PracticeConsulting‘E-commerce is an act of faith’

'E-commerce is an act of faith'

It was the quiet period just after Christmas last year, and Tony Rice, supply chain management director at defence giant BAE Systems, found himself heading west on a long-haul transatlantic flight. He was in search of the industrial e-revolution.

As colleagues sloped off for early ski holidays or to country retreats to work off the millennium excesses, Rice spent seven days moving from boardroom to boardroom of industrial America talking about e-business and the future of the old economy.

‘In the States the work ethic seems greater at these times of the year,’ Rice jokes. ‘I spent the week finding out what was actually happening with cross-industry online exchanges.’

Just two months earlier, the 48-year-old management accountant had been appointed group director of the new BAE Systems multibillion pound supply chain management operation, following the merger of British Aerospace with Marconi Electronic Systems.

Rice, prior to the merger, had headed up British Aerospace’s commercial aircraft division as general manager and says he had no previous experience of supply chain management ‘whatsoever’.

‘I discovered that IT and systems issues were essentially tactical, and that we needed a strategic approach to e-commerce,’ he says. ‘E-commerce is not about IT – it’s about businesses and culture change. And I came back convinced of the need to change.’

Back in the BAE Systems boardroom, Rice shared his conclusions from his fact-finding mission and sparked the debate about getting an e-business strategy up and running in the merger of two old economy experts in the hi-tech sharp end of defence and aviation.

‘Like most smoke-stack companies there has been a fair degree of resistance to change,’ he says. ‘But chairman Sir Dick Evans and chief executive John Weston both have a cutting-edge understanding of IT and have pushed us to move fast in this area.’

Six months later BAE signed up as one of four founding partners to, the aerospace and defence industry’s largest business-to-business exchange along with manufacturing giants Boeing, Lockheed Martin and Raytheon.

Their joint global procurement outlay is in the region of $71bn.

The day-to-day challenge

Despite the global scale of the new venture, the former corporate treasurer for 15 years with both British Gas and BAE keeps his eyes on the immediate task ahead. He stresses the day-to-day challenge of instilling a business culture change within a large manufacturing organisation. ‘On the operator management level, everyone is struggling with the normal issues of management, such as delivery to programme and specification,’ he says. ‘The culture change is difficult to effect – and we all know that e-commerce is to a certain extent an act of faith at the front end until the benefits start to flow.’

A year down the line and Rice is pragmatic about the challenge ahead of him at a global industrial giant that commands a £36.6bn order book for its aircraft, ships and military systems, and has nine home markets worldwide employing more than 100,000 people.

‘Our e-business strategy is work in progress rather than work undergone’, he says. ‘We’re one year along on a voyage that is going to take five or six years to complete. The internet is a global entity and fits very well with a global company with global supply sources penetrating local markets.’

When he started last November, he says, there was a huge opportunity frankly going begging. ‘We weren’t really using our clout in terms of cross-country firepower’, he says.

Despite new transaction IT ordered within a few weeks of starting his role, he says the scale of the operation means that he does not know how many transactions are made each year.

‘It could be anything between one million and a million and a half a year’, he says. ‘I don’t know, because I don’t have the systems yet to tell me.’

The internet will eventually give him this power, and Rice gives the example of airframe and wing fastener procurement as an area that will benefit from the web.

‘We were buying 140 different types of fastener,’ he reveals. ‘We found one instance where we were paying 10p for a fastener in one business and #20 for the same fastener in another business. We weren’t collecting together the information, we were competing between our businesses with that supplier for their capacity.’

Rice says duplication has already been eliminated and the range of fasteners reduced to 50 sources, with an aim to go down to a dozen or less.

‘E-commerce can drive the standardisation of essential items,’ he says.

‘We have a system that allows our suppliers to plan an even level of production and therefore cut costs come down.

‘The thing about the internet is that at its core is interoperability, because all these guys working on the internet aren’t thinking about doing something with ICI and BAE Systems, but hitting a mass market overnight.

‘The universal geography of the internet is by definition based on a simple system that works and can be applied everywhere,’ he enthuses.

‘And that to me is immensely attractive.’

So how will the internet reshape his sector?

‘The defence and avionics industry will be altered on the sell side rather than buy side,’ he says. ‘The buy side creates a standard technology within our industry, and it creates the user-customer base. The sell side is where the world is going to change more radically – but you need the buy side to get there.’

Although all suppliers will be channelled through, BAE won’t procure all its supplies through the online site, but will administer all its deals online. ‘An e-procurement exchange in itself has no equity, its real value is to the users – and it’s through follow-on services that we are going to find the real equity value.’

Rice’s internet vision is also part of BAE’s strategy to move from supplying 50% of original equipment manufacturer (OEM) products for the MoD to expanding its product support activity, which at the moment accounts for only eight per cent of the group’s total work.

‘If you’re going to attack that market you need very good systems to ensure continuity of supply for spares and support – and customers need confidence because they’ve got mission critical products.

‘Web and browser-based technology with ready access anywhere is a very attractive means of ensuring transparency in the supply chain. The internet can be used by a guy in the reserve trenches to order in supplies on a just in time basis or to keep planes in the air for 18-hours non-stop.

You can’t do that with the old system, because systems couldn’t talk to each other.’

He illustrates the point with a conversation he had over a beer last year with colleagues in the States. ‘The guy from Raytheon said ‘We’re going to invest $100m plus in SAP – and we think exostar will enhance that. The guy from Lockhead said hundreds of millions in SAP and we think exostar will replace that. And I said we’ve invested hundreds of millions of dollars in SAP and we just want to connect to it.’

He argues that new technology can replace systems like SAP, and points to CommerceOne working with SAP, and Invensys moving on Baan. He believes these new and old technologies will soon marry up to create 21st century automated factories driven by information specification through the web.

‘If the internet hadn’t come along, we’d have had to invent it, because you need good IT systems to transparently show the highly complex movement from material to assembly to deliver high-value added products.’

Web security is one area where, like others in the industry, he is looking for rapid advances.

‘Safe data transmission is a major issue in the defence industry,’ he says. ‘I would take a lot of convincing that the internet can be a secure environment, because there are so many smart people out there who regularly hack for fun.

‘If you start to introduce encryption, you start to slow the pace of the internet. The trick is to put what you need behind a fire wall and make it highly secure.’

A year on, is the circumspect former treasurer a full convert to the claims of the e-revolution? ‘I bought the vision a while ago,’ he says.

‘But, I’m still to see the benefit – for me until the numbers in our bottom line go 15% to 20% cost down, I will be slightly cynical.

‘However, the concept and vision is compelling and I’m absolutely hooked on to that. What I’m finding out is how we get from the vision to the reality – and, as always, it’s not as easy as people think.’


BAE Systems and three of its global US-based competitors last month started to trade through an online exchange portal set up to cater for the procurement needs of the $400bn aerospace and defence industry.

Exostar is an independently incorporated e-marketplace designed to increase the efficiency of supply chain transactions and improve design across the industry.

Industrial giants Boeing, Lockheed Martin and Raytheon announced the web-based alliance in March and have a collective $71bn exchange online.

The four bring more than 37,000 suppliers worldwide, hundreds of airlines and nearly every national government together through the Exostar portal.

BAE systems spend $11bn annually in goods and services, while Boeing buys $38bn, Lockheed Martin purchases $13bn and Raytheon spends $9bn.

The international HQ of Exostar is based in Washington DC. Kent Swanson, Exostar’s acting chief executive officer and a partner at Andersen Consulting, said: ‘Exostar is one of the most visible examples of an e-marketplace bringing together a global industry.’

Commerce One Inc has provided the e-marketplace technology, while business integrator and program manager, Andersen Consulting, designed, built and launched Exostar.

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