Latest / The Buyer's Side with Fexingo: Procurement, Sourcing, and B2B Purchasing Decisions / How One Buyer Used Supplier-Led Cost Transparency to Cut Spend 20 Percent
Transcript
- Lucas: So there is a medical device manufacturer in the Midwest — let's call them MedCore — who spent about a hundred and twenty million dollars a year on purchased components. Plastic housings, circuit boards, sensors, that kind of stuff. And their procurement team realized they had no idea what those components actually cost to make. Luna: They knew what they were paying, but not what went into the price tag? Lucas: Exactly. They had good relationships with suppliers, but the pricing was always a black box. So about two years ago, the VP of supply chain decided to try something different. She told their top twenty suppliers — who collectively accounted for about 70 percent of spend — that going forward, MedCore wanted a full cost breakdown. Not a quote, but actual data on raw materials, direct labor, manufacturing overhead, and the supplier's profit margin. Luna: And the suppliers just handed that over? I feel like most of them would say that's proprietary. Lucas: Some did push back. But MedCore made it clear this was a condition of being considered for new contracts. And they offered something in return — a longer contract term and a commitment not to shop the data around. They also signed pretty tight non-disclosure agreements. So about fourteen of the twenty agreed to participate in what they called a 'cost transparency pilot.' Luna: What kind of stuff did they find when they actually looked inside those numbers? Lucas: In some cases, the supplier's margin was where they expected — maybe 10 to 12 percent. But in others, they found that the supplier was adding a 5 percent 'expedite fee' that had been baked in years ago and never removed. Or the raw material cost they were being charged was 15 percent above market because the supplier was buying from a middleman. Luna: So the suppliers themselves weren't being efficient. Lucas: Right. And that's the key insight — the problem wasn't always that the supplier was gouging them. Often the supplier just hadn't optimized their own sourcing. MedCore could say, 'Hey, we see you're paying fifty cents per pound for this resin. The market index says it should be forty-two cents. Can we work on that together?' Luna: And the supplier actually agreed to reduce the price? Lucas: In most cases, yes. Because MedCore wasn't demanding a margin cut — they were asking to eliminate waste. And the supplier's own margin stayed the same, sometimes even improved. One supplier realized they were over-ordering a custom fastener and carrying huge inventory. MedCore helped them switch to a just-in-time delivery model, which lowered the supplier's carrying cost and allowed them to drop the price by 8 percent. Luna: So it became a joint cost-reduction exercise rather than a zero-sum negotiation. Lucas: Exactly. Over eighteen months, MedCore reduced spend with those fourteen suppliers by an average of 20 percent. And they did not lose a single supplier — in fact, the suppliers that stayed in the program reported higher satisfaction because the relationship became more collaborative. One supplier told MedCore they had never had a customer actually look at their production process and help them improve. Luna: But there has to be a downside. What about the six suppliers that said no? Lucas: MedCore gradually phased them out over two years. But interestingly, two of those six came back after seeing their competitors win new business. They agreed to the transparency model, and once they did, MedCore found similar savings. So eventually, seventeen out of twenty participated. Luna: That is a pretty compelling track record. I imagine the legal side of this is tricky — you are essentially asking for a supplier's cost structure, which is their competitive advantage. Lucas: Absolutely. MedCore's legal team had to draft agreements that prevented the data from being used beyond pricing negotiations. Also, they agreed not to share cost data from one supplier with another. That was a major trust builder. And they capped the data retention — after the contract ended, they had to destroy all cost breakdowns. Luna: So this is not a strategy for every buyer. You need leverage and a certain scale to pull it off. Lucas: That is true. MedCore was a big fish in their pond. But I think mid-market buyers can still use a lighter version — maybe ask for a cost breakdown on the top three components instead of everything. Or start with a single category like packaging where margins are thin and the data is less sensitive. Luna: I want to circle back to something you said earlier — the suppliers actually improved their own margins. Do you have a number on that? Lucas: MedCore tracked it. For the suppliers that participated, their average gross margin stayed flat or increased by about 2 percentage points over the pilot period. Because they reduced their own input costs. So it was genuinely win-win. Luna: That is the kind of data that makes this approach scalable. Listen, before we go deeper into the implementation steps — and I want to get into how to structure the data request — I think it is worth pausing for a moment. You know, this show takes a ton of research and time to produce. We keep it ad-free because a handful of listeners chip in through buy me a coffee dot com slash fexingo. And honestly, that support is what lets us dig into cases like this one with the level of detail we do. Lucas: Yeah, it is a small group but it makes a real difference. If these conversations have moved your work forward in some way, that link is there. No pressure at all. And now, let us get into the nuts and bolts of how to actually run a cost transparency pilot. Luna: So what is the first step? Do you just email your top supplier and say, 'Show me your books'? Lucas: You do not. MedCore started with a conversation. They invited their top five suppliers to a meeting and explained the rationale — we want to grow together, we think there is waste in the system, we want to find it collaboratively. They positioned it as a partnership initiative, not a demand. And they offered the longer contract as a carrot. Luna: So framing is everything. If you come in as an auditor, you get resistance. If you come in as a partner trying to improve the whole chain, you get buy-in. Lucas: Exactly. The second step is to define what 'cost transparency' means. MedCore used a standard template that broke costs into four buckets: raw materials, direct labor, manufacturing overhead, and SG&A plus profit. They also asked for the supplier's cost of goods sold as a check. They did not ask for R&D costs or any future product plans. Luna: And how did they verify the numbers? I mean, a supplier could just inflate some line items. Lucas: They did spot audits. For about a third of the suppliers, MedCore sent a team to tour the facility and look at purchase orders for raw materials. They also compared the labor hours claimed against standard industrial engineering times for similar products. If something looked off, they discussed it openly. But they found that most suppliers were honest once they committed to the process. Luna: I think the trust factor is huge. Did MedCore have any issues with suppliers who initially agreed but then tried to hide costs? Lucas: One supplier had a discrepancy in their overhead allocation — they were charging a 25 percent overhead rate on a product that actually only used 15 percent of their plant capacity. MedCore flagged it, and the supplier corrected it. That supplier later said they had never audited their own allocation methodology. Luna: So the transparency benefited the supplier internally too. Lucas: Right. And that is the story we keep hearing. The buyer gets a better price, but the supplier gets a clearer picture of their own operations. MedCore actually created a shared savings model where if they found a cost reduction, they split the savings for the first year — 60 percent to the buyer, 40 percent to the supplier. That incentivized the supplier to help find the waste. Luna: That is a nice mechanism. So the supplier has a financial reason to open up. Lucas: Exactly. And after the first year, the full savings flow to the buyer. But by then, the supplier has already improved their own margin, so they are still better off than before. Luna: Are there any industries where this approach would not work? I am thinking of highly commoditized items where the supplier has razor-thin margins and no room to move. Lucas: It is harder, but not impossible. MedCore did it with commodity plastic parts. The key is that even in commodity markets, there are inefficiencies in logistics, inventory, or quality. One supplier was shipping products in boxes that were 30 percent oversized, wasting freight. That is not related to the commodity price itself. Luna: So the opportunity is in the non-product costs rather than the raw material. Lucas: Precisely. The raw material might be set by the market, but how the supplier handles that material — their scrap rate, their inventory turns, their shipping methods — those are all variable. And a buyer can help improve them. Luna: I want to ask about the cultural shift within MedCore's own procurement team. Did they have to develop new skills to handle this kind of analysis? Lucas: Absolutely. Their buyers were used to negotiating on price — 'give me 5 percent off.' Now they had to understand cost structures, read financial statements, and talk about overhead allocation. MedCore invested in training: they brought in a cost accountant to teach the team how to analyze a supplier's income statement. It took about six months for the team to feel comfortable. Luna: So this is not a quick fix. It requires a strategic investment in your own people. Lucas: It does. But the ROI is huge. MedCore calculated that for every dollar they spent on training and supplier auditing, they saved about twelve dollars in procurement costs over two years. That is a twelve-to-one return. Luna: That is hard to argue with. So for our listeners who might want to try this, what is a realistic first step this week? Not a six-month plan, but something they can do Monday morning? Lucas: Pick one supplier that you have a good relationship with. Schedule a 30-minute call. Say: 'We value our partnership and we want to find ways to grow together. Would you be open to sharing a high-level cost breakdown on one product line, just to see if there are opportunities we can both benefit from?' Start small. If they say yes, you have a pilot. If they say no, you have learned something about the relationship. Luna: That is concrete. And if they say yes, you can scale from there. Lucas: Exactly. The cost transparency model is not about squeezing suppliers — it is about making the whole supply chain more efficient. And that is a philosophy that tends to pay off, regardless of your industry. Luna: Alright, Lucas. Great case study. I think we have given our listeners a lot to think about. Lucas: Yeah, and if anyone tries it, we would love to hear how it goes. Maybe that will be a future episode.