Latest / The Buyer's Side with Fexingo: Procurement, Sourcing, and B2B Purchasing Decisions / How One Buyer Used Supplier-Led Innovation to Cut Costs 15 Percent
Transcript
- Lucas: There's a moment in every procurement professional's career where they realize the biggest savings aren't in the price negotiation — they're in the design. And today I want to talk about a buyer who took that idea literally. Luna: Okay, I'm intrigued. You mean redesigning the product itself? With the supplier's help? Lucas: Exactly. The buyer is a mid-size industrial equipment company — about $200 million in revenue. They make hydraulic systems for construction machinery. And they were stuck: they'd already consolidated suppliers, negotiated better payment terms, done all the classic procurement moves. But their margins were still under pressure. Luna: So what did they do differently? Lucas: They went to three of their top component suppliers — the ones making the valves and seals — and said: 'We want you to redesign this hydraulic valve assembly. Don't just give us a lower price. Change the design. Make it cheaper to build, lighter, faster to assemble. And if your idea works, you split the savings with us.' Luna: That's a huge shift from the typical RFQ where you hand them a spec and say 'beat this price.' Lucas: Right. It's a completely different mindset. Instead of treating the supplier as a vendor, you're treating them as a design partner. And it worked. Over six months, the suppliers submitted proposals. One of them suggested replacing a machined steel component with a stamped part — cut the weight by 30 percent and slashed machining time. Another proposed a snap-fit connection instead of threaded fasteners, which cut assembly labor by 40 percent. Luna: So the cost savings came from multiple angles — materials, labor, assembly. Lucas: Exactly. The total cost of the valve assembly dropped 15 percent. And because the buyer shared the savings — they gave the supplier a percentage of the cost reduction for the first year — the supplier had a real incentive to innovate. It wasn't just a one-time price cut; it was a sustained improvement. Luna: I imagine there were concerns about intellectual property. If a supplier redesigns a part, who owns the new design? Lucas: That's the first thing any buyer worries about. In this case, they handled it upfront. The buyer said: 'You bring us ideas, we evaluate them. If we adopt your design, you get a royalty for a fixed period — typically 12 to 18 months — after which the design becomes ours.' That gave the supplier a return on their R&D investment, but didn't lock the buyer into long-term dependency. Luna: That makes sense. And I'm guessing not every supplier was on board. Lucas: No. One of the three suppliers declined to participate. They said they didn't have the engineering bandwidth. That's okay — the buyer didn't force it. The two who did participate ended up becoming preferred suppliers for other components as well. Luna: What about the internal resistance? I imagine engineering or product teams might push back on letting a supplier change their design. Lucas: That's a huge point. In fact, the buyer's own engineers were skeptical at first. They saw it as outsourcing their core competence. But procurement brought them into the process early — they were part of the evaluation team. And when the suppliers' proposals actually improved performance — the snap-fit design was actually more reliable than the threaded fasteners — the engineers became advocates. Luna: So it required a cultural shift within the buying organization. Lucas: Absolutely. And I think that's the hidden lesson here. The 15 percent cost reduction is impressive, but the real win is that the company now has a process for supplier-led innovation. They've since applied it to other components — pumps, seals, even electrical harnesses. Luna: It sounds like a model that could work beyond manufacturing. Have you seen it applied in services or software? Lucas: I have. There's a parallel in what some call 'open innovation' in procurement. For example, a large retailer invited its logistics providers to redesign its warehouse layout. One provider suggested a new racking system that increased storage density by 20 percent. The retailer shared the savings, and the provider got a multi-year contract. Luna: So the principle is: instead of dictating the solution, you define the problem and let suppliers bring their expertise. Lucas: Exactly. And it requires trust. You have to be willing to share cost data, production volumes, sometimes even margin information. That's uncomfortable for a lot of buyers. But if you want suppliers to act like partners, you have to treat them like partners. Luna: Before we go deeper into that trust element, Lucas, I want to touch on something that makes shows like this possible. We keep the episodes ad-free — no sponsor breaks, no mid-roll commercials. That's a deliberate choice. If you find value in these conversations, the simplest way to support it is through a coffee. The link is buy me a coffee dot com slash fexingo. Lucas: Yeah, and I think that matters. We're not trying to sell you anything. We're just trying to share practical ideas that might move your work forward. If that's been useful to you, even a small contribution helps keep it going. Luna: Exactly. No pressure, just an option. Now, back to trust — you mentioned sharing cost data. How do you protect yourself when you open the books? Lucas: You do it selectively. You don't share your entire cost structure. You share the cost breakdown for the specific component you want them to improve. And you use non-disclosure agreements. In the hydraulic valve case, the buyer created a 'clean room' — a secure data room where suppliers could see the target cost and the current cost breakdown, but they couldn't take any data out. Luna: So it's controlled transparency. Lucas: Exactly. You want suppliers to understand where the costs are so they can target their ideas. But you don't want them walking away with your entire bill of materials. Luna: That seems like a smart middle ground. Lucas: There's another risk, though. If you share savings with one supplier, other suppliers might hear about it and demand similar treatment. Luna: How did the buyer handle that? Lucas: They didn't publicize the exact terms. They told suppliers generally: 'We have a program where we share savings from innovative ideas. If you bring us a good idea, you'll be rewarded.' But they kept the specific percentages confidential. And they made it clear that not every idea would be accepted — only those that met rigorous criteria. Luna: That way, it's an incentive, not an entitlement. Lucas: Right. And I think that's key. Supplier-led innovation works best when it's framed as a voluntary opportunity, not a mandatory program. Luna: Let me ask you this — does this approach work for small buyers? If you're a $10 million company, do suppliers care enough to invest time in your redesign? Lucas: It's harder, but not impossible. Smaller buyers can leverage the fact that they're less bureaucratic — decisions get made faster. One small manufacturer I know offered a supplier a 50 percent share of savings for two years. That got their attention. The supplier ended up redesigning a custom motor housing and cut costs by 22 percent. Luna: So the incentive has to be big enough to overcome the supplier's opportunity cost. Lucas: Exactly. And for smaller buyers, the savings might be smaller in absolute dollars, but the percentage impact on their margin is huge. Luna: What about the timing? How long does a typical supplier-led innovation project take? Lucas: In the hydraulic valve case, from initial invitation to implemented design, it was about eight months. That's faster than if the buyer had done it internally, because the suppliers already had deep expertise in their specific components. Luna: So speed is another benefit. Lucas: Yes. And quality. The suppliers know their materials and processes better than anyone. They can often identify improvements that an internal team would miss because they're thinking about manufacturability from the start. Luna: I want to push back a little. Isn't there a risk that suppliers will propose changes that lock you into their proprietary technology? Lucas: That's a very real risk. And that's why the buyer in our case insisted that any adopted design become their property after the royalty period. They also required that the design be sourced from at least two qualified suppliers — not just the innovator — to avoid single-sourcing dependency. Luna: So you get the innovation without losing leverage. Lucas: Exactly. It's a balance. You want to reward creativity, but you don't want to hand over control. Luna: Let's talk about measurement. How do you quantify success beyond cost savings? Are there softer benefits? Lucas: Absolutely. The buyer in our case saw improved supplier relationships — their top suppliers started proactively sending them ideas for other components. They also saw faster new product development because suppliers were more engaged early in the design phase. Luna: That's the kind of long-term value that doesn't show up on a P&L right away. Lucas: Right. But it compounds. One of the suppliers in the program later helped the buyer solve a quality issue with a different component — a problem that had been plaguing them for months. That kind of problem-solving partnership is hard to put a dollar figure on, but it's real. Luna: So what's the one takeaway you'd give a procurement professional listening? Lucas: Start small. Pick one component, one supplier you trust, and one clear problem. Don't try to roll out a company-wide innovation program overnight. Prove it works with a single pilot, then scale. Luna: And the key is to frame it as a partnership, not a squeeze. Lucas: Exactly. The supplier has to see that they'll win too. If you only focus on your own savings, the program won't get traction. Shared savings, shared risk, shared success. Luna: Well said. Thanks for walking us through that case, Lucas. Lucas: My pleasure. It's one of those ideas that sounds simple but takes real discipline to execute. I hope it gives listeners something to try.