Latest / The Buyer's Side with Fexingo: Procurement, Sourcing, and B2B Purchasing Decisions / How One Buyer Broke a Sole-Source Supplier's Grip
Transcript
- Lucas: Let's talk about the situation every procurement professional dreads. You have a critical component, maybe a custom-machined part or a proprietary subassembly, and only one supplier in the world can make it. They know it. You know it. And every year, without fail, the price goes up. Luna: Sole-source dependency. It's like being in a bad relationship where you can't leave because you've built your whole life around the other person. Lucas: Exactly. And that's the trap. A mid-sized manufacturer of industrial sensors reached out to us — I'll call them SensTech — and they were living that nightmare. They had a single supplier for a custom sensor housing. The supplier knew SensTech had designed their entire product line around that housing. And they were raising prices 12 percent year over year. Luna: Twelve percent annually? That's well above inflation, even for this decade. Lucas: Right. And SensTech's procurement team had tried negotiating. They'd asked for longer-term contracts, volume commitments, anything. The supplier just said no. So the team had to ask a harder question: could they actually walk away? Luna: And the answer wasn't obvious, because switching costs in manufacturing can be brutal. New tooling, revalidation, maybe even redesigning the product. Lucas: That's what makes sole-source situations so sticky. It's not just the unit price. It's the total cost of ownership of switching — retooling dies, requalifying the part, potential downtime during the transition. SensTech's initial estimate was that switching would cost them about 400 thousand dollars. Luna: That's a big number. But if they were spending two million a year on these housings and getting hit with 12 percent increases, the payback might be faster than they think. Lucas: That's exactly how their procurement director framed it. She ran a ten-year total cost projection. If they stayed with the incumbent, assuming 12 percent annual increases, the cumulative cost would be over 38 million dollars. If they switched, even with the upfront cost and a potential first-year price premium from a new supplier, the ten-year total was under 30 million. Luna: So the math was clear. But finding an alternative supplier for a custom part isn't like switching office supplies. Where do you even start? Lucas: They started with the print. The original engineering drawings. And they realized something interesting — the housing was complex, but not magic. There were machine shops in the Midwest and in Mexico that had similar capabilities, just not in that specific industry. So the team approached three shops that made parts for automotive and agricultural equipment. Luna: Adjacent industries. That's smart. The capabilities transfer even if the specific part geometry doesn't. Lucas: Exactly. Two of the three said they could make it. But they wanted guarantees — minimum order quantities, multiyear commitments — because they'd have to invest in tooling too. SensTech was willing to give them a two-year contract, but they wanted a price cap for year two. Luna: So they were asking for reciprocity. We'll give you volume certainty if you give us price certainty. Lucas: Right. And here's where it gets interesting. The procurement team didn't just pick one supplier. They qualified both. One became the primary, the other the backup. And they phased the transition over six months — starting with a low-risk component family, proving the new supplier could hold tolerances, then moving to the high-volume parts. Luna: That phased approach reduces risk. If the new supplier has teething problems, you're not scrambling to go back to the old one on their terms. Lucas: Exactly. And by the time they fully transitioned, they had reduced the unit cost by 18 percent compared to the incumbent's final price. Plus, they now had two qualified sources, so the incumbent — who they still use for a small legacy product line — suddenly became willing to negotiate. Luna: It's a beautiful thing. Competition changes everything. Lucas: It does. And the key insight here is that SensTech broke the sole-source dependency not by finding a magical supplier that no one else knew about, but by doing the hard work of quantifying the switching cost, identifying adjacent capability, and managing the transition risk. Luna: So for a buyer listening who's in a similar spot — maybe not as extreme as 12 percent annual increases, but feeling trapped — what's the first step? Lucas: I think the first step is to run the switching cost analysis honestly. Include the soft costs — engineering time, potential downtime, qualification testing. Then compare that to the projected cost of staying. If the numbers are close, you have leverage even if you don't switch. Because the incumbent doesn't know how close you are. Luna: That's a good point. The threat of switching has value even if you never actually do it. Lucas: Absolutely. And the second step is to look outside your industry. The machine shop that makes brackets for tractors might be perfectly capable of making your sensor housing. They just don't know your market exists. Luna: Which brings up a broader question. How common are these sole-source relationships really? I mean, every procurement team I've talked to says they're trying to dual-source, but then they show me their spend data and there's always a handful of single-source parts. Lucas: It's more common than most people admit. Partly because it's easy to let a unique part slip through the cracks. The engineer who designed it specified one supplier, and no one ever challenged it. So it becomes institutional inertia. SensTech's housing had been single-source for twelve years before they looked at it. Luna: Twelve years. That's a long time to be paying a premium without asking the question. Lucas: Right. And that's the lesson. Every part that's sole-source should be on a watch list. Not necessarily to switch, but to regularly re-evaluate. Because the technology changes, the supplier landscape changes, and your own cost structure changes. Luna: So it's not just about breaking dependencies. It's about building a process that prevents them from forming in the first place. Lucas: Exactly. And that process includes things like design for procurement reviews, where engineering and procurement sit together and ask: can this part be sourced from at least two suppliers? If not, what's the contingency? Luna: Speaking of processes that add value — and this might seem like a left turn, but it's related — a lot of the frameworks we talk about on this show come from listeners who share their own experiences. And honestly, the reason we can keep doing episodes like this, digging into real cases, is that listeners support the show directly. A couple of dollars a month on buy me a coffee dot com slash fexingo genuinely makes a difference. Lucas: It does. No ads, no sponsors, just listeners who find the conversations useful. If these episodes have helped you think differently about a negotiation or a sourcing decision, that's the whole point. And if you want to help keep them coming, that link is buy me a coffee dot com slash fexingo. Luna: Yeah, we appreciate everyone who's chipped in. It really does keep the lights on. Lucas: Alright, back to SensTech. One more thing worth noting. After they transitioned, they didn't just enjoy the lower price. They also started getting better service. The new supplier proactively suggested a design change that simplified the housing and reduced machining time. That was another 6 percent cost reduction. Luna: That's the hidden upside of breaking a sole-source relationship. You don't just get a better price. You get a partner who's actually motivated to help you improve. Lucas: Exactly. The old supplier had no incentive to innovate because they had no competition. The new supplier knew they had to earn the business every day. And that mindset difference is worth more than any single price concession. Luna: So the takeaway for anyone in procurement: if you have a sole-source part that's been untouched for years, it's worth a second look. The cost of switching might be lower than you think, and the benefits go beyond the unit price. Lucas: Yeah. And you might end up with a better supplier than you started with. That's the win.