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How Should-Cost Data Helps You Make Informed Purchasing Decisions

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. Without manufacturing should-cost data you lack the ability to analyze the cost to quality relationship.

How to Calculate the Should-Cost

To bulk cost the assembly of a product, all you need is to supply aPriori with 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. An example of how this might look for a standard gas cooking grill is shown below.

Screenshot of assembly details for manufacturing grill in China

In addition to the baseline components, you’ll need to add in some assumptions on specifics like surface finishes for exterior parts and welding parts. These minute details provide a more holistic view into manufacturing costs and will eventually lead to a more accurate should-cost estimate. Once you run your cost, aPriori will deliver your manufacturing should-cost estimate in seconds. This will include SG&A costs, direct and indirect overhead, raw material, and processing and labor costs. 

For more on how to conduct your own spend analysis, watch our on-demand webinar.

Detailed Cost Information Supports Effective Negotiations

Having this detailed cost information adds leverage needed to negotiate a better price. In the absence of should-cost data, buyers can only judge if they are getting a good deal by comparing pricing estimates from multiple suppliers. The problem with this methodology is that it isn’t based on what the product actually costs to manufacture. This can lead to product pricing inflations and downstream cost implications for your business.

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

With aPriori’s advanced should-cost estimators, you can even prepare for curveballs like the need to maintain profit margins or regionally-specific cost implications. The tool can easily account for different manufacturing locations and run a multitude of variable scenarios in a matter of seconds. This puts negotiating control into your hands and will help you have more successful conversations with suppliers.

Assembly summary report for manufacturing grill in USA

 

Use Should-Cost Data to Inform Purchasing Decisions

The more data you have at your disposal, the stronger your negotiating position. Instead of starting the cost conversation with a supplier 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.” Understanding the cycle times, material utilization, and labor rates that went into producing a product makes you an informed consumer.

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.

Learn How to Make Better Purchasing Decisions

Download our whitepaper to learn more.

Download the Whitepaper
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