If industries could be cast in movies, many might take a role in Casablanca . Demands for belt tightening and better control over supply-chain costs usually elicit the response, "Round up the usual suspects." In other words, companies almost always seek their supply-chain savings from their largest suppliers, driving to push as much purchasing as possible through a small vendor base. For most companies, however, that still leaves a significant number of suppliers muddling along as they always have.

Ingersoll-Rand—which has diversified from its origin in rock drilling equipment to include climate control equipment, locks and steel doors, mining equipment, and bearings—had followed a similar course. But now the company is taking another look at all its vendors and considering whether cost reductions can be found in any purchasing. "If you believe that suppliers contribute to your business success, that should include all suppliers," says Bill Lindquist, a business unit leader at I-R, which may indeed find good things in small packages.

Ingersoll-Rand is certainly a company that paints a complicated picture. When compared by Hoovers.com to major competitors Caterpillar, Emerson, and York International, I-R ranked dead last in net profit margin and returns on equity, assets, and invested capital. All these are indications that too much money may be unnecessarily tied up in operations. In addition, the company had the highest revenue growth, at 10.4 percent, paired with the greatest income drop, 82.3 percent, over calendar year 2000. And yet the company was rated the best for inventory turnover and days cost of goods sold in inventory.

Efficient use of inventory does help a company's bottom line, but only if the underlying materials are purchased cost-effectively. With I-R's cost of goods being 73.4 percent of its revenues, the good news is that there's plenty of room for financial savings. Like many companies, I-R has worked on concentrating purchases with a limited number of vendors and then driving operational and cost efficiencies.

"I-R over the years has been deeply concerned in getting leverage out of their acquisition by sourcing strategies," says David Dobrin, president of B2B Analysts. "They have a corporate mission to work on this particular issue. It's both a challenge and an opportunity."

"We've created centers of excellence," Lindquist says, around certain commodity types such as steel or controllers for automation. Each center focuses on creating a strong relationship with a small group of suppliers. Although the company's goal is to manage 80 percent of what it buys through the centers of excellence, and perhaps even reach the best practice of purchasing that amount literally through 20 suppliers, the destination is still in the distance. "We probably have 50 percent in our strategic supplier programs," Lindquist says.

Restricting progress is the nature of Ingersoll-Rand's business. "It's a dog's breakfast of business units," says Luigi Peluso, vice president of the Concours Group. "They want the benefits of autonomy. They build these models of independent business units to give them an entrepreneurial flair and marketplace focus. [And] by being part of the larger enterprise, they feel they will be able to drive economies." What they aren't able to drive, naturally, is a unified customer and business approach. With different pricing schedules, discount schedules, contacts, and shipping locations, it is difficult to coherently address market segments, or even customers.

A business-unit focus, combined with a diverse set of products and markets, also makes it problematic to leverage purchasing. Past the steel and controllers, there are few types of machinery and materials that are common to the many product types. As a result, the company has found only 17 or 18 commodities that can be purchased for enterprise use.

For the times when bigger isn't necessarily better, smaller may be a solution. That is why Lindquist's team is called the 21st Supplier Group, referring to all the suppliers beyond the top 20 suggested by industry best practices. When 50 percent of purchasing is placed through strategic suppliers, another half is not, which means lots of potential cost savings. "It's even more dramatic because no one has done anything in the logistics of this space," says Lindquist, who estimates that potential cost reductions among small vendors are higher. Small vendors tend to fulfill orders from different I-R divisions separately, often through ground parcel shipments. Then there is the lack of pressure for cost efficiencies. "These smaller suppliers, because they have less of an impact, haven't been worked on for productivity programs and price reductions," he adds. "They've probably had inflation creep."

According to benchmarking the company has done, the small suppliers have averaged 2 to 5 percent price increases each year, instead of a downward trend. Between logistics and product pricing, Lindquist estimates, the potential savings from smaller vendors are probably twice those from their larger kin. The idea behind the 21st Supplier Group is that an organization separate from any business unit at Ingersoll-Rand might be able to improve efficiency in dealing with these smaller vendors. Although the savings from any single small supplier are likely to be diminutive, when taken in bulk they would quickly add up.

Lindquist's crew has been working with the company's Husmann division, which makes refrigerator units. The target is to handle $20 million of purchasing for each business unit. To drive efficiencies, the unit is using an outsourced Web purchasing system that integrates with virtually any ERP or MRP system, according to Lindquist. The software automatically places orders at pre-defined trigger points, freeing purchasing personnel to manage by exception and address vendors only when they fall outside specific performance expectations.

Getting up and running under this program doesn't necessarily take a long time, Lindquist explains. "If it's something that's simple and out of the box, a recognized big name [MRP or ERP], it could be 90 days," he says. "And it could be six months for an old legacy system."

The Ingersoll-Rand approach is intriguing. And the company does not plan to keep it to itself, as it plans to look for external customers sometime this year. "We want this to be a revenue-generating company," Lindquist says. I-R's target will be Fortune 500 companies, which may have $400 to $500 million in direct material costs. Perhaps it's the beginning of a beautiful friendship.