Rolls Royce – Power By the Hour

Project Report Prepared by NUPUR MITTAL (WMP7106), PANKAJ GUPTA (WMP7107), PHANESH V. R. ATMURI (WMP7108), PIYUSH RAJESH GUPTA (WMP7109), POULASTYA DUTTA (WMP7110), PRAMUKH SINGH RAWAL (WMP7111)) and PRASHANT JOSHI (WMP7112) Section B, WMP 2011-14, INDIAN INSTITUTE OF LUCKNOW – NOIDA CAMPUS

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Executive Summary
Today most Multi National Companies that are operating globally are realizing that they have to take complete control of After-Sales-Service, in order to compete effectively and synergize their operations with profitability. Earlier days, much of the service operations were handled by third parties. Companies have identified that after-salesservice is a significant source of revenue for the organization. With this paradigm shift and change in the culture, Rolls Royce pioneered and conceptualized ‘Power by the Hour’, an after-sales-service program that helps focus customer in their core business activities & offers peace of mind. In order to achieve this, Rolls Royce had to restructure and revamp its various operations including vertical integration of various divisions. The after-sales services provided by Roll-Royce helped its customers reduce maintenance costs and downtime. The service also enabled the company to improve its aero engine designs and build good relationships with customers. Moreover, the company gained a steady long-term revenue stream from the maintenance contracts. Analysts felt that the service strategy adopted by the company strengthened its position considerably in the highly volatile aerospace industry.

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Contents

....................... 1 Executive Summary ........................................................ 1 Contents ......................................................................... 2 1. Introduction ............................................................. 3 2. Rolls Royce Background ............................................. 5 3. Power By the Hour – Service Conceptualization ...... 6 4. Process Choices ........................................................ 7 5. Performance Metrics. .............................................. 15 6. Commercial Success ................................................ 16 7. Conclusion……………………………………………………………. 18 8. Reference …………………………………………………………… 19

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1. Introduction
A concept that originated with a novel way of providing maintenance contracts for RollsRoyce engines has now evolved into a model for significant cost savings as well as a method for cost sharing between the client and the supplier as well as providing a performance incentive to the supplier. Performance based logistics or contracting can be basically defined as: you pay if it works and we mutually decide how long it works before maintenance or support is required.

This new approach is already reshaping customer-supplier relationships in defence and aerospace contracting under the name "Performance-based Logistics" (PBL). Customers and suppliers of mission-critical products, such as commercial aircraft and military weapon systems, are recognizing that the acquisition of world-class products is not sufficient, but rather it is necessary to provide superior, cost effective maintenance and support services throughout the after-sales phase of the customer-supplier relationship. A major focus of these efforts involves re-designing the contractual and implicit relationships between customers and suppliers in the service support supply chain. At the heart of PBL is the notion that risks and incentives should be more equitably aligned between suppliers and customers than has been possible under traditional "fixed-price" or "cost-plus" contracts. According to a recent paper by Wharton professors, performance-based contracting may also "improve product availability and reduce the cost of ownership by tying a supplier's compensation to the output value of the product generated by the customer." This new strategy is fast becoming an important component of the management of after-sales service supply chains, with implications that potentially reach beyond defense and aerospace contracting, and into certain retail sectors. And, it is also predicted that the optimal customer-supplier relationship will be realized by combining performance-based contracting with elements of more traditional service agreements. The optimal contract is really a combination of three things: fixed payment or fixed price, cost-sharing and performance-based compensation." The essence of PBL is buying performance outcomes, not the individual parts and repair actions. Instead of buying set levels of spares, repairs, tools, and data, the new focus is on buying a predetermined level of availability to meet the [buyer's] objectives . Rolls-Royce has responded to this market demand by developing a comprehensive, integrated suite of engine aftercare services named “Power by the Hour”(PBH). RollsRoyce works closely with customers, irrespective of their size and operating business model, developing a customized service package, optimized to individual customer requirements. PBH is a flexible approach to achieving an engine support service that has the correct fit and scope of services to meet the operator’s specific needs. It provides a
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single source solution ensuring "Peace of Mind" for the overall lifetime support of the engine, from the time the engine is delivered to the customer until the engine goes out of service. This is achieved through the sharing of knowledge, expertise and experience. Through a partnership approach, PBH:  aligns incentives and goals  minimizes financial and operational risk  enables the operator to concentrate on core business  improves residual value Power by the Hour is a total support program aligned to each customer's operation and paid against hours flown. Against an agreed $ per flying hour fee, it offers the opportunity to remove uncertainties from engine management and provides greater financial confidence from managing predictable costs.

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2. Rolls Royce background
Rolls-Royce was started in 1906, and initially manufactured and sold cars. Later, the company started manufacturing aero engines, which were widely used in civil and defense aircraft. By the late 1940s, the company had become a major player in the aero engine business in Europe. However, it remained a relatively small global player and to grow further, the company realized that it needed to have a significant presence in the US aero engine market. In 1960s Rolls-Royce faced several setbacks after entering into a contract with Lockheed Corp to whom they were supplying engine RB211-22 because of which they had to declare bankruptcy. In 1996 under John Rose (Rose) the new CEO Rolls-Royce made major inroads into business segments like defense aviation, marine propulsion, and energy, also added innovations to its aero engines. Under Rose‘s leadership, after-sales service also became a significant source of revenue for the company as he realized competition from GE, P&W etc. Rolls-Royce sold maintenance contracts for its aero engines under the concept of ‘Power by the Hour‘. Under this concept, the customers paid a fixed maintenance fee for each aircraft flight hour (only for the time during which the aero engine was running). The company also offered different service packages for different customers.

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3. Power by the Hour Service Conceptualization
Until 1990(or before PBH), the company‘s after-sales service had consisted largely of spare parts sales and providing distress repairs. The support and maintenance activities were mostly licensed out to other companies. Rolls Royce CEO Rose recognized the revenue potential from after-sales service and believed that even if the aero engines were sold at low margins or in some cases even at cost, the after-sales service would provide the company with revenues over the lifetime of the engine. This was a smart move on the part of the company as over the lifetime of an aero engine, support and maintenance services generally provided about seven times as much profit to the company as the profit earned at the time of sale. Rolls-Royce created a highly customer-centric business model that combined manufacturing and services. When a customer purchased its engines, Rolls-Royce offered a maintenance contract based a new concept. Under this concept, the customer had to pay Rolls-Royce a maintenance fee per aircraft flight hour (only for the time the engines were running), as the customer earned returns only during the flight period. In return, Rolls-Royce offered to maintain the engines and replace them if they broke down. The company offered these maintenance contracts not only to civil aerospace customers, but also to defense aviation customers. Rolls-Royce, which coined the term ‘Power by the hour(PBH)’, later registered it as a trademark. In order to strengthen its After-Sales-Service, Rolls Royce completely revamped its operations by making vertical integration of various departments and entered into joint ventures with companies like Data Systems & Solutions (DS&S) with Science Applications International Corporation (SAIC), integrating Rolls-Royce‘s engine maintenance expertise with the IT systems knowledge of SAIC. New Customer service portals like enginedatacenter.com and Aeromanager.com etc., were created. Also developed the in-house software called Service Data Manager, Rolls-Royce studied the operational data gathered from the engines to predict and plan future engine repairs/removals.

In addition to providing these services, Rolls-Royce also invested heavily on building a global repair and overhaul network. The company maintained a network of service centers, workshops, and teams of technicians around the world. The headquarters of the global after-sales network was in Derby, England. This site also had a center for overhauling large civil engines. The other important service centers around the world were mostly managed through joint ventures with other aerospace companies

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4. Process choices
The shift from traditional service to PBH conceptualization also led to a cultural change from offering a service to support a product to designing a service and the product to support it. To ensure that the commercial risk to the manufacturer is minimised, any new engine must be designed to provide lower and more predictable maintenance costs. To minimize maintenance costs through out an engine's life cycle, design engineers must obtain knowledge gained from maintenance histories of similar products during an engine's design phase. This will help engineers identify engine parts most likely to be problematic throughout the engine's life cycle. As engine design is typically undertaken by a number of teams, who are responsible for individual engine modules, e.g. compressor, turbines, it is impossible for any single member of a design team to access more than a fraction of the available documentation. To overcome this challenge, Rolls Royce developed new processes and intelligent, knowledge-based document repository to support engineers to design for the new culture. The new process flow helped engineers to search, analyse relevant maintenance records and design guidelines based on QFD.

Figure: the flow of information gained during the life-cycle of one engine variant to inform the design of the next variant. The dotted arrows indicate the flow of design rationale and related knowledge. The solid arrows represent all other information flows including design documentation and real time engine information.

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The QFD process is used to ensure that all the requirements are understood and addressed with the appropriate “functionality” on the program, power plant and engine level. This process also acts as an effective flow down of the requirements from the top to the lower level. As with many companies, engineering at Rolls-Royce is challenged with supporting increasing workloads while seeking creativity to sustain technological advantage. By continually building upon and incorporating industry best practice, Rolls-Royce has embraced Process Excellence to bring robustness into design by understanding and accounting for variation during the early stages of the design process. The Rolls-Royce model uses various Six Sigma tools, along with standard design processes, and packages these tools under the acronym DCOV (Define, Characterize, Optimize, Verify). This new method of designing components requires a methodical approach beginning with understanding customer requirements and design space through to verifying the assumptions made throughout the process with analysis and hardware testing. After implementing pilot projects on a number of programs, RollsRoyce has applied Process Excellence in a highly disciplined manner on a new centerline engine being designed for a performance oriented commercial aircraft. The new engine’s requirements include significant noise, weight, cost, specific fuel consumption (SFC), schedule, and vibration challenges. Ultimately, the Process Excellence objective is to reduce weight and cost in various components while maintaining the previously noted requirements. Process choices made by Rolls-Royce to implement Power by the Hour. 1. 2. 3. 4. 5. 6. 7. Capacity, Flexibility, Resource planning, Product real time feedback Degree of vertical integration, & logistics management Materials & software technologies Customer service and service management

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Capacity

Flexibility

Resource Planning

PROCESS CHOICES for ROLLS ROYCE

Real time Product feedback Vertical Integration

Customer service & service management

Materials & software technologies

Service Network

PROCESS CHOICES FOR ROLLS ROYCE

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4.1 Capacity
For a profitable proposition the ‘POWER BY THE HOUR’ required contracts of volume and the contracts at many times were extended to decades. This posed a real time challenge for the handling of bulk spares and services. Concept of ‘power by the hour’ required a high amount of back calculations using the previous years’ data for the maintenance and services of the engines. The company also kept in mind the future growth needs of the Service contracts and accordingly finetuned the capacity.

4.2 Flexibility
Being at the customers end to provide real-time solutions required the solution provider to be really flexible with the risk sharing and technically too. Any risk to the engine required the ROLLS ROYCE engineers to be at their toes as the ‘POWER BY THE HOUR’ honored the challenge of the least down time of the aircrafts. ROLLS ROYCE had to accept the call of being the customers being a supplier. ROLLS ROYCE had to think from the prospective of a client to reduce the technical glitches and provide solutions. Many a times it could be cut throat but the revenues to be earned from the ‘POWER BY THE HOUR’ incentivized ROLLS ROYCE to take the task and meet the aspirations of the customers.

4.3 Resource Planning
Resources were to be planned at a level of high accuracy considering the future demands. The spare part garage was required to have parts which were anticipated to fail or forecasted to be problematic before the real problem actually occurred. Back to back vendor management, skilled engineering staff and optimal inventory management are key to the timely and successful delivery of the PBH model.

4.4 Real time product feedback
The ‘POWER BY THE HOUR’ service aided ROLLS ROYCE to achieve real time flight data which shall be highly helpful in developing new models. The data was so rich that it could not have been simulated as the way it was available in the real time situations. Rolls Royce could view the service problems in a full frontal view rather than the hind view a supplier has in the conventional service packages. The real time data sometimes from the air craft to the ATC (air traffic control) were available by which the ROLLS ROYCE engineers could map out the problems and provide solution on the wings i.e. when the flight is still in air.
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The ROLLS ROYCE engineers could now predict the inventory to be supplied for the problem before hand and it was to be mobilized and made available before the aircraft really landed on the air base.

4.5 Vertical integration
Rolls-Royce provided its customers with asset management services to enable them to manage their inventory requirements better. It provided engine support equipment like spare engines, engine accessories, line maintenance parts and tooling. Rolls-Royce had to vertically integrate as regards to the jet engine’s inner core, holding a full design capability over its outer core and for the remaining components it had to retain a system integration capability. Rolls-Royce has to exhibit backward vertical integration where it had to control subsidiaries that produce some of the inputs used in the service of its products. Subsystems like fan, compressor, turbines system and combustor representing the critical subsystems of the engine are part of the ‘inner core’. Nacelles, nozzles, sealing devices, joint couplings, lubricating systems etc form the ‘outer core’ while the software technologies and materials etc are the remaining components.

Inner core:
Rolls-Royce developed and then kept in-house a thorough knowledge about the subsystems like ‘combustion product generator’, ‘fluid handling’, advanced methods of manufacturing, impellers etc whose performances affect to a large extent the final product performance. Thus Rolls-Royce retained both design and manufacturing competencies related to fan, compressor, combustion and turbine systems which constitute the ‘inner core’ of the gas turbine engine. This long-term and special commitment towards these components is also supported by considering the research activities. The Research activities were focused on the improvement of the key subsystems. Rolls-Royce had been funding university research since mid 1960s in the fields like combustion, heat transfer & cooling, compressors, aero-thermal systems, fluid dynamics etc. Therefore with regard to key subsystems of the engine, Rolls-Royce by retaining both design and manufacturing competencies are vertically integrated.

Outer Core:
Rolls-Royce had spun-off manufacturing and sometimes designs of peripheral components and subsystems which for the part of ‘outer core’, it performed research activity that enabled it to maintain either a full design capability or a system integration capability over them. Moreover, Rolls-Royce pursues a deliberate R&D strategy, labeled ‘intelligent customership’ which allows it to be a knowledgeable purchaser of such components.

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4.6 Materials & software technologies:
Rolls-Royce started developing technologies to control systems in 1985. This decision stemmed from the increasing importance of the technology in the engine, Rolls-Royce achieved a sort of system integration capability with regards to software-based systems i.e. it designs the entire jet engine control system which encompasses hardware but it does not produce any hardware.

4.7 Customer service, & service management
Rolls-Royce provided its customers with unique services to enable them to manage their engines better. It provided engine support software, routine health checks for engines. Engine Health Management (EHM) service was provided to the customers. The main aspects of this service were to monitor engine performance, detect anomalies and provide solutions to all engine related problems. Rolls-Royce studied the operational data gathered from the engines to predict and plan future engine repairs/removals. A portal – aeromanager.com was created for aerospace customers. Through this portal, company provided customers with a number of services that included online facility to order spare parts, ability to view the status of the engines that had been sent for repair. With time, EMH service was improved to receive the data while the engines were in operation. This was done through live satellite feeds which were analyzed using an innovative IT system which picked up any variations from the specified operating parameters in the engines’ performance.

4.8 Service Network & Logistics
Rolls-Royce invested heavily on building a global repair and overhaul network. The company maintained a network of service centers, workshops and teams of technicians around the world. The headquarters of the global after sales network was in Derby, England. The other important service centers around the world were mostly managed through joint ventures with other aerospace companies. To optimize the spares business, a long term forecasting model was designed to forecast the spares the company needed to manufacture to meet the needs of its customers, before they actually arose.

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Global Repair and Overhaul Network
NAME YEAR LOCATION

Rolls-Royce Canada Rolls-Royce Brazil

1952 1950

Montreal, Canada São Paulo, Brazil Zamudio, Spain Hong Kong, China Fort Worth, Texas, USA Querétaro (México) Singapore Oakland, California, USA Ansty, Bristol, East Kilbride, Derby, (4 centers in UK) Singapore

Industria de Turbo Propulsores, S.A., 1988 (ITP) Hong Kong Aero Engine Services 1997 Limited (HAESL) Texas Aero Engine Service LLC 1998 (TAESL) Industria de Turborreactores (ITR) 1998

International Engine Component 1998 Overhaul Pte Ltd (IECO) Rolls-Royce Engine Services-Oakland 1999 Inc. (RRESO) Rolls-Royce AR&O (Aero Repair and Overhaul) Singapore Aero Engine Services 1999 Private Limited (SAESL) TRT Ltd. Rolls-Royce Deutschland 2000 -

Derbyshire, UK Dahlewitz Germany & Oberursel,

Rolls-Royce Engine Services Ltd (RRESLI) N3Engine overhaul Services 2007

Pampanga, Philippines

Thuringia, Germany

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Rolls-Royce’s ‘Power by the Hour’ service by implementing the above mentioned processes helped the airline operators to remain focused on their core business activity, while at the same time enabled the company to improve operations and increase market share. The service provided several benefits including predictable maintenance costs, reduced capital investment and improved residual of the aircraft. Rolls-Royce took up the risk and costs for an aircraft’s downtime and repairs and therefore put in more efforts to provide superior service. It was confident of doing so because of high degree of vertical integration for the most critical technologies coupled with system integration for the other parts. This service enabled Rolls-Royce to design and build more reliable engines and to modify the engines which were already in use to increase reliability. The strong aftersales service enabled it to gradually expand the marked for its aero engines, as the company developed strong relationships with airline operators and managed to win repeat orders.

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5. Performance Metrics
Performance measurement is an important cornerstone of the contracts between RR and the Airliner for the services of their airlines. Performance metrics should be constructed to encourage service improvement, effectiveness, efficiency, and least downtime for the airline. They should incorporate "best practices" related to the performance being measured and cost/risk/benefit analysis, where appropriate. RR has promulgated a set of Total Quality Management guidelines that indicate that performance metrics should lead to a quantitative assessment of gains in:


Customer Satisfaction



Organizational Performance



Market Gain

The key elements of the performance metrics to these guidelines should address:


Alignment with Organizational Mission Quality of Product



Cost Reduction and/or Failure Avoidance Cycle Reduction Failures Predictability Time of



Reduce down-time







Meeting Commitments



Timely Delivery





Man Hour efficiency

The first step in developing performance metrics is to involve the people who are responsible for the work to be measured because they are the most knowledgeable about the work. Once these people are identified and involved, it is necessary to: 1. Identify critical work processes and customer requirements. 2. Identify critical results desired and align them to customer requirements. 3. Develop measurements for the critical work processes or critical results. 4. Establish performance goals, standards, or benchmarks.

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6. Commercial Success
The growth and importance of the service sector to Rolls-Royce is illustrated by the fact that ‘TotalCare’, the pioneering ‘powerby-the-hour’ long-term product support package introduced by Rolls-Royce for airlines, has grown from covering just 2% of the company's installed fleet at the turn of the decade to over half today. The Rolls-Royce civil jet fleet currently stands at 12,500 engines. Around 75% of Trent engines and 90% of the regional fleet are covered by long-term maintenance agreements.

The service provided several benefits including predictable maintenance costs, reduced capital investment, and improved residual value of the Aircraft. Rolls-Royce reported that during the period 2004-08, when it operated the Derby facility, the number of ‘in-service events‘ – incidents in-flight – involving Rolls-Royce engines on civil aircraft had fallen by almost 25% Year-On-Year. Based on the robust operational process design, the company improved its service efficacy effectively and was able to plan repairs/removal in advance and allocate technical resources more efficiently. Rolls-Royce also achieved significant savings in maintenance costs (by almost US$ 500,000 per engine), as an unplanned engine repair/removal increased logistics and other costs. The operational data also enabled Rolls-Royce to design and build more reliable engines and to modify the engines which were already in use to increase reliability. Rolls- Royce‘s strong after-sales service enabled it to gradually expand the market for its aero engines, as the company developed strong relationships with airline operators and managed to win repeat orders.
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The success of the service strategy saw Rolls-Royce achieving a 10% compounded annual growth rate during the period 2000-07 (See Exhibit below - for growth in aftersales service revenues). Rolls-Royce‘s maintenance contracts were for a period of 12 years on an average. Typically, they varied between eight years for CorporateCare customers and twenty years for some TotalCare customers. These contracts thus represented a relatively secure revenue stream for the company for several years into the future.

After years of spending heavily on giant new engine models, Rolls-Royce is roaring ahead. It plans to double its sales in the next ten years. Its order backlog (mostly civil jets) is now more than £60 billion ($97 billion).

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7. Conclusion
In spite of many challenges it faced, the most important reason for the success of RollsRoyce was its after-sales-service. The company was able to merge its technology and service to create a sustainable revenue stream even in the conditions of economic turmoil. The highly customer-centric win-win approach, robust process design and service delivery combined with its technology leadership and long product cycles helped Rolls Royce to be ahead of competition.

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8. References
1. www.rolls-royce.com and its Annual Report 2. Rolls-Royce: A Manufacturer at Your Service. IBS Center for Management Research 3. Aftersales = after profit by Ruari McCallion, as published in the April 2007 issue of ‘The
Manufacturer’ publication

4. 'Power by the Hour': Can Paying Only for Performance Redefine How Products Are Sold and
Serviced? Published: February 21, 2007 in Knowledge@Wharton 5. Performance Contracting in After-Sales Service Supply Chains by Sang-Hyun Kim, Morris A. Cohen, and Serguei Netessine, The Wharton School, University of Pennsylvania Philadelphia, PA 19104 January 2006, Revised August 2006. 6. Informing Preliminary Design by incorporating Service Knowledge – by Sylvia C Wong, Richard M Crowder, Gary B Wills and Nigel R Shadbolt, - Paper presented during International Conference on Engineering Design 2007

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