Latest / The Buyer's Side with Fexingo: Procurement, Sourcing, and B2B Purchasing Decisions / How a Buyer Used Collaborative Cost Modeling to Cut Costs 19 Percent
Transcript
- Lucas: So earlier this year I was talking to a procurement director at a mid-sized automotive parts manufacturer — about 800 million in revenue — and she told me about a pilot she ran that cut costs on a key component family by 19 percent. And the surprising thing is, she didn't use an auction, she didn't force a price cut, she didn't even negotiate in the traditional sense. Luna: Okay, that sounds like the opposite of how most buyers are trained. What did she actually do? Lucas: She used something called collaborative cost modeling. The idea is straightforward but the execution is tricky. She took a complex engineered part — a hydraulic valve assembly that had about 40 different components — and she built a completely open cost breakdown. Every raw material cost, every labor hour, every overhead line item. Then she shared that model with her three incumbent suppliers and said, 'Help me find where we're wasting money.' Luna: Wait — she showed them her own cost model? Doesn't that give away your hand? I mean, usually you keep your cost assumptions close to the chest. Lucas: That's exactly what most buyers would think. And honestly, that's the biggest barrier to this approach. But her logic was: for a part this complex, the suppliers know their own processes better than she ever could. If she kept her model secret, they'd just bid against a target price. But if she shared it, they could point out where her assumptions were wrong and suggest actual process improvements. Luna: So she traded leverage for information. Did the suppliers actually engage? I could see some being hesitant to show their hand too. Lucas: Two out of three did, enthusiastically. The third was more guarded and ultimately didn't participate. But the two that engaged came back with detailed proposals. One supplier identified that the specified steel grade was over-engineered for the application — they proposed an alternative that met the performance requirements but cost 18 percent less per kilo. Another supplier suggested a change in the machining sequence that reduced scrap by 22 percent. Luna: So the savings came from the suppliers themselves redesigning the part and the process. That's very different from a typical cost-down exercise where the buyer dictates the target. Lucas: Exactly. And here's the key number: over the first year, the landed cost for that valve assembly dropped 19 percent. But it wasn't just a price reduction — the cost structure itself changed. Material costs went down 12 percent, labor hours per unit dropped 15 percent, and even logistics improved because the redesigned part was lighter and easier to pack. Luna: That's a pretty comprehensive win. But I imagine it required a lot of trust on both sides. What if the suppliers had just used the open model to pad their margins? Lucas: That's the risk. She mitigated it by making the model a living document. Every quarter, they reconvened to update the cost drivers — commodity prices, labor rates, whatever had changed. And she had a clause that any savings from process improvements were shared 60-40 in her favor for the first year, then 50-50 after that. So the suppliers had a direct financial incentive to keep finding efficiencies. Luna: So it's not just a one-time exercise. It becomes an ongoing governance structure. Did she apply this to other parts? Lucas: She scaled it to three more component families, though she emphasized it only works for parts that are complex enough that the buyer can't fully model the cost on their own. For simple commodities — say standard fasteners — the cost model is already well understood, so collaborative modeling doesn't add much. But for anything with multiple processes, custom tooling, or engineered specs, she said it's been her most effective tool. Luna: It almost sounds like a form of supplier development where the supplier becomes a partner in cost reduction. But I wonder — did the suppliers who participated end up winning more business overall? Lucas: Yes. The two engaged suppliers both saw their share of wallet increase. One went from 30 percent to 45 percent of that category. The third supplier, the one who didn't participate, actually lost the business entirely because their pricing couldn't compete with the new cost structures. So there was a clear reward for collaboration. Luna: That's a powerful signal to other suppliers. 'If you help us cut costs, you'll get more volume.' In a way, it flips the typical adversarial negotiation on its head. Lucas: Right. And it requires a different skill set from the buyer. She told me the hardest part wasn't building the model — it was facilitating the conversations. You have to be comfortable saying, 'I don't know the answer, help me understand.' That's not a posture most procurement people are trained to take. Luna: No, it's not. Most training emphasizes leverage, competition, and keeping information asymmetrical. This approach requires vulnerability and trust. Lucas: Exactly. And I think that's why it's still rare. But the results are hard to argue with. Nineteen percent on a high-volume part — that's real money. And the relationships with those suppliers are stronger than ever because they feel invested in the success of the product. Luna: I'd love to hear more about the facilitation techniques she used. Was it just meetings, or were there workshops? Lucas: She ran two-day kaizen-style workshops at the supplier sites. The buyer's team — including engineering and quality — sat down with the supplier's production engineers and operators. They literally walked the line together, identified bottlenecks, and brainstormed solutions. The cost model was projected on a screen so everyone could see how their ideas affected the bottom line in real time. Luna: That level of transparency must have been uncomfortable at first. Did anyone on her team resist? Lucas: Her own purchasing manager was skeptical. He worried they were giving away negotiating leverage. But after the first workshop, he saw that the suppliers were surfacing issues the buyer never would have found. For example, one supplier pointed out that the specified tolerance on a bore diameter was tighter than functionally necessary, requiring an extra grinding pass. Loosening it by 0.01 millimeter saved 8 percent in machining time and had zero effect on performance. Luna: That's the kind of insight you only get when you open the books and invite people to challenge your specs. It's almost like the suppliers become an extension of your own engineering team. Lucas: That's exactly how she described it. She said the goal is to turn suppliers from 'vendors' into 'partners in value creation.' And while that sounds like buzzword bingo, the numbers back it up. Nineteen percent cost reduction, improved quality, shorter lead times — all from a process that cost essentially nothing to implement beyond time and trust. Luna: I think a lot of procurement leaders would be interested but hesitant. What advice would she give to someone wanting to try this for the first time? Lucas: She said start small. Pick one medium-complexity part that you buy in decent volume, ideally with two or three incumbent suppliers you already have good relationships with. Build the cost model yourself first, even if it's imperfect. Then invite the suppliers to a half-day meeting with no agenda other than 'help us improve this model.' No pricing discussion initially. Just process and cost drivers. Luna: So separate the cost improvement conversation from the pricing negotiation. That makes sense — keeps the focus on problem-solving rather than haggling. Lucas: Right. And once you've built trust through the model, the pricing conversation becomes almost self-evident because both sides can see what a fair cost should be. She said it actually made negotiations easier, not harder. Luna: It's a great example of how procurement is evolving from a transactional function to a strategic one. And it's a reminder that the smartest cost savings often don't come from squeezing suppliers, but from working with them. Lucas: Absolutely. And speaking of working with people — if you've found value in these conversations, whether it's a specific framework you've applied or just a new way of thinking about supplier relationships, it's worth knowing that this show is ad-free and listener-supported. You can help keep it going at buy me a coffee dot com slash fexingo. Even a small contribution helps cover hosting and research costs and lets us keep digging into these practical case studies. Luna: Yeah, it's a simple way to make sure episodes like this one keep coming. We really appreciate the support. Lucas: So back to collaborative cost modeling — one last thing I found interesting. She said the biggest lesson wasn't about cost at all. It was about culture. She had to deliberately create a space where it was safe for suppliers to point out flaws in her assumptions. That required her to model humility first, and that set the tone for everything that followed. Luna: That's a good note to end on. Procurement as humility practice. Who knew? Lucas: Right. Next episode, I want to dig into a case where a buyer used a different kind of transparency — sharing supplier performance data across a consortium to drive industry-wide improvement. That one has some interesting twists. Luna: Looking forward to it. See you next time.