Turning procurement into a profit centre has become a staple of purchasing theory, but real-life examples of profitable purchasing are somewhat rarer. One notable exception is aero-engine and industrial group Rolls-Royce. It has revolutionised the performance of its non-production purchasing and created Sourcerer, a business-to-business company that is successfully exploiting the latest e-commerce techniques.

In the early 1990s, Rolls-Royce reorganised its purchasing practices and was able to pull together comprehensive data on the indirect spend attached to its engines.

At the time, spending on non-capital indirect goods was £370 million, which, at 30 per cent of the total outlay on manufacturing, was typical for the industry. But Rolls-Royce had 13,000 suppliers providing 97,000 items to 110 locations and was holding £20 million-worth of stock with a turnover of less than 2 per cent a year.

There was also an average 56-day gap between identifying the need for a non-stock item and receiving it. Some attempt had been made at instituting group contracts, but in practice local buying offices used these as benchmarks for local deals.

Indirect expenditure was a big target for making savings and improving efficiency. Gerald O’Keane, previously director of procurement at Railtrack, was recruited as Sourcerer’s managing director in 1996. By 1998, the indirect purchasing department had been relaunched as Sourcerer, a wholly owned Rolls-Royce subsidiary.

Since then, the company has moved into the large external market of airlines and engineers that maintain and service Rolls-Royce’s products worldwide. Sourcerer now has the potential to become a significant player in the business-to-business e-commerce market in the manufacturing sector and generate profits for its parent.

The first phase involved aggregating spending power through centralising purchasing and contracts activity; standardising stock and procurement systems and rationalising both suppliers and products. Over two years the results were dramatic: indirect spend was reduced to £180 million, or just 14 per cent of the total, £4 million was taken out of inventory, and purchasing was focused on 180 key suppliers that supply more than 80 per cent of requirements.

Regional purchasing units were replaced by local customer support teams, suppressing renegade purchasing but retaining the ability to procure site-specific items. O’Keane says: “This process of leveraging buying power and rationalising and standardising products never finishes - it’s a question of constantly eliminating differences that have no business justification.”

Price reduction was not enough, however. O’Keane and his team were determined to attack the total cost of acquisition across the full supply chain, using e-procurement techniques. “Our view of e-procurement starts with the user,” O’Keane says. “If a desk or a shopfloor needs something, that’s where demand starts.” Sourcerer took the core procurement contracts and converted them into an electronic catalogue, now with over 500,000 items covering more than 80 per cent of demands.

Users can search the catalogue, select items and confirm orders from their desktop. The system holds expenditure levels and budget thresholds pre-agreed with department managers and local financial controllers. Orders are passed automatically to Sourcerer’s AS400 system, which allocates an order to a contract and supplier on the database, and sends the order on by automatic fax or web-based electronic data interchange.

The effect has been dramatic - 80 per cent of items can be delivered in two days or less. Other benefits include consolidated invoicing, with a detailed breakdown of items, dates and codes that did not exist before. Users can now be charged for what they consume, rather than on a fixed percentage of total stores costs, and so have an incentive to reduce usage. At the same time, they can be confident that their order is being routed to the most economical source.

Inventory levels continue to fall. “Total inventory in the system is down by 75 per cent - we track it every month and it continues to fall,” says O’Keane. The new procedures have revealed squirrel stores, the unofficial stocks that every self-respecting supervisor typically maintains.

Steve Ryder, Sourcerer’s head of marketing and business development, says: “The initial management reaction was to get rid of squirrel stores, but it was realised that line operators know they will get kicked if a machine is down, so they will protect that machine at all costs. A better target is to retain and formalise these local stores, supported by direct line delivery, and downsize main stores instead.”

Besides the electronic catalogue, Sourcerer also traces suppliers for specialised tools and other consumables, plus services from security to utility contracts. This gives Sourcerer two revenue streams from its £175 million spend: consumables, sold on to Rolls-Royce at a mark-up and to external customers at a margin; and the fees from services and utilities channelled through Sourcerer. Since its incorporation, Sourcerer’s market has expanded internally with the acquisition by Rolls-Royce of Allison Engine Company (US) and Vickers, as well as the Rolls-Royce joint venture with BMW.

There are 300 external customers around the world, predominantly in the aero-engine overhaul business, but O’Keane has ambitious plans to widen the customer base to, for example, key Rolls-Royce suppliers and sub-contractors, and other partners in the Supply Chain Relationship in Aerospace (Scria) initiative. In the process, Sourcerer will continue its move to become a complete e-business.

O’Keane explains that whereas Rolls-Royce’s internal customers can access Sourcerer over the group’s local network, each external customer needs to install Sourcerer On-Line. “We are discussing the investment opportunities in web enablement. Talking to larger potential external customers, our business concept is exactly what they want, but our tool isn’t.”

Sourcerer has been in discussions with e-commerce players from Microsoft and Commerce One to BT. But O’Keane says: “We are trying to find a pathway where the web technology we desire can be harnessed to our catalogue to provide further value for Rolls-Royce. In our view, existing and planned portals will coalesce, with a single portal dominating a field like aerospace. Suppliers and customers will find it more effective and convenient to deal though that portal. But this will involve new business models and associated revenue streams.”

“Within a few years,” adds Ryder, “it won’t be possible to put margin on product as per our current revenue stream, but by creating more information on buying patterns and becoming a data-mining infomediary we can create further added-value services and hence new revenue streams.”

The vision is hardly unique to Sourcerer, but Ryder points out: “Microsoft reckons our first-generation system is the largest, in transaction terms, in Europe - and we’re making a profit.

“The fact that we have the expertise to allow us to implement new ideas and processes in a portal-dominated world, and that we are trading successfully today in electronic format, makes us very attractive to the major players. We can lever our core competences to attract the biggest brands in the marketplace.”

Sam Tulip is a freelance journalist specialising in supply chain issues