Latest / The Buyer's Side with Fexingo: Procurement, Sourcing, and B2B Purchasing Decisions / How One Buyer Cut Costs with Supplier Audits
Transcript
- Lucas: Alright Luna, let's talk about something that doesn't sound as exciting as AI or reverse auctions but might be one of the most reliable ways to save real money in procurement: supplier audits. Luna: Supplier audits. That sounds like something we should have covered a while ago. What's the story here? Lucas: So there's this mid-sized industrial parts distributor, about 400 million in annual revenue, and their procurement director decided she was tired of just accepting supplier price increases without question. She started a formal audit program, and what she found shocked her: about 21 percent of what they were paying was inflated. Luna: 21 percent. That's a massive number. How did she even get that kind of visibility? Lucas: Well, she started with the data they already had. Quality rejection rates, on-time delivery performance, but those were all operational metrics. She wanted to look at cost. So she pulled invoices from their top ten suppliers and started line-item analysis. Luna: And that's when the red flags started popping up? Lucas: Exactly. She noticed that some suppliers were charging for things like storage fees, tooling amortization, and even some administrative overhead that wasn't in the original contract. And on top of that, the labor rates they were billing didn't match the market rates at the time. Luna: So the contracts they had were basically the floor, and the suppliers were adding on extras. That's not necessarily malicious, but it's definitely worth auditing. Lucas: Right. The thing is, many buyers just accept these charges because they don't have the time or the leverage to question them. But she decided to take it a step further. She scheduled on-site visits at two of the biggest offenders. Luna: On-site audits. That's brave. How did the suppliers react? Lucas: One of them was actually pretty open to it. The other one was more defensive, but they eventually agreed because they wanted to keep the contract. She went in with a checklist, looked at their cost structures, and found that the labor rates they were charging were about 15 percent higher than what they actually paid their workers. Luna: So they were padding the labor line. And that's where the 21 percent comes from? Lucas: Partially. When she added up all the discrepancies across all ten suppliers, it came to about 21 percent of what they were spending with those suppliers. That's millions of dollars a year in overcharges. Luna: So what did she do with that information? I imagine it gave her some serious leverage in renegotiations. Lucas: Absolutely. She went back to each supplier with the audit findings and said, 'Look, we've identified these discrepancies. We want to renegotiate the terms to reflect the actual costs.' And because she had the data, she wasn't just making accusations. She had evidence. Luna: And they came to the table. How many of them actually agreed to lower their prices? Lucas: Seven out of ten agreed to new pricing that reflected the true costs. Two of them offered concessions in other areas, like extended payment terms or better delivery schedules. Only one supplier dug in and refused to budge. She ended up replacing that supplier within six months. Luna: Seven out of ten is pretty good. And the one that refused, that's a bold move to replace them. Lucas: It was, but she had the numbers to show that the new supplier would be cheaper even with the transition costs. And honestly, that's one of the hidden benefits of audits: they give you the confidence to make tough decisions. Luna: You know, this reminds me of something. If you're a buyer who's thinking about doing this, where do you even start? Is there a checklist or a process that makes sense? Lucas: Great question. The first step is to pick your highest-spend suppliers. You don't need to audit everyone. Focus on the ones that represent the largest chunk of your procurement budget. That's where the biggest savings are hidden. Luna: And then what? You just ask for their cost breakdowns? Lucas: You can start by analyzing the invoices you already have. Look for charges that aren't explicitly in the contract. If you see something like 'miscellaneous' or 'handling fee,' that's a red flag. Then, once you've identified patterns, you can request a formal audit clause be added to future contracts. Luna: So it's not just about doing audits, it's about building the right to audit into your agreements. That makes sense. Lucas: Exactly. And if you're a smaller company without a dedicated procurement team, you can still do this. Even a simple spreadsheet analysis of your top five suppliers can reveal a lot. You don't need a big consultancy to find the low-hanging fruit. Luna: It's funny, we talk about all these high-tech solutions, and sometimes the most effective thing is just looking at the bills carefully. Lucas: Right. And that's why I love this example. It's not about fancy software or complex models. It's about being diligent and asking the right questions. The data was already there; she just took the time to actually look at it. Luna: You know, this episode is a perfect example of what we try to do here. If you're listening and this has helped you think about your own procurement, that's exactly what we're going for. And if it's worth a coffee to you, you can find us at buy me a coffee dot com slash fexingo. That's a small way to keep this show ad-free and independent. Lucas: Yeah, every little bit helps us keep doing episodes like this. But back to the audits: the other thing she did was she made the audits a regular part of her supplier management process. She didn't just do it once and move on. Luna: So she made it a habit. How often does she audit now? Lucas: She does a light review every quarter and a deep dive once a year for her top five suppliers. And the audits have become a selling point in negotiations. She tells new suppliers, 'We do regular audits to make sure we're getting fair pricing.' It sets expectations from the start. Luna: That also builds trust, I'd imagine. If you're transparent about your process, suppliers are more likely to be honest with you. Lucas: Exactly. And she's seen the quality metrics improve too. The suppliers she's auditing are performing better in terms of on-time delivery and defect rates. It's not just about cost; it's about overall supplier health. Luna: So the audits have a dual benefit: cost savings and better performance. That's a win-win. Lucas: And it's a long-term strategy. She told me that the first audit cycle saved them about 21 percent of their spend with those suppliers, but the ongoing audits have kept that savings from eroding. Supplier costs creep up over time, and the audits catch those creep-ups early. Luna: So if you're a buyer listening, what's the one thing you should take away from this episode? Lucas: Start with your top suppliers. Pull up their invoices for the last twelve months and just scan for anything that looks odd. You don't need to be an expert. If something doesn't make sense, question it. That's the beginning of a supplier audit. Luna: And if you find something, you have the leverage to fix it. That's a pretty powerful position to be in. Lucas: Yeah, and it's not about being adversarial. It's about being informed. Most suppliers want to keep your business, and if you show them the data, they'll usually work with you to find a fair solution. Luna: Well, I think this is a great milestone episode. Supplier audits might not be the flashiest topic, but it's one that can genuinely move the needle. And that's what this show is about. Lucas: Absolutely. And if you've got a supplier audit story of your own, we'd love to hear it. You can find us on the usual channels. Thanks for listening, and we'll catch you on the next one.