Gazing at their balance sheets, financial staffers at the Hilton Hotels world headquarters in Beverly Hills, Calif. no doubt smile when they see the $150 million in savings the company's purchasing and supply chain staff have brought in over the last seven years through strategic sourcing and regionally developed programs.

But when they spot the $5-7 million in revenue the same 147-person department has brought to the corporation's bottom line each year, those smiles widen into ear-to-ear grins.

Purchasing at Hilton has turned the traditional notion of procurement as a cost center on its head. “We in the supply chain organization are actually a separately incorporated group and act as a business, with income, balance sheet and cash-flow statements,” says Anthony Nieves, senior vice president of supply management.

Through a variety of means, including contract-management fees, manufacturer volume incentives, purchasing fees, cash discounts, interest income and others, the supply-management team brings money into the company at the same time that it reduces overall costs.

“Basically,” says Nieves, “it doesn't cost Hilton anything to have a purchasing organization. We are cost neutral.”

Of course, bringing in more revenue than expenses is not the goal of the purchasing and supply management team. “We are first and foremost a purchasing organization, managing a $2 billion annual spend, and our goal is to break even on our department expenses,” Nieves says. But in finding ways to actually make money to offset expenses for the organization, they may be on the leading edge of a trend that at the very least could result in a re-thinking of purchasing and supply chain organizational structures.

The idea of purchasing as a profit center isn't entirely new. In the 1980s, Lance Dixon, then head of purchasing at Bose Corp. in Framingham, Mass., convinced senior management at the company to offer incentive pay to buyers in connection with attained savings. Dixon outlined standard costs, froze them and measured his staff's performance against how they reduced those costs. Some of those savings went back to the purchasing department so Dixon could use them to, among other things, augment staffing. While the program isn't in effect any more, Dixon, now retired, says it showed that management initiatives that are routine in sales and marketing departments, such as incentives, can work to improve performance in purchasing too.

Purchasing consortiums often help members earn money through taking advantage of group discounts.

And purchasing's work with suppliers often yields ideas that can later bolster product-development efforts. Says consultant Tim Underhill, president of Phoenix-based Strategic Business Solutions, the technical support suppliers provide can decrease downtime, drive down assets like inventory and floor space and ultimately help companies produce more product for sale. In fact, he says, 60% of innovation comes from suppliers.

It's a two-way street, of course. Purchasing can help suppliers be more profitable too—or at least give them the opportunity to find new customers. Today, Dallas-based American Airlines makes it possible for suppliers to advertise their products or services on airplanes and in American's clubs. Vice President of Purchasing John MacLean says the airline has a “skunk works” group that works with marketing to sell ad space or other promotions to suppliers.

American also has an arrangement with suppliers who check bags at airports for a $2 fee. In a three-year program the company worked out with the suppliers, they each split the fee.

Those two programs have brought the airline over $10 million in revenue. The money goes to the operating departments rather than the purchasing budget. “It's a value-added service we provide,” says MacLean.

At medical device manufacturer Boston Scientific in Natick, Mass, the supply management organization provides business intelligence to senior management, especially on commodities used in manufacturing. “Markets are extremely volatile, and supply management is often the first to identify market changes that may have a significant impact on global operations,” says Karen Weinstein-Millson, vice president of global sourcing.

But, Nieves' programs at Hilton are unique in their formal organizational structure. He has his own finance department with a senior director who reports on a dotted line to corporate finance, and even has his own marketing vice president responsible for getting the word out to the hotels about the value purchasing and supply management can bring to them.

Hilton supply management negotiates and implements contracts for its own hotels, those it manages for others and some of its franchise hotels with suppliers of hospitality products and services, including food, beverage, housekeeping, computers and office supplies, furniture, uniform and other materials. Nieves' team assesses a contract-administration fee of about one percent or less.

Hilton also has purchasing fees. Since 1967, the hotel chain has had dealer status with all the major hotel-equipment manufacturers, Nieves tells Purchasing. “We act as merchant of record for all of our hotels, acting as a stockless distributor,” he says. Supply management takes title to the supplies on paper, adds a small markup and has the supplier drop ship the equipment directly to the hotels. The arrangement enables individual hotels to take advantage of low prices that the supply management organization has negotiated and eliminates intermediary costs. Hilton guarantees the manufacturer timely payment, and the manufacturer knows it has one customer of record.

The “wholesaler” arrangement is especially important when buying large capital equipment such as laundry equipment, and for buying furniture, fixtures and equipment for new hotels or renovations. For the latter, Nieves and his team track and manage all projects from beginning to end with their own project management software, SupplyTRACK.

That wholesale model comes naturally to Nieves. He was a wholesale distributor in the hospitality industry before he joined the Hilton organization 20 years ago. At Hilton, he employs a break-even discipline.

Can Hilton's model work in manufacturing companies? Nieves says—maybe. “To get started, you have to communicate openly with your strategic suppliers and fully explain the model,” he says. “We are totally open with our suppliers, and that's how you have to be.” Creative thinking is another key, he adds. “You have to work to get past the old culture and bureaucratic hurdles and think differently.”