Andrew Scuoler, CPF spoke with Sir Ian Davis, Chairman of aerospace giant Rolls-Royce, about forecasting, scenario planning, Big Data and why we shouldn’t be so hard on millenials.
Andrew: How important is your forecasting group at Rolls-Royce?
Ian: I think forecasting is absolutely crucial in a business and perhaps even more important is the planning side of it. We make very major capital investment decisions on the basis of these forecasts and if you get the forecast wrong, your whole capital structure capacity can be wrong.
I would say that the time frame of forecasting is what’s interesting to me. In our business, medium to long-term forecasting is critical, because typically you have to an order book that looks two, three of four years ahead. So for us, short term volatility in demand isn’t too problematic. We look at medium to long-term trends. If you’re in retail or consumer products, the short-term view is obviously much more important and short-term volatility presents more challenges.
Forecasting is a foundational skill and we spend a lot of time on it
Forecasting is a foundational skill and we spend a lot of time on it. We talk a lot with our customers like Airbus and Boeing to make sure that we’re in-sync with them when it comes to operational forecasts. Then from those we build financial and capacity forecasts. There’s an awful lot of planning that goes into such a complicated supply chain like ours, and that’s true across the aerospace industry as a whole. There’s a lot of contingency and scenario planning. Long-term forecasting is hugely important for Rolls Royce because if you get the big capital investment decisions wrong, they can have ramifications for five, ten or fifteen years.
Andrew: Does Rolls-Royce anticipate any issues arising with its supply chain in relation to Brexit?
Ian: There could be issues. We’ve made a lot of preparation, as have all manufacturers. The industry and ourselves are primarily governed by WTO rules rather than EU rules so that’s a bit of a defense for us. But a lot of our supply chain is within Europe which means a lot of our regulation is in Europe, so we’ve obviously done a lot of contingency planning.
Of course, we don’t know what we don’t know so a lot of our efforts from the last two to three years have focused on mitigation of potential impacts. We’ve made sure we’ve got alternative supply routes for certain materials and parts, and we’ve built up inventory on certain commodities just in case.
Andrew: Can you talk about the particular scenarios you plan for?
Ian: We scenario plan for changes in the overall markets we operate in and we scenario plan for individual products. For example, when you launch a new engine on the civil aerospace side, you’re typically launching it for a particular plane. You don’t know how well the plane is going to sell—some planes sell incredibly well, some don’t, and you need to know how to react in both situations. It’s product specific as well as market specific. That’s less true in our power systems business where we’ve got tens of thousands of customers, whereas in our civil aerospace business, we’ve got tens to hundreds of customers.
Exchange rates are very important in forecasting and require a lot of focus on hedging positions.
It’s very much on a customer by customer basis as they have different levels of demand and require different forecasts. The other thing we think very hard about is—and people don’t talk about this very much—is exchange rates. In the aerospace business, going from launch of a product to net cash could take 10 or 15 years which can create all sorts of problems. So exchange rates are very important in forecasting and require a lot of focus on hedging positions.
Andrew: Can you talk about how Rolls Royce approach data and the Internet of Things?
This is absolutely core. Some people would argue that the aerospace industry, whether military or civil, has been at the forefront of data insight. For example, Rolls-Royce has had for some time what we call engine health monitoring. Real-time data comes from the engines, it’s monitored, typically in Derby [Rolls Royce plant in England] where there’s a big Customer Service Center that feeds insights back to the airline, and sometimes the plane itself if there are any issues that need attention.
We never call it Big Data these days, but we’ve been at the leading edge of it for quite some time.
We never call it Big Data these days, but we’ve been at the leading edge of it for quite some time. The aerospace industry has always been pretty sophisticated when it comes to using data, predictive analytics, and what’s now called the Internet of Things.
The good news for us is that we’re culturally very, very comfortable with big data sets and have had to work with them for forty or fifty years so it’s not such a big cultural or technical challenge for us as it is for other industries. Overall, the opportunities for efficiency gains, quality monitoring, and feedback are absolutely enormous. I’m absolutely in the camp that IoT and Big Data are really going to be transformational.
Andrew: Is it fair to say Rolls-Royce has a data-driven culture?
Ian: Yes. The whole industry and the company is data-driven and always has been. I would say whereas other companies are trying to figure how to develop a data culture, we already have it. Most engineering-based businesses are very respectful of data—that’s the reality when a company is composed of scientists and engineers.
AI is necessary to help you navigate and make sense of all the data that you hold.
I think the biggest challenge is the explosion of data and the analytical capability to make sense of it. That’s not a cultural issue as much as a technical issue. The culture is there, so the main challenge for us is developing the analytical skills to make sense of all the data we have. For us, getting meaningful analysis from this enormous quantity of information is key. I imagine a lot of companies are overwhelmed just seeing the amount of data they have, let alone derive insight from it. And that’s where AI is going to have a big impact because AI is necessary to help you navigate and make sense of all the data that you hold.
You need people who can challenge the output of data–just because a sophisticated algorithm produced it doesn’t mean it’s accurate or useful.
Now remember a lot of the data may be wrong or it may be misleading or programmed wrong. You’ve always got to be very careful about the risks that go with big data. You need people who can challenge the output of data–just because a sophisticated algorithm produced it doesn’t mean it’s accurate or useful.
Andrew: Is your planning team embracing predictive/data analytics or do you have a separate analytics team?
Ian: We have planning and data teams across all our functions, in engineering, in new products and technology. They all have their own planning and data teams. Data and predictive analytics I would say, need to be core competencies. It’s got to go right across the company. It’s a foundational skill like finance or teamwork. Certainly, our planning group is very well versed in this we are looking to distribute the capability right across the company.
Andrew: There is a fear that AI will makes many roles obsolete. Do you feel this is true, or will roles simply change?
Ian: The answer could be both yes or no to both those questions. There is no question in my mind that it is going to displace anything that’s capable of replication, whether it’s white-collar or blue-collar work. Anything that’s capable of replication is potentially something that can be done better and more cheaply with the use of AI techniques.
Having said that, and it’s like with Industrial Revolution, or the Agrarian Revolution or the data revolution, you’re going to see a massively increased demand for new jobs as well. The bigger issue is not destruction of jobs, there’ll be creation of jobs too, but it’s actually changing the skill mix of the company and its people. People need to have the skills to move into the new world. We’ve talked a lot about analytics—what we haven’t talked about is the move from products to solutions, which is pervasive in most industries. That requires different skills and new people.
Andrew: I understand that Rolls-Royce has dozens of plants globally. Is that strategic?
Ian: We have a lot of plants because we’re in a number of different industries — power systems, defense and civil aerospace. The number and spread of our plants is a function of our business needs but I think having some geographic diversity in our manufacturing footprint is both desirable and necessary. Necessary because increasingly, if you sell in large volume to a particular country, they expect to have a share of the value-added employment. It’s also logistically helpful and helps with risk management.
Andrew: As a business leader, what advice would you give to young professionals looking to reach the C-suite over the next decade?
Ian: I think having ambition to be in the C-suite is good. The thing I observe about young people is they’re often interested in the next thing rather than the current thing. I sometimes think you can spend too much time calculating how to get to the C-suite where often the best way is to do your job really well, have people think that you’re doing it really well, build relationships, build respect, and then usually advancement is an output of that rather than a goal. It may sound very corny and old fashioned and perhaps it is, but doing your current job really well, building relationships and taking every chance to impress is still very good advice. It’s quite difficult to plot 10 or 15 years ahead these days but it’s quite easy for me to see who’s going to be successful based on how well they do their jobs and how well they interact with colleagues.
Andrew: In an age characterized by Millennials who have a very different view of life and the work, does business leadership need to evolve?
Ian: I get annoyed about all this talk about Millenials and the X generation, the Y generation and the baby boomers. I actually think that there’s much more commonality than difference between the current generation and say, my generation, in terms of fundamental values and ambitions. The younger generation has grown up in a different world with technology and social media but I’m not so sure that the fundamental human, emotional and psychological needs and aspirations are that much different.
Retreating to tired old labels like Millenials I think Is very sloppy thinking.
People talk about Millenials as though they are billions of people who all think and behave the same and I just don’t think that’s true at all. I find it a very lazy and unhelpful characterization. What we need to ask is what do people reasonably expect? What is true is that expectations are very different now, I get that, people don’t expect to have a job for life here as in the past, they want to do interesting work, and they expect to progress fast. I think these are all things that can be managed in a micro-sense rather than retreating to tired old labels like Millenials. I think it’s very sloppy thinking.
When I was at McKinsey, I spent a lot of time talking to young people about what they want, and it’s all very familiar and understandable—it’s just the context in which they’re doing it is very different. Back in the 60s we didn’t even have computers, and in one sense that makes life today very different, but fundamental human needs haven’t changed.
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