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Aerospace Manufacturers Head to Singapore Innovation Hub Essay

Supply chain management for multinational corporations has become challenging because of the globalisation of their operations (Ayers 2012). Since globalisation has created opportunities in the international markets, companies have taken up the chance to establish the manufacturing bases in different countries in order to exploit the economies of location. Although production in such low-cost regions is beneficial, it creates some other challenges that make coordination of the value chain activities strenuous. Consequently, managing the supply chain becomes a headache for the organizations because poor supply chain management may cripple the operations and negate the gains of the low production costs. The countries chosen for the production operations have some unique features that the countries of origin do not have. As such, an organization prefers to operate in a foreign country that offers the benefits that are elusive in the home country. Singapore is one of the South Asian countries that have attracted the manufacturers of aerospace engines from around the globe. Certain characteristics of this country have given it a competitive edge over other nations. This research paper evaluates the factors that make Singapore a country of choice for Rolls-Royce’ operations, studies potential challenges to its supply chain, and provides recommendations for handling these challenges.

Factors Influencing Rolls-Royce’s Choice of Singapore

Low Corporate Tax Rates in Relation to Other Countries

Singapore’s tax rate is about 17% as compared to other countries such as the United Kingdom with the rates of above 20% (Bhatnagar 2010). The low tax rate in Singapore is one of the factors that have attracted Rolls-Royce to Singapore. The tax rate is significant because it determines the amount of profit a corporation earns in a given country. Low rates mean that the companies pay a small amount of tax and, thus, retain significant profits. The purpose, for which a corporate entity such as Rolls-Royce exists, is to provide the value to its shareholders (Jalilvand & Malliaris 2012). Its objective is to undertake the investment decisions that increase the shareholders’ value as much as possible. Rolls-Royce’s choice of Singapore, thus, is consistent with its objectives of maximizing the profitability.

Stable Political Environment

Political atmosphere determines the attractiveness of a country as an investment destination (Cavusgil Knight & Riesenberger 2012). Countries with political stability elicit confidence that investors will be safe and secure. On the other hand, the nations that experience turmoil and violence shun entrepreneurs that fear losing their businesses. Singapore is a strong democracy with a parliamentary system. The country has enjoyed a relative period of peace and prosperity. Consequently, investors prefer the country over other nations. Since Rolls-Royce has a long-term plan for the Asian manufacturing, Singapore is the best country for locating a plant because it shows signs of a prolonged political stability.

Regulations that are Predictable and Transparent

Multinational corporations have been unable to operate in some countries because of the bureaucracy and stiff regulations. The regulations may limit the ability of corporations to get licenses and other approval documents that are required before the operations commence. In such nations, corruption is rampant, and the government officials solicit bribes in order to expedite the paperwork process. The red tape wastes valuable time that the prospective investor would have used to create value. Additionally, the money wasted on bribes reduces the profitability and shareholders earnings. Singapore has transparent regulations that make business transactions swift. An entrepreneur can start operations in the country within six days (Monetary Authority of Singapore 2014). The short period required for securing the legal approvals reduces the start-up costs and makes Singapore an attractive destination. The increased competition in the aerospace engine manufacturing requires swift operations in order to respond to customer demand and competition (Rolls-Royce 2008).

Customer Base Growth in Asia

The number of people using air travel in Asia has been increasing over the years because of the increased disposable income. Consequently, there is a high demand for aircraft in the Asian continent in order to respond to the needs. A third of the global aircraft deliveries will have head Asia by 2031 (Beh 2015). A large number of carriers in Asia requires additional support services such as maintenance and repairs. The increased demand for the aircraft has prompted the engine manufacturers to realign their manufacturing plants in order to reflect the change in demand. Locating manufacturing plants near the market is critical because it reduces the cost of transportation. Rolls-Royce identified the opportunity in having an operational division near the market. Singapore has the combination of factors that make manufacturing more profitable than the other countries in the region do. Since Rolls-Royce serves both Airbus and Boeing, its location in the region was a strategic move that improved the performance of the air travel industry, in general.

Adequate Supply of Qualified Workers

A critical reason for offshoring by numerous organizations is the increased labour costs in the parent country (Czinkota & Ronkainen 2011). Over the last decade, many companies have relocated their manufacturing bases from their countries of origin to the developing countries. A part of the process was initiated by the increased cost of labour that made manufacturing in the home countries untenable. As education levels improved in the developing countries, cheap but quality workforce became available. A company can produce the same amount of goods with high quality but at a lower price than in its home country through offshoring. Singapore has the highly-qualified engineers and technicians from the Institute of Technical Education that is supported by the government (Grant 2014). The government of Singapore aims to lure the aerospace engine manufacturers into the country. The corporations can only function in an environment with a trained workforce, which is readily available in Singapore. The attractiveness of Singapore as a low-cost labour location has been boosted by the increasing labour costs in China. The low-cost advantage that China used to provide to manufacturers in the past has been eroded by the increasing cost of labour. While Rolls-Royce could have considered China in the past, today, it can only think of the countries such as Singapore.

Availability of Suppliers

Suppliers form an essential component of the supply chain. They provide the materials, with which the finished products are made. As such, being located near the critical suppliers is advantageous because they can deliver material swiftly and over a short period (Cook 2010). The proximity to suppliers reduces the complexity of managing and monitoring supplies because the transportation chain is short (MacLennan 2011). The production costs, thus, reduce when the suppliers and manufacturers are located close to each other. One of the suppliers of titanium alloy that Rolls-Royce uses is the RLC Engineering Group. The supplier has a location in Singapore, which makes it easy for Rolls-Royce to order the alloy quickly. Additionally, their other suppliers are located in Japan, Thailand, and within Singapore. The entire source of supply is within a short distance from Rolls-Royce engine manufacturing plant. Consequently, Singapore is the ideal location for the company.

Challenges in Rolls-Royce’s International Supply Chain

Rolls-Royce supply chain faces a myriad of challenges because each of its components is not constant. The suppliers, employees, information, processes, and customers keep on changing; this fact makes it difficult to predict and manage.

Poor Operational Performance by Suppliers

Suppliers are critical because entire Rolls-Royce’s operation depends on the company’s honesty and ability to meet the requirements. The delivery of poor quality materials can jeopardize the whole supply chain and invalidate the effort of all the other parts of the chain (Dinitzen & Bohlbro 2010). The operational performance can be poor when the suppliers fail to meet the quality standards set by the engine manufacturer. Additionally, the performance can fall short of expectations when suppliers are unable to deliver the materials on time. Late delivery delays the company’s response to demand in the market and leads to loss of the competitive edge (Hooley, Saunders & Piercy 2014). The management of the supply chain requires automation so that all the processes are synchronised in order to maximise the operational excellence (Dyckhoff, Lackes & Reese 2014). Since suppliers are located in the developing countries, their technology may not match that of Rolls-Royce; the fact can hinder the implementation of a single supply chain management system. The lack of consistency between the management of the supply chain by both the suppliers and Rolls-Royce can lead to blocked nodes within the supply chain, which can paralyse manufacturing.

Increased Competition

The manufacturing of aerospace engines and parts has experienced an increased competition over the years. Globalisation has facilitated the competition by converging manufacturers in the low-cost regions of the world such as Singapore (Frynas & Mellahi 2011). The consequence of the convergence is that the competitors utilize the available suppliers and materials that are scarce (Ross 2010). As a result, there are those manufacturers that will not receive an essential material because their competitors sourced them earlier. The competition affects the international supply chain because limited resources may limit the ability of Rolls-Royce to serve its current and prospective clients. Additionally, the competitors constantly reduce the market share owned by each other. For instance, Rolls-Royce is not guaranteed of its market leadership because the competitors are crafting strategies in order to take away some of its clients and suppliers. Rolls-Royce’s supply chain performance, thus, is negatively affected by the extra competition that accompanies globalisation.

Growing Customer Expectations

The changing trends in technology and availability of products influence the preferences and tastes of the customers. As the technology advances, the clients expect improved products with enhanced safety and performance features (Gattorna 2009). The aerospace engine manufacturing is essential to the air travel because of the dangers of producing malfunctioned engines. The fatal accidents that may result increase the customers’ expectations. Sometimes, the clients change their specifications over short notices and expect the delivery time to be unaffected. Rolls-Royce must become flexible in order to respond to such challenges because the failure to adapt may drive customers away. A part of the plant’s obligations is providing the repairs and maintenance of the engines to the existing airlines. The cost of maintenance may increase depending on the economic conditions. The engine manufacturer may not change the price charged initially, despite the increase in cost, and must continue offering the services to the clients. The cost of the repairs and maintenance weighs down on the profits and investors’ earnings. Rolls-Royce’s supply chain must decide on how to tackle such challenges while meeting the customer expectations.

Material Costs

Resources such as the raw materials are always in short supply. Those using them must compete and allocate them wisely among the competing needs. The cost of materials changes from time to time. When the cost increases, the gains realized through the economies of location are lost through the raw material expense (Rolls-Royce 2013). When the raw material purchase is made using different currencies, the fluctuation of exchange rates can affect the cost. For instance, when Rolls-Royce decides to buy materials with the US dollars, the exchange rate between the dollar and the local currency will influence the cost. When the inflation of the local current is high, the dollar will be stronger than the local currency. As such, the materials will be cheaper than when the local currency starts gaining value against the dollar. The competitors in the market have a vital role to play in controlling the cost of the raw materials (Hill & Jones 2008). When their demand exceeds the supply, the suppliers may hike the prices because the manufacturers have little choice. Unfortunately, Rolls-Royce has no control over inflation and exchange rate, thus the challenge of material cost.

Capital Access and Financial Market Crises

The manufacturing of aerospace engines is a capital intensive. As such, Rolls-Royce needs access to the capital at different times of its operations in order to meet the needs of the customers. The capital is not always available because financial institutions may not have confidence in the prospective debtor. The equity providers may not be willing to contribute more finances when the company falls short of its financial requirements. On the other hand, financial crises can cripple the manufacturing process. Since they are unpredictable, they are bound to happen in the future. When there is an economic meltdown, people reduce their air travel as they divert their disposable income to other basic needs (Scott, Lundgren & Thompson 2011). Accordingly, the demand for aircraft reduces; this fact limits the need to manufacture engines. Rolls-Royce may face such a challenge in the future, which would halt the vital processes in its international supply chain.

Recommendations

Adequate Procedures and Criteria for Choosing Suppliers

Rolls-Royce can enhance the performance of the suppliers by developing the adequate criteria and procedure for identifying and engaging the potential candidates. The criteria depend on the needs of the company, but the material quality should be among them irrespective of the other needs (Shar 2009). The supplier must commit to delivering the requested quality without failure, prior to signing a contract. Secondly, the organization can enhance its performance by collaborating with suppliers in order to create an automated supply chain management system. Such a system can socialise the two partners and facilitate their working relationship. The system enhances communication and reduces the chances of late delivery because of the communication breakdown. The suppliers can monitor the levels of the materials in the manufacturing plant and add them as they get depleted (Wisner & Leong 2011). Rolls-Royce should train suppliers on the technologies it uses in its supply chain and assist them in acquiring them. Collaboration at the technological level can enhance the suppliers’ commitment to the company in the long-run.

Differentiation

Differentiation is a useful tactic when dealing with the competition. The differentiation should be on the quality of the engines and the manner, in which Rolls-Royce deals with its suppliers. The company can attain the product differentiation by investing on research and development. The research and development create innovative products that the competitors cannot imitate (Mena, Christopher & Hoek 2014). If having the best performing engines in terms of quality, safety and reliability can secure the company’s market share and attract customer loyalty. Rolls-Royce can encourage suppliers to buy the shares of the company and become a part of it. When the suppliers have a stake in the performance of the company, they will be motivated to meet the quality standards and schedules. Their devoted effort is likely to lead to customer satisfaction because Rolls-Royce will offer the high-quality engines in a timely manner.

Customer Relations Management

The management of customers and their expectations is essential in Rolls-Royce’s supply chain. The customer relations management approach should aim to learn the trends of the changing preferences and needs. The identification of the trends can help the company develop engines that will meet the expectations proactively (Hugos 2010). The company should engage its customers and seek their views on the designs, quality, safety, and reliability. When customers are consulted, they feel valued and appreciated and are likely to become loyal to the company. Their expectations on the maintenance should be addressed through the dialogue by setting realistic costs. The cost should consider the changes that may occur in the future due to unforeseen factors such as inflation. Additionally, Rolls-Royce can reduce the defects of the engines through lean production procedures after the consultations, which eliminates the need for frequent repairs and maintenance.

Multiple Suppliers in Different Locations

Fluctuation in the currency exchange rates and surplus demand affect the cost of materials (Ochonma 2015). Rolls-Royce should have suppliers in different countries in order to mitigate the changes in the exchange rates. The company should also have a financial expert in order to monitor the exchange rates in its suppliers’ countries. When fluctuation is high in the country, the company should seek materials from the other suppliers in a different country (Brewer, Button & Hensher 2010). The diversification of suppliers helps reduce the negative impact that the cost of materials has on profitability. Contractual agreements between Rolls-Royce and its suppliers can set the price limits for materials, beyond which the supplier cannot exceed. Such a strategy would limit the unjustified price hikes that result from the surplus demand. The manner, in which the suppliers behave, depends on the respect between them and the engine manufacturers (Pearce & Robinson 2009). A cordial relationship can prevent unreasonable price increment. Rolls-Royce can offer financial assistance to the suppliers when the need arises. Such a gesture can prevent them from increasing the prices without justification.

Proper Corporate Governance Structures

Adherence to the corporate governance procedures is critical to the survival of Rolls-Royce during an economic crisis. The firm should have the internal control methods and risk mitigation procedures. Such internal controls help identify the risks, to which the company is exposed, and recommend the best remedy (Hopkin 2010). The action is then implemented and assessed for success. Transparent financial reporting processes also help appeal to the confidence of the financiers. The company should maintain high credit ratings by meeting all its financial obligations. An organization with a high credit rating can get funds from the creditors even in difficult economic times. Additionally, it should diversify its portfolio in order to spread risks when the aerospace engine manufacturing is performing poorly (Paulino 2009).

Conclusion

The factors that drove Rolls-Royce to select Singapore for its engine manufacturing plant include the low corporate tax, stable political environment, and transparent and predictable regulations. In addition, the customer base growth in Asia, qualified workers, and availability of suppliers attracted Rolls-Royce. The low tax rate could increase the earnings while political stability could assure investors of their investments’ safety. The regulations could hasten the start-up procedures for the new investments. The huge customer base lured the company to operate near its markets while the workers could offer valuable skills (Asherson 2015). The availability of suppliers simplified the supply chain by reducing the physical distance. The potential challenges to Rolls-Royce’s international supply chain include the poor suppliers’ performance, competition, customer expectations, high cost of materials, capital access, and financial market crises. The inadequate suppliers’ performance is in the form of the poor quality and late delivery. The competition is for the material resources and suppliers while customer expectations relate to the quality, reliability, and performance. Inflation and high demand influence the material cost. Capital access and financial market crises would reduce the finances available to the company. The recommendations on handling these potential challenges include the establishment of criteria for choosing suppliers, differentiation, customer relations management, geographically diversified suppliers, and effective corporate governance.