and risk, diversity status and certification (e.g. green-certified)
SAP Ariba Spend Analysis can be used to analyse all airline cost categories including MRO items. Spend data from across different source systems can be extracted; consistently and optimally classified over time. Once classified, these data can be analysed in a consolidated view to improve sourcing efficiency, reduce risk, and unlocking new savings opportunities resulting in spend visibility and insights into suppliers.
Spend analysis is a foundational business process that can help procurement teams determine the next best steps in the sourcing process including how to prioritise sourcing resources and where the largest opportunities exist.
Strategic Sourcing and Contract
It is common to see airlines adopting different processes for sourcing indirect and direct materials. Relying on separate processes and systems for different spend increases contract leakage and IT cost, limits savings and revenue opportunities and hinders alignment across teams.
SAP Ariba Strategic Sourcing Suite, when combined with SAP S/4HANA manages e-sourcing events and contract creation based on templates for all types of spend. Companies can manage simple to complex sourcing events with Ariba Strategic Sourcing; the entire sourcing, contracting and spend analysis processes in one place ranging from office supplies, professional services, crew uniforms inflight inventories to aircraft fuel.
Requirements can either be initiated directly in SAP Ariba Sourcing or triggered via an unsourced requisition in SAP S/4HANA, send to SAP Ariba for sourcing activities. Depending on the need, selected sources can lead to an Operational Contract, Info Record, Catalog or Purchase Order.
Sourcing and Contract activities for all airline cost categories can be managed via SAP Ariba Strategic Sourcing Suite except MRO items (i.e. aircraft parts) sourced via the Aeroxchange platform.
Flight Based Procurement
Direct operating costs occur when flights are operated and increases as an airline grows their network and fleet. Cost efficiency is critical for an airline’s ability to compete and survive, the accurate calculation of the operating costs per flight is essential for keeping the airline operations profitable.
Often, direct operating cost invoices are based on long term supplier contracts with no purchase order controlling them. Airline finance team rely fully on the vendor invoices, manually captures and mapping these invoices. There is a high probability that a large volume of supplier overbilling goes unnoticed and lead to leakages for services either not delivered or are charged incorrectly.
Flight Based Procurement in SAP S/4HANA provides a complete end to end view in the procurement of all flight related costs. The Flight Order object in SAP S/4HANA allows the supply chain processes associated with aircraft turnaround to be automated and costs to be captured at flight level. It enables automation of invoice validation and verification; each invoice can be validated at a detailed level against operations data and vendor contracts. Timely cost collection of direct operating costs enables route profitability reporting.
The Flight Order object is created based on interfaced flight schedule information. It acts as a central cost collector for all the direct costs, enabling direct cost accruals close to the event of cost capture and not towards the end of the month during invoice verification. It provides a full integration of the operational contracts, cost accruals and 3 way matching during invoice verification. All flight-based purchases orders are automatically generated and most of them are not sent to the supplier; they serves as a repository for the defined service scope and payment information for the invoice verification process.
Flight Based Procurement solution also provides a mobile interface for the station managers to capture the services rendered at source.
Fuel accounts for a large percentage of an airline spend, ranging from 20 to 30% of the total airline costs. SAP Fuel Management solution utilises Commodity Management solution capabilities to manage the end to end fuel management process starting from Fuel Hedging to Procurement and Sales Management as seen in the diagram below.
Contracts can be linked to market-based price quotes (i.e. Platts, Reuter etc); any complex rules regarding price quotation can be captured in the contract via Commodity Pricing Engine. When fuel information is received via ACARS or fuel log, purchase order is automatically created with reference to the contract, this ensures accurate price calculations and eliminate the need for “out of system” calculations and manual input of pricing. This approach again offers the direct accrual at event business time and facilitates the 3-way matching of invoices. Fuel Management solution also provides differential invoice capabilities to cater price fluctuation in the commodity market.
Although fuel uplift is not considered as part of the route operating costs, fuel uplift and purchase order information can be stored in the Flight Order object providing a central repository for all flight related activities.
Fuel Procurement can also be integrated with SAP Aviation Refueling solution. Aviation Refueling solution allows digital fuel ticket to be captured on tablets. Refueling tickets are automatically populated with flight information and electronic proof of delivery (POD) can be sent in real-time using IATA standard formats. When integrated with the Fuel Procurement solution, purchase orders can be automatically created based on the received POD ensure end to end real-time integration eliminating manual invoice reconciliation.
SAP Aviation Refuling solution is provided by SAP Innovative Business Solutions Organisation. For more information on, go to https://www.sap.com/sea/services/innovation.html
Plan Driven Procurement
Plan Driven Procurement are purchasing requirement that are generated by the system as a result of MRP, Work Order, Projects, Sales Order or Production Order. Plan Driven Procurement supports the automated procurement of goods and services.
Plan Driven Procurement is typically used in Catering, Maintenance (including MRO) or Project Accounting. Such requisitions are created and processed in SAP S/4HANA; although it is possible to utilize Ariba punch out catalog for non-MRO stock or service selection. Any unsourced requisitions will be sent to SAP Ariba or Aeroxchange (for MRO items) for sourcing. Once the pricing has been established, purchase order and subsequent transactions (receipt and invoicing) will take place in S/4HANA. Any supplier collaboration will be via Ariba Network or SAP Ariba Supply Chain Collaboration for Buyers for forecast and inventory collaboration scenarios.
User Driven Procurement
User Driven Procurement can potentially come from any person in the company. User should be guided through the process, spend as little time as possible with procurement and be empowered to use their mobile devices. Compliance can be achieved when users are guided simply and painlessly to preferred suppliers and are motivated to follow company policies. Guided buying deployment for SAP Ariba Procurement solution offers smart guidance and predictive search functionality to help users find the items and suppliers they need, with rules and policies provided within the context of the buying process. It increases user engagement across all indirect spend categories.
In general, airline companies (typically start up or low cost carriers) with less than US$1billion in revenue and low indirect spend, where essential indirect procurement capabilities are usually sufficient, procurement can be done in SAP S/4HANA, complemented with Ariba Network and SAP Ariba Catalog solution.
When indirect spend is a significant cost driver, airline customers should leverage SAP Ariba Buying solution. This can happen in two ways:
- Manage indirect procurement processes in SAP Ariba Buying, integrated to SAP S/4HANA for core procurement processing. This means requisitioning can happen in Ariba Guided Buying or Catalog, purchase order, receipt and invoicing are done in SAP S/4HANA
- Running the entire procurement process in SAP Ariba Buying, integrated with SAP S/4HANA for invoice processing
User driven procurement are used for indirect spend such as office supplies, building maintenance spares, marketing merchandise and IT supplies.
In the airline industry there are uniforms for cockpit crew, cabin crew and ground staff. Uniform Management Solution is designed to manage uniform order and fulfilment processes. It enables employees to directly request uniforms including accessories from the uniform store based on job profile and entitlement. Uniform store manages the issue, reordering, receiving, storing and distribution of uniforms for all relevant users across different department.
The solution is developed on SAP Cloud Platform and it integrates with various modules from SAP SuccessFactors Human Experience Management (HXM) Suite and SAP S/4HANA such as Employee Central, Payroll System, Procurement and Inventory to streamline uniform distribution and control.
Uniform Management Solution is provided by SAP Innovative Business Solutions Organisation. For more information on, go to https://www.sap.com/sea/services/innovation.html
Contingent work is becoming the new normal, in 2019 Southwest Airlines spend about $65 million each year on their contingent workforce, for everything from interns to professional services to cleaning crews (Karen Thrasher, Staffing.com).
Engaging external workers and service providers is a key way that airline companies can ensure enterprise agility. From wheelchair pushers to IT professionals, ticket agents to engineers and beyond, utilizing flexible talent helps increase and decrease headcount as needed.
The contingent workforce is categorized into 2 groups:
- For services which is highly dependent on qualification (such as maintenance engineers or professional services), it is critical to identify the right candidates from a broad ecosystem of contractors. This includes reviewing resumes and candidates, onboarding and setting up HR records, certifying and building contractor profiles, and finally, paying market rates.
- For services where the scope is around “what” and “how much” is important (such as aircraft cleaning). This is done through statement of work, service descriptions and negotiated rates. The aim is to maximize preferred supplier savings and eliminate overbilling.
Airlines should consider implementing SAP Fieldglass Services Procurement if qualification is important. SAP Fieldglass will process the external workers selection, onboarding and compensation based on time-sheet information. Approved invoice is integrated with SAP S/4HANA for payment.
For scenarios where the “what” is more important, airlines should leverage SAP Ariba Procurement solutions integrated to SAP S/4HANA. This includes, for instance, project or field services (e.g. building maintenance or airport/ground services) that might combine material consumption with services, or recurring services that are invoiced against a contract. Requirement will be initiated from SAP S/4HANA (e.g. Service Order or Flight Order), external workers can submit their Service Entry Sheets via Ariba Network to create an invoice based on contracted rates. The Service Entry Sheets can also be entered on behalf of the external worker by an airline employee (i.e. buyer or operations).
In both scenarios, Ariba Network enables contractors to use one network connection for both SAP Ariba and SAP Fieldglass to deliver invoices to SAP S/4HANA.
In addition, supplier can also gain visibility into their SAP Fieldglass transactions on the Ariba Network.
Invoice and Payable Management
It is not uncommon for a mid-size airline to process more than 7,000 invoices per month. Classic ways of processing these invoices received in various formats is labor intensive, time-consuming, error-prone and expensive. In order to control spend and minimize risks, airlines must implement “No PO No Pay” policy for most if not for all purchases. SAP S/4HANA must be used for final invoice approval and payment processes.
In general, OpenText Invoice Capture Center (ICC) can be used to transform any paper-based invoices and SAP Invoice Management by OpenText to define business rules and verification of these business rules against the received invoices.
Majority of invoices received by airlines falls under two categories – Flight and Non-Flight Related Invoices:
Flight Related Invoices
These are invoices, usually in large numbers, from vendors providing services on Direct Operating Costs, i.e. Landing, Parking, Overflying Charges, Ground Handling Charges, Catering etc. These invoices formats are mostly paper-based and includes flight level details.
Flight Based Procurement in combination with OCR and SAP Invoice Management solutions must be used to process such invoices to enable the invoices to be digitized and a streamline 3 way matching process.
Flight Based Procurement solution provides an invoice verification cockpit to match the uploaded invoices (by flight) with purchase orders created by the Flight Orders and receipts captured by the service entry sheets. Any exceptions will be highlighted and manually processed by Accounts Payable.
Non-Flight Related Invoices
These are invoices from standard procure to pay processes such as inflight inventory, office supplies, maintenance services etc. All suppliers should send PO-based and contract-based invoices through Ariba Network to digitize the entire invoice process.
Simplified Interline Settlement (SIS)
It is common for airlines to engage each other’s services such as interlining or code sharing via interline agreements. Interline agreements can involve complex processes for billing and settlement and the level of complexity can grow exponentially with every new partnership an airline enters into. For this reason, many airlines choose to settle their billings through IATA Clearing House (ICH).
ICH provides billing and settlement services in multiple currencies for the air transport industry. It enables the world’s airlines and industry suppliers such as ground handlers, maintenance companies and manufacturers to settle their Passenger, Cargo, Miscellaneous/Non-Transportation and UATP billings by applying the principles of off-set and netting.
Simplified Interline Settlement (SIS) is an IATA initiative, aimed to remove paper from the entire billing and settlement process and to simplify interline billing through a single channel. With SIS, a carrier will submit a single electronic billing file that will be converted into an invoice and a settlement file, sent to the billed airline and cleared and settled through ICH. Part of the solution is to create a completely paperless invoicing environment for prime billings and rejects for all carriers, where invoices will be validated against the rules set out in the IATA Revenue Accounting Manual.
SAP IATA SIS solution provides quick and simple connection with the IATA SIS platform. It is fully integrated with SAP S/4HANA using standard functionalities in Sales and Distribution, Materials Management, Accounts Receivable, Accounts Payable and General Ledger modules to automate the invoicing processes and archiving.
Ariba Network replaces slow and costly paper-based processes by automating operational procurement with supplier collaboration. In general, Ariba Network should be implemented for supplier collaboration activities for all types of spend.
Ariba Network can be extended beyond purchase order and invoice to supply chain collaboration, such as exchanging demand forecasts, schedule agreements and inventory and consumption. One example of a supply chain collaboration use case is a catering warehouse managed externally by a third party provider or caterer.
Ariba Network is not applicable for airline customers that are using proprietary B2B platform such as Aeroxchange in the area of MRO as no interoperability is in place between the 2 networks. Aeroxchange service enables businesses to perform loans, borrows and exchanges of aircraft parts based on prearranged agreements between partners. Data exchange, often large files between aircraft operators and suppliers is based on SPEC2000 specifications. For details, see http://www.spec2000.com/index.html.
S/4HANA should be directly integrated to the B2B network using the SPEC2K Interface for ATA SPEC2000. ATA SPEC2K specification, controlled by Air Transport Association of America (ATA), describes the communication flow, the content of the information to be exchanged, and the structure and format of the SPEC messages that are to be sent in the various provisioning, procurement and sales processes as seen in the diagram below.
Airline/MRO customer and vendor communicate through the SPEC2K interface by exchanging messages that are defined in the specification. Associated application documents (purchase order, sales order, invoices etc) are processed in the airline or vendor system and document information is hierarchically stored in IDocs. After performing syntax and semantic checks in the text files, the SPEC2K interface converts these IDocs into the SPEC message format as required by ATA SPEC2000 before being communicated.
Integration with SAP Invoice Management by OpenText
SAP Invoice Management by OpenText (VIM) is an invoice reconciliation and scanning application that works with both SAP ERP and SAP S/4HANA On Premise systems. When a customer has VIM as the invoice reconciliation tool, Ariba Network invoices must be routed and mapped to VIM instead of SAP S/4HANA. Similarly, the Invoice Status Update interface also needs to check VIM for the invoices status.
VIM can be integrated with the Ariba Network on the airline side; suppliers creates the invoices within the Ariba Network and sent to the airline SAP S/4HANA system. Airline processes (exception handling or approving) all incoming invoices within VIM; from local invoice channels (email, scan or OCR) to those received via the Ariba Network.
Ariba Cloud Integration Gateway (CIG) is a new integration option supported by VIM and it supports the following scenarios:
- Inbound Invoice – standard invoice, credit memo and non-PO invoices including support of attachment
- Outbound Invoice Status Update
Digital procurement must equip stakeholders across the business with real-time insights and analytics through artificial intelligence (AI) and easy-to-use tools; it deploys new and smarter ways to infuse data models to enrich day-to-day operations and decision making.
Different SAP analytics solutions co-exist to meet the needs of business:
- Operational Analytics – Real-time operational reporting; data is based on live transactions and restricted to a single source system with no third-party connectivity. Such analytics are available in all SAP solutions highlighted in this paper. An example is the embedded analytics in SAP S/4HANA, accessible via role-based Fiori apps; it supports the buyers’ daily operations with high level overview of important information and tasks at a glance, complete with drill down capabilities.
- SAP Analytics Cloud – A cloud-based analytics tools that provides Business Intelligence, Planning and Predictive Analytics in a single solution; data can be imported or connected live, modeled and converted into charts, graphs, tables and other data visualization to support data-driven decision making. Spend data from different source systems can be used to analyse profitability results or financial planning. SAP Analytics Cloud connects live to S/4HANA, which means any changes made in SAP S/4HANA are reflected immediately in SAP Analytics Cloud, this eliminates data duplication in multiple systems. It is also possible to combine other data sources such as SAP SuccessFactors, SAP Fieldglass, SAP Ariba, SAP Concur, SAP C/4HANA and Google Analytics.
I hope this blog post provides a good overview of how various SAP procurement solutions can be used to efficiently manage the Source to Pay process for an airline. Airlines must continue to reduce costs; this could be achieve by having effective procurement strategy supported by the right tools.
All feedback are welcome!
Very informative, Ruby!!!
Great content, flow and read... gave me great insights and information on how the airline industry procurement runs
thanks for the effort and time