Latest / The Buyer's Side with Fexingo: Procurement, Sourcing, and B2B Purchasing Decisions / How a Buyer Used Supplier Audits to Cut Costs 20 Percent
Transcript
- Lucas: So there's this mid-size manufacturer — about $400 million in revenue, makes industrial valves and fittings — and they had a problem that sounds awfully familiar. Their procurement team had been using scorecards for years, getting the standard 3 to 5 percent annual price concessions, but leadership wanted more. They needed a 20 percent reduction in a category where suppliers were already lean. Luna: Right, because squeezing another nickel out of a supplier who's already running thin margins — that usually backfires. You get quality issues or late deliveries. Lucas: Exactly. So instead of asking for another discount, the procurement director — her name is Sarah — decided to audit her suppliers. Not financial audits, not quality audits — operational audits. She wanted to see how her top ten suppliers actually produced the parts she was buying. Luna: And she did this unannounced? Lucas: Some were scheduled, some were unannounced. She gave suppliers a heads-up that audits would happen within a 90-day window, but not the exact date. That flexibility was key. And look, I should mention — and this is relevant to how we structure these conversations — the reason we can dig into stories like this without ads or paywalls is because a handful of listeners chip in monthly through buy me a coffee dot com slash fexingo. It's a small group, but it funds the research time and keeps the shows ad-free. So if these episodes have moved your work forward in some small way, that's where you can nudge it along. Luna: Yeah, and it really does make a difference. We hear from people who use these exact cases in their own presentations. Okay, back to Sarah's audit. Lucas: Right. So she shows up at the first supplier — a family-owned metal stamping shop outside Cleveland. And she doesn't just walk the floor with a checklist. She brings a cost model — a should-cost model — based on raw material indices, labor rates for that region, machine depreciation schedules. She sits down with the owner and says, 'I think this part should cost $4.52, not $5.65.' Luna: That's a 20 percent gap. And the owner's first reaction is probably defensiveness, right? 'You don't know my costs.' Lucas: Exactly. But because she had the data — LME copper prices, local wage surveys, even the electricity rate for that county — she could have a real conversation. The owner looked at her model and said, 'Well, you're using a 15 percent scrap rate, but we actually run at 22 percent on that part because of the tight tolerances.' And that was true. So she adjusted the model on the spot. Luna: So the audit wasn't about beating them down. It was about finding the actual cost drivers. Lucas: Right. And in that case, they discovered that the supplier's raw material purchasing was inefficient — they were buying small lots at spot prices instead of contracting forward. Sarah helped them lock in a six-month contract for steel, which saved the supplier 4 percent, and she got half of that savings passed through. Net result: the part price dropped from $5.65 to $5.20 — about 8 percent. But that was just one part. Luna: And the other 12 percent came from where? Lucas: Process waste. She found that the supplier was doing a secondary deburring operation that could be eliminated if the die were sharpened more frequently. That saved labor and tooling. Over the full portfolio of parts from that supplier, the total reduction was 14 percent. Not 20 yet. Luna: So she had to go deeper. Did she audit all ten? Lucas: She audited six in the first phase. The second supplier — a plastics injection molder — was where they hit the 20 percent target. This molder was using a standard polypropylene that had a 2 percent shrinkage rate, causing a higher reject rate. Sarah's team identified a different grade — same mechanical properties, slightly different shrinkage — that cut rejects from 5 percent to under 1 percent. The supplier didn't even know the alternative existed. Luna: So the savings came from material science insight, not just haggling. Lucas: Exactly. And that's the pattern across all the audits. About 60 percent of the savings came from what they called 'found money' — process improvements that the supplier could implement at zero or low cost, and the buyer got a share. The other 40 percent came from pricing corrections where the supplier had been charging a premium for features that weren't actually needed. Luna: I can imagine some suppliers felt pretty put-upon. How did Sarah handle the relationship piece? Lucas: She was very upfront. She told them from the start: 'I'm not here to squeeze you. I'm here to understand your cost structure so we can find a fair price together.' And she backed it up by sharing her should-cost model with them — complete transparency. That built trust. In fact, three of the six suppliers later asked her to help them audit their own sub-suppliers. Luna: So the audit became a value-add service, almost. That's a far cry from the adversarial stereotype. Lucas: Right. And the results were real. Over the full program, the company reduced spend in that category by 20.3 percent year-over-year — about $2.7 million in annual savings. And supplier satisfaction scores actually went up by 12 percent in the same period. Luna: Because you gave them a path to be more efficient. Not just a demand. Lucas: Exactly. And now the company is rolling this out to three other categories: packaging, electronics components, and logistics. The audit framework is standardized — a one-day on-site visit, a cost model review, a waste walk, and a negotiation session. They call it the Cost Discovery Day. Luna: Cost Discovery Day. That's a much better name than 'supplier audit' — sounds like a collaboration. Lucas: It's intentional. Language matters in procurement. If you call it an audit, suppliers brace for confrontation. If you call it a discovery day, they come to the table curious. Sarah actually told me that the first two suppliers she invited — the ones who got the unannounced visits — later said they preferred the scheduled ones because they could prepare data. So she adjusted. Luna: So the process evolved based on feedback. That's smart. What about the suppliers who refused? Lucas: Two of the ten opted out. One said they didn't have the bandwidth. The other was a sole-source supplier of a proprietary component — they had leverage. Sarah didn't push. She documented the refusal in the supplier scorecard and flagged them for future re-sourcing. But she also noted that their pricing was already competitive, so it wasn't a priority. Luna: So you don't alienate a good supplier over a process preference. Pragmatic. Luna: So for a buyer listening who wants to try this — where do they start? What's the first step? Lucas: Pick one category where you have high spend but low visibility into the cost drivers. Build a should-cost model using public data — commodity indices, labor rates, machine hour rates. Then invite your top supplier to a Cost Discovery Day. Share the model. Ask them to validate it. The conversation alone will reveal 5 to 10 percent savings just from correcting assumptions. Luna: And if they say no, you've lost nothing. But if they say yes, you might find that 20 percent. Lucas: Right. And the beauty is, once you've done it with one supplier, you can scale the model across the category. Sarah's team did six audits in the first quarter, and the templates they built made subsequent audits faster and cheaper. The second audit took half the time of the first. Luna: Sounds like a compounding return on the initial effort. Lucas: Exactly. So the question for any procurement team is: are you managing supplier relationships, or are you truly understanding their cost structure? One gives you incremental savings. The other gives you twenty percent.