Quick Answer
When the target cost of a client for a machining component and a sheet metal component appeared 53% below the quoted price of the supplier, a bottom-up should-cost analysis traced the gap to two root causes. A raw material rate was locked into an outdated supply agreement, and a manufacturing process was built around laser cutting where shearing, drilling, and piercing would do the job for less. Re-pricing the raw material against current quarterly base rates cut the material cost of the machining component by roughly 20%. Re-sequencing the manufacturing process cut its process cost by roughly 17%. On the sheet metal component, switching to cut-to-length material and a shearing-based process sequence delivered a combined cost reduction that met the 20% target of the client.
Context
A precision machining component and a sheet metal bracket used in elevator manufacturing both needed independent should-cost analysis. The cost was rebuilt from the ground up, covering material, machine time, labor, and overhead, instead of being negotiated against the quote of the supplier.
Challenge
The derived should-cost of the machining component came in 53% below the target cost of the client, a gap large enough to require a full line-item breakdown before the number would be accepted
The sheet metal component needed a 20% cost reduction without any change to form, fit, or function
The raw material rate of the machining component was locked into a low-volume, fixed-term supply agreement that no longer reflected current market pricing
The process for the sheet metal component used laser cutting for both the outer blank and internal holes. It is flexible, and costlier than the geometry required.
Approach
The cost structure for both components was split into raw material cost and process cost, and each was analyzed independently.
Re-priced raw material against market rates: The raw material cost of the machining component was recalculated using quarterly base rates with an index cost correction, replacing the outdated locked-in agreement
Measured actual process times: Real cycle-time data for each machining operation, rather than standard or estimated times, became the basis for opening the lathe operations to competitive supplier comparison
Converted sheet stock to cut-to-length material: Shifting the raw material spec of the sheet metal component to pre-slit, pre-cut stock moved yield optimization to the larger-scale process of the supplier and removed a manual cutting step
Re-sequenced the manufacturing process: Laser cutting was replaced with shearing for the outer blank, drilling for round holes, and piercing and notching for oblong holes. Dedicated tooling replaced a single flexible, more expensive laser pass.
Results
Component | Cost Element | Change |
Machining | Raw Material Cost | About 20% reduction |
Machining | Process Cost | About 17% reduction |
Sheet Metal | Raw Material Cost | Up to 8% reduction |
Sheet Metal | Process Cost | Up to 12% reduction |
For the machining component, correcting the contract structure and opening lathe operations to comparison closed the majority of the 53% gap. For the sheet metal component, the combined raw material and process cost reduction met the 20% cost-down target of the client while keeping the design, tolerances, and function of the part unchanged.
What This Reveals
Two patterns from this engagement show up repeatedly in should-cost work. Locked-in supply agreements often outlive the market conditions that justified them. Process selection, laser cutting versus shearing and piercing, is a design decision made early and rarely revisited, even after the part geometry no longer needs the flexibility that justified it.
Frequently Asked Questions
What is the difference between should-cost analysis and a price negotiation?
A price negotiation starts from the quote of a supplier and tries to push it down. Should-cost analysis starts from an independent, bottom-up estimate of what the part should cost to produce, and uses that estimate as a factual reference point for the conversation.
Why does converting sheet stock to cut-to-length material reduce cost?
Cut-to-length material is pre-slit to the width and length the part actually needs. This shifts yield optimization to the larger-scale process of the material supplier instead of the smaller batch runs of the fabricator, reducing scrap and eliminating a manual cutting step.
When does it make sense to replace laser cutting with shearing, drilling, and piercing?
When part geometry is simple, with straight edges, round holes, and regular oblong cutouts, dedicated tooling processes like shearing and piercing are typically cheaper per part than a flexible laser-cutting setup. They trade flexibility for lower per-cycle cost at volume.
Why was the should-cost of the machining component 53% below the target of the client?
The gap traced to two causes. A raw material rate was locked into an outdated, low-volume supply agreement, and process costs were based on standard cycle times rather than measured actual times. Both were correctable without changing the part itself.
Related Reading
For another example of should-cost methodology applied at scale, see the escalator should-cost and VAVE case study from Goken. explore more engineering cost-reduction case studies on the Goken Insights library.
If your program has a cost gap that needs a bottom-up breakdown before it can be trusted, talk to the Goken should-costing team.
Sources cited: DFMA, Should Cost Analysis; Galorath, Should Cost Analysis, What It Is, How To Do It and Best Tools; aPriori, Should Cost Analysis.
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