Why Rolls-Royce is 'concentrating spend' to help overcome £188m losses

Aerospace giant Rolls-Royce lost £188m in 2022’s first half following supply chain woes but has outlined a series of measures it is taking to reduce costs.

Rolls-Royce said it was “concentrating spend with leading suppliers”, increasing inventory to address supply constraints, controlling costs, and “applying contractual and pricing discipline to limit inflation risk”.

The company has hired around an extra 70 procurement specialists to undertake the work.

Warren East, CEO at Rolls-Royce, said in an earnings call: “We're partnering with key suppliers, ensuring that we have contractual pricing protection in place through long-term contracts… You have to look to your costs and think about how we can control those costs. which we're absolutely doing. 

“And part of that is softening the blow of the inflationary pressures by things like hedging, things like long-term supply agreements with our suppliers, focusing on the smaller number of suppliers so that we can actually strike better agreements. Some of these supply agreements, fortunately, do stretch out for a very long period of time.”

Other measures East mentioned included passing on a higher proportion of input costs to customers, innovating in manufacturing processes by repairing and reusing spare parts, and derisking deliveries by increasing inventories.

East continued: “Basically, we are spending more with fewer suppliers. The relationship with those suppliers is richer, the contract terms can be longer and more rigorous… Obviously, there's real world risks that all of these suppliers face – but we have a close working relationship with those suppliers and are hiring people specifically to manage suppliers at the moment. And we also have task forces from within our business working with suppliers.”

Panos Kakoullis, CFO at Rolls-Royce, added: “It's procurement specialists, and we've hired around about 70 extra people, specialists in that area. It's about spending time with the suppliers to make sure that we're in the right place in the queue. And we understand day-to-day, and we manage day-to-day what's going on around that supply chain.”

Kakoullis explained Rolls-Royce’s consolidation of spend, clarifying the company would “focus down” spend on the “best-performing suppliers”. “It's not just about cost. It's about being able to deliver to the highest quality as well.”

He said on one project “a innovative digital sourcing approach has allowed us to achieve a 10% cost reduction on parts by consolidating our spend with four high-performing suppliers”. 

“And more broadly in civil aerospace, we've taken proactive steps to further strengthen our focus on supplier management in the first half. That included very careful selective hiring to support and manage the supply chain. We've established tiger teams in those severely stressed parts of the supply chain, including the use of external specialists.”

Rolls-Royce ended 2022’s first half with an underlying loss of £188m, compared to a profit of £104m in the same period last year.

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