Blankets and pillows that the airline can no longer use are donated to charity. © Etihad Airways
Blankets and pillows that the airline can no longer use are donated to charity. © Etihad Airways

Etihad's award-winning procurement strategy

Rebecca Ellinor Tyler is editor of Supply Management
9 June 2017

Luxury airline Etihad applies procurement expertise across its entire business, right down to coordinating blanket donations for refugees – making it this year’s overall winner at this year's CIPS MENA awards

Taking a job in the procurement department at luxury airline Etihad, the national airline of the United Arab Emirates, one might expect to be exclusively dealing in leather sofas and silver service for ‘penthouse in the sky’ top-quality flights. But the 140-plus staff who deliver procurement, supply chain, logistics and inventory play a significant strategic role in the wider business. This means they’re just as likely to be organising warehousing and logistics support to helping Syrian refugees via distribution charity Red Crescent, coordinating delivery of blankets, pillows and other linen Etihad can no longer use because of minor damage.

This broad role has helped to earn them the award of ‘Best Contribution to the Reputation of the Profession’ at the CIPS Middle East Supply Management Awards in May.

Etihad is one of the fastest-growing airlines in the history of aviation. It was established by royal decree in 2003 and, like the UAE itself, puts an emphasis on luxury, hospitality and innovation. Taking inspiration from leading hotels and restaurants to cater for its top-paying passengers, it was the first commercial airline to offer triple-roomed suites onboard its Airbus A380.

Smart procurement is not only simply creating savings ($102m in 2016); it is also helping to generate revenue. And in the area of corporate social responsibility, the team is able to not just connect its work to Etihad’s corporate aims, but to the overall vision of Abu Dhabi.

The airline was recently awarded a five-star certification from ranking consultancy Skytrax. Procurement’s help to achieve this includes, as you might expect, sourcing for the ‘penthouse’ suites on the top floor of the Airbus A380s. The team also sourced onboard products such as in-flight entertainment, catering and lounges, chauffeur services and more. “It’s anything that contributes to guests getting a superior experience,” says Adil Al Mulla, vice president, procurement and supply management. (Which, by the way, happens to include Savoy of London-trained butlers, Norland College-approved nannies and first-class chefs.)

For the last three years, the procurement and supply chain team has won a category at the CIPS Middle East Supply Management Awards. This year it triumphed again, with the team title for ‘Best International Procurement Project’ as well as the aforementioned award for reputation to the profession. But it was the impact of the latter, both internally and externally, that clinched the Overall Winner title.

With a fleet of around 120 aircraft, Etihad last year carried 18.5m passengers, an increase of 6% on 2015. With its pace of expansion, it is imperative it grows responsibly, it says. Its corporate responsibility initiatives come under four banners: growing together, working together, giving together and greener together.

Responsible growth

Under ‘growing together’, procurement and supply hosted workshops with Khalifa Fund for Enterprise Development vendors and Dubai SMEs to support local businesses, plus the country’s 2030 Vision for a diversified economy. It’s awarded 73 small companies with $8.85m of contracts and presented procurement best practice workshops to other UAE organisations, including the Mohammed Bin Rashid Space Centre, Emirates Nuclear Energy and Ministry of Interior.

“We are implementing the vision for the UAE through innovation in all aspects of the business, as well as careful support of local entrepreneurship and products through the partnership with Khalifa Fund,” says Al Mulla. “We’re also supporting all sustainability initiatives across Etihad, as a part of corporate strategy towards achieving Abu Dhabi’s Vision 2030.”

For the ‘working together’ stream, the team took the lead in developing and launching a graduate programme to attract young UAE nationals to the profession. It aims to recruit 16 graduates who each follow a two-year programme to become junior managers. The scheme was so successful it was oversubscribed. It also invested in negotiation and skills training for its existing team, which has been reaping the rewards. In 2016 alone, the savings amounted to $102m.

Under the ‘giving together’ banner the team has encouraged suppliers to donate to charity events, helping with efficient warehousing and delivery of blankets and other items for distribution worldwide by Red Crescent. Procurement also ran a charity drive to support refugee children, and has donated thousands of items to orphans in Belgrade.

Finally, for the ‘greener together’ initiative, it has partnered with Enviroserve to ensure obsolete stock items are recycled instead of sent to landfill.

The hard work of the procurement and supply team on these initiatives has proved incredibly successful and resulted in benefits for both Etihad and the wider UAE economy – and boosted the profile and reputation of the profession in the process.

Awards judges said the initiative was an excellent way of aligning procurement and supply to the rest of the business. “The team engaged with staff, vendors, environmental experts, CIPS, SMEs and organisations from across the UAE to achieve its aims, and enhanced both the reputation of the department and the profession as a whole,” they said.

All these achievements would not be possible without a strong, well-trained team. Procurement VP Al Mulla says people development is an integral part of his department’s strategy, adding that the “high level objective is to grow and measure employee engagement to deliver results”.

A total of 22 procurement and supply staff are currently undergoing the CIPS Advanced Practitioner Level qualification, with 10 having already completed the course. In addition, eight UAE nationals are undertaking the Practitioner Level certificate and will ultimately go on to achieve the advanced level. “During 2016 we have trained more than 70 people on negotiation, contract management, fraud awareness, FX and taxation, strategic sourcing and category management,” says Al Mulla. “Our staff can now complete strategic sourcing plans and therefore add more strategic value.

“We are better equipped to enter into negotiations with the market analysis and vendor research that has been previously completed. Our employees have learned new negotiation techniques that are contributing to greater savings.”

And where contract management was largely decentralised, procurement and supply is now on the way to centralising this category by category with increased legal knowledge gained in the classroom.

“This in-depth training programme has improved our reputation internally in terms of our professionalism and knowledge of procurement best practice; and externally from our vendors who expect professionalism in procurement from a leading global company like Etihad,” Al Mulla concludes.

From cost to revenue

The team also clinched the win in the ‘Best International Procurement Project’ category for its work turning a traditional cost contract into a revenue-generating deal – something it plans to be doing a lot more of in future. Airport (ground and cargo) handling is the second-biggest spend category for the procurement and supply management team. It’s therefore a critical spend area with a high degree of risk and business impact.

High-profile elements include passenger check-in, aircraft safety and scheduled departure times – all of which are critical to the performance of the airline and can have a massive impact on cost and brand reputation.

After tough years of marginal profitability, competition and colossal cost challenges, the procurement and supply management team had to be bold and innovative in negotiating contracts to improve financial performance. The team managed to consolidate three categories – airport lounge, ground and cargo handling – at an Asian station where industry rivalry was low for ground handling but had twice the number of cargo handling suppliers.

A major discovery was that cargo warehouse providers were earning substantial storage revenue from airline cargo customers. So the procurement team asked for a slice of that revenue – and got it. The total cost saving for airport handling spend was $5.9m, the equivalent of a 90.1% difference.

Vydya Venkateswaran, VP of financial planning and control, says: “That’s another remarkable achievement from the team, who are critical to supporting the airline in achieving its annual cost reduction targets.”

It’s not often procurement is heaped with praise from suppliers, but in this case vendors on this contract thanked the team for their professionalism, toughness and honesty.

This may not be the only project to generate revenue in future. Al Mulla says the procurement and supply management department is spearheading a new business model, which is now all about cost and business efficiencies. “We are becoming a business enabler, besides our usual role of a cost watchdog. Critical projects are now having a revenue tag attached to them and we’re considering both cost and revenue benefits in the strategic sourcing process.”

Explaining more about future projects, he adds: “We have a joint initiative with commercial sales to work with them and our vendors to develop sales programmes that will benefit vendors while increasing revenue. Similarly, procurement and supply management is driving branding opportunities with vendors, again to increase revenue, and we’re working with the marketing team.”

Next steps include the implementation of SAP Ariba supplier relationship management tools and developing an enhanced operating model for procurement across the Etihad Aviation Group. “We’re demonstrating our strategic ability to increase revenue for the company, as well as manage the cost base,” Al Mulla. Sky’s the limit.

 

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 A hat-trick in the international arena

As well as its category winning international entry, Etihad was shortlisted for two more of the five ‘Best International Procurement Project’ nominations 

Chosen as three of the five strongest entries, Etihad’s international entries featured a joint aviation fuel project in the UK; a project to tackle snowy conditions in Switzerland; and the winning project was for turning a traditional cost contract into a revenue-generating one (see above).

The company holds equity investments in seven airlines under the Etihad Aviation Group (EAG) banner – including its own regional carrier, as well as Alitalia and Air Berlin. As demonstrated in the fuel category, the group uses its joint procurement power by leveraging regional strengths and volume, as well as improving internal efficiencies by eliminating duplication of effort.

The recent tough trading environment for the industry has prompted the need to further reduce costs and generate savings. Fuel is a major expense and London Heathrow is one of the biggest and critical airports for EAG, where it operates more than 4,300 flights annually with a volume requirement of around 57m US gallons and a contract value of approximately $183m.

In December, Etihad initiated an international strategic group sourcing project and delivered savings of around $2m to the benefit of all partners. Adil Al Mulla, vice president, procurement and supply management, says across the five years Etihad has been guiding the joint procurement it’s been able to deliver increasing value to all members – from $6m in 2013 to nearly $45m in 2016 of overall cash benefits.

In Switzerland, meanwhile, the team faced meteorological challenges with severe snow and ice. When you’ve got jets on the tarmac, you can’t just get your scraper and spray out. Freezing conditions and precipitation necessitate de-icing because frozen elements stuck to planes could disrupt smooth airflow and cause an accident.

The aim of this project was to have a reliable, safe anti-icing supplier for the whole aviation group and to increase competition among vendors to improve value. The initiative achieved cost savings of $209,000 over three years. There’s now no shortage of access to supply in winter, dedicated trucks on site perform the work and training takes place to meet safety standards.

Incredibly, the work Etihad’s team did on this deal in Geneva and Zurich had never been attempted in the country before by any airline.

 

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Good to know...

 Procurement is involved in many of these Etihad activities: 

 

  • Butlers serving high-flyers in The Residence suites on an Airbus A380 carry their own ‘magic box’ of items, hoping to cater to their customers’ every whim
  • Guests in the suites can seat their derrières on leather sofas upholstered by Ferrari’s interior suppliers, Poltrona Frau
  • Innovation in de-icing operations is helping to protect fish stocks and other creatures in the aquatic ecosystem by using a forced air method
  • Procurement’s work ahead of the introduction of 18 new aircraft in 2014 (the arrival of the first Boeing 787-9 Dreamliner and Airbus A380), achieved total savings of $15m against a project spend of $120m (12.5%)
  • Procurement was able to influence pricing in a monopolistic environment for fuel in Nepal, which generated savings, increased efficiency and enhanced safety in Kathmandu
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