(FORTUNE Magazine) – For AT&T, it's an expressway to $1 billion in cost reduction by 1997, a crucial part of the phone giant's plan to stay on top in long distance. It's the route Larry Bossidy has chosen for revitalizing AlliedSignal. It's the highway on which Columbia/HCA is racing to dominate America's hospital business. This thoroughfare to savings is broad and fast--yet so unsexy that even seasoned managers sometimes pass it by.

It is exploiting the power of purchasing. You can spend your days trimming inventories and tweaking labor productivity, but if you think purchasing is a bore best left to ink-stained clerks in basement cubicles, you're misusing your time. Listen to William Marx, AT&T's executive vice president for telephone products: "Purchasing is by far the largest single function at AT&T. Nothing we do is more important."

Simple fact: When the goal is boosting profits by dramatically lowering costs, a business should look first to what it buys. On average, manufacturers shell out 55 cents of each dollar of revenues on goods and services, from raw materials to overnight mail. By contrast, labor seldom exceeds 6% of sales, overhead 3%. So purchasing exerts far greater leverage on earnings than anything else. By shrinking the bill 5%, a typical manufacturer adds almost 3% to net profits. Extracting that much from labor would mean chopping the entire payroll in half. The same arithmetic applies to service businesses: At investment firms like Merrill Lynch and Salomon, for example, purchases of goods and services account for more than 15% of revenues.

Why is it, then, that at many companies the fat in purchasing bulges like President Clinton's waistline? Says Robert Howell, a professor of management and accounting at New York University's Stern School of Business: "The tragedy is that so many companies take the massive spending on purchasing totally for granted." As the record of Columbia/HCA demonstrates, shrewd purchasing management can yield spectacular results. By combining the buying power of its growing collection of 200 hospitals, the company last year cut its bill for cotton swabs, IV solution, and other supplies by $200 million--boosting net profit 15%.

No wonder purchasing has begun to attract some of the best young executives: They know a fast lane when they see one. At General Motors, G. Richard Wagoner served as both CFO and head of worldwide purchasing in 1993 and 1994. In July his seasoning in procurement helped elevate Wagoner to the top post in GM's $90-billion-a-year North American operations.

At AT&T, purchasing chief Daniel Carroll, 49, is former CEO of the $6-billion-a-year division that manufactures switching equipment. Executive vice president Marx, Carroll's boss, asked him to take the purchasing job in 1993--as a promotion. Carroll wasn't so sure. "My first reaction was, 'What did I do wrong?' " he recalls. "This isn't a high-glamour area. There's lots of blocking and tackling, and no Nobel Prize winners. But I've delivered far more dollars to the bottom line than I ever could have done in switching."

Cutting purchasing costs has surprisingly little to do with browbeating suppliers of raw materials and components to lower their prices. Such bullying worked in the depths of the recent recession, when suppliers were drowning in capacity. But now factories are full and prices are rising; in response, fast-trackers like Carroll have turned to "creative collaboration." Translation: In exchange for helping key suppliers manufacture more efficiently and thereby hold down prices, purchasers garner a share of the savings. Says Jack Barry, a purchasing specialist with EDS's management consulting division: "As we move to a seller's market, companies win by treating suppliers not as adversaries but partners."

Purchasing virtuosos are also using their buying power in the realm of business services and supplies--from airplane tickets and telephones to computer classes and laser-printer replacement cartridges. While outlays on raw materials and components at many companies are tightly controlled, services and supplies often represent a wide-open savings frontier. Such costs can eat up as much as 20% of revenues; the leverage in trimming them is enormous.

Take the category that is inelegantly known as maintenance, repair, and operating supplies, or MRO--items as varied as staplers, mops, and spare parts. American business spends a staggering $250 billion a year on such stuff, according to a study by Joseph Cavinato, a professor of business logistics at Penn State University. At Ford Motor, for instance, the bill for miscellaneous items works out to $530 per car. It isn't just careless buying that inflates MRO costs: Administrative expenses are huge. For each item, a secretary or mechanic typically collects three or four signatures on a purchase order and delivers it to the purchasing department. By the time the valve or fax machine arrives two weeks later, purchasing has unleashed a blizzard of paper on the supplier, the receiving department, and accounts payable, which writes the check. Most companies pay as much in overhead to buy a $20 wrench as a $4,000 truckload of office furniture.

Companies today are packing once fragmented purchases of services and supplies into one or two companywide contracts for each. Watching those bulk orders drive down costs is a delight for Patrick Grace, president of Grace Logistics, a company that manages purchasing and distribution for W.R. Grace & Co. He reckons that high-volume purchasing can trim bills for services and MRO by 10% to 25%. By comparison, he says, establishing nationwide contracts for raw materials or components now saves only 2% to 5%. As the compass narrows in materials, companies are discovering in services and MRO a lost, lush continent for cost reduction.

The best buyers tread a middle path between pressure and cooperation in dealing with suppliers. That was not the approach of Josa Ignacio Lopez de Arriortua, the colorful, combative Spaniard who headed purchasing at GM in 1992 and 1993 and is now manufacturing chief at Volkswagen. At GM, Lopez squeezed suppliers till they howled, demanding double-digit price reductions. He broke the tradition of renewing one-year contracts with long-term vendors, switching the business to the lowest bidders. After a supplier helped GM develop a new part--and absorbed part of the cost--Lopez often shopped the plans to competitors, searching for the best production prices. Such aggressiveness paid off. In his brief tenure in Detroit, Lopez shrank GM's annual materials cost by $4 billion. But GM learned the hard way that pitting suppliers against each other doesn't necessarily achieve the best result in the long run. Now that capacity is tight, auto industry suppliers sometimes reserve their best ideas for loyal customers like Chrysler or Honda. Says David Cole, director of the Office for the Study of Automotive Transportation at the University of Michigan: "The relationship of trust between GM and its suppliers is not what it used to be."

Rather than focusing on price alone, purchasers at companies like AT&T and Chrysler have a broader goal: lowering the total cost of each part or service they buy. They see price as just one aspect of total cost, and form enduring partnerships with suppliers that enable them to chip away at other key costs year after year. They aim to help suppliers shrink inventories, banish waste, and standardize components, steps that can generate as much savings as beating down prices.

Here are the steps to power purchasing as practiced by these experts:

Leverage your buying power. Find the parts and services used across groups of plants or the entire corporation--anything from telephone services to paper to valves. Says Thomas Stallkamp, head of procurement at Chrysler: "The advantages of decentralization don't show up in purchasing. We centralize buying to get the best prices from suppliers." Factory managers and division heads should understand that the company can boost profits by purchasing each item in large volumes from one or two big suppliers instead of divvying orders among a patchwork of vendors.

Commit to a handful of suppliers on which you can depend. For each material and service, invite the leading suppliers to compete for your business. Set requirements each must meet: state-of-the-art products, sound finances, a geographic reach broad enough to make sense for your business. Offer a simple deal: "Our company is willing to substantially increase your volumes in exchange for low unit prices and a long-term commitment that you'll lower your costs. If your prices and costs stay down, we'll reward you with even bigger orders."

From the field of bidders, choose two or three at most that offer the best combination of low prices and promised productivity improvements, such as introducing just-in-time delivery and eliminating defective parts. The contract may extend anywhere from one year for a volatile commodity like aluminum to five years or more for a service like overnight mail--long enough to demonstrate that you want a genuine partnership. Says Stallkamp: "We want our suppliers to invest and streamline for us. They won't if they're worried about being thrown out."

Work together to reduce total cost. Dispatch your production people to help suppliers lower inventories and cut waste. To make sure their competitors aren't improving even faster, benchmark your suppliers' prices, costs, and technology against those of their rivals at least once a year. If your vendors have slipped, help them to regain their edge--making sure they understand that your business is theirs to make something of, or lose. If a supplier can no longer run with the leaders, it's time to seek a new long-term partner.

AlliedSignal has emerged as a master at wielding both the stick of leverage and the carrot of cooperation. An $11.8-billion-a-year maker of auto parts and aerospace electronics in Morristown, New Jersey, AlliedSignal works shoulder to shoulder with suppliers to wrestle down production costs. It has also extracted huge savings from MRO. The results have been remarkable: Even as revenues grew 6% in 1994, AlliedSignal's purchasing costs actually shrank. The reward: an expected 21% surge in profits.

The company attacks component costs using a classic two-pronged approach. When it signs up a supplier, it exacts a kind of initiation fee: a steep, one-time reduction in price. At the same time, it demands that the supplier commit to lowering the component's total cost by 6%, adjusted for inflation, every year. Typically, suppliers hit the 6% target with a combination of price cuts and service improvements, such as increasing the frequency of deliveries, that help lower AlliedSignal's manufacturing costs. The 6% goal--plus a pledge to virtually eliminate defects--is enshrined in a standard "partnering agreement" that binds the suppliers to AlliedSignal.ÊThe pacts aren't one-sided. For its part, AlliedSignal agrees to pump up the suppliers' volumes and help them boost productivity.

The system can work brilliantly. In 1993, AlliedSignal offered to double its orders from Mech-Tronics, a Melrose Park, Illinois, maker of aluminum chassis for avionics systems in airplanes and rockets, to $1 million a year. The quid pro quo: a 10% price cut. The terms initially wiped out Mech-Tronics' margins. But after a time, the higher volumes-along with plenty of nurturing from AlliedSignal--spurred huge productivity gains. "It would have been distasteful if they'd just said 'cut your prices,' " recalls Mech-Tronics vice president Gene R. DeMuro. "We decided to pay the price and join the club because they agreed to work with us."

Partnering helps cushion the shock of rising raw material prices. AlliedSignal signed a long-term agreement in 1993 with Baja Oriente of Ensenada, Mexico. Baja makes aluminum castings for AlliedSignal's truck-components plant in nearby Mexicali. As usual, AlliedSignal demanded a 6%-a-year cost reduction. "It was scary, and you can bet that 6% gets tougher every year," says Baja CEO Michael Joyce. Baja and AlliedSignal also faced an unexpected problem. Last year the price of aluminum, which accounts for over one-fifth of the cost of each casting, jumped more than 50%.

To help Baja counteract the price increase, AlliedSignal multiplied its orders from $500,000 in 1991 to more than $6 million last year, enabling Baja to spread its fixed costs over far more units. With small volumes, workers would make a batch of AlliedSignal castings, then retool Baja's machines to produce parts for other customers. Now the company devotes a large section of its plant to AlliedSignal. Long production runs and less time spent on changeovers help cut costs. Baja delivers castings daily to AlliedSignal in Mexicali; inventories in that part of Baja's business are a minuscule $60,000 and turn 50 times a year. ÊPropelled by productivity gains, Baja hit its 6% cost-reduction target in 1994. Lately AlliedSignal has added compressor housings to the parts it orders from the company.

AlliedSignal applies much the same discipline to MRO, on which it spends a mountainous $800 million a year. The company's plants and offices combine their purchases of important items such as air filters, using a practice known as presourcing. Each year AlliedSignal negotiates contracts with anywhere from one to a half dozen suppliers of each product. The factories and offices then order supplies as they need them at the prearranged, low prices. Two years ago, for example, AlliedSignal's 150 plants bought valves, pipes, and fittings from no fewer than 400 suppliers. Last year the company packed all that business into a $10-million-a-year contract with Van Leeuwan, a Dutch-owned manufacturer and distributor. The endless paperwork associated with pipe orders disappeared: Plants now place orders electronically and receive most supplies in 48 hours, and Van Leeuwan sends each plant a single monthly bill. Such arrangements enabled AlliedSignal to cut its MRO spending last year by more than $50 million. Processing costs dropped by millions more.

National Semiconductor of Santa Clara, California, works closely with one of its chief suppliers of silicon wafers, Siltec. The companies have found ingenious ways to cut expenses despite big increases in the cost of basic silicon. Siltec, for example, has taught National to conserve costly packing material. At National's plant in South Portland, Maine, workers on the loading dock used to discard the expensive plastic cassettes the silicon wafers arrived in. Now a giant box sits on the loading dock, already inscribed with the address of Siltec's plant in Salem, Oregon. As workers unload the wafers, they chuck the cassettes into the box. When the box is full, a driver from UPS tapes it shut and carts it off for return to Siltec, which passes to National the resulting savings: more than $300,000 a year.

National has also found ways to save on its MRO budget, which last year encompassed more than 25,000 items and amounted to $180 million. As recently as 1991, each purchase cost $30 in overhead, often more than the item itself. Each office or plant bought its own supplies from stationery distributors or hardware stores; purchasers haggled over the prices each time they bought a door lock or copier.ÊPresourcing has enabled National to cut its budget for miscellaneous supplies by 20% and has erased $7 million in annual processing costs.

Credit card organizations have jumped on the trend toward thriftiness in purchasing. The industry's fastest-growing category is so-called corporate purchasing cards, aimed at incidental purchases that offices and plants make at a moment's notice-duplicates of keys, Mr. Coffee machines, even Christmas trees. Such transactions are too small for national contracts, yet accounting for them costs a fortune in paperwork. Companies distribute the cards to foremen, clerks, and secretaries; the cards incorporate codes that set credit limits and restrict where they can be used. A factory worker, for example, might carry a card limited to the local hardware emporium.

Hundreds of AlliedSignal's factory workers carry Visa and American Express corporate purchasing cards as part of pilot projects; National Semiconductor is trying out Visa. Amex and Visa pay the suppliers, eliminating thousands of purchase orders and checks; each plant writes a single monthly check to the credit card company. Both AlliedSignal and National plan to roll out the cards throughout their plants and offices this year. Says James Critzer, National's purchasing chief: "The cards cut our processing costs from $30 an order to a few cents."

Business-to-business services have proved a rich target for cost cutters at Shell Oil. In the U.S. alone, Shell spends a huge chunk of its $5-billion-a-year purchasing bill on services. Like all drilling and refining companies, Shell relies on outside contractors to perform grimy tasks that propel the business. In the sunbaked oil patch, roustabouts weld sections of drilling pipe. Other contract workers repair gas pipelines, clean oil tanks in the refineries, and build gas stations. In the past, each Shell refinery and regional exploration company used its own suppliers-usually several. From the barren plains of Texas to New Jersey's smoking refineries, Shell employed a crazy quilt of 20 or more contractors to perform each task.

Lately Shell has become adept at applying its leverage. For many services it hires just one or two contractors nationwide; for others it designates a single firm in each region. Until last year, for example, nine separate "workover rig" companies visited the company's oil wells in West Texas and New Mexico to replace leaking pipe. Sixteen trucking firms hauled fresh sections of pipe to the rigs. Then Shell replaced all 25 suppliers with a single firm, Pool Energy Services. "We've gone from a total lack of coordination to generating tremendous leverage," says Shell procurement executive Lisa Liles Peters. The contract is significantly cutting Shell's pipe replacement costs.

At AT&T, chopping the gargantuan bill for business-to-business services is a corporate mission. The greatest problem was the laissez-faire attitude of AT&T's service units, which sell everything from long-distance service to credit-card verification and telemarketing, and account for 60% of AT&T's $67.2 billion in annual sales. Such businesses devour computer programming, clerical help, and office supplies; services and MRO items account for a towering $12 billion of AT&T's $20-billion-a-year purchasing bill.

Until recently the service companies--and even some of AT&T's manufacturing units--bought travel services, clerical help, and overnight mail delivery independently. Units spread their orders among a profusion of suppliers and paid a penalty in high prices. Now AT&T is pressing its profit centers to combine their orders into big, companywide contracts. Their aim is epic: AT&T's annual savings targets for MRO and services rise to $1 billion in 1997.

Just last year AT&T pocketed $125 million in savings. It scored a big success in contract computer programming. Programming is a big cost at AT&T, totaling $500 million a year. At any time, 3,000 programmers from outside firms are working on projects at the company, designing inventory systems, for example, or creating software for telephone products like 900-number services. Fees range from $200 per person per day for routine work to $3,000 per day for special projects.

Three years ago AT&T did business with no fewer than 300 firms and simply paid their advertised rates, making no effort to negotiate discounts. "It was totally out of control," says Patricia Cox, head purchaser for administrative services. AT&T has cut the number of contractors to 75, roughly one per city, and driven hard bargains. The daily rates it pays for programming have fallen 15%, saving roughly $75 million a year since 1991.

At Tenneco, purchasing does more than generate savings. It has grown into a thriving business in its own right. The Houston conglomerate (estimated 1994 sales: $13 billion) established a purchasing subsidiary, TennEcon Services, that uses Tenneco's buying power to secure discounts for everything from telephone services to personal computers. TennEcon, in turn, markets those products--at low, bulk prices--to outside customers, chiefly small companies that would otherwise pay more because they buy in tiny volumes. TennEcon pockets a fat fee; last year the operation earned $30 million, not counting the savings it achieved for the parent company.

Among TennEcon's most popular offerings--both inside and outside Tenneco-are phone service and overnight mail delivery. Until 1994 the parent's five divisions dispersed their telephone spending among AT&T, MCI, and Sprint. In November, TennEcon negotiated a single, companywide contract with MCI. The deal calls for an estimated cost savings of 10%, or more than $15 million, over five years. It also lets TennEcon buy service at discounted rates for resale to outside customers. The sole caveat: TennEcon can't steal MCI's existing accounts.

TennEcon has a similar contract with Federal Express for overnight delivery. It gets a steep discount from the list prices paid by individuals and small businesses. Typically, TennEcon passes on a more than 20% reduction to its clients and still makes a profit. TennEcon president David Gosselin says the savings could well improve: "As we add more and more outside businesses to our volumes from Tenneco, we're negotiating even lower prices."

TennEcon is on its way to becoming a one-stop supermarket for small businesses. It also offers discounts on American Express travel services, Compaq PCs, and Canon fax machines. For harried entrepreneurs, buying from TennEcon saves money and time. Financial Guardian, an insurance broker in Houston, uses the company for travel and overnight mail. "It was a big waste of time for my agents and me to negotiate small contracts," says executive vice president Michael Stroman. "And when we did, we'd never know if we were getting the best prices."

Purchasing has only begun to show its awesome power. As customers lavish more business on fewer vendors, successful suppliers will become ever larger and more efficient; small, regional vendors will be pushed out or gobbled up. The new generation of super-suppliers represents an advance in industrial evolution. Okay, purchasing is still grimy and mundane. But show some respect: It's beginning to change the face of American business.