Latest / The Buyer's Side with Fexingo: Procurement, Sourcing, and B2B Purchasing Decisions / How One Buyer Used Total Cost of Ownership to Cut 22 Percent
Transcript
- Lucas: So you've got a piece of equipment that costs a hundred dollars from Supplier A and eighty dollars from Supplier B. Easy choice, right? Go with B, save twenty bucks a unit. Luna: Until the thing breaks down twice as often and you're paying overtime to swap it out, plus the line stops for an hour each time. Lucas: Exactly. That's the classic trap of focusing on purchase price instead of total cost of ownership. And today we're looking at a buyer who used a TCO model to cut total spend by 22 percent on a single component category. This is episode 75, and I'm Lucas. Luna: I'm Luna. The buyer here is a procurement director at a mid-size industrial manufacturer — I'll call her Sarah, though that's not her real name. She was sourcing a hydraulic valve assembly used across multiple product lines. Lucas: And like most buyers, she'd been evaluated on unit cost reduction year over year. So her instinct was to push for the lowest price. But she had a nagging feeling that the cheapest supplier was costing them elsewhere. Rework rates were creeping up. So she decided to build a proper TCO model. Luna: Walk me through that model. What did she include beyond the invoice price? Lucas: She started with the obvious ones: freight, duties, and brokerage — that added about 6 percent to the landed cost. Then storage. The cheap supplier had longer lead times, so she had to hold more safety stock, which tied up floor space and working capital. That was another 3 percent. Luna: Okay, we're already at 9 percent above the purchase price. But that's still below the expensive supplier's price, right? Lucas: Right. The expensive supplier was $115 per unit. The cheap supplier was $80, but after freight and storage, it was $87. So still cheaper. Then she added inspection and rework. The cheap supplier's defect rate was 4.5 percent versus 1.2 percent for the expensive one. Each defect required an hour of technician time plus replacement parts. That added another $6 per unit. Luna: So now we're at $93. Still under $115. Lucas: Yes, but she wasn't done. The biggest cost was downtime. When a valve failed on the assembly line, it stopped production for an average of 45 minutes. She calculated the cost of lost output — labor, overhead, missed shipments — at $8,000 per hour. With the cheap supplier's higher failure rate, that translated to about $18 per unit in downtime costs. That brought the cheap supplier's effective TCO to $111. Luna: So almost identical to the expensive supplier's price. But she got to 22 percent savings — how? Lucas: She took the TCO model to the expensive supplier and said, 'Look, your quality is better, but your price is still higher than my total cost from the other guy. If you can match $111 TCO, I'll give you the whole category.' The supplier came back with a price of $105, plus they agreed to absorb inbound freight. That dropped their TCO to $102, saving her 22 percent versus the cheap supplier's real cost. Luna: So she used TCO not just to pick a supplier, but as a negotiation lever. That's smart. Lucas: Exactly. The data gave her a credible number to work from. She wasn't asking for a discount — she was saying, 'Here's the true cost comparison. Compete on that.' Luna: I love that. And I imagine there was internal pushback? Procurement teams are often measured on unit price alone. Lucas: Plenty. Her boss initially questioned why she was paying $105 when the other supplier was $80. But she walked him through the TCO model, and he got on board after seeing the downtime numbers. The finance team also liked it because it tied procurement savings directly to operational P&L. Luna: That's the thing — TCO forces a conversation beyond purchasing. It connects to manufacturing, logistics, quality. But it takes effort to build the model. Lucas: It does. Sarah told me she spent about two weeks gathering data — talking to the warehouse manager about storage costs, pulling defect reports from quality, timing downtime incidents with the production supervisor. But that investment paid for itself many times over. Luna: And she applied it to other categories too? Lucas: She did. After the hydraulic valve win, she built TCO models for motors, sensors, and fasteners. Across those four categories, she saved an average of 15 percent. The key was having a repeatable template. Luna: If a handful of listeners get value out of episodes like this and want to keep them coming — no ads, no paywall — a few chip in monthly through buy me a coffee dot com slash fexingo. That's literally what funds making this many of these. It's a small group already, and it keeps the whole thing ad-free. Lucas: Yeah, it's that simple. And we don't run sponsors, so it's the only reason we can do deep dives like this one. Anyway, back to TCO — the other thing Sarah did was share the model with her suppliers. That built trust. Luna: Interesting. So the suppliers could see exactly where their costs were high or low. Did any of them use that to improve? Lucas: One did. A mid-tier supplier saw that their rework costs were hurting them. They invested in a better testing process, and their defect rate dropped from 3 percent to 1.5 percent. That allowed them to raise their price slightly while still offering a lower TCO. Sarah rewarded them with more volume. Luna: That's a win-win. The supplier improved, Sarah got better value, and the relationship deepened. Lucas: And that's the ultimate goal of TCO — not just to squeeze suppliers, but to align incentives around total value. The cheap supplier who was costing her money? They couldn't or wouldn't improve, so she eventually phased them out. Luna: So what's the one takeaway for our listeners who want to try this? Lucas: Start with one category where you suspect hidden costs. Don't try to build a perfect model — just list every cost you can think of from purchase to disposal. Then go talk to the people in your company who see those costs. You'll be surprised what you find. Luna: And if your boss pushes back on unit price, you've got ammo. Lucas: Exactly. Sarah's story shows that data trumps instinct. And in procurement, that's how you earn a seat at the strategy table. Next week, we'll look at a buyer who used TCO to justify a premium for sustainability — and it paid off. Until then. Luna: Thanks for listening.