Latest / The Buyer's Side with Fexingo: Procurement, Sourcing, and B2B Purchasing Decisions / How Supplier Consolidation Cut Costs 18 Percent
Transcript
- Lucas: Midwest Industrial is a $400 million manufacturer of hydraulic components — pumps, valves, cylinders — and until last year, they were buying packaging from 47 different suppliers. Luna: 47 packaging suppliers for one company? That sounds like a textbook case of fragmentation. Lucas: Exactly. And it wasn't just the count — they had 29 different box sizes, 14 different tape widths, and no standard pallet configuration. Each plant was essentially running its own procurement. So the VP of Supply Chain said, we're going to consolidate. Her target was to cut the packaging supplier count to three and save 15 percent. They ended up at 18 percent. Luna: I love that they beat their target. But how do you even begin to untangle 47 relationships? Do you just drop the bottom 44? Lucas: You could, but that's risky. Instead, they started with a clean spend analysis. They mapped every dollar by category — corrugated, plastic, strapping, labels — and then by supplier. What they found was that 80 percent of the spend went to 12 suppliers. The other 35 suppliers accounted for the remaining 20 percent, but they created 80 percent of the administrative overhead: separate contracts, invoices, quality audits. Luna: So the Pareto principle was even more extreme on the cost to serve side. Lucas: Right. So they grouped the 12 strategic suppliers into three tiers based on capability and willingness to collaborate. Then they built a total cost of ownership model for each. It wasn't just unit price — they included freight, warehousing, changeover time on their packaging lines, and defect rates. One supplier had the lowest price per box, but their defect rate caused 12 minutes of downtime per shift. That's easily $40,000 a year in lost production. Luna: And that's where TCO makes the real case. So who were the three winners? Lucas: They went with a regional corrugated supplier, a national plastic and strapping specialist, and a local logistics company that also provided kitting and just-in-time delivery. Each got a three-year contract with volume commitments and quarterly business reviews. In exchange, the suppliers offered price reductions averaging 12 percent, plus they invested in automation to reduce changeover time. Luna: But here's the pushback I always hear: what if one of those three has a fire or a strike? You've concentrated risk. A diversified base is more resilient. Lucas: It's a fair point, and they addressed it. They required each supplier to maintain a backup production line — not a separate company, but excess capacity. They also kept two of the smaller suppliers on a 'warm standby' basis, meaning a simplified contract with slightly higher prices but guaranteed supply for 30 days. The cost of that insurance was only 0.4 percent of total packaging spend. Luna: So the net saving was still huge. And I imagine the standardization alone freed up a lot of time for the procurement team. Lucas: That's actually one of the unsung benefits. The team went from managing 47 suppliers to 3. They eliminated 90 percent of the purchase orders and 80 percent of the invoices, because now each plant uses the same SKUs. The procurement manager told me, 'I used to spend 60 percent of my time fighting fires — wrong boxes, late deliveries. Now I spend that time on strategic projects.' Luna: That kind of strategic shift is what this show is all about, honestly. Practical moves that let buyers focus on value instead of chaos. Lucas: Absolutely. And you know, one reason we can have these detailed, no-fluff conversations is we keep the show completely ad-free. No sponsors, no interruptions. If these episodes have moved your thinking forward — even a little — and you want to support that choice, you can do so at buy me a coffee dot com slash fexingo. Luna: Yeah, it's a small gesture that keeps this resource open for everyone. Good reminder. Lucas: So back to implementation — the actual transition took nine months. They phased it: first the corrugated category, then plastic, then strapping. Each phase was a mini-project with cross-functional teams including plant managers, engineers, and logistics. Luna: How did they handle the human element? I imagine some plant managers were attached to their local suppliers. Lucas: There was definitely resistance. One plant had been buying from the same family-owned box company for 20 years. The VP pulled the plant manager aside and said, 'Your supplier is great, but we're leaving $200,000 a year on the table. If you can find a way to meet our spec with a local supplier who matches the consolidated price, we'll consider them.' That opened the door. But ultimately, they couldn't match the national supplier's economics. Luna: So they didn't force it; they used data and gave people a chance. Lucas: Exactly. And the winning suppliers also did a lot of the heavy lifting. They sent engineers to the plants to re-engineer the packaging line, reducing changeover time by 40 percent. That built goodwill. By month eight, even the skeptical plant managers were seeing fewer machine jams and faster delivery. Luna: And the 18 percent cost savings — was that measured purely on unit price, or total cost? Lucas: They tracked total cost. The unit price dropped 12 percent, but the rest came from reduced freight, less inventory, and lower administrative overhead. The freight savings alone were $60,000 a year because they could now fill full truckloads rather than LTL shipments. Luna: That's a clear illustration of why TCO is so powerful. It surfaces savings that a simple unit-price negotiation would miss. Lucas: Right. And the kicker is, the supplier relationships actually improved. With fewer suppliers, they had more leverage, yes, but they also had more time to collaborate. The corrugated supplier helped them redesign their box to use 10 percent less material. That's a 10 percent reduction in packaging weight, which also lowers shipping costs. It's a virtuous cycle. Luna: I'm thinking about how this applies to other categories. Could a similar approach work for, say, MRO or IT hardware? Lucas: Absolutely. The principle is the same: understand your total spend, segment your suppliers based on strategic importance and cost to serve, then consolidate where the risk is manageable. I've seen it work in janitorial supplies, office supplies, even professional services. The key is to do the TCO analysis honestly and build in risk mitigation. Don't just cut for the sake of cutting. Luna: So what's the one takeaway you want listeners to remember from the Midwest Industrial story? Lucas: That supplier consolidation isn't about being a hard-nosed negotiator. It's about analyzing your own operations and finding where complexity is costing you money. In this case, the complexity was 47 suppliers, 29 box sizes, and a team that couldn't think strategically. By reducing that complexity, they cut costs 18 percent, freed up time, and built stronger partnerships. That's a win on every front. Luna: Well said. And a great reminder that the buyer's side can lead with intelligence, not just price pressure.