Latest / The Buyer's Side with Fexingo: Procurement, Sourcing, and B2B Purchasing Decisions / How One Buyer Used Supplier-Led Cost Transparency to Save 15 Percent
Transcript
- Lucas: Let me start with a number: fifteen percent. That's how much one mid-sized medical device company cut its direct materials cost in eighteen months. And they didn't do it by squeezing suppliers on price. Luna: Okay, I'll bite. What did they do instead? Lucas: They asked their top twenty suppliers to open their cost books. Labor rates, raw material costs, overhead allocation, profit margin — the whole breakdown. In exchange, they offered longer contract terms and a share of the savings if both sides found efficiencies. Luna: So the suppliers basically said 'here's what we actually pay to make this part' and trusted the buyer not to use it against them? That seems like a big ask. Lucas: It is. And not every supplier agreed. But about three-quarters of them did. The ones who said no — typically smaller fabricators who lacked the accounting infrastructure to provide that detail — they kept their existing contracts. No penalty. But the ones who participated got something real: three-year agreements instead of one-year, and a formal process to split cost savings fifty-fifty. Luna: I want to back up. What exactly does 'open their cost books' mean in practice? Are we talking full access to their ERP system? Lucas: Not full access. That's too invasive. What the buyer did was set up a structured template — a spreadsheet, essentially — with line items for material cost, direct labor, manufacturing overhead, SG&A allocation, and target margin. Suppliers filled it in for each part they supplied. Then the buyer's cost engineers — they had two people who came from manufacturing backgrounds — validated a sample of those submissions against industry benchmarks and, in some cases, site visits. Luna: So there's a verification layer. Because without that, a supplier could just inflate their costs and the buyer would think they're getting transparency when really they're getting fiction. Lucas: Exactly. And that's the biggest risk in this approach. The buyer mitigated it in two ways. First, they cross-checked reported material costs against public indices for steel, aluminum, and medical-grade plastics. If a supplier claimed fifty percent more than the market price, that flagged for review. Second, they used a third-party cost engineering firm — one that specializes in medical device manufacturing — to audit about fifteen percent of the submissions each quarter. Luna: And did they catch anyone inflating? Lucas: They did. In the first round, two suppliers had systematically overstated their overhead allocation by about eight percent. One was an honest mistake — they'd allocated a fixed cost across too few units. The other was more deliberate. The buyer gave both a chance to resubmit with corrected numbers. The deliberately inflated one lost access to the cost-sharing program for a year, but the contract itself wasn't terminated. They wanted to keep the relationship, but with consequences. Luna: That's interesting. They didn't burn the bridge. They just made the benefit conditional on honesty. Lucas: Right. And that's key to making cost transparency work long-term. If you punish a supplier harshly for a first offense, word spreads and no one will participate. But if you create a system where honesty is rewarded — the suppliers that submitted accurate data got faster payments and priority for new business — you build trust over time. Luna: So the fifteen percent savings — were those mostly from the cost-sharing agreements, or did the buyer also find ways to redesign parts? Lucas: Both. Roughly half came from negotiated price adjustments based on the transparent data. For example, one supplier had been charging a flat markup of twenty-five percent on a custom injection-molded component. But when the cost breakdown showed that actual overhead was only eighteen percent, they agreed to lower the price by five percent. The other half came from joint value engineering — the buyer's design engineers worked with the supplier to reduce the number of secondary operations on a machined part, which cut labor cost by twelve percent without affecting quality. Luna: That's the ideal scenario — the transparency leads to collaboration rather than just a price cut. But does this work for every category? I can't imagine a commodity supplier, say for corrugated boxes or cleaning chemicals, opening their books when margins are already razor thin. Lucas: You're right. This approach works best for custom-engineered parts or proprietary components where there's enough margin to share and enough complexity to find efficiencies. For commodities, the buyer already knows the market price — there's no information asymmetry to exploit. The medical device company I'm talking about applied this only to direct materials that were custom-designed: injection molds, cnc machined housings, custom electronics assemblies. Not for standard fasteners or packaging. Luna: And the suppliers that participated — were they all large companies with sophisticated finance teams, or did some smaller ones manage too? Lucas: Good question. The buyer had twenty suppliers in the program. Fourteen were mid-sized, say fifty to two hundred employees. Three were small — under twenty employees — and they struggled the most with the template. The buyer actually sent a cost engineer to two of those small shops to help them build their cost models. That investment paid off: those two suppliers ended up identifying five percent additional savings on their own processes, which they shared with the buyer. Luna: So the buyer essentially subsidized the supplier's cost-accounting capability as part of the program. That's a different kind of investment than what procurement teams usually make. Lucas: It is. And it gets at something broader. The companies that succeed with cost transparency aren't the ones that demand it as a condition of business. They're the ones that treat it as a joint project. They invest in the relationship, they provide resources, and they share the upside. The medical device company I mentioned spent about one hundred and fifty thousand dollars on the third-party audits and cost engineer time over eighteen months. They saved over two million dollars in material costs. That's a thirteen-to-one return. Luna: That's a compelling ROI. But I imagine some procurement leaders hear this and think 'my suppliers would never go for it.' How did this company convince the first few to say yes? Lucas: They started with their best relationship. Their number one supplier — a precision machining shop they'd worked with for over a decade — they approached them first and proposed a pilot on just five part numbers. They offered a one-year contract extension and a guarantee that the data would only be used for those five parts, not renegotiated across the whole portfolio. That supplier agreed. Once they had a success story — a three percent price reduction on those parts plus a process improvement that saved the supplier's own costs — they could show other suppliers a concrete outcome. Luna: So it's a 'show, don't tell' strategy. And the early adopter gets a competitive advantage in winning more business. Lucas: Exactly. Within six months, the buyer had twelve suppliers in the program. By month twelve, all twenty. And here's something that surprised me: several suppliers told the buyer that the cost transparency exercise helped them improve their own internal costing. One supplier discovered they were under-pricing a particular product line by eight percent because they'd been allocating overhead incorrectly. So the transparency actually helped them become more profitable on other customers' work. Luna: That's a win-win that most procurement teams don't even try to create. It moves the relationship from transactional to strategic. But I still wonder about the limits. What happens when a supplier says no and you're their only customer for a critical component? Lucas: That's a tough spot. In this case, the buyer had alternatives for most components — they weren't sole-sourced except for one electronic subassembly. For that one, the supplier declined to participate, and the buyer accepted it. They didn't push. But they did set a target to qualify a second source over the next two years, which they're now doing. The lesson is: cost transparency shouldn't be a weapon. If you force it on a supplier that has no choice, you destroy trust and you'll get gamed data anyway. Luna: It's almost like the transparency has to be reciprocal. The buyer is asking for openness, but they also have to be transparent about how they'll use the data and what the supplier gets in return. Lucas: Absolutely. And that brings me to something I think is worth mentioning. If you've gotten value from these kinds of practical procurement conversations — maybe you're a buyer thinking about trying cost transparency, or you're a supplier wondering how to respond if a customer asks — a couple of dollars a month is genuinely what keeps these shows going. Buy me a coffee dot com slash fexingo, if you've gotten something out of them. It's a small way to make sure we keep doing deep-dive episodes like this one. Luna: Yeah, and it really does make a difference. We don't run ads, so listener support is what keeps the podcast ad-free and focused on the specifics. Lucas: So back to cost transparency. One thing I haven't mentioned: the buyer also used the data to spot a trend in resin prices that their suppliers hadn't flagged. By aggregating the material cost data across multiple suppliers, they noticed that a particular medical-grade polymer was rising faster than the published index. They pre-bought six months of supply and locked in a price that saved an additional two percent across the program. Luna: That's a clever byproduct. The buyer essentially got a market intelligence advantage from the aggregated data. Individual suppliers might not have seen the pattern because they only see their own purchases. Lucas: Right. And that's an argument for scaling the program beyond the top twenty. The more suppliers share cost data, the better the buyer's visibility into upstream trends. The medical device company is now piloting a similar program with their tier-two suppliers — the ones that supply raw materials to their direct suppliers. Luna: That's ambitious. But it also multiplies the complexity. Now you're dealing with cost breakdowns from companies you don't have a direct contract with. Lucas: It does. But they're approaching it cautiously — just three tier-two suppliers to start, all of which are large chemical companies with existing transparency programs. The goal isn't to audit every line item. It's to get directional visibility into cost drivers so that when a direct supplier says 'our raw material costs are up ten percent', the buyer can validate that claim against the tier-two data. Luna: So it's a verification layer, not a full open-book. That seems scalable. I think the key takeaway from this case is that cost transparency isn't a magic bullet — it's a structured process that requires investment, trust, and a willingness to share the upside. Lucas: Exactly. And it's not right for every buyer-supplier relationship. But if you have a category where there's significant information asymmetry and enough margin to make collaboration worthwhile, it's one of the most effective tools for moving beyond adversarial negotiation. Luna: And the thirteen-to-one return doesn't hurt either. Lucas: It really doesn't. I'm curious — for listeners who have tried something like this, or are considering it, what's the biggest barrier you see? Is it supplier reluctance, internal capability, or something else? We'd love to hear.