Page 4: Risk and revenue sharing partners
In the past, relationships down the supply chains were based upon transactions relating to cost and efficiency. With a massive project such as the development of an aero engine, if Rolls-Royce was successful, the project would have a considerable knock-on effect for the suppliers of parts for the engines whose revenues would also increase.
Though it takes between three and five years to develop an engine, every time an engine is ordered, it could be in service for up to thirty years. During that time repair and overhaul would be required to maintain the engine. Given the potential benefits for these manufacturing organisations, it seemed logical that by sharing some of the investment they could also qualify for the rewards.
Risk sharing is about developing strategic relationships with partners. It is an integrated approach to outsourcing based on both Rolls-Royce and its suppliers working as a team. In the early phases of the Trent 500 project a key element was assembling partners from both the UK and around the world that had the right mix of expertise. These included:
- FiatAvio of Italy
- Industria de Turbopropulsores from Spain, in which Rolls-Royce has a 47 per cent shareholding
- Fokker Elmo of the Netherlands
- TRW - Lucas Aerospace from the UK
- IHI, KHI and Marubeni from Japan
- Hamilton Sundstrand in the USA.
Just as Rolls-Royce had to make a substantial investment in the development of the new engine, each of these partners had to invest in its own research in a range of areas, such as design work and materials technology in order to help create a world-class engine. The principle behind the project was simply that those partners required to make the largest investment would then be entitled to a proportional amount of the revenue, as the project realised its goals.
Risk sharing partnerships also develop long-term relationships between Rolls-Royce and its suppliers based on trust that focuses all partners on a common goal of supplying world-class engines.There are many benefits from such arrangements. For example, risk sharing:
- focuses each partner upon the link between investment and profit
- brings suppliers together to meet an overall objective
- allows suppliers more freedom, without being constrained by the details and procedures of a traditional contractual arrangement
- stops any form of misuse of power
- pools best management practice
- encourages the integration of cultures and skills
- engages all partners in achieving strategic goals.