Latest / The Buyer's Side with Fexingo: Procurement, Sourcing, and B2B Purchasing Decisions / How One Buyer Used Joint Cost Modeling to Cut Prices 14 Percent
Transcript
- Lucas: You know how most cost-cutting conversations between a buyer and a supplier go. The buyer says, 'We need a 10 percent price reduction.' The supplier says, 'Our margins are already razor-thin.' Both sides walk away frustrated. Luna: Right. It's a tug of war over the same dollar. But there's a different play — one where both sides actually pull together. Lucas: Exactly. It's called joint cost modeling. And I want to walk through a real case from a mid-size manufacturer — let's call them Precision Components — that used this approach to cut costs by 14 percent without squeezing the supplier's margin. Luna: Fourteen percent is significant. How does joint cost modeling work in practice? Lucas: The core idea is that buyer and supplier share their cost data openly — labor rates, material costs, overhead allocations — and together build a cost model for the product. Then both sides look for waste. The savings get split, but the supplier doesn't lose margin because the savings come from inefficiency, not from their profit. Luna: So it's not about squeezing the supplier. It's about finding the hidden fat in the process. Lucas: Exactly. In the Precision Components case, they had been buying the same machined part from the same supplier for seven years. The price had crept up about 3 percent per year — inflation, raw material cost increases, that sort of thing. The buyer's new procurement lead, a woman named Sarah, decided to try something different. Luna: What did she do first? Lucas: She asked the supplier if they'd be willing to do a joint cost model. Not a price negotiation — a model. She came with her own data: the total cost of ownership for that part, including freight, inventory holding, and quality inspection costs. That was actually the hook — the supplier had never seen the buyer's full cost picture. Luna: So she led with data from her side first. That builds trust. Lucas: It does. And the supplier agreed. They spent two days together in a conference room — buyer's team on one side, supplier's engineers and cost accountants on the other. They laid out every cost element on a whiteboard. Labor rates, setup times, scrap rates, tooling costs, even utility costs for the machines. Luna: That's incredibly detailed. Did the supplier push back on sharing their numbers? Lucas: There was some hesitation. But Sarah had already shared her own numbers, so the supplier felt obligated to reciprocate. And she made it clear that the goal was to find waste, not to reduce the supplier's margin. They signed a non-disclosure agreement specifically for the cost model. Luna: So what did they find? Lucas: Two big items. First, the supplier was using a more expensive raw material grade than the part actually required — the buyer's engineers confirmed it. Switching to the appropriate grade saved about 6 percent on material cost. Second, the setup time on the machine was twice as long as it needed to be because the buyer's specification had a tight tolerance on a non-critical dimension. Relaxing that tolerance cut setup time by 40 percent. Luna: That's fascinating. The buyer's own spec was creating waste on the supplier's side. Lucas: Exactly. And those two changes alone accounted for about 11 percent of the total cost. The remaining 3 percent came from things like optimizing packaging and reducing the frequency of small-batch orders. Total savings: about 14 percent, which in dollar terms was roughly $2.3 million annually. Luna: And the split? Lucas: They agreed that the buyer would get the price reduction — so the unit price dropped 14 percent. But the supplier's margin actually improved slightly because their own costs went down by more than the price drop. So both sides won. Luna: That's the ideal outcome. But I imagine this doesn't work with every supplier. When is joint cost modeling the right move? Lucas: It works best when the relationship is already fairly collaborative — not purely transactional. If you've been fighting over price for years, it's hard to flip that switch. Also, the category needs to have enough cost complexity to make the exercise worthwhile. Commodity items where the market price is set? Probably not. But engineered components, custom parts, complex assemblies? Great candidates. Luna: And I'd add that the buyer needs to have strong internal data. You can't walk in with rough estimates. Sarah had actual cost data from her ERP system, freight invoices, quality reports. Without that, the supplier might not take you seriously. Lucas: Absolutely. The credibility of the buyer's data is what opens the door. I think that's one of the reasons joint cost modeling is still relatively rare — it requires a level of internal preparation that many procurement teams don't invest in. Luna: Speaking of investing in preparation — you know, one thing I appreciate about this show is that we never run ads. We spend the whole episode on the substance. If you've found these conversations useful — maybe they've helped you think differently about a negotiation or a sourcing strategy — consider supporting the show. It keeps things ad-free. The link is buy me a coffee dot com slash fexingo. Lucas: Yeah, I'm glad you brought that up. No ads means we get to go deep on exactly what matters. So if that's valuable to you, we appreciate the support. Luna: Alright, back to joint cost modeling. One thing I want to dig into — what are the biggest pitfalls? Lucas: The first is data mistrust. If either side thinks the other is hiding costs or manipulating the model, the whole thing falls apart. That's why starting with your own data is so important — it signals good faith. Luna: Second pitfall? Lucas: Scope creep. The model can get so detailed that you're spending weeks debating whether the electricity cost per machine hour should be allocated by run time or by machine footprint. You need to agree upfront on which cost elements are in scope and which aren't. In Sarah's case, they limited the model to direct costs and a few key overhead items. Luna: So keep it focused. What about after the model is built — how do you sustain the trust? Lucas: That's actually the surprising part. After the initial model, the supplier came back six months later with a proposal to change the packaging design — they had done their own cost analysis and found another 2 percent savings. Because the relationship was now based on shared data, they felt empowered to bring ideas to the buyer. Luna: That's the long-term win. The supplier becomes a partner in cost reduction, not just a vendor. Lucas: Exactly. And I think that's the real lesson from this case. Joint cost modeling isn't just a tactic for a one-time price cut. It's a way to transform the dynamic from adversarial to collaborative. If you can do that with even a few strategic suppliers, the compounding effect over years can be massive. Luna: I want to ask about the upfront investment. Sarah spent two days in a room, plus prep time. How do you sell that to a CFO who wants results this quarter? Lucas: You frame it as a high roi project. Two weeks of a buyer's time and a supplier's time for $2.3 million in savings — that's an incredible return. And the savings recur year after year because the new cost structure stays in place. So it's not just a one-time discount; it's a permanent cost reduction. Luna: Plus the relationship benefits. Fewer quality issues, more innovation ideas. Lucas: Right. And that's often hard to quantify upfront, but it's real. Sarah told me that after the joint model, the supplier's on-time delivery improved from 88 percent to 96 percent — because they felt more invested in the buyer's success. Luna: That's a beautiful byproduct. So for procurement pros listening — if you have a supplier you've worked with for years, where the trust is decent but the price keeps creeping up, this might be the right moment to propose a joint cost model. Lucas: Start with your own data. Be transparent. And go in with the mindset that you're looking for waste, not margin. If you can do that, you might be surprised what you find. Luna: Alright, that's our episode. Lucas, great case study. Lucas: Thanks, Luna. And thanks to everyone listening. See you next time.