How to Do Should-Cost Analysis: A Step-by-Step Guide

Should-cost analysis has a reputation for being the domain of specialist cost engineers with proprietary databases and years of process knowledge. That is partly true — rigour matters. But the methodology itself is structured and learnable. This guide walks through the complete process, step by step, with real manufacturing examples.

Step 1: Read the Drawing (or CAD File) Like an Engineer

Before you open a spreadsheet, you need to understand what you are costing. Pull up the engineering drawing or CAD file and extract:

• Part family — Is this a machined component? A sheet metal fabrication? A casting? A moulded part? A welded assembly? The process family determines everything downstream.
• Material specification — Note the exact grade: EN24 alloy steel, ADC12 aluminium die cast, SS304, PP+20% GF. Grade determines material price per kilogram, density (for weight calculation), and machinability factor (which affects cycle time).
• Finish weight and envelope dimensions — These determine material cost and machine time. Note both.
• Critical features — Deep holes, tight-tolerance bores, thin walls, complex profiles, and tight surface finish requirements (Ra 0.8 or better) all increase process cost. Flag them.
• Tolerance class — General tolerance (IT7–IT9) vs. precision tolerance (IT5–IT6) changes both process selection and inspection cost.

This step takes 15–30 minutes for a single part but pays back many times over in model accuracy.

Step 2: Map the Manufacturing Process Route

The process route is the sequence of operations needed to take raw material to finished part. For most part families, there is a standard route with variations:

CNC machined shaft: Bar stock cutting → Rough turning → Semi-finish turning → Heat treatment → Finish grinding → Inspection

Sheet metal bracket: Laser cutting → Deburring → Press braking → Spot welding → Powder coating → Inspection

HPDC aluminium casting: Die casting → Trimming / deflashing → Shot blasting → CNC machining → Anodising → Inspection

For each operation, you need to specify:

• Machine or process type (CNC lathe, press brake, HPDC machine, laser cutter)
• Machine tonnage or size class (affects machine hourly rate)
• Estimated cycle time at the part's dimensions and material
• Number of operators required
• Setup time, amortised over the batch size

Step 3: Calculate Material Cost

Material cost has two components: bought material and wastage.

Formula: Material cost = Input weight × Material price per kg

Input weight is always higher than finish weight. The difference is:

• Machining swarf (turned and milled away)
• Casting sprue and runner (trimmed off)
• Sheet metal skeleton waste (remaining after laser cutting)
• Rejection allowance (typically 1–5% of units)

A typical machined part has a material utilisation of 50–70%. A casting might be 80–90%. A laser-cut sheet metal part might be 70–80%, depending on nesting efficiency.

Example: A steel forged ring gear with finish weight 2.5 kg and input weight 3.8 kg at 0.89 USD/kg gives: 3.8 × 0.89 = $3.38 material cost per part.

Step 4: Calculate Process Cost for Each Operation

Process cost is cycle time × machine hourly rate, divided by the number of parts produced per hour.

Formula: Process cost (per part) = (Cycle time in minutes / 60) × Machine hourly rate ($/hr)

For a CNC turning operation with 8-minute cycle time on a machine running at $3/hr: (8/60) × 3 = $0.40 per part.

Machine hourly rates vary significantly by geography:

• CNC turning, India: $2–4/hr
• CNC turning, Germany: $60–90/hr
• Laser cutting (3kW), India: $8–15/hr
• HPDC (250T), India: $12–20/hr
• Gear hobbing, India: $4–6/hr

Sum the process cost across all operations to get the total process cost per part.

Step 5: Add Labour Cost

In many should-cost models, direct labour is already embedded in the machine hourly rate (particularly for highly automated processes). For labour-intensive operations — manual assembly, wire harness assembly, inspection — add direct labour separately.

Formula: Labour cost = (Cycle time in hours) × Labour rate ($/hr) × Number of operators

Indian direct labour rates for precision manufacturing: ₹150–300/hr ($1.80–3.60/hr) depending on skill level and region. Wire harness assembly in Bangalore: approximately $2.50/hr fully loaded.

Step 6: Apply Overhead and SG&A

Factory overhead covers indirect costs: facility rent, utilities, maintenance, indirect labour, depreciation. It is typically expressed as a percentage of direct manufacturing cost.

Common overhead structures for Indian precision manufacturing:

• Inbound logistics: 2% of raw material cost
• Inventory carrying cost: 5% of raw material cost
• Machine overhead: 8% of machine cost
• Labour overhead: 5% of direct labour
• Rejection and rework: 2% of total direct manufacturing cost
• R&D: 2% of direct manufacturing cost (for technology-intensive suppliers)
• SG&A: 1% of (R&D + direct manufacturing cost)

Step 7: Add Supplier Margin

Supplier margin varies by sector, relationship, and technology complexity:

• Standard precision machining, India: 7–10%
• Die casting or moulding (capital-intensive): 10–15%
• Single-source specialist (proprietary process): 15–25%
• MSME sub-tier (high volume, commodity part): 5–7%

Apply margin on the total cost (direct + overhead + SG&A), not just on direct manufacturing cost — this is a common modelling error.

Step 8: Build the Negotiation Brief

Your should-cost model is now a negotiation tool. Structure the brief to show:

1. Should-cost estimate — your bottom-up model result
2. Supplier quote — what they are charging
3. Gap analysis — where the difference is, broken down by cost category
4. Target price — your ask, supported by the model
5. Key assumptions — material price basis, volume, manufacturing location

When you share this with a supplier, the conversation changes. Instead of "we need a 15% reduction," you are saying: "our model shows material at $4.20, process at $2.80, and overhead at $1.40 — your quote at $12.50 implies $4.10 of unaccounted cost. Can you walk us through where that sits?" That is a productive, fact-based discussion. It respects the supplier's expertise while challenging assumptions that can't be justified.

Common Errors to Avoid

• Using finish weight instead of input weight for material cost — this understates material cost by 20–50% for machined parts
• Using outdated material prices — commodity prices move significantly; always use current market data
• Ignoring scrap and rejection rate — a 3% rejection rate adds 3% to effective unit cost
• Applying margin to direct cost only — margin should be on total cost including overhead
• Assuming a single process route — suppliers may use different equipment than your model assumes; validate against actual process capability

When to Use Software vs. Manual Modelling

Manual should-cost modelling in Excel is practical for one-off analyses or for engineers building their cost intuition. At scale — across hundreds of active parts, multiple programmes, and changing commodity prices — it becomes unmanageable.

Should-cost software automates the repeatable parts: CAD parameter extraction, live material pricing, machine hourly rate databases, and cycle time estimation. This lets your cost engineering team focus on the high-value work: process route judgment, supplier challenge, and negotiation strategy. The model runs in minutes; the strategic thinking still requires human expertise.

Emithran's Should-Cost Engine handles the end-to-end workflow — from drawing upload to negotiation brief — for machined, stamped, cast, and sheet metal parts across India, UK, Germany, USA, and China.