Improving demand forecast accuracy is one way to reduce the $4 billion that the Air Force spends annually on spare parts. A step toward this is to reduce the flying hour variance — the difference between predicted and actual numbers of flying hours. RAND researchers were asked to gauge the potential effect of flying hour variance on cost and readiness, identify the causes of the variance and quantify their effects, and identify possible solutions.
Increasing Cost-Effective Readiness for the U.S. Air Force by Reducing Supply Chain Variance
Technical Analysis of Flying Hour Program Variance
- What are the causes of flying hour program variance?
- What are the potential effects of flying hour variance on cost and readiness?
- What are the relative sizes of these effects?
- What are the policy options to reduce flying hour program variance, and/or to mitigate its negative effects?
The Air Force spends about $4 billion annually to buy and repair spare parts for aircraft. One way to reduce these costs is to improve the accuracy of demand forecasts: Demand that runs lower than forecast levels results in excess parts; demand that runs higher results in shortages and reduced readiness. One way to improve spare part demand forecasts is to reduce the flying hour variance — the difference between the number of flying hours that are forecast and the number that are actually flown. RAND researchers were asked to gauge the potential effect of flying hour variance on cost and readiness and identify policy options to rectify problems identified. They determined that although flying hour program variance resulted in a substantial opportunity cost, its effect on enterprise-level financial cost and readiness was relatively small. The Air Force is taking steps to reduce variance in the flying hour program, and researchers endorsed that effort. However, they indicated that other factors had much greater influence and should be dealt with to make significant reductions in the overall variance.
Understanding the various sources of flying hour program (FHP) variance is key to crafting policy solutions to the causes.
- Simple planning error is one source of uncertainty in predicting flying hours in a given year. Another is external causes, such as congressional action. A third source involves Air Force decisions made after the original flying hour program is set; this issue appears to be the most problematic and frustrating for supply chain managers. Examples of this are wide-scale flying hour cuts and combat aircraft reductions. Such changes in course are among the most disruptive examples identified and are sometimes large enough to register in enterprise-wide error metrics.
FHP variance causes negative, though usually modest, downstream effects on the supply chain.
- Underflying, for example, can incur opportunity costs (leaving money on the table in the budget process). It can also incur financial costs (around $2–4 million annually in holding costs for unneeded inventory). Overflying, on the other hand, can contribute to readiness problems.
Some individual programs do experience large FHP variance and downstream effects.
- Planners can be caught off guard when sudden, radical changes to a fleet's flying hour forecast appear, with little or no communication as to why, and with little opportunity to communicate the downstream effects, such as canceled contracts.
Improved flying hour planning would not significantly improve enterprise-level spare parts forecasting.
- Flying hours are generally poor predictors of actual removals, and the Air Force bases its flying-driven parts forecasts primarily on that single variable. Better coordination and communication could help avoid many of the program-level perturbations experienced recently, but further efforts to reduce FHP variance may not have an observable effect on enterprise-level forecast accuracy because of the inherent underlying uncertainty.
- Already-implemented (essentially zero-cost) changes to the flying hour program planning process should be maintained. Such changes would mostly address simple planning error.
- Efforts to support, extend, and improve integration and communication should be continued. Improved communication and integration should help avoid surprises and also potentially mitigate shortsighted decisions.
- Management mechanisms that could dampen the downstream volatility caused by flying hour program variance should be considered. Managers could incorporate uncertainty into their decisions. If personnel upstream and downstream communicate clearly and regularly, they should be able to, collectively, reach decisions that are least cost to the Air Force.
- A holistic approach to improving spare parts forecasts should be continued. If the Air Force can improve its spare parts forecasting using information system solutions, this might allow managers to better calibrate spare parts decisionmaking, thus realizing benefits to readiness and cost-effectiveness.
Table of Contents
Quantifying the Negative Effects of Flying Hour Program Variance
Conclusions and Recommendations
Simulation Tool for DLR Decisions
Additional Data on Flying Hours and Removals