The chart on the next page says it all. After rising to an estimated $1.66 trillion in 2000, total spending among the nation's Top 250 purchasing and supply management organizations plunged to an estimated $1.41 trillion in 2001. Much of this is attributable to the recession that struck in the latter half of last year-lower revenues simply meant fewer buys. But there's another force at work here as well: intense corporate cost cutting. Unable to raise prices and needing to please increasingly demanding investors, top brass at the nation's biggest companies have been making some very public promises to lower costs and they're placing a big chunk of the burden on their purchasing and supply chain management organizations.

Last spring, Ford Motor Co. outlined a plan to cut its cost per vehicle by an average $700 by 2005. To underscore its sincerity, the Big Three automaker shook up its sourcing ranks, ousting global purchasing leader Carlos Mazzorin and shifting the responsibilities to David Thursfield, chairman, Ford Europe, a known cost cutter who is credited with leading Ford's comeback over there.

Top execs at Pittsburgh-based Alcoa, which makes aluminum and aluminum products, have promised investors $1 billion worth of cost reductions by 2003. VP of procurement Christie Breves and her North American Lead Team are working to deliver a big piece of that goal (PUR: Sept. 5, '02; p. 30).

When Dow Chemical announced its intent to acquire Union Carbide back in February 1999, its leaders promised Wall Street $500 million in savings, a fifth of which would come from strategic sourcing of feedstocks, goods and services. After the acquisition went through, Dow's CEO Michael Parker upped the synergy objective to $1.1 billion and boosted purchasing's goal to $150 million over eight quarters.

Stories like these are legion. A recent PURCHASING poll of top supply execs at Fortune 1000 companies finds 84% listing direct-materials cost reduction among the major objectives their executive management teams are emphasizing at this time. Seventy two percent list direct-materials cost reduction among their top three priorities for the coming year.

It doesn't stop there. More than half (56%) of the supply execs polled by PURCHASING say they are also making a priority of pursuing cost reductions on indirect purchases (things like MRO, office supplies, travel and information technology) and services buys as well. Roughly one in four cite this among the top three objectives that management has set for them.

Other key priorities for purchasing and supply management at this time include corporate demand aggregation, cash flow improvement, implementation of Internet-based technology, outsourcing, improved inventory management, and more sourcing with low-cost foreign producers.

Corporate demand aggregation is really a first step toward lowering costs for direct, indirect and services buys. That 25% of the top supply execs polled by PURCHASING cite it as a top-three priority hints at the great, untapped potential for the nation's largest companies to reduce their costs through less fragmented spending.

'We have been doing strategic sourcing here for five years,' says Ernest Gabbard, strategic sourcing director for Allegheny Technologies Inc., a producer of stainless and other specialty metals. 'What has changed recently is the amount of attention and support we are receiving from our top executives. Before, we had to justify every strategic sourcing initiative. Now, we have to justify not doing one for any major spend.'

Eaton Corp. is another example. Toward the end of 2000, the $7.3 billion diversified industrial company created a new structure that would allow it to become even more effective in its dealings with suppliers. Under the new structure, Stanley Mickens, vice president of supplier resource management for Eaton, reports to Steve Buente, senior VP in charge of Eaton's Automotive group. Reporting to Mickens is a Supplier Resource Management Corporate Initiatives Group (SRM-CIG) that addresses things like strategic commodity management, integrated MRO, inbound logistics, e-commerce, minority supplier development, supplier quality assurance, and sourcing in low cost countries (primarily in Asia). Also reporting to Mickens are three regional Supplier Resource Management (SRM) directors, one for North America, one for Europe and one for Asia. And, making the connection between Mickens' group and Eaton's four divisions are four operating SRM executives. These execs report jointly to Mickens and to the senior operating VPs for their respective divisions.

Eaton's director of commodity management in the Corporate Initiatives Group has a team of strategic commodity managers who spend their time establishing corporatewide commodity strategies and seeking opportunities for collaborative contracts among Eaton's many plants and locations. But Mickens says that can be more difficult than it sounds. 'Our spend visibility tool might, for example, identify a collaboration opportunity for aluminum die castings. But when we dig into the enterprise resource planning (ERP) data, which is more granular, we may find that the aluminum die-casting spend does not lend itself to a single collaboration. We may find ourselves subdividing into several different collaborative arrangements.'

In 2001, Eaton spent in the neighborhood of $3.8 billion. So far, according to Mickens, the company has pushed its proportion of collaborative contracts up to around 20%. He expects that number to double next year.

Houston, Texas-based Cooper Industries is another example of a highly decentralized company that has recently started to pursue strategic leverage on the supply side.

The $4.2-billion maker of electrical products and tools operates more than 100 manufacturing locations on five continents and spends somewhere in the vicinity of $1.5 billion each year. Three years ago, according to Sourcing Director Robert Foster, the company did not typically even leverage its spend within business divisions. 'Every plant was doing its own thing,' he says. Then, along came a software company (i2 Technologies) with a promise to give Cooper an eagle's eye view of how much it was spending each year, on what, and with whom. 'We saw the software as a good investment,' says Foster, 'but only if we could build an organization that could act on the information once we had it.'

So Cooper's strategic sourcing group-the only nontraditional centralized function in the entire company-was born. Five commodity directors lead the group, one each for mechanical commodities (Foster), electrical commodities, raw materials and transportation, MRO/indirect, and plastics. One commodity specialist supports each commodity director.

Creation of the strategic sourcing group represented a 10% increase in corporate headcount at Cooper Industries, which, at the time, was around 200 people, so there needed to be a high return on the investment. Initially, Cooper's CEO promised analysts a $50 million return within three years while the internal goal was really to reach $50 million in two years. 'He has since ratcheted up the published goal to $75 million,' Foster says. A somewhat higher internal savings goal hedges the risk that 'not every deal will work out in the timeframe we have planned.'

In its first year of existence, Cooper's strategic sourcing group, which includes team members from each division, delivered $9 million in savings. 'We staffed the organization, built the business processes and filled the pipeline that year,' Foster says. In 2001, the savings figure soared to $50 million. And for 2002, he says, the group is on track to make the $75 million savings goal.

Yet another example of greater centralization in purchasing is Sonoco, a $2.6-billion industrial and consumer packaging interest based in Hartsville, S.C. The hundred-year-old company has augmented its growth by acquisitions and has often located its production facilities near its customers, which means operating some 300 plants around the world.

Until three years ago, the company had made virtually no attempt to pool its $1.6 billion in annual purchases across business units or locations. But, CEO Harris E. DeLoach, Jr. saw great potential in a more strategic approach to sourcing, so he initiated a centralization process and eventually recruited Terry Sueltman (a veteran of Honeywell) for the post of vice president, corporate supply management.

Sueltman, who reports directly to DeLoach, has a charter 'to be involved with every dollar the company spends and create a world-class operation.' The initial focus, Sueltman says, was to 'focus on North America.' His group is now turning its focus to fostering cooperation with Europe and other smaller locations around the world.

Big companies' big drives to lower spending on raw materials and other goods and services are leading many into foreign lands as well, especially China.

A spokesperson for IBM says the company will 'continue strategic sourcing (via global councils) and use of emerging-market suppliers to drive cost-of-acquisition reductions.' Meantime, Mickens at Eaton Corp. names among his Corporate Initiatives Group an 'Asia program manager' who is 'responsible for driving the push to low cost sourcing throughout Asia.'

Stanley Works, based in New Britain, Conn., has gone so far as to locate its Vice President of Purchasing, Deven Arora, at an international purchasing office in Taipei. This is to prove the company is 'serious about buying from low-cost Asian sources,' according to a spokesperson. The spokesperson says Stanley has committed to increasing its purchasing volume in China to 60% of its estimated $1.3 billion annual spend by the end of this year.

Cooper Industries has invested in an Asian sourcing center in Shanghai, China that is staffed mostly by Asian engineers. Says Foster, 'We didn't feel comfortable including offshore suppliers in our strategic bidding events until we had 'feet on the ground' to qualify them and to pay attention to their performance over time. It's a very long supply chain, so we can't afford to find out the products are no good after we've moved them 3,000 miles.'

Foster says each Cooper division has been asked to identify parts that might feasibly be sourced in Asia. 'We're looking at purchased goods like completed hand tools, electrical components, printed wiring boards and molded plastics-typically high volume, simpler parts.' Typically, Foster adds, the company is looking for a minimum 20% landed cost savings before it chooses an Asian source. That accounts for qualification costs, logistics, warehousing, the cost of operating Cooper's Asian sourcing center, plus a factor for costs that are more difficult to capture, such as miscellaneous travel or the cost of turning a container around.

Robert Greenslade, vice president of global purchasing for Xerox's Document Systems & Solutions Group, says the company, which typically sees its product prices decline on curve of about 8-10% per year, has little choice but to source heavily in Asia and other low-cost countries. 'We are competing against some very aggressive companies that do a large part of their sourcing in Asia.'

While Xerox has long employed quality-focused personnel in Asia, Greenslade says the company now has full sourcing capabilities there as well. 'We have roughly 15 people operating out of Hong Kong with others situated in places like Shanghai, Korea and Singapore. They have access to our cost engineering tools and work on new products from the design stage onward.'

To decide where it will buy a part or subassembly, Xerox uses a cost engineering tool it has created to tear down new product designs and determine the lowest theoretical cost for producing the product. Calculations are based on real data that Xerox has gathered on global suppliers' capabilities and cost structures (things like tooling, labor, overhead, margin and freight) through its supplier qualification and quoting processes. According to Greenslade, the system essentially asks (and answers) the question: What will it cost to procure the best-of-breed design for a particular part or subassembly out of the lowest-cost country? 'We create a theoretical estimate of what we should pay,' Greenslade says. 'It becomes the target that we design and buy to. We don't typically hit the target straightaway, but our goal is to close the gap to benchmark.'

Greenslade says the company currently spends around 40% of its dollars in Asia, but includes other low-cost countries (such as the Czech Republic) in its calculations as well.

Cash flow improvement ranks surprisingly high on the list of most popular objectives that top execs are setting for their procurement and supply management organizations at this time. Half the purchasing execs polled by PURCHASING say it's on their list of objectives and one in four place it among their top three priorities.

For purchasing and supply management, the push to improve cash flow typically translates into a push for longer payment terms with suppliers, although inventory shifting (through JIT, consignment, etc.) certainly falls under the cash-flow umbrella as well.

One West Coast supply exec reports 'pushing payment terms to the breaking point.'

Sonoco's Sueltman says payment terms are a big piece of the cash flow push, but not the whole picture. 'When we buy a piece of capital equipment or software, we are typically asked to make progress payments: 25% with the purchase order, another 25% after 90 days, etc. We're working to eliminate many of those payments because we don't want to be funding a supplier's work-in-progress.' The rationale: 'If they can't afford to fund their own work-in-progress, they probably are not financially stable enough to be our suppliers,' Sueltman says. 'And if they're demanding progress payments to hedge a cancellation risk, we'll do what we can to reduce their perception of risk.'

There is also the matter, according to Sueltman, of cleaning up internal payables systems to ensure the company actually benefits from longer payment terms by not paying too soon. 'In some cases where we had negotiated a 45-day payment term, our system was still paying in 30 days or sooner. We had to work with finance and IT to improve our internal controls as well.'

The challenge of making big, decentralized conglomerates behave more like single companies when it comes to sourcing and supply management requires a great deal of credibility on the part of the supply management organization. And most companies that are moving successfully to more centrally-controlled buying are doing some version of the following four things:

• Staffing their organizations with experienced, financially savvy, and otherwise highly capable personnel (typically people with MBA degrees and/or degrees in engineering and supply chain management).
• Soliciting detailed input from the business units and locations they are representing,
• Applying standard processes and more 'scientific' approaches to sourcing decisions, and
• Carefully validating any cost savings they are claiming.

This last point is particularly important at a time when a number of high-profile corporate execs are being carted off to prison for propping up stock prices-at least long enough to cash out their options-by portraying their companies as better off financially than they really are.

While much of the corporate fraud brouhaha has focused on overstated earnings, it raises the stakes considerably on the cost-reporting side as well. The big challenge for supply execs is to report cost savings numbers that can withstand the tough scrutiny they are bound to undergo in financial markets but which also capture the benefits of investing in such things as early supplier involvement in design, supplier training and development for quality control and lean manufacturing, etc.

Emerging strategies in this vein involve forging closer bonds between companies' purchasing and finance organizations and bringing qualified financial personnel right into the purchasing and supply management function.

Sueltman says he asked Sonoco's finance organization to dedicate personnel to tracking the savings associated with his group's strategic sourcing initiatives. 'I wanted the reporting to come out of finance and not supply.' For now, he says, the reporting focuses on only year-over-year reductions but notes the company is 'looking for ways to be more sophisticated' so the reporting will reflect, with integrity, the impact of things like productivity and cash flow improvements as well.

Gabbard of Allegheny Technologies Inc. (ATI) stresses the credibility issue as well. 'We have gone out of our way to establish detailed metrics so we can have confidence in the savings numbers we report.' While the company's organization dictates that Gabbard's group perform initial calculations, he says the company's business units are asked to either confirm or refute purchasing's numbers. 'This is important, because we don't always have access to information about what they were paying before a corporate deal went into effect or about what is going to be happening commercially within the business unit that might affect their demand going forward,' Gabbard says.

Once the savings data are confirmed, he adds, ATI's business units become responsible for incorporating projected savings from strategic sourcing initiatives into their budgets.

Reporting for this story was done by William Atkinson, Susan Avery, Jim Carbone, David Hannon, Jennifer Eno, Anne Millen Porter, Gina Roos, Doug Smock, Tom Stundza and Ryan Vemmer.

Editor's note: For examples of how companies like BellSouth, DuPont, and The Walt Disney Corp. are approaching their reporting of cost savings, see 'Spend a little, save a lot!' in the archives .

(Full Top 250 listing with industry averages available here.)