Wesco Aircraft (NYSE:WAIR) is one of the largest distributors of aircraft hardware and chemicals in the world on a sales basis. It additionally provides comprehensive supply chain management services for its customers, which includes almost every major aerospace company worldwide. Wesco’s business model is focused on providing and managing extremely high-quality, highly regulated inventory for its clients. It does so through rigorous in-house quality control of parts it receives from suppliers, through direct management of regulatory needs attached to inventory, and by integrating directly into customers’ manufacturing operations. By doing so, Wesco has garnered a reputation as the aeronautics distributor that provides inventory quickly and efficiently, with rare stockouts and minimal regulatory difficulty for the consumer.
Originally founded in 1953, Wesco currently operates in over 20 countries servicing over 8,000 customers and 8,300 suppliers. It originally focused on distribution and supply chain management for C-Class aeronautic components, which largely consists of bolts, screws, fasteners, clamps, and other simple mechanical items. In 2014, Wesco expanded its distribution services to include other components, particularly chemicals such as lubricants, coolants, and solvents with its complete acquisition of Haas Group, a chemical management company. This past year, Wesco had $1.5B in revenue, of which 49% came from sales of hardware, 40% from chemicals, and the remainder from electronics, bearings, and machined parts or other. Although Wesco declared a $154M net loss this past year, it incurred significant costs in non-recurring or unusual (non-GAAP) expenditures. Adjusted net income for 2015 was $101M, in line with its 2014 and 2013 net income of $102M and $105M, respectively.
C-Class Aerospace Components
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Construction of aircraft is highly regulated in both commercial and military aviation. Individual parts (down to individual fasteners and bolts) require rigorous quality inspection and associated legal documentation, which is time-consuming and hassling for aerospace companies. However, proper quality and documentation is vital. Given the enormous cost of constructing airplanes, a delay of hours or days can cost millions of dollars. Mismanaged supply chains of C-Class hardware components can thus lead to multi-million dollar losses due to a shortage of parts that cost less than $100 to manufacture.
As a result, there is a massive financial incentive for superb inventory management and regulatory oversight. Wesco provides this for over 600,000 stock-keeping-units (SKUs) in its active inventory. It takes cares of quality inspection and any legal regulatory paperwork required for parts. Six percent of its staff is dedicated to quality assurance. It has a reject rate of 2.94% of parts it receives from suppliers; in turn, only 0.11% of parts it distributes are rejected by the end-consumer. Distributed parts are provided to consumers with all legal documentation required for use. The value consumers derive from these practices of Wesco is receiving high quality parts with the regulatory burden already managed.
In addition to quality assurance and regulatory oversight, Wesco manages inventory for many of its clients. It sells most of its products and services under contracts that typically last 3-5 years on either a just-in-time (JIT) basis or a long-term-agreement (LTA) basis. JIT contracts are highly predictable in future forecasting and generally require specific customization to an individual client’s needs. Wesco will often set up shop directly inside the client’s manufacturing plant to fully integrate with the production process. Its employees may also consult with clients to help with process control and improvements, waste reduction and management, and health and safety compliance. LTA contracts are simpler, essentially a pre-negotiated price list of a set of SKUs for a client. Typically, Wesco is obligated to honor that price and keep the SKUs in stock and the clients are required to order that particular type of part from Wesco.
These long-term contracts provide stability for Wesco, allowing it to accurately predict demand, smoothing variability and decreasing stockouts. Wesco clients benefit from decreased delays in production and decreased burden of stocking and ordering inventory. Wesco does provide ad hoc sales, which are typically small and urgent in nature. As evidence of Wesco’s superior supply chain management, ad hoc sales often come from Wesco’s competitors when they have stockouts.
Wesco’s daily practices are custom-built for improved supply chain management. Wesco has invested in highly customized IT systems, some of which were designed in-house, for the purposes of improving efficiency in its inventory management and online ordering system. The IT systems provide inventory quantity, stocking location, and purchases by every customer on a daily basis. They also allow easy online ordering for clients across the world, with orders cross-matched to stocking location that will provide the most efficient turnaround time. These systems provide a level of automation to inventory control that allows Wesco to fulfill over 16,000 orders per day. They provide their hardware in a system that holds a 60-day supply of each type of part in two conjoined bins. When half of the units are consumed, the “Twin-Bin” system automatically flags manufacturing management to restock that particular part via hand-held scanners.
All-in-all, Wesco has aligned its operating model with its business model – its daily operations are designed to minimize stockouts, provide rapid order fulfillment for clients, and do so while maintaining high quality standards and obtaining regulatory clearance. Because of this, Wesco can efficiently distribute aeronautics parts on a global scale. The number of clients and suppliers with which Wesco contracts gives it huge bargaining power, and in turn it can keep prices fairly low despite the added services it provides. In fact, consumers often can buy parts from Wesco more cheaply than from suppliers directly. Therein is Wesco’s competitive advantage. It has the ability to provide services beyond simple distribution without charging a massive premium for parts that are simple to manufacture and thus largely commoditized. As a result, Wesco has been continually expanding over the past decade, even throughout the financial crisis of 2008, and expects to continue doing so into the future.
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