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T H E M c K I N S E Y Q U A R T E R LY 2 0 0 3 N U M B E R 3

Better purchasing
for auto suppliers
Russell Hensley, Zubin J. Irani, and
Aurobind Satpathy
Auto suppliers understand exactly what
steps to take to improve procurement
but thus far havent executed them.

KEVIN CURRY

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 suppliers costs. For a supplier with revenues of $2 billion, even a 5 percent reduction in the cost of
EXHIBIT 1

The earlier the better

Product-development time line
Leading automakers
purchasing departments involved

Ability to
control costs

Auto suppliers purchasing

departments involved

Concept

Auto suppliers deployment of

purchasing resources, percent

Design Development Launch

Time

36
Products in
production

Products
under design

64

Source: 2003 Original Equipment Suppliers Association (OESA)McKinsey survey of 50 OESA member companies
1

We conducted our research in 2003 in collaboration with the Original Equipment Suppliers
Association, whose 300-plus members broadly represent the North American automotivesupply industry. The study covered 50 of these companies, from large suppliers with more
than $5 billion in annual sales to some of the smallest.

BET TER PURCHASING FOR AUTO SUPPLIERS

direct and indirect goods2 would raise operating profits by 40 to 50 percent. Other ways of generating that kind of impacta 50 percent
increase in revenues, for example, or the elimination of 10 percent of
the workforceare much more extreme.
Our surveys most troubling message is that auto suppliers know what
they should be doing but simply cant do it. They agree that managing a
companys 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 crossfunctional 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)
EXHIBIT 2

Misplaced faith
Auto suppliers plan to more than double
e-procurement spending over the next 3 years . .

. . . and most of the industry plans to

invest in e-tools at similar or higher levels

E-procurement as share of purchasing

spending, percent
Direct materials
2003
2006

Planned investment in e-tools, percentage

of respondents
Dont know

Indirect materials

Lower level
6

20

31
60

50

Similar level

34

9
51

Higher level1

However, most of the industry is less than

satisfied with current e-procurement tools
Percentage of respondents

Satisfied

Neutral
34

37

16 13
Dont know

Dissatisfied

Particularly on tools for on-line auctions, on-line requests for quotes, databases to manage purchasing-department spending.
Source: 2003 Original Equipment Suppliers Association (OESA)McKinsey survey of 50 OESA member companies

Direct goods are the materials (such as chemicals, sheet metal, and stampings) that go
directly into products; indirect goods include the computers, tools, and travel that support
production.

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T H E M c K I N S E Y Q U A R T E R LY 2 0 0 3 N U M B E R 3

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 vitalit 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,
EXHIBIT 3
and only 13 percent say
Still an organizational backwater
they get innovative ideas
from their suppliers.
Percentage of respondents
Unlike leading automakers, auto suppliers dont
Purchasing is magnet for
Senior management views
top talent
purchasing as strategic function
involve their purchasing
Disagree
departments early
Agree
22
27
enough in the development of new products
73
78
(Exhibit 1).
Disagree
Agree

While suppliers do
expect to purchase sigPurchasing viewed as essential
Many key leaders in company
nificantly more goods
stepping-stone to senior roles
have had stint in purchasing
from manufacturers in
Agree
Agree
Asia and Eastern Europe
12
15
during the next three
years, upward of half
85
88
have no resources
Disagree
Disagree
deployed in these
regions. The suppliers
leading customers
Source: 2003 Original Equipment Suppliers Association (OESA)McKinsey survey of 50 OESA
member companies
havent made this mistakeand 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

BET TER PURCHASING FOR AUTO SUPPLIERS

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).
Automotive suppliers that build distinctive purchasing capabilities by
following the example of their leading customers could stand to increase
their profits significantly.

Russ Hensley and Zubin Irani are consultants in McKinseys Detroit office, where
Aurobind Satpathy is a principal.

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