Latest / The Buyer's Side with Fexingo: Procurement, Sourcing, and B2B Purchasing Decisions / How a Buyer Used Supplier Consolidation to Cut Logistics Costs 22 Percent
Transcript
- Lucas: Luna, I want to talk about a procurement strategy that sounds almost too simple on paper but delivered 22 percent savings in freight costs for a mid-sized automotive parts manufacturer. It's supplier consolidation — but not the blunt-force kind where you just cut suppliers and hope for the best. Luna: Twenty-two percent? That's a big number. What was the starting point? Lucas: They had 47 different logistics providers. Think about that — 47 carriers handling inbound raw materials, outbound finished parts, cross-border lanes, warehousing. Each one with its own contract, its own billing system, its own service levels. The procurement team was drowning in admin overhead. Luna: Forty-seven. That's definitely more than most companies need. But I can also see the logic — more carriers means more competition on price, right? Lucas: That's the conventional wisdom. And to be fair, it works in some categories. But what the buyer here realized — and this is the key insight — is that in logistics, fragmentation doesn't create competition. It creates chaos. Every small carrier has less incentive to give you their best rate because they know you're splitting volume across dozens of vendors. Luna: So they were paying a premium for fragmentation without realizing it. Lucas: Exactly. And if today's conversation is useful to you — I mean, if you're sitting there thinking about your own supplier base and wondering whether you're leaving money on the table — the way these shows stay ad-free and independent is listener support. Buy me a coffee dot com slash fexingo. It's a small gesture that keeps us from having to run commercials. And we appreciate it. Luna: Absolutely. So let's dig into how they actually did it. What was the first step? Lucas: The buyer started with a clean audit of every dollar they spent on freight over the prior 12 months. They segmented the spend by lane — so, which routes were they shipping on — and by mode. Truckload, less than truckload, parcel, intermodal, ocean, air. They found that 80 percent of their freight spend was concentrated on just 12 lanes, but those lanes were being served by 23 different carriers. Luna: That's the classic Pareto principle — 80/20. So they knew exactly where to focus. Lucas: Right. Armed with that data, they modeled what they called total cost of ownership for each lane. Not just the per-pound or per-mile rate, but the hidden costs. Invoice errors, late deliveries, administrative time spent reconciling bills, the cost of managing relationships with dozens of account managers. When they added all that up, the true cost of fragmentation was about 11 percent above the base freight rate. Luna: So the savings opportunity wasn't just about negotiating lower rates — it was about eliminating the hidden costs of complexity. Lucas: Exactly. They set a target to reduce the carrier base from 47 to somewhere between 5 and 8. But they didn't want to go too lean. They knew single-sourcing a critical lane is risky — if that one carrier has a disruption, your whole supply chain stops. Luna: So what was the magic number? Lucas: They landed on seven. But here's the interesting part — it wasn't seven identical full-service carriers. They used what I'd call a hybrid consolidation model. They kept two regional specialists — one for the Pacific Northwest, one for the Southeast — because those carriers had unique depot networks and could offer better transit times on those specific lanes. The other five were national full-service providers that could cover all major lanes. Luna: That makes sense. You keep the best of breed for your niche lanes, and consolidate the bulk volume with the big players. Lucas: Exactly. Then they went to those five national carriers and said, 'We're going to give you a much larger share of our volume, but we need a commensurate rate reduction — and we need it structured as a tiered discount that increases as our volume grows over the contract term.' That's important because it aligned incentives. The carrier knows that if they perform well, they get more business. Luna: Did the carriers push back? I imagine some of them were skeptical that a mid-sized manufacturer could actually deliver the volume. Lucas: Some did. So the buyer offered a 12-month rolling commitment with a 60-day exit clause for both sides. That gave the carriers confidence — they had a guaranteed minimum volume for a year — but it also protected the buyer if service levels slipped. And it worked. Within six months, two of the five carriers had already hit the first volume tier, triggering a 3 percent discount. By month 12, all five had hit it, and the average discount across the portfolio was 6.5 percent. Luna: And the regional specialists — did they also have to cut rates? Lucas: They did, but not as aggressively. The buyer used a different approach there. Instead of a volume-based discount, they negotiated a fixed-rate contract for two years with a built-in annual cost escalator tied to the Producer Price Index for trucking. That gave the specialists predictable revenue, and the buyer got rate certainty. It was a fair trade. Luna: So the overall savings came from a mix of rate reductions and reduced admin costs. How did they measure the admin savings? Lucas: They tracked the hours their procurement and accounting teams spent on freight-related tasks before and after consolidation. Things like invoice matching, dispute resolution, quarterly business reviews. Before consolidation, they had 2.5 full-time equivalents just managing carrier relationships. After, it dropped to 0.8. That's a 68 percent reduction in labor costs tied to freight management. Luna: That's huge. So the 22 percent savings was a combination of lower rates and lower overhead. Lucas: Correct. But I want to be careful here — consolidation isn't a magic bullet. There are real risks. Luna, what do you think is the biggest risk of over-consolidation? Luna: I'd say loss of flexibility. If you consolidate too much, you become dependent on a small number of carriers. If one of them has a labor strike, a fleet shortage, or goes bankrupt, you have very few alternatives. And switching carriers takes time — you can't just flip a switch. Lucas: That's exactly the concern. The buyer in this case built in two safeguards. First, they maintained what they called 'warm standby' relationships with three carriers that didn't win the primary business. Those carriers got a small amount of spot freight — maybe 5 percent of total volume — to keep the relationship alive and the operational integration ready. If a primary carrier failed, they could scale up the standby within two weeks. Luna: That's smart. It's like having a backup generator — you pay a small premium for the insurance. Lucas: Exactly. The second safeguard was quarterly business reviews with every carrier, including the standbys. In those reviews, they'd go over on-time delivery rates, damage claims, billing accuracy, and capacity commitments. If a carrier started slipping, they'd get a corrective action plan. If they didn't improve within two quarters, the buyer could shift volume to a standby. Luna: So they created a performance-driven system rather than just a static contract. That's a good model. Lucas: It really is. And the results speak for themselves. Eighteen months after starting the consolidation, the buyer had reduced total freight spend by 22 percent, cut the carrier count from 47 to 7, and improved on-time delivery from 89 percent to 96 percent. The carriers themselves were happier because they had more predictable volume and a clearer growth path. Luna: I think a lot of procurement teams could benefit from this approach. So what's the one takeaway you'd leave listeners with? Lucas: Don't assume more suppliers equals better pricing. In logistics — and in many other categories — fragmentation hides real costs. Start by auditing your total cost of ownership, not just the unit price. Consolidate thoughtfully, keep backups for critical lanes, and build in performance reviews that let you course-correct. That's how you turn a simple idea into 22 percent savings. Luna: Great advice. And if you want to dig deeper into your own supplier base, there's a practical checklist on our website. Thanks for listening, Lucas. Lucas: Thanks, Luna. Talk to everyone next time.