Frequent Supply Chain Matters readers are well aware of the ongoing and constantly evolving supply chain challenges facing the Aerospace industry and its associated community of suppliers.
One of the largest and perhaps most critical of these suppliers is that of aircraft engine provider Rolls-Royce. This engine-maker is planning to double its production output of wide-body aircraft engines over the next five years.
Among other areas of contracted supply, this manufacturer servers as the sole supplier of aircraft engines for the Airbus A350 and A380 aircraft as well as one of two prime suppliers for Boeing’s 787 Dreamliner aircraft. By some estimates, Rolls holds 54 percent supplier market share among the combined wide-body engine provider programs according to a recent chart featured in The Financial Times.
Rolls has joined other wide-body engine providers such as General Electric in providing aircraft power as a service, allowing airline operators to lease their power requirements by the hour, avoiding huge up-front costs for equipment allowing airline and leasing companies the option for amortizing aircraft engine costs over the life of the engine’s period of use. Aerospace engine providers thus exercise performance-based service lifecycle contracts in their business models.
Within the past two weeks, Rolls-Royce has been featured in global business media from two contrasting perspectives. Readers may recall a November 2010 incident when a fairly new Qantas A380 aircraft carrying over 400 passengers shortly after take-off out of Singapore had to make an emergency landing as a result of an uncontrolled engine explosion that narrowly avoided what could have been a tragic outcome. This aircraft experienced severe damage to its left wing, fuel tank and hydraulic systems and without the skills of a group of five augmented on-board pilots the results could well have been far more tragic. As a result of the incident reports indicated that Rolls-Royce’s total direct costs associated with this incident were $190 million, including nearly $90 million in direct costs incurred by Rolls in dealing and responding to this one incident and a $100 million settlement with Qantas for disruption of operations. Over 40 Trent series engines involving three A380 airline customers had to subsequently taken out of service and repaired causing further customer disruption.
After a thorough post-incident investigation, The Australian Transport Safety Bureau concluded last week that “uncontained engine failure” was caused by oil leaking from a cracked pipe in the affected engine. The Financial Times (paid subscription or free metered view) and other business media reported last week that Rolls admitted “it clearly fell short” of its own safety standards related to the specific manufacturing processes related to the Trent series engine. The manufacturer indicated that the engine component consisting of the failed oil pipe was produced at the Hucknall UK manufacturing facility. FT reported that there several opportunities to identify and fix the problem but were missed for a number of reasons related to non-conformance to quality procedures and specific plant culture. At the end of 2011, Rolls changed the sourcing of the high pressure intermediate hub assembly to its manufacturing site at Bernoldswick UK. The director of engineering and technology at Rolls is quoted by FT as indicating that the A380 related engine failure was a rare event “which we very much regret.” Readers should be astounded at the subsequent monetary implications as to the risks of a leaking oil pipe in one of this engine’s most critical functional areas.
Today’s edition of FT outlines (paid subscription) a second important challenge for Rolls-Royce, that of increasing product margins through reduction of manufacturing and supply chain costs over the coming years. The new head of the civil and defense aerospace business, Tony Wood, indicated to FT that his business was prepared to cope with plans to dramatically increase product rates of Trent series engines while improving operating margins. Current product margins were recorded at 11.3 percent compared with rival GE Aviation margins of 18.7 percent. Previous operating margins at Rolls were 14 percent in 2007, but that was before massive new investments in current engine technology and advanced product capability. The article describes other inflationary price pressures related to price increases in raw materials and how Rolls suppliers are investing in low-cost manufacturing regions including Asia. Rolls recently announced added investment in U.S. manufacturing capability. Mr. Wood declared that the operating unit would work on increasing profitability partly through cost-cutting and leveraging the near doubling of engine output over the next five years.
Thus, Rolls-Royce has taken on a unique set of challenges. The company has strong roots as engineering-centric and engineering-driven. From a business outcomes lens, it must scale-up complex engine product output while balancing and constantly coordinating the complexity of a globally extended supply chain. It must reduce unnecessary manufacturing and supply chain costs and insure that quality and engine reliability is increased. That adds to culture-conflict.
Continued severe economic downturn forces across the Eurozone add to supplier stress in finding cost-effective investment in working capital. There is also the previous learning from OEM experiences from Airbus and Boeing in coordinating a complex, globally-extended supply chain which have led to multiple snafus and operational setbacks in original scheduling.
“Power by the hour” airline customers increasingly expect to pay for engine up-time and long-term reliability, which in reality shifts more operating risk burden to the OEM manufacturer. This makes Roll’s upcoming production, associated supply chain and product management challenges a true balancing of expected business outcome needs with realities of today’s complex supply chain risks.
This will be a company for our community to keep an eye-out in the coming months and years since the right investments in process control, supply-chain wide analytics and intelligence, supplier collaboration and service lifecycle management (SLM) will be crucial.