SiliciumHex FieldKit

Supply Chain · Source

Should-Cost Analysis

Build a bottom-up estimate of what a part should cost: materials, labor, machine time, overhead and margin.

  • Time1 h
  • FormatSolo
  • StageSource

Should-Cost Analysis: what it is and why it works

Should-cost analysis builds a bottom-up estimate of what a part ought to cost an efficient supplier to make, then compares it with the price quoted. Starting from the drawing and specification, the analyst estimates raw material weight and price including yield losses, the process routing with cycle times and machine hourly rates, direct labor hours and rates, setup costs spread over lot size, scrap, overhead, packaging and logistics, and a reasonable profit margin. Each element is priced from commodity indices, published or internal machine rates, labor data for the supplier's region, and benchmarks. The result is a cost breakdown that can be compared line by line with the supplier's quote.

The method changes the conversation from percentages to facts. Rather than asking for a generic discount, the buyer can point to a specific difference, such as an assumed cycle time much longer than the process requires, a material price above index, or overhead out of line with the region. It also works as a design tool: if the gap is caused by a tolerance, material or feature that drives expensive processing, engineering can change the part instead of squeezing the supplier. Should-cost complements total cost of ownership, which adds costs beyond price, supports supplier development by revealing process weaknesses, and draws on value stream mapping to see where process time really goes.

What you need

  • The part drawing, material specification, tolerances and annual volume
  • Supplier quotes, ideally with a cost breakdown
  • Material price indices, machine hourly rates and regional labor rates
  • Knowledge of the likely manufacturing process and cycle times, from engineering or cost engineers
  • Assumptions for overhead, scrap and margin appropriate to the supplier type

What you get

  • A bottom-up cost model broken into material, labor, machine, overhead, scrap and margin
  • A line-by-line comparison with the supplier's quote showing where gaps lie
  • A negotiation brief with data-backed questions for the supplier
  • Design change ideas where the gap is structural rather than commercial

When to use it

When supplier quotes feel high but you cannot say why.

How to do it, step by step

  1. Get the part’s drawings and specifications.
  2. Break the cost into material, labor, machine time, overhead, scrap, margin.
  3. Price each element from indices, quotes or benchmarks.
  4. Compare your model to the supplier quote line by line.
  5. Negotiate the gap with data, and redesign the part if the gap is structural.

Worked example: Should-cost for a machined pump impeller

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

A pump manufacturer received a quote of $418 per unit for a 316 stainless steel impeller at 600 units a year from its current supplier, up 15% from the previous year. The supplier cited material and labor inflation.

  1. A cost engineer estimated a cast blank weight of 28 pounds. Using an index-based casting price, material and casting came to about $170 per unit.
  2. She modeled machining on a five-axis center at about 1.6 hours per part, including setup over lots of 50, at a regional machine rate of $95 per hour, giving roughly $152, plus $20 for balancing and inspection.
  3. Adding 4% scrap, packaging, and a 10% margin, with overhead already embedded in the machine rate, gave a should-cost of about $395.
  4. The line-by-line comparison showed that material was close, but the quote assumed 1.8 hours of machining. The supplier explained that a tight surface finish on non-wetted faces forced an extra slow finishing pass.

Result. The buyer and supplier reviewed the model together and agreed that the finishing pass explained most of the gap. Engineering confirmed the finish had no function on those faces and relaxed it, and the supplier requoted at $392, slightly below the model. The buyer accepted the new price. The team noted that the largest saving came from the drawing, not from negotiation alone.

Open it in the FieldKit Supply Chain app → Get the Supply Chain template pack — join the waitlist

Common pitfalls and how to avoid them

  • Using the model as a weapon to demand the should-cost price exactly.Treat the model as a basis for discussion, accept reasonable differences, and ask the supplier to explain large gaps.
  • Assuming an ideal process the supplier does not use or cannot afford at your volume.Model the process realistic for the supplier's equipment and your annual quantity and lot sizes.
  • Pricing materials from outdated or wrong indices.Use current indices for the exact grade and form, and include yield losses such as scrap, gates or offcuts.
  • Negotiating only on price when the gap is driven by design requirements.Bring engineering into the review and challenge tolerances, finishes and materials that add cost without function.

Frequently asked questions

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

It is a type of cost estimate with a specific purpose. A general cost estimate predicts what something will cost you, often for budgeting. A should-cost model estimates what a part ought to cost an efficient supplier to produce, including a reasonable margin, so you can test a quote. It is built bottom-up from materials, processes and rates, and is used mainly in negotiation and design decisions.

How accurate is a should-cost analysis?

Accuracy depends on the quality of inputs, especially cycle times, machine rates and material prices, and on how well the modeled process matches the supplier's. A well-built model is usually close enough to show where large gaps come from, even if it is not exact. The aim is not to find the precise price but to identify which cost elements need explanation.

What data do you need to build a should-cost model?

You need the part drawing and specification, annual volume and lot sizes, material type and weight, the likely manufacturing process with cycle times, machine and labor rates for the supplier's region, and assumptions for scrap, overhead and profit. A supplier cost breakdown, if available, makes the comparison much easier and more productive.

Origin

Should-costing — cost engineering practice; Sherman, "Purchasing and Supply Management", 1980s.

Related methods

More in “Source”

Secure the inputs: suppliers, contracts and total cost.