Potential risks faced by Rolls- Royce in international supply chain performance

1. Potential risks faced by Rolls- Royce in
international supply chain performance
Table of content
1. Introduction ................................................................................................................. 1
2. Potential challenges and risks in improving the international supply chain
performance of Rolls- Royce........................................................................................... 1
2.1 Theoretical view on international supply chain risks .............................................. 1
2.2 Challenges faced by Rolls – Royce ....................................................................... 2
2.2.1 Supply risks ..................................................................................................... 3
2.2.2 Operational risks.............................................................................................. 4
2.2.3 Demand risks................................................................................................... 5
3. Recommendations to handle the potential challenges and risks................................. 6
3.1 Solutions to the supply risks................................................................................... 6
3.2 Solutions to the operational risks ........................................................................... 8
3.3 Solutions to the demand risks................................................................................ 8
4. Conclusions................................................................................................................. 9
References.................................................................................................................... 10

2. 1
1. Introduction
Rolls – Royce is a very famous brand in the manufacturing industry in over the world. In
association with the manufacturing, international supply chain management is highly
appreciated since this industry is generally relevant to the outsourcing and global flows
of goods along with materials as well as the specialized production of different parts.
Therefore, in this report, the performance of international supply chain of Rolls – Royce
Holdings which is divided from the Rolls – Royce Group and concentrates on producing
aircraft engines will be analyzed through both the theoretical views and empirical
evidences. However, the consideration on the potential risks and challenges faced by
the corporation along with the recommendations to handle these risks will be more
focused.
2. Potential challenges and risks in improving the international supply
chain performance of Rolls- Royce
2.1 Theoretical view on international supply chain risks
Many researchers have investigated on the potential risks and uncertainties in the
global supply chain of different companies in over the world (Chopra and Sodhi, 2004;
Manuj and Mentzer, 2008; Özlen and Hasanspahic, 2013). And it is consistent that the
possible risks and challenges happen in three stages of the supply chain management,
known as the source or materials, making or producing and the delivering to customers.
Or in other words, according to Manuj and Mentzer (2008, p. 201), the model of global
supply chain risks consist of three issues, namely, the supply risks, operational risks
and demand risks, shown in the following figure.

3. 2
Source: Manuj and Mentzer, 2008, p. 201
Figure 1: Model of global supply chain risks
Therefore, in theory, the major challenges for the supply chain management captured
by Carroll (2010) are increase in customer demands or volatility in outbound logistics,
costs incurring from the supply sides or inbound logistics, delays or possible risks in
production and integration of different parts as well as the globalization along with
application of electronic forms to improve the performance of the international supply
chain management. Moreover, almost researchers notice that these above risks in
association with three stages have been faced by almost businesses, especially the
manufacturers (Tang, 2006; Tang and Musa, 2011). Thus, to analyze the risks and
challenges encountered by Rolls – Royce Holdings, the above model and the specified
uncertainties mentioned above will be taken into account.
2.2 Challenges faced by Rolls – Royce
The real risks and challenges relating to the improvement of international supply chain
performance for Rolls – Royce in aircraft engine production are clarified in term of three
groups, demand risks, supply risks and operational risks.

4. 3
2.2.1 Supply risks
2.2.1.1 Theoretical views
Supply risks are defined as the risks relating to flow of resources to support the
business operation or the flow of any parts to enable the final assemble for
manufacturing, hence, it is also called the input risks (Meulbrook, 2000).
According to Mentzer et al. (2006), global supply chain management easily encounters
the supply risks which consist of fluctuation in extra costs resulting from transportation
breakdowns and other geopolitical threats as well as inventory and handling costs. The
extent to which these additional costs can influence on the supply chain management
varies from time to time and is different for different businesses. In addition to costs, the
other risks relating to supply side are the degree of dependency on the key suppliers
and length along with variability of replenish lead – times, which are raised from the
supply network (Harland et al., 2003). To explain, opportunistic behaviors of suppliers
are assessed as the very influential risks in supply chain (Spekman and Davis, 2004).
Moreover, any problems in technology or services of the suppliers can easily affect the
performance of supply chain (Zsidisin and Ellram, 2003). Depending too much on
outsourcing cites an increasingly significant risk (Giunipero and Eltantawy, 2004).
2.2.1.2 Supply risks facing by Rolls – Royce
Regarding supply risks, the most important challenges for Rolls – Royce Holdings in
managing the supply chain of aircraft engines are the materials necessity and costs
along with the lack of consistent process flow due to the separate productions of
different parts at different locations (Tiwari, 2005, p. 74). These risks are assessed as
the biggest challenge for Rolls – Royce in relation to the supply side.
Firstly, the connection procedure with the suppliers at Rolls – Royce seems to face the
variability in time to transit and less coordination among different suppliers as well as
the powers from the suppliers. In detail, because the aircraft engines must be
completed under the mix of different productions of separate elements, according to
Rolls – Royce (2013), there are nearly 18,000 parts for an engine such as fans,
turbines, compressors and so on. So, it requires the high consistency in combining and
integrating the components to assemble the final product. Or in other words, the

5. 4
challenge of consolidating the supplier base is very significant for the company
(Aberdeen, 2006).
Additionally, because of international supply chain, the suppliers are located in different
nations in order to make specialization for aero engine manufacturer, Rolls – Royce
Holdings. It results in the difference in time zone and time for transits. The issue also
contributes to the challenge for coordination among suppliers. Moreover, the bargaining
powers of the suppliers are another risk for the manufacturer, this risk is derived from
the opportunistic behaviors of suppliers, mentioned above (Spekman and Davis, 2004).
In detail, it is found that in 2012, Rolls – Royce aircraft sector faced the risks of
bankruptcy from the suppliers as the result of financial crisis. But, because the majority
of the suppliers are the small or medium – sized enterprises, the manufacturers
certainly encountered the challenge and it is the reason that at this time, Rolls – Royce
needed to lend to its suppliers to help boost their performance (Salmon, 2012).
Secondly, since any engine must be supported by oils and fuels, to make the aircraft
engines, Rolls – Royce faces the uncertainties in fuel prices and a lot of costs relating to
this raw material. To analyze clearly, inflation effect on price of raw materials is captured
as the root for the unexpected increase in expenditure (Parker, 2013). Also, according
to Ferrari (2013), accidental leaking of oil led to the very high total direct cost of the
company, approximately $190 million. Moreover, other purchasing cost of the
manufacturer is derived from the paper –based process and other documents
(Aberdeen, 2006). Therefore, this challenge is very significant to be discussed and
minimized in the future.
2.2.2 Operational risks
2.2.2.1 Theoretical view
While both supply risks and demand risks belong to network risks, the operational risks
relate directly to organizational risks (Jüttner, 2003). Or in other words, it is also called
as process risk which is interpreted as the list of risks in accordance with production or
business operation. Hence, operational risks may occur internally, referring to the
infrastructure risks (Chopra and Sodhi, 2004) and the inflexible process (Veenstra et al.,
2006).

6. 5
2.2.2.2 Operational risks facing by Rolls – Royce
The operational risk of Rolls – Royce Holdings is significantly identified as the inventory
management which is derived from the inflexible process (Veenstra et al., 2006).
Because the separate components of an engine are produced in different parts of the
world, it is noticed that the manufacturer will face the challenge in monitoring the
inventory as well as collecting them for the assemble process (Tiwari, 2005). In addition
to the hardship in checking and controlling the inventory, the operational risk involved by
Rolls – Royce international supply chain is the complexity which is assessed as the
main reason for the failures in some projects such as Airbus and Boeing (Ferrari, 2013).
Thus, as a result, the manufacturer has encountered the challenge for making the
production process simpler so as to achieve both the effectiveness and efficiency in the
supply chain management.
2.2.3 Demand risks
2.2.3.1 Theoretical views
As mentioned above, demand risks relate to network risks and customers side
(Meulbrook, 2000). It is also called the market risks. Also, these risks result from the
disruption or challenges in the downstream supply chain operations (Jüttner, 2005). It
can be the uncertainty in demands of customers or the difference in demands
(Nagumey et al., 2005). These differences characterize the bullwhip effect which also
leads to the delayed information and delayed delivery (Lee et al., 1997).
In brief, it is noticed that the higher the supply risks, demand risks and operational risks
are, the worse the performance of supply chain (Wagner and Bode, 2008).
2.2.3.2 Demand risks facing by Rolls – Royce
While the operational risk comes from the internal source, the demand risk is derived
from the customer side. In term of demand risk, there are two critical challenges for the
aircraft engine manufacturer, namely, the demand variability as well as the delay in
delivery to final customers which are referred to the literature of bullwhip effect (Lee et
al., 1997; Nagumey et al., 2005).
Firstly, the demand variability refers to the different demands from different customers,
which create the difficulty for the manufacturer to target on a specific customer group

7. 6
and gain the effective outbound logistics. To explain, in the most recent time, the
company experienced the significant decrease in sale due to the fall in demands of
customers towards the current design of aircraft (Monaghan, 2015). Additionally, the
change in expectations of customers also indicates the risk for Rolls – Royce to have
the accurate observation and response. For example, in 2013, facing the demand
variability, the manufacturer decided to boost the turbine sale when decrease the
marine sale (Wall, 2013) by creating the more fuel – efficient aircrafts (Parker, 2013).
Secondly, challenge in operating the delivery effectively is also significant for the Rolls –
Royce as an aircraft engine manufacturer. It is noticed that the appropriate time for the
delivery of the company seems to be not completed for all cases. For instance, the
delay of 787 deliveries in 2010 raised the important risk for Rolls – Royce to complete
the outbound logistics to the final customers (Thompson, 2010). This situation is seen
as the trouble in international supply chain management of the manufacturer and in
reality, its impacts were very negative for a long time (Meakin, 2010). However, the
issue has been the significant challenge for the time being (Hollinger, 2014).
In brief, the potential risks and challenges for Rolls – Royce as an aircraft engine
manufacturer in enhancing the supply chain performance are the supply risks which
consist of relationship with suppliers and costs incurring, the operational risks referring
to the inventory management and the complexity in production procedure as well as the
demand risks from customer side.
3. Recommendations to handle the potential challenges and risks
3.1 Model of supply chain risks assessment and management
The response to risk in the risk management process is displayed in the following figure.

8. 7
Source: Kovacevic et al., 2015
Figure 2: Risk management framework
According to the above model, it is noticed that the three steps involving the risks
management are modeling or listing possible risks, measuring or identifying the scope
and degree of influence of risks as well as solving to the risks (Kovacevic et al., 2015).
The model will be applied for the recommendation parts.
3.2 Recommendations
3.2 Solutions to the supply risks
In order to deal with the supply risks, the most critical recommendations are suggested
as the use of wireless connection to transfer information, share ideas, allocate the
documents and reduce the gaps among the different suppliers of Rolls – Royce in over
the world. In reality, for many years, the company has utilized the Global Supplier Porter
as a point for the suppliers to access information and the electronic process (Rolls –
Royce, 2015). Nonetheless, it is not sufficient to consolidate the supplier base. It is
recommended that the network which gathers the suppliers is necessary to be
established. As the result of the network, the fast connection can be easily gained and
the culture conflicts are also minimized.

9. 8
Apart from the online network for the supplier base, Rolls – Royce should also enhance
the e – procurement to handle the challenge of high costs, especially avoiding the paper
– based processes (Aberdeen, 2006). In addition, to deal with the fluctuations in raw
materials prices, the manufacturers can reserve the appropriate amount of raw
materials to protect the company from the lack of materials or dramatic increase in input
costs.
3.2 Solutions to the operational risks
Operational risks include the inventory management and too much complexity in
production. Hence, it is suggested that the manufacturer needs to simplify both the
inventory management and the manufacturing procedure by applying to a specified
schedule which should be arranged and imported online to support the ease of
monitoring and checking. That means the number of inventory from different parts of the
world will be imported and reported in detail to an only platform so that the supply chain
managers can access the information easily and comprehensively. Also, by integrating
the inventory data into the same folder, the online management will be employed
effectively and the managers can combine the different parts of the aircraft engines for
the assemble procedure online. This strategy not only reduces costs and efforts for the
managers but also motivates the regular check of the sufficient inventory for the prompt
completion. However, the solution only refers to the quantitative data, not the quality of
the components of the engines. So, there has been still a risk for the inventory
management process.
3.3 Solutions to the demand risks
Facing the demand variability, the only response which is found to be most effective and
successful is the enhancement of the flexibility in design of aircraft engines. But, in
order to reveal the flexibility and the low cost involving, it is essential to apply the
technological support. In other words, by investing more in research and development,
Rolls – Royce manufacturer of aircraft engines can find more successful designs as well
as effective technologies inside the products.
Last but not least, the selection of the appropriate time for the delivery is another
recommendation for the manufacturer in handling the challenge of possible delays in

10. 9
several situations. Nonetheless, it is still difficult to assess which time is appropriate and
prompt to avoid delays. Timeline is essential in such case. In addition to the creation of
timeline, the agreement and confirmation from both of two sides, customers and Rolls –
Royce are also necessary to predict the accurate time for delivery in the outbound
logistics. And because the outbound logistics refer to the foreign markets, the
improvement of the relationship with the foreign customers is also highly appreciated.
In brief, it is found that almost recommendations concentrate on the necessary issue
relating to the international supply chain management of Rolls – Royce, the e- logistics
or the application of Internet in the supply chain. Besides e- logistics, technology is also
captured as the significant contribution to the successful management of the potential
risks and challenges.
4. Conclusions
To recap, it has been reported that in enhancing the international supply chain
performance of Rolls – Royce, an aircraft engine manufacturer, supply risks, operational
risks and demand risks are found to be the potential challenges. To handle them, use of
e – logistics and technological progress is appraised as the most effective solutions for
the manufacturer.

11. 10
References
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International Journal of Physical Distribution & Logistics Management, 38(3), 192- 223

12. 11
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13. 12
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