Latest / The Buyer's Side with Fexingo: Procurement, Sourcing, and B2B Purchasing Decisions / How One Buyer Used Supplier Consortia to Cut Costs 18 Percent
Transcript
- Lucas: So there's this procurement approach that sounds almost counterintuitive on the surface: you take a group of your suppliers — including some who compete with each other — and you formally get them to share capacity, share data, even share pricing benchmarks. And the result? One mid-sized manufacturer cut their direct material costs by 18 percent in eighteen months. Luna: That does sound counterintuitive. Usually buyers are trying to keep suppliers isolated, play them off each other. How do you get competitors to cooperate? Lucas: The key is the structure. It's called a supplier consortium. The buyer acts as the anchor customer — they bring in suppliers that serve adjacent categories, not identical ones, so they're not direct competitors on every line. Then a third-party administrator runs the data sharing. Each supplier sees aggregate demand forecasts, not each other's individual orders. They commit to a shared capacity pool and get access to lower raw material prices because they're buying as a group. Luna: So the buyer gets better pricing and more reliable supply, and the suppliers get volume they wouldn't have individually. Who was the manufacturer in this case? Lucas: A Midwest-based industrial components maker — name's not critical, but think roughly $400 million in annual procurement spend. They had about 80 suppliers for machined parts, castings, and electronics. They invited 25 of them to join the consortium. Sixteen said yes. The rest either couldn't commit to the data transparency or were too worried about antitrust. Luna: Antitrust is the obvious elephant. How do you set up a consortium without triggering price-fixing concerns? Lucas: You hire a good antitrust lawyer. Seriously. The consortium used what's called a 'safety zone' structure — the participating suppliers never discuss prices directly with each other. The third-party administrator aggregates the data and sets a baseline. The buyer negotiates with each supplier individually, but the baseline shifts because the suppliers' input costs are lower from the collective buying. The Federal Trade Commission actually issued business review letters for similar consortia in the late 2010s, as long as they're pro-competitive and not exclusionary. Luna: And the suppliers don't see each other's individual pricing? Lucas: Exactly. They see a composite cost index. Like, 'the consortium average for raw steel this quarter is X.' They don't know that Supplier A got a better deal from the mill than Supplier B. That protects both the suppliers and the buyer. The manufacturer saved about 18 percent on the categories in the consortium — about $12 million annually. Luna: Twelve million is significant. But I imagine the setup cost wasn't trivial. Legal fees, the third-party admin, the time to get everyone aligned. Lucas: The manufacturer spent about $300,000 on legal and admin in year one. So roughly a forty-to-one return in the first year alone. And the consortium kept running after that. The ongoing cost was maybe $50,000 a year for the administrator. The suppliers also chipped in a small fee — about one percent of the savings they captured. Luna: That's a great incentive alignment. Suppliers pay into the consortium only if they're actually saving money. What kind of data did they share beyond raw material costs? Lucas: Shared demand forecasts were the biggest piece. The manufacturer gave the consortium a rolling twelve-month forecast, which let suppliers plan capacity more efficiently. Before the consortium, each supplier was holding safety stock equivalent to about six weeks of demand. After, they dropped to three weeks collectively. That freed up working capital on both sides. Luna: So the suppliers' inventory costs went down, and they passed some of that back to the buyer? Lucas: Right. The savings weren't just from raw material aggregation. About a third came from reduced inventory carrying costs. Another third came from logistics — they consolidated truckloads. The suppliers shared a distribution center near the manufacturer's plant. That cut freight costs per unit by about 15 percent. Luna: And the last third? Lucas: Process efficiencies. Standardised packaging, standardised labeling, electronic data interchange. The manufacturer had been dealing with seventeen different invoice formats. The consortium agreed on one. That alone cut the buyer's accounts payable processing time by 40 percent. Luna: That's the kind of detail that makes a case study real. But I'm curious — were there any suppliers who refused and then felt disadvantaged? Lucas: A few. One supplier told the manufacturer they felt the consortium gave competitors too much insight into their cost structure, even with the data firewall. The manufacturer respected that and kept them as a solo supplier for a niche component. Interestingly, after two years, that supplier asked to join. They'd seen their competitors' margins improve and their own hadn't. Luna: Once the consortium was established, did the manufacturer still run competitive bids? Lucas: They did, but differently. Instead of annual RFQs for every part, they used a 'benchmark tier' system. If a consortium supplier's price was within 2 percent of the market index, they kept the business. If it was more than 2 percent above, the buyer would open a mini-bid among consortium members only. That kept the competitive pressure without destroying the collaboration. Luna: So the consortium became the first source, not the only source. That makes it more sustainable. Lucas: Exactly. And the buyer didn't stop there. They later expanded the consortium to include a second-tier group of smaller suppliers who couldn't commit to the full data sharing but could participate in the raw material aggregation and logistics consolidation. That added another 3 percent savings on an additional $8 million in spend. Luna: It's interesting that this model hasn't spread more widely. You hear about supplier collaboration a lot in automotive and aerospace, but not as much in mid-market manufacturing. Lucas: I think the barrier is first-mover risk. The buyer has to invest the time and legal cost upfront, and there's no guarantee suppliers will join. But the ones that have done it — like this manufacturer — tend to stick with it and even expand. The concept has been around since the 1990s, but it's still underused outside of the big OEMs. Luna: And from a procurement career standpoint, setting up a consortium is the kind of initiative that gets noticed. Lucas: Absolutely. If a procurement professional can show they saved their company twelve million dollars and improved supplier relationships, that's a career-defining achievement. It's not easy — it requires trust, legal rigor, and a willingness to share control. But the payoff is real. Luna: And you know, this is exactly the kind of conversation we try to bring to the show — practical, specific, with real numbers. We don't run ads on these episodes, and we want to keep it that way. Lucas: Yeah, we've never been comfortable with the interruption model. If these conversations have moved your work forward in some small way, you can support that choice at buy me a coffee dot com slash fexingo. No pressure, no perks — just keeping the show ad-free. Luna: It's a small gesture that makes a big difference for us. And now, back to that manufacturer's next step — they actually started using the consortium to co-develop new products with suppliers. Lucas: Right — that was phase three. Once they had the trust and the data infrastructure, they invited a few suppliers to participate in early-stage design reviews. One supplier suggested switching from a machined aluminum bracket to a stamped steel design. It reduced the part cost by 22 percent and cut weight by 15 percent. That innovation came directly out of the consortium relationship. Luna: That's a great example of how cost savings can lead to innovation when the relationship is right. And it all started with a consortium. Lucas: Exactly. The structure created the conditions for collaboration that wouldn't have happened in a traditional adversarial procurement setup.