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Design to Cost · Negotiate

Open-Book Costing

Share the should-cost model with the supplier and work the gap together — transparency beats poker.

  • Time1 h
  • FormatSmall group
  • StageNegotiate

Open-Book Costing: what it is and why it works

Open-Book Costing puts the buyer's should-cost model on the table with a selected supplier and invites them to correct it with their actual process data. Instead of two parties bluffing over a single price, both look at the same breakdown: material weight and price, cycle times, machine rates, scrap, overhead and margin. The difference between the model and the supplier's quote is worked line by line. Each gap item ends up either as a corrected assumption in the model or as an action owned by one side, such as a design change by the buyer or a process improvement by the supplier, with a date to re-run the model.

The method works because most price gaps come from assumptions, not from greed, and assumptions can be tested together. The buyer often underestimates scrap or setup; the supplier often carries costs caused by the buyer's specification that a small design change could remove. Open books grew out of 1990s automotive supplier collaboration and the lean supply literature. They only work in relationships with mutual dependence and a long horizon: strategic suppliers, high volumes, multi-year programs. With transactional suppliers, the Quote Comparison Grid and competitive bidding are usually better. Open-Book Costing builds on the Should-Cost Model and often leads into a Cost-Down Agreement.

What you need

  • A should-cost model with assumptions visible and sources stated
  • The supplier's quote with at least a basic cost breakdown
  • A supplier selected for mutual interest: volume, horizon, strategic fit
  • Agreed confidentiality terms and ground rules for the session
  • Engineering availability to evaluate design-driven gap items

What you get

  • A reconciled cost model with corrected assumptions on both sides
  • Gap items classified: model error, supplier inefficiency, buyer-driven cost
  • Action list with owner, expected saving and date
  • An agreed re-run date and, often, a revised price or price path

When to use it

When the supplier relationship can bear daylight and both sides want the volume.

How to do it, step by step

  1. Share your should-cost model with the supplier, assumptions visible.
  2. Ask the supplier to correct your assumptions with their real process data.
  3. Work the gap between model and quote line by line, together.
  4. Agree which gap items each side takes as actions.
  5. Fix a date to re-run the model with the agreed changes.

Worked example: Working a casting gap with a foundry partner

Illustrative scenario — figures are realistic but not from a real company.

A compressor manufacturer buys a gray-iron cylinder casting at 9,000 pieces a year. The quote was $84 per piece; the buyer's should-cost model said $66. The foundry had supplied the part for six years and wanted a new contract covering a larger successor model.

  1. The buyer shared the model: 58 lb poured weight, 72% yield, 3% scrap, a molding line rate and a 12% overhead and margin.
  2. The foundry corrected two assumptions with data: actual casting scrap was 7%, driven by core breakage at a thin section, and yield was 64% because of the gating the part geometry required.
  3. Of the remaining gap, about $6 came from a 100% pressure test the drawing required, which the buyer's model had omitted; the foundry in turn agreed that its quote carried conservative setup allowances.
  4. Actions were agreed: engineering would thicken the core section and review whether the pressure test could move to a sampling plan with data; the foundry would trial a revised gating layout.

Result. The reconciled should-cost settled at $77. After the design change and gating trial, scrap fell to 4% and yield rose to 69%, bringing the cost to about $71 six months later. The contract fixed that price with a path for the successor casting.

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Common pitfalls and how to avoid them

  • Using open books as a lever to squeeze margin once the supplier has shown its costs.Agree up front that a fair margin is protected and that savings come from process and design, not from margin cuts.
  • Opening books with suppliers who have no reason to cooperate.Select suppliers with mutual dependence and a long horizon; use competitive methods elsewhere.
  • Sharing a should-cost model with hidden or unsourced assumptions.Make every assumption visible and sourced so the supplier can correct it with evidence.
  • Ending the session without owners and dates.Close with a written action list and a fixed date to re-run the model.

Frequently asked questions

What is open-book costing in procurement?

It is a practice where the buyer and supplier share cost information, typically the buyer's should-cost model and the supplier's cost breakdown, to understand and reduce cost together. The focus is on material, process, scrap and overhead assumptions rather than on haggling over the final price. It is used mainly with strategic suppliers in long-term relationships.

Do suppliers have to share their costs?

No, unless the contract requires it, and many will not without trust and a clear benefit. The method works best when the buyer shares first and when both sides see a gain, such as more volume, a longer contract or design changes that lower cost without cutting margin. Forcing open books on reluctant suppliers usually produces edited numbers.

Is a should-cost model the same as a cost estimate?

A should-cost model is a specific kind of estimate: a bottom-up calculation of what a part ought to cost with efficient processes, built from material, cycle time, rates, scrap and overhead. A general cost estimate may be top-down, parametric or based on quotes. The should-cost model is designed to be discussed line by line, which makes it the basis of open-book work.

Origin

Open-book costing — automotive supplier collaboration practice, 1990s; part of lean supply literature (Lamming).

Used in these playbooks

Should-cost negotiation pack 2 days

Two days to walk into the negotiation with a model, a normalized comparison and a prepared plan — then open the books with the chosen supplier.

  1. Should-Cost Model
  2. Quote Comparison Grid
  3. Negotiation Preparation
  4. Open-Book Costing

Related methods

More in “Negotiate”

Align suppliers on real costs: models, openness and prepared plans.