Latest / The Buyer's Side with Fexingo: Procurement, Sourcing, and B2B Purchasing Decisions / How a Buyer Cut Costs with Supplier Savings Gainsharing
Transcript
- Lucas: So there's a procurement tactic that's been around for decades but most buyers still treat it as a last resort. I'm talking about supplier savings gainsharing. And it just helped a mid-sized manufacturer in the Midwest cut procurement costs by twelve percent in a single year. Luna: Twelve percent? That's not a rounding error. How did they pull it off without just hammering suppliers on price? Lucas: Exactly, that's the point. Instead of demanding price cuts and squeezing margins, they sat down with their top suppliers and said, if you help us find savings in our own operations, we'll split the verified savings with you. Fifty-fifty in this case. Luna: So the supplier gets a slice of the pie. But how do you actually measure the savings? Seems like that's where it could get messy. Lucas: That's the crux. They spent two months setting the baseline. They looked at the total cost of ownership for each component, not just the purchase price. That includes logistics, inventory holding, scrap rates, even the administrative cost of processing orders. Once the baseline was locked, any reduction below that was considered savings. Luna: And the supplier gets half of that. So what kind of ideas actually came out of this? I mean, suppliers know their own processes, but do they really have insight into the buyer's side? Lucas: Turns out they do. One supplier noticed the manufacturer was using a certain grade of steel that was over-specified for the application. They suggested a slightly lower grade that still met the performance requirements. That alone cut material costs by eight percent. Another supplier suggested changes to the packaging that reduced freight damage and allowed more units per pallet. Luna: So the suppliers are essentially acting as unpaid consultants, but with skin in the game because they get paid on the results. Lucas: Right. And that's the key difference from a typical cost-cutting program. When a buyer just demands a three percent price reduction, the supplier has an incentive to protect their margin, maybe by cutting corners. With gainsharing, they have a direct financial incentive to make the buyer's operations more efficient, because they share in the upside. Luna: But there's got to be a risk. What if the supplier games the system, or the baseline is set unfairly? Lucas: That's why the contract matters. They had a detailed agreement on what counts as savings, how it gets verified, and a dispute resolution process. They also did quarterly audits. But the bigger risk, I think, is trust. If the buyer moves the goalposts or delays payment, the whole thing falls apart. Luna: So it only works if both sides genuinely respect each other. That's a big if in some industries. Lucas: Absolutely. But the interesting thing is that this manufacturer had a history of adversarial negotiations. They had to change their own culture first. The CPO spent a lot of time with the sales teams of their key suppliers, explaining the program and building buy-in. It took about six months before the first ideas started flowing. Luna: Six months is a long time. What did they do in the meantime to keep the momentum? Lucas: They held monthly joint workshops focused on cost drivers, not price. They mapped the entire supply chain for a few key components and looked for waste. One idea came from a supplier's logistics manager who noticed the manufacturer was using next-day air freight for a component that could be shipped ground if they ordered a week earlier. That simple change saved forty thousand dollars a year. Luna: So it's not just about the big ideas. It's the cumulative effect of lots of small ones. Lucas: Exactly. They ended up with over thirty separate initiatives, and the average savings was around two percent per line item. But because they were multiplying across the entire spend, it added up to that twelve percent overall. And the suppliers made money too. One supplier earned an extra two hundred thousand dollars in gainsharing payments, which they reinvested in their own equipment. Luna: That's a nice positive feedback loop. The supplier gets more efficient, which makes them more competitive, and the buyer benefits from that. Lucas: And that's the thing. Gainsharing isn't a one-time discount. It's a way to build a long-term partnership where both sides are invested in each other's success. But it's not easy. It requires transparency, data sharing, and a willingness to trust that the other side isn't going to take advantage. Luna: What about the risk that the savings are real on paper but don't actually hit the bottom line? I've seen that happen with cost-saving initiatives. Lucas: That's a real concern. That's why they tied the gainsharing to actual cost reductions in the P&L, not just theoretical savings. For example, if a supplier suggested a change that reduced the number of rejected parts, they measured it by the actual scrap rate before and after. If the scrap rate didn't drop, no payout. Luna: So it's performance-based pay for suppliers, essentially. That's a pretty powerful incentive. Lucas: It is. And it's spreading. I've seen similar programs in automotive, electronics, even healthcare. But the key is that it works best when you have a stable supply base and a significant amount of spend with each supplier. If you're just buying spot from a hundred different vendors, it's too hard to set baselines and track savings. Luna: So this is a strategy for when you've already consolidated your supplier base. That makes sense. Lucas: Right. And it's not a silver bullet. You still need good negotiation skills for the upfront contract. But once the framework is in place, it can transform the relationship from adversarial to collaborative. And that's what happened here. The manufacturer's supplier survey scores went up, and they saw a thirty percent reduction in quality issues within a year. Luna: That's a big win. But I'm curious, what did they do with the savings? Did they just pocket it? Lucas: They invested some of it back into the business, but they also passed a portion to their own customers through lower prices, which helped them win a couple of new contracts. So the gainsharing actually had a ripple effect through the whole value chain. Luna: That's the kind of story that makes you wonder why more companies don't do this. It seems like a no-brainer. Lucas: The barrier is usually cultural. It requires a level of trust and transparency that many companies aren't comfortable with. Plus, it takes time and effort to set up properly. But for companies that are willing to make that investment, the payoff can be significant. Luna: And it's not just about cost savings. It's about building a more resilient supply chain. When suppliers feel like partners, they're more likely to go the extra mile in a crisis. Lucas: Exactly. And that's something we've seen play out in recent years. Companies with strong supplier relationships were the ones that recovered fastest from disruptions. Gainsharing is one way to build that kind of relationship. Luna: Before we go deeper, I want to step back. These conversations are part of what keeps Fexingo Business going. If you've gotten something out of this episode, a couple of dollars a month at buy me a coffee dot com slash fexingo genuinely makes a difference. It's what keeps these shows ad-free and accessible. Lucas: Yeah, it's a small thing that adds up. We really appreciate the listeners who support us that way. But back to gainsharing — there's also a version where the buyer and supplier share in upside from revenue growth, not just cost savings. Have you seen that? Luna: I have, actually. In some tech supply chains, they've experimented with revenue-based gainsharing, where the supplier gets a cut if their component helps the buyer win a new product launch. But it's trickier to measure because revenue depends on so many factors. Lucas: Right, that's why cost-based gainsharing is more common. But the principle is the same: align incentives so that both parties benefit from improvements. And that's really the takeaway from this case. It's not about who can squeeze the hardest. It's about finding ways to grow the pie together. Luna: And a twelve percent reduction in procurement costs is a pretty compelling argument for that approach. Lucas: Absolutely. And it's repeatable. The manufacturer is already planning to extend the program to another category next year. So this isn't a one-off. It's a strategy they're building into their procurement playbook. Luna: That's a smart move. I'd be curious to see how it scales to more complex categories like services or software. Lucas: That's a whole other episode. But for now, if you're a buyer looking to cut costs beyond just price negotiation, gainsharing might be worth a look. Just be prepared to put in the work upfront. Luna: And to build trust. That's the foundation. Lucas: Exactly. Thanks for listening, and we'll catch you on the next one.