Disclaimer: This article is for informational purposes only and does not constitute legal, tax, financial, or investment advice. Laws and regulations vary by jurisdiction and change frequently. Always consult a qualified professional before making any decision. An OEM's procurement team spends ₹2–4 lakhs to build a should-cost model of your stamped bracket or machined housing before asking for a quote.
They own the labour, material yield, machine utilisation, and overhead math—and they use it to benchmark your margin. If you haven't modelled your own part with the same rigour, you're negotiating blind. This article walks a component maker through building a defensible should-cost model, indexing raw-material (RM) price variation into supply contracts, mapping single-source vendor risk, and auditing inventory engineering to free trapped cash.
Advisory
OEMs conduct should-cost benchmarking using cost-plus-margin models that typically allocate 18–22% overhead and 12–16% profit margin on component assembly. If your quoted price lands at ₹850 but their should-cost arrives at ₹780, the gap is treated as fat you either surrender or lose the order. The mechanism: they reverse-engineer your bill of materials (BoM), query material indices (LME copper, Platts steel, CRISIL aluminium references), apply standard machine rates (₹180–250/hour for CNC turning, ₹120–160/hour for stamping presses in Tier-1 regions), and assume 78–82% machine utilisation and 3–5% material waste. Second-order consequence: if you haven't built your own model first, you can't distinguish between defensible cost and negotiable margin, so you either accept a margin squeeze or walk from the deal without data.
A raw-material indexation clause in your supply agreement should specify: (1) the material (e.g., mild steel per IS 1570 Grade A), (2) the reference index (e.g., monthly LME futures settlement, or CRISIL-published plate prices), (3) the base price and base date (e.g., ₹45/kg as of 1 Jan 2026), (4) the trigger threshold (e.g., ±3% month-on-month movement), and (5) the adjustment formula (e.g., price adjustment = [(current index − base index) / base index] × material content % × base price). Without a named index, disputes arise immediately: the OEM claims 'steel was cheaper elsewhere' but provides no auditable proof. The trigger threshold prevents nickel-and-diming—only moves beyond 3% force recalculation. Proof mechanism: append certified index downloads (monthly LME copper settlement, CRISIL plate-rate bulletin, or published exchange data) to your monthly invoice. Omit this and you're arguing price orally; include it and you move adjustment by formula, not negotiation.
Identify the 5–8 vendors whose failure breaks your production plan within 48 hours: e.g., your sole precision-casting supplier (gear blanks), your dedicated tool-and-die partner, your captive heat-treatment house, your specialty-plating vendor (hard-chrome), or your single source of a custom-tolerance fastener. For each, document: (1) annual spend, (2) lead time (typically 21–35 days for castings, 14–21 for tooling, 7–10 for plating), (3) inventory days on hand at your plant (e.g.,
Frequently asked questions
A should-cost model is a cost-plus-margin analysis that OEMs build to reverse-engineer your component's true cost using material indices, machine rates, labour, and overhead benchmarks. They use it to benchmark your quoted price and identify negotiable margin.
Audit your bill of materials (BoM), query live material indices (LME copper, Platts steel, CRISIL aluminium), apply standard machine rates for your region and process, and model realistic machine utilisation (78–82%) and material waste (3–5%).
RM indexation clauses automatically adjust your quoted price based on published raw-material index movements, protecting you from margin erosion when steel, copper, or aluminium prices spike mid-contract.