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Chris Catalini

How Should-Cost Data Helps You Make Informed Purchasing Decisions

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Here at aPriori, we love to grill. Whether it is behind our office for after hours beach volleyball or at the Villa Benz in Stuttgart Germany at our STARS conference. It is a fun and delicious activity but can also become very expensive!

While our mission is to help our customers save money and time developing fantastic products, we also want to help our end users save some money this summer as well.

Labor Day weekend is right around the corner and we all know the key to an unforgettable cookout is the grill. It is the centerpiece. An iconic symbol of leisurely afternoons in the backyard with friends, family, and good food. And what better way to celebrate the unofficial end to summer than with a new grill?

The problem is new grills are expensive… but you are in luck. I want to give you the tools you need to avoid overpaying for that grill and make sure you are getting a fair market price.

Manufacturing Data Helps Determine a Fair Price

How? By using manufacturing should-cost data you can challenge your grill supplier if the prices they are charging for their products is much higher than is warranted. Using this data you can command a much lower price if they chose to take too many shortcuts in their products.

We have all fallen victim at one point or another to purchasing products with poor build quality and inferior materials that do not live up to their price. This year’s model cost the same as last year’s model but with more plastic, flimsier construction, and rougher finishes.

Should these really cost the same? Probably not but without manufacturing should-cost data you won’t have the facts that justify what the actual prices should be.

How to Calculate the Should-Cost

As an example let’s imagine going to your local grill store, Backyard Grill Inc, and find this beauty on display with a price tag of $2,799:

Grill-image

It looks fantastic but is it really worth $2,799?

You have finite resources to fund your Labor Day weekend and still need to buy beverages, food, and tiki torches. This is a significant investment so let’s import the grill into aPriori and find out how much this really costs to make!

Before starting, we need to make some production assumptions. The United States buys over 15 million grills every year. This is a very popular model so let’s assume the annual production volume is 500,000 units.

To bulk cost the assembly all we need is to supply the high level process group (i.e. Casting, Sheet Metal) and an appropriate material to each component and we can get a manufacturing should-cost estimate for the grill:

Screenshot of assembly details for manufacturing grill in China

This is a particularly nice grill that will become the jewel of your patio with lots of finishing touches so we will want to also assign powder coat, painting, and other surface finishes for exterior parts. We also have welds we need to take into consideration.

After entering these details, the manufacturing should-cost estimate comes out to $1,446. This includes SG&A costs, direct and indirect overhead, raw material, as well as processing and labor costs.

Detailed Cost Information Supports Effective Negotiations

Having this detailed cost information gives you serious leverage to negotiate a better price for your grill. In the absence of should-cost data, buyers can only judge if they are getting a good deal or not by comparing similar grill’s prices to each other. This is similar to sourcing a part to multiple suppliers but none of this is based on what the product really costs to manufacture and does not tell you if the whole market is off base and overpriced.

The manufacturing should-cost estimate is another independent voice in the cost conversation based only on the part cost drivers and benchmark economic rates to generate a fair market price.

We can even prepare you for some curve balls like if the sales associate justifies the additional costs by telling you it is made in America or that they need to maintain a profit margin. We can easily account for different manufacturing locations and run scenarios to see what the cost would be if the grill were manufactured in the United States:

Assembly summary report for manufacturing grill in USA

Even when assuming a reasonable margin of 20% it still only brings the cost of the grill to $1,735 per unit if manufactured in China or $1,928 if manufactured in the United States.

Use Should-Cost Data to Inform Purchasing Decisions

So the next time the Sales Associate at Backyard Grill Inc. starts trying to sell you on what a great value their grill is, you know better and are armed with a manufacturing should-cost estimate to challenge their value assertion.The more data you have at your disposal, the stronger your negotiating position is.

Instead of starting the cost conversation by saying “I think this costs too much…” you can transition to saying “help me understand why you are charging me double what your sheet metal components cost to manufacture.” You are the epitome of an informed consumer because you understand the cycle times, material utilization, and labor rates that went into producing their product and you can use this information to save money.

We hope this helps illustrate how should-cost data helps you make informed purchasing decisions and elevate your cost consciousness as buyers. With these tools, we have no doubt you will have plenty of budget left over for burgers and buns. Have a great Labor Day weekend!

Want to Learn More?

Download our whitepaper, Are You Overpaying for Your Outsourced Parts?, to learn more about how sourcing professionals can leverage aPriori to make better purchasing decisions.

You can also read our posts on how to collaborate with suppliers to get the best price on existing components and get a fair price on NPI parts.

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