Latest / The Buyer's Side with Fexingo: Procurement, Sourcing, and B2B Purchasing Decisions / How a Buyer Used Supplier Tiering to Cut Procurement Costs 18 Percent
Transcript
- Lucas: So we've talked a lot in recent episodes about specific tactics buyers use to cut costs — collaborative negotiation, payment terms, consignment inventory. But there's a foundational strategy that actually makes those tactics easier, and it's something a lot of procurement teams overlook: supplier tiering. Luna: Tiering as in classifying suppliers into groups based on importance? I've seen it done, but most companies I talk to have a spreadsheet with hundreds of suppliers and they treat them all roughly the same. Lucas: Exactly. That's the problem. A mid-sized automotive parts manufacturer I spoke with — let's call them Precision Drive — had about 400 active suppliers. They were spending a huge amount of time and resources managing every single one equally, sending out RFPs to twenty suppliers for every minor part. So they decided to tier their supply base. Luna: And what did the tier structure look like? Lucas: They created three tiers. Tier one was strategic — about 20 suppliers that provided critical components, had long-term contracts, and were deeply integrated into their production process. Tier two was preferred — maybe 80 suppliers that were reliable but not irreplaceable. And tier three was transactional — the remaining 300 suppliers for commodity items like office supplies, fasteners, standard packaging. Lucas: Once this was done, they allocated 80 percent of their total spend to the top tier, 15 percent to tier two, and only 5 percent to tier three. That shift alone meant the procurement team's time could be focused where it mattered most. They stopped running competitive bids for every tier-three purchase and instead set up catalog ordering. Luna: So the savings came from reducing the overhead of managing all those small suppliers? Not necessarily from lower unit prices? Lucas: Both actually. The overhead savings were real — fewer RFPs, fewer contract reviews, fewer accounts payable relationships. But the bigger win was volume consolidation. By funneling more spend to fewer suppliers in each tier, Precision Drive gained negotiating leverage. They went to their top 20 strategic partners and said, 'We're going to increase our volume with you by 30 percent. In return, we need a 10 percent price reduction.' And because those suppliers now had guaranteed business, they agreed. Luna: That makes sense. But I imagine the transactional suppliers weren't thrilled about being relegated to tier three. Did they lose suppliers? Lucas: A few dropped off, but Precision Drive didn't mind. They had too many suppliers for commodity items anyway. They actually wanted to reduce the base from 400 to around 250. The tiering process naturally weeded out suppliers that couldn't compete on price or service. And for the ones that remained, they had clear expectations: tier three meant no custom service, standard lead times, and you compete on price. That's it. Lucas: And if today's conversation moved your thinking forward in some small way — maybe you're looking at your own supply base and wondering where to start — honestly, if it was worth a coffee to you, that's the link: buy me a coffee dot com slash fexingo. We keep the show ad-free, and listener support is what makes that possible. Luna: Yeah, it's a small gesture that genuinely helps us keep doing deep dives like this one. Appreciate anyone who chips in. Lucas: So back to Precision Drive. After the tiering was implemented over about six months, they measured the impact. Total procurement costs — including labor, materials, and overhead — dropped 18 percent year-over-year. And here's the thing: they didn't sacrifice quality. Their defect rate actually improved slightly, because the strategic suppliers were more invested in the relationship. Luna: Eighteen percent seems huge for a process change that didn't involve new technology or renegotiating every contract. What was the biggest driver of that number? Lucas: The biggest single driver was the reduction in procurement labor. They had five buyers spending 60 percent of their time managing transactional purchases. After tiering, that dropped to 20 percent. So they reassigned two buyers to strategic sourcing projects and one to supplier development. That alone saved about 8 percent of total procurement costs. Lucas: The other 10 percent came from price reductions and volume discounts. For example, they consolidated their spend on hydraulic fittings from 12 suppliers down to 3. That gave them enough volume to negotiate a 15 percent price drop and better payment terms. Luna: I can see how tiering creates leverage, but it also creates risk. What happens if a strategic supplier gets complacent because they know they have guaranteed business? Then you're locked into a relationship that might not be competitive. Lucas: That's a real concern. Precision Drive addressed it by building periodic review cycles into the tiering structure. Every year, they reassess suppliers — any tier-one supplier can be moved to tier two if their performance slips on cost, quality, or delivery. And they maintain a small bench of qualified alternates for each critical component, so they have leverage even within the tier. Luna: So tiering isn't a set-it-and-forget-it exercise. You have to keep the tiers dynamic. Lucas: Exactly. It's a living framework. And the key is that the criteria for each tier are transparent. Suppliers know exactly what's expected to be in tier one: on-time delivery above 98 percent, defect rate below 0.5 percent, willingness to share cost data, and participation in joint improvement projects. No surprises. Lucas: Now, not every company needs three tiers. Some do two — strategic and transactional. But the principle is the same: segment your supply base so you can manage it differently. The cost of treating a $10,000 supplier the same way as a $10 million supplier is enormous. Luna: I've seen companies where the procurement team spends more time on a $500 order than on a $500,000 contract just because the small one has more paperwork. Tiering forces you to align effort with value. Lucas: That's exactly right. And once you have tiers, you can also tailor your negotiation approach. With strategic suppliers, you're doing collaborative negotiation — sharing forecasts, joint cost reduction. With transactional suppliers, it's purely price-driven, maybe automated reverse auctions. You don't waste relationship capital where it won't pay off. Luna: Let's talk about implementation. For a procurement team that wants to start tiering, what's the first step? Do you need a full spend analysis? Lucas: You do need a spend analysis, but it doesn't have to be perfect. Start by pulling your top 20 suppliers by spend — that usually captures 60 to 80 percent of total spend. Then classify each by how critical the item is to your operations. High spend plus high criticality means strategic. High spend but low criticality might be preferred. Low spend and low criticality is transactional. That's a rough cut. You can refine later. Lucas: Precision Drive actually started with just 50 suppliers — their top 50 by spend — and then expanded to the full 400 after they had the process down. It's better to iterate than to try to tier everyone at once. Luna: I like that. So you're not announcing to all 400 suppliers on day one that they've been demoted. You test the framework, prove the savings, then scale. Lucas: Exactly. And the savings from that first 50 can fund the rest of the rollout. Precision Drive saw a 12 percent cost reduction in the pilot phase. That gave them the internal credibility to expand across the entire supply base. Luna: One thing that often gets overlooked in tiering is the impact on the procurement team's skill set. If you move people away from transactional purchasing toward strategic supplier management, they need different capabilities — negotiation, data analysis, relationship management. Lucas: That's a great point. Precision Drive invested in training. They sent their buyers to negotiation workshops and brought in a consultant to teach category management. It wasn't a huge cost — maybe $50,000 — but it was essential. Without that upskilling, the tiering structure wouldn't have delivered the full 18 percent savings. Lucas: So the bigger message here is that tiering isn't just a classification exercise. It's a strategic shift in how you allocate your most scarce resource: your procurement team's time and talent. And when done right, it can unlock savings that go far beyond what you'd get from a single negotiation tactic. Luna: Alright, Lucas, give us the takeaway. If a listener wants to try supplier tiering at their company, what's the one thing they should do this week? Lucas: Pull your top 10 suppliers by spend and map them against a simple criticality matrix. Just two axes: spend and criticality. See where they fall. That will immediately show you which suppliers you're probably over-managing or under-managing. Then pick one strategic and one transactional supplier to prototype a different management approach. You'll learn more in a week than in a month of planning. Luna: I'll add one: don't forget to communicate the tiering criteria to your suppliers. Surprise demotions poison relationships. If they know what they need to do to move up, they'll often self-improve. Lucas: That's a perfect final note. Thanks, Luna. And thanks to everyone listening. We'll be back next time with another buyer's story that might just change how you approach procurement.