Latest / The Buyer's Side with Fexingo: Procurement, Sourcing, and B2B Purchasing Decisions / How One Buyer Used Multi-Year Agreements to Cut Costs 16 Percent
Transcript
- Lucas: Multi-year agreements. They sound like a no-brainer on paper — lock in a price, build a relationship, take volatility off the table. But the procurement team at a mid-sized manufacturer I've been following found out the hard way that if you don't structure them right, you can end up paying more than if you'd just gone spot market every quarter. Luna: How much more? Or in this case, how much less? Lucas: In this case, they cut costs sixteen percent. But the real story is how they got there, because they had failed once before. Two years earlier, they signed a three-year deal with a supplier that had no built-in performance reviews and no price adjustment mechanism. By year two, the market price had dropped fifteen percent, and they were stuck above market. Luna: So they learned the hard way that locking in isn't always winning. Lucas: Exactly. So when they went back to the drawing board, they designed what I'd call a 'smart multi-year agreement.' It had four distinct features. First, a three-year term with an annual price escalation cap of two percent. Second, volume commitments on their side — they guaranteed to buy at least eighty percent of their forecasted volume each year. Third, quarterly business reviews with cost breakdown updates. And fourth, an exit clause that kicked in if the supplier missed two consecutive performance milestones. Luna: That quarterly review piece seems key. It forces transparency, keeps the supplier honest. Lucas: And the buyer didn't just rely on the supplier's data. They used a third-party cost index for the raw material component of the product. So every quarter, they'd check the index, and if it had moved more than five percent, the price would adjust automatically. That prevented what I call 'contractual creep' — where the price slowly drifts away from market reality because no one's checking. Luna: What category was this? Raw materials, components? Lucas: Packaging materials. Corrugated cardboard and plastic film. Not glamorous, but for a manufacturer that ships hundreds of thousands of units a month, packaging can be five to eight percent of total cost of goods sold. So a sixteen percent reduction in that category alone added up to about one point two million dollars annually. Luna: And the supplier agreed to all of that? The quarterly reviews, the index adjustment, the exit clause? Lucas: They did, but not without pushback. The supplier's initial counteroffer was a two-year deal with no price adjustment at all. The buyer's procurement lead told me they had to show the supplier the mutual benefit: the volume commitment gave the supplier predictable revenue, which allowed them to optimize their own production runs. In exchange, the buyer got cost certainty and transparency. Luna: So it's about framing. You're not just cutting costs; you're offering stability. Lucas: Right. And the numbers backed it up. The supplier's margin actually improved slightly because they could schedule production more efficiently. It wasn't a zero-sum game. Luna: What about the exit clause? Did they ever have to use it? Lucas: No, but just having it changed the dynamic. The buyer told me that in the first quarterly review, the supplier was noticeably more prepared — they brought detailed cost breakdowns, showed improvement plans. The procurement lead said it was the most productive supplier meeting they'd ever had. The exit clause created what I'd call a 'constructive tension.' Luna: That's interesting. A lot of buyers worry that multi-year agreements make suppliers complacent, but it sounds like the opposite happened here. Lucas: Because the agreement was designed to prevent complacency. The quarterly reviews weren't just check-ins; they were structured with a scorecard. On-time delivery, quality defect rate, cost reduction ideas submitted, response time to requests. If the supplier scored below a threshold two quarters in a row, the exit clause could be triggered. That kept the supplier engaged. Luna: So the contract itself became a management tool. Lucas: Exactly. And this is where I think a lot of procurement teams miss the opportunity. They draft multi-year agreements as if they're just extending a one-year contract. But the real value comes from building in mechanisms that keep the relationship dynamic. The contract should force conversations, not replace them. Luna: Conversations like quarterly business reviews that actually have teeth. Lucas: Right. And one other thing the buyer did that I thought was smart: they tied the supplier's performance score to a small bonus pool. If the supplier hit all their targets for the year, they got an additional one percent on top of the contract value. It wasn't huge, but the buyer said it created goodwill and made the supplier feel like a partner. Luna: A little incentive goes a long way. Especially when you're asking for transparency and flexibility. Lucas: And the results speak for themselves. Over three years, the buyer saved that sixteen percent, but they also saw a reduction in quality defects by about thirty percent, and on-time delivery improved from ninety-two percent to ninety-seven percent. The multi-year agreement didn't just cut costs; it improved service. Luna: That's a pretty strong case. I wonder how many buyers are leaving money on the table by not negotiating these longer-term deals with the right safeguards. Lucas: If these conversations have moved your work forward in some small way — maybe given you a new idea for a contract structure, or a way to frame a negotiation — a couple of dollars a month is genuinely what keeps these going. Buy me a coffee dot com slash fexingo, if you've gotten something out of them. Luna: Yeah, it's a small thing that makes a real difference. Keeps us ad-free and focused on the actual procurement stories. Lucas: So back to the packaging buyer. Their next step is interesting: they're now looking at multi-year agreements for a different category — fasteners and hardware. The same principles apply, but the supply base is more fragmented. They're planning to bundle several small suppliers into one agreement with a distributor who can aggregate demand. That's a whole other episode, but it shows how once you have a framework that works, you can replicate it. Luna: I'd love to hear how that plays out. The bundling approach has its own challenges. Lucas: Indeed. And that's a story for another day. For now, the takeaway is: multi-year agreements aren't just about locking in a price. They're about designing a relationship that creates value for both sides over time. If you build in the right triggers, reviews, and incentives, you can get more than a cost cut — you get a better supplier. Luna: And a better bottom line.