During the past decade, many leading automakers have aggressively cut costs, assets, and processes from their supply chains, thus setting a new standard for managing their supplier relationships. Auto suppliers should be following suit because they badly need to prune costs from their own supply chains. But a new study¹ suggests that these companies have been slow to adopt leading-edge purchasing practices.

Auto suppliers typically make purchases in a less disciplined way than their customers, so their bottom lines are shrinking. Materials and services constitute more than half of an average supplier's costs. For a supplier with revenues of $2 billion, even a 5 percent reduction in the cost of direct and indirect goods² would raise operating profits by 40 to 50 percent. Other ways of generating that kind of impact—a 50 percent increase in revenues, for example, or the elimination of 10 percent of the workforce—are much more extreme.

Our survey's most troubling message is that auto suppliers know what they should be doing but simply can't do it. They agree that managing a company's aggregate spending in a more disciplined way and monitoring compliance with corporate standards are two hallmarks of good purchasing. More than half of the companies we surveyed have developed integrated sourcing strategies across their business units and use cross-functional teams to buy direct goods. But only 12 percent of these companies conduct clean-sheet cost buildups (calculations of exactly what products would cost to make), and only 27 percent conduct teardowns (analyses of their competitors' products to see how costs compare)—practices that are common among leading automakers. Furthermore, only a third of the suppliers adequately enforce corporate standards for indirect goods or use cross-functional teams to procure them.

A vast majority of suppliers also acknowledge that a close working relationship between buyers and sellers is vital—it can obviously speed up product-development cycles and restrain costs. But of the companies in our sample, only 28 percent hold regular workshops with their key suppliers, only 12 percent include their suppliers in projects to improve manufacturing productivity, and only 13 percent say they get innovative ideas from their suppliers. Unlike leading automakers, auto suppliers don't involve their purchasing departments early enough in the development of new products (Exhibit 1).

While suppliers do expect to purchase significantly more goods from manufacturers in Asia and Eastern Europe during the next three years, upward of half have no resources deployed in these regions. The suppliers' leading customers haven't made this mistake—and even the laggards are catching up quickly. Moreover, some auto suppliers still believe that IT tools will suddenly transform them into world-class purchasers. Of the companies we surveyed, 85 percent intend to invest at their present or higher levels in new software to automate procurement processes, though only about a third of these companies feel satisfied with their current IT purchasing systems (Exhibit 2).

Auto suppliers would be better served by beefing up their purchasing organizations with skilled managers. Most senior executives at auto supply companies view purchasing as a strategic function; indeed, as suppliers have learned firsthand from their customers, management experience and commitment are necessary parts of an effective purchasing strategy. But auto suppliers have yet to position purchasing as a stepping-stone to future prominence, so it fails to attract the most talented employees or to produce future corporate leaders (Exhibit 3). Auto-motive suppliers that build distinctive purchasing capabilities by following the example of their leading customers could stand to increase their profits significantly.