Should-Cost Modeling for Buyers

The most dangerous way to buy is "Blind Quoting." You send a drawing to three suppliers. One quotes $50, one quotes $80, and one quotes $120. You pick the $50 option and think you got a deal. But what if the part actually costs $20 to make?

Should-Cost Modeling is the process of building up a price estimate from the bottom up—Material, Labor, Overhead, and Profit—so you know the "fair market value" before you ever talk to a supplier. It shifts the power dynamic from "What is your price?" to "Here is what I think this costs; let's discuss the gap."

The 4 Components of Price

Every manufactured part, from a plastic widget to a jet engine, is composed of four cost buckets. To build a model, you need to estimate each one.

1. Material Cost (The Easy Part)

Formula: (Gross Weight x Cost per Lb) - Scrap Value.

How to find it: Check commodity indexes (e.g., LME for metals, PPI for plastics). If you are buying a 1lb steel bracket and steel is $0.80/lb, your material floor is $0.80. If they quote $10.00, you know the rest is labor/overhead.

2. Labor Cost (The Variable)

Formula: Cycle Time (Hours) x Shop Rate ($/Hr).

How to find it: Estimate cycle time based on complexity. A simple laser cut might be seconds; a complex 5-axis mill might be hours. Shop rates vary by region ($60-$120/hr in the US, significantly less overseas).

3. Overhead (The Black Box)

What it is: Rent, electricity, machine depreciation, SG&A.

Rule of Thumb: Usually applied as a percentage of labor (e.g., 150-200%).

4. Profit (The Motivation)

Target: 10-20% for manufacturing.

Strategy: You *want* your supplier to make a profit so they stay in business. You just don't want them to make *excessive* profit due to inefficiency.

How to Use the Model in Negotiation

The goal isn't to be perfect; it's to be directionally correct. If your model says $15 and they quote $18, that's reasonable. If they quote $40, you have a conversation starter.

The Script:

"Thanks for the quote of $40. My internal should-cost model puts this closer to $15 based on $5 of material and 10 minutes of machine time. Can you help me understand what cost drivers I'm missing? Are there tight tolerances driving up the cycle time?"

Why this works:

It doesn't accuse them of gouging. It asks for collaboration. Often, they will reveal that your drawing has an unnecessary spec (e.g., a super-tight tolerance) that is tripling the cost. You change the spec, the price drops to $15, and you both win.

When to Use It

Don't model everything. Use Should-Cost modeling for:

High-Spend Items: Your top 20% of parts.
Sole-Source Parts: Where you have no competitive quotes to benchmark against.
Custom Fabrications: Where "market price" is hard to define.

Summary

Should-Cost Modeling transforms you from a "Order Placer" into a "Cost Manager." By understanding the physics and economics of what you buy, you unlock savings that competitive bidding alone can never find.

Benchmark Your Costs

Purchaser aggregates historical pricing data to help you build smarter cost models. See what you paid last time, what the market is paying, and spot outliers instantly.

Analyze Your Spend