Latest / The Buyer's Side with Fexingo: Procurement, Sourcing, and B2B Purchasing Decisions / How One Buyer Used Joint Cost Modeling to Share Savings
Transcript
- Lucas: You walk into a negotiation knowing your supplier is making a healthy margin on the part. You also know they could probably reduce costs if they changed their process, but they have no incentive to share those savings with you. Luna: So you default to the old playbook — threaten to retender, squeeze on volume, demand a price cut. And they resist, because why would they cut their own margin? Lucas: Exactly. That adversarial loop wastes time and leaves money on the table for both sides. But there is an alternative, and a buyer I spoke with at a mid-sized aerospace parts manufacturer pulled it off recently. He used a technique called joint cost modeling. Luna: Joint cost modeling — meaning you sit down with the supplier and literally model their cost structure together, then agree on where to find savings and how to split them? Lucas: That's exactly it. In this case, the buyer — let's call him Mark — was sourcing titanium extrusions for aircraft brackets. He had one primary supplier, a specialty metals company based in Ohio. The part cost about $1,200 per unit, and Mark knew from industry benchmarks that the raw material cost was roughly $400 of that. But beyond that, the supplier's cost breakdown was a black box. Luna: And that's the typical situation. You know the price, you maybe know the commodity price of the raw material, but you have no idea what their yield losses are, or their machine time, or their overhead allocation. Lucas: Right. So Mark proposed a six-month pilot: the supplier would share a detailed cost breakdown on this one part family, and together they would identify cost reduction opportunities. Any savings realized would be split 60-40, with 60 percent going to the buyer as a lower price, and 40 percent staying with the supplier as increased profit. Luna: Sixty-forty in the buyer's favor — that's a strong split. How did the supplier react? Lucas: They were skeptical at first. The purchasing manager at the supplier said, quote, 'You want me to show you my cost cards so you can beat me up on price later?' Mark assured them that was not the intent, and he put a nondisclosure agreement in place that specifically prevented using the cost data in any future competitive bidding. That was key. Luna: So the data was protected. And the supplier knew that if they found real savings, they'd pocket 40 cents of every dollar. That's a pretty strong incentive. Lucas: It really is. So they agreed to share the cost breakdown. And when Mark and his team analyzed it, they found something surprising. The supplier was using a standard extrusion die that produced a lot of scrap — about 18 percent of the titanium ended up as offcuts. That's not unusual in extrusion, but the scrap rate was higher than industry best practice of about 12 percent. Luna: So the savings opportunity was right there: reduce scrap from 18 to 12 percent. On a $400 raw material cost, that's about $24 per part, just from better die design or process control. Lucas: Right. But Mark didn't just point at the scrap rate and demand improvement. He asked the supplier's engineers: 'If we helped you redesign the die to reduce flash and trim waste, what would it take?' The supplier's team estimated they could get to 12 percent scrap with a $50,000 investment in new tooling and process adjustments. The payback period was about ten months on their 40 percent share of the savings. Luna: That's a smart approach — you're not just asking them to eat the cost of improvement. You're co-investing, effectively, by guaranteeing them a return through the shared savings. Lucas: Exactly. Mark's company agreed to pay for half of the $50,000 tooling investment — $25,000 — on the condition that the savings were realized within twelve months. The supplier handled the rest. They implemented the new die, adjusted the extrusion parameters, and within four months the scrap rate dropped to 11.5 percent, beating the target. Luna: So what was the total savings? Lucas: On an annual volume of about 15,000 parts, the raw material savings alone came to roughly $360,000 per year. But here's the thing — once they opened up the cost model, they found another opportunity. The supplier was using a premium-grade titanium alloy that was certified for aerospace, but Mark's part didn't actually require that specific certification. A slightly lower-cost alloy with equivalent mechanical properties would work. Luna: That's a material substitution opportunity — classic. But usually suppliers resist because they don't want to requalify a new alloy or risk performance issues. Lucas: Right. But because they had a joint cost model and a shared savings agreement, the supplier was motivated to explore it. They worked with their own mill to test an alternative alloy, which took about three months. The new alloy cost $30 less per pound, and because the part used about 2.5 pounds of titanium, that was $75 per part in savings. Combined with the scrap reduction, the total savings came to about $99 per part, or roughly $1.5 million annually. Luna: And the split: 60 percent to the buyer, 40 percent to the supplier. So Mark's company saved about $900,000 per year, and the supplier made an extra $600,000 annually — plus they kept the $25,000 tooling contribution from the buyer. That's a win-win. Lucas: It is. And the relationship changed. Mark told me that before this exercise, price negotiations were tense and took weeks. Now, they have quarterly business reviews where they look at the cost model together and discuss new opportunities. The supplier even proactively suggested moving to a larger coil size that reduces setup waste, which will save another $50,000 next year. Luna: That's the kind of innovation you only get when the supplier trusts that you won't use their transparency against them. It's the opposite of the adversarial model. Lucas: Exactly. And it's not just for aerospace or titanium. Joint cost modeling can work in any category where there's a reasonable volume and a supplier who is willing to be transparent. I've seen it done in packaging, in electronics components, even in professional services. Luna: What's the one thing a buyer needs to get right before proposing this? Lucas: You have to be genuinely willing to share the upside. If you go in with the mindset that you're going to find all the savings and then still demand a price cut on top of your share, the trust evaporates. Mark was clear from the start: the supplier gets 40 percent of every dollar saved, no renegotiation. That commitment made the whole thing work. Luna: And you need a solid NDA that explicitly protects the cost data from being used in competitive bids. Otherwise, no supplier in their right mind would share that information. Lucas: Absolutely. The legal framework is critical. But once that's in place, joint cost modeling can transform a transactional supplier relationship into a strategic partnership. It's one of the most underused tools in procurement, in my opinion. Luna: It really is. And you know, if this episode gave you a practical idea you can apply, that's exactly what we aim for. These conversations stay ad-free thanks to listeners who find value in them and choose to support the show. If today's topic moved your work forward in some small way, you can keep that going at buy me a coffee dot com slash fexingo. Lucas: Yeah, it's a simple way to ensure we can keep digging into real-world procurement stories without any sponsor pressure. And honestly, it's listeners like that who make episodes like this possible — because they share their own experiences, too. Luna: Exactly. So back to the case — Mark told me that after the first year of the joint cost model, his supplier actually proposed expanding it to three other part families. They had gone from guarding their cost data to proactively offering it up. Lucas: That's the ultimate sign of trust. And the savings multiplied. Across all four part families, the total annual savings reached about $2.3 million, with the buyer capturing roughly $1.4 million of that. Not bad for a mid-sized company with about $50 million in annual procurement spend. Luna: So the question for our listeners is: which of your suppliers would be open to a conversation about joint cost modeling? And what would you need to put in place to make them feel safe enough to share? Lucas: That's the right starting point. Start with one supplier, one part family, and a clear NDA. Offer a fair split. And then see what you find. Chances are, there's a lot of cost hiding in plain sight.