Should-cost modelling for custom parts

What a should-cost model is

A should-cost model is an independent estimate of what a part ought to cost, built from the process, the material and the volume. It is not a supplier's quote and it is not a market price. It is a structured view of the cost drivers that both sides can inspect.

The model is useful because a quote is a single number with the workings hidden. If the number looks high, the buyer cannot tell whether the material assumption, the cycle time, the tooling amortisation or the margin is responsible. A should-cost model separates those lines and shows where the difference sits.

It is not a substitute for a quote. The supplier knows its equipment, yield and overhead better than the buyer does. The model is a challenge tool: it produces questions, and the answers either explain the gap or reveal an error.

A model is also useful before a drawing is finished. If the concept needs a tight tolerance, a second operation or a specialised material, the model shows the cost effect while the design can still change. That is the point at which the model has the most value, because the cheapest fix is a design change, not a negotiation.

Start with the process route

Before any arithmetic, write the route. A stamped part might run blank, pierce, form, trim and finish. A machined part might run saw, turn, mill, deburr and plate. A wireform might run straighten, feed, bend, cut and finish. Each step has a machine, a cycle time and a labour content.

The route decides the cost blocks. A part with a plating step carries a finish cost and an inspection cost. A part with a welded joint carries a fixture and a test. A part with a tight tolerance may need a second operation or a slower cycle. The route is where the model earns its credibility.

State the assumptions that are not visible on the drawing: the material form, the stock size, the number of parts per stroke or per bar, the scrap rate, the setup time and the batch size. A model without those is a guess with a spreadsheet around it.

The route should also include the inspection and packing steps. A part that needs a first article, a load test or a dimensional check at every batch carries a cost that does not appear in the machine cycle. Packing can be a small line, but it becomes significant when the part needs protection, separation or a clean room.

The building blocks

Material is the input mass multiplied by the material price, less any scrap credit. The input mass is not the finished weight. It includes the runner, the blank, the cut off or the machining allowance. The material price should match the grade, the form and the quantity the supplier would buy.

Conversion is the machine time and the labour to run the route. It usually includes setup spread across the batch, the cycle time per part and the burden rate for the equipment. The burden rate is the hardest input to verify, because it includes depreciation, space, power and indirect labour.

Tooling is either a one off charge or an amortised cost per part. Finish, packing and freight are separate lines, because they are often quoted separately and can be compared. Margin is a percentage or a fixed add, and it should be visible rather than folded into conversion.

The sum of the blocks gives a should-cost range. A range is more honest than a point estimate, because several inputs are uncertain. Present the low, mid and high case, and say which assumption drives the spread.

A worked example

The table is an illustrative build for a stamped copper part at an annual volume of 10,000 pieces. The numbers are round and the process is simplified. They show the structure, not a market price.

Where models go wrong

The most common error is using the finished weight as the material input. That understates the cost whenever the process produces scrap. The second is using a material price from a small quantity catalogue when the supplier would buy a coil or a mill lot. The third is ignoring the setup cost at low volume.

Another error is applying a generic burden rate to a specialised machine. A five axis machining centre and a mechanical press do not carry the same hourly cost. A model that uses one rate for every process will be wrong on at least one of them, and often in a way that flatters the wrong supplier.

The model can also be too precise. A should-cost built to four decimal places from estimated cycle times implies a confidence that does not exist. Round the output to a sensible range and show the sensitivity. Precision is not the same as accuracy.

A final error is to ignore the cost of quality. A supplier with a lower conversion rate may carry a higher reject rate, more sorting and a higher safety stock. The should-cost should include the expected yield and the inspection burden, or the comparison will favour the supplier that looks cheapest before the rejects are counted.

Using the model in negotiation

Do not open with the number. Open with the route and the assumptions. Ask the supplier whether the material form, the cycle time, the scrap rate and the tooling amortisation are right. A supplier that engages with the inputs is easier to work with than one that defends a total.

If the gap is in material, ask for the mill certificate, the input weight and the scrap credit. If it is in conversion, ask for the cycle time, the number of cavities or stations and the setup. If it is in tooling, ask for the tool cost breakdown. Each question has an evidence trail.

The model also helps with a volume change. If the annual quantity doubles, the setup and tooling per part fall, but the material and conversion do not fall by the same proportion. A model shows the shape of the curve, so the buyer can test whether a volume break is credible.

Maintaining the model

Date every input. Material prices, exchange rates, labour rates and freight move. A model built on last year's assumptions can be worse than no model, because it looks authoritative while being stale.

Keep the source for each input: the quote, the index, the drawing, the time study or the supplier's breakdown. When the design changes, update the route and the input mass before the next quote. When the volume changes, update the setup and tooling amortisation.

Review the model with the supplier at the start of a programme, not only when a price is disputed. That turns it into a shared cost structure and reduces the chance that a future increase arrives without a shared basis for discussion.

Keep a short note of what changed between versions. A model that is updated without a history cannot explain why the estimate moved, and the buyer may end up defending a number that no longer reflects the process. Version control is part of the model, not an extra.

1. 01

   Fix the route

   List every operation, machine and inspection step.

2. 02

   Set the inputs

   Material form, input mass, cycle time, scrap and batch.

3. 03

   Build the blocks

   Material, conversion, tooling, finish, packing, freight, margin.

4. 04

   Test the range

   Run low, mid and high cases and identify the driver.

5. 05

   Compare

   Put the model beside the quote and explain the gap.

6. 06

   Record and review

   Date the inputs and update when the design or volume changes.