Has Rolls-Royce revolutionised supply chain finance?

Rolls-Royce had the credit rating, the reputation and a vast order book. It also had a lengthy, world-wide chain of suppliers producing precision components for its engines. Unfortunately, many of these suppliers were struggling to finance their tooling costs at affordable rates, so much so that the viability of some suppliers was at risk. The suppliers depended on Rolls-Royce and Rolls-Royce depended on them to build its engines. How could Rolls-Royce leverage its financial strengths to help its suppliers? It contacted a funder to see whether a solution could be found.

The solution that the various parties eventually found illustrates the revolution that has occurred in supply chain finance since the Fukushima and other natural disasters that knocked out entire linkages of suppliers.

As he told GT News, the site for corporate treasurers, Rolls-Royce’s Andrew Leach, head of purchase risk, wanted a much cheaper and easier method of funding for the manufacturer’s suppliers in what he described as “funding the unfundable.” Leach, who has overall responsibility for financial risk management in the supply chains, was aware of the danger.

High interest rates on short-term loans were making Rolls-Royce’s suppliers vulnerable. The terms of the financing were so tough (generally 30 to 90 days under trade financing arrangements) that it threatened their long-term competitiveness. This state of affairs was not in the interests of Rolls-Royce or its global family.

However, Rolls-Royce had a lot to offer: a strong A credit rating, a stacked order book for its aerospace, maritime and other engines worth more than £70bn (€97bn) and a great brand.

Financing system

In due course, the funder devised an award-winning system of financing that was anchored on Rolls-Royce’s A rating. However, plenty of snags remained. The system had to be available in many different countries with different currencies. The funding had to be treated as “non-recourse” from the suppliers’ viewpoint but as trade payables from Rolls-Royce’s. It also had to be simple to operate, without any elaborate set-up obligations or other administrative fees.

Once the hurdles had been cleared, the solution was a much lower rate for suppliers plus a longer, three-year terms. It amounted to a major improvement for them. In addition, suppliers had recourse to more working capital. (Some of them had been forced to finance their tooling out of equity.)

The first supplier, a US-based company was signed up in a few minutes with a minimum of paperwork. As Leach recalls: “The company had the cash in its US bank account only days later. It’s been followed by many more suppliers since.”

Thus, overnight, the suppliers, particularly SMEs, became much more viable, and Rolls-Royce had strengthened its supply chain. “It is now possible for even the smallest supplier to finance its tooling at competitive rates,” explains Leach. “Most importantly to Rolls-Royce, it has mitigated a key business risk by strengthening the resiliency of its supply chain.”

In a world of financial uncertainty, the project provides the resources for suppliers to reliably deliver the engine parts that Rolls-Royce requires.

This article was taken from StrategicRISK’s guide to property and casualty risks supported by AIG. This guide can be viewed or downloaded here.