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There are 2 main types of cost models, clean sheet cost models and open book collaborative cost models. Clean Sheet cost models are generic and are based on a generic factory scenario. Collaborative Open Cost Models are based on an actual factory and its cost structure. Each one has itsadvantages and application in the business world. This article will dive deep and investigate when it is better to apply each one.

First, let’s define the elements that make up a cost model for any manufacturing scenario. Below is the list of the basic cost drivers for any manufactured part or assembly. These are used in both Clean Sheet cost models and Collaborative Open Book Cost Models.

Materials

• Blank and Net Weight of the part (example is a stamping has a blank weight and a part weight, the difference is the engineered scrap) 
• $/kg of the raw materials, including the inbound freight to get the material to the factory
• Purchased Components or Services
• * Processing Equipment Type and Size
• Cycle Times to produce a part
• Efficiency % (typically this ranges from 50% to 90%, depending on the company)
• Set Up Time (this is a fixed time and a fixed cost that must be spread over the lot run size)
• # of Persons to operate the equipment
• Direct Labor $/hr (wages, taxes, benefits, insurance)
• Burden $/hr (depreciation, utilities, repairs and maintenance, indirect and salary staffing, etc.)
• * SGA and Profit
• Selling, General and Administration (sales, accounting, finance, executives)
• Profit (Earnings before interest and taxes)
• * Freight
• This is freight costs to get your product to the customer.
• * Packaging
• This is the packaging that protects the parts as it is shipped to the customer. It typically includes pallets, boxes, bags, shrink wrap and

Now let’s define each type of cost model, Clean Sheet Cost Models and Open Book Collaborative Cost Models.

CLEAN SHEET COST MODEL - Clean Sheet cost models are based on factual and accurate representation of the manufacturing processes, raw materials, packaging, freight, ware housing and the appropriate regional cost structures. This approach applies generally accepted cost structures for such things as $/lbs. for raw materials, labor $/hr, Burden $/hr, Cycle Times, Set Up Times, SGA % and Profit %. This is a generic approach to costing and is not based on a specific factory or manufacturer. Hence the name “clean sheet” as it refers to a hypothetical factory or a “clean sheet” factory. There are various names for generic factory cost models including “Should Be Cost Models” and “Zero Based Estimated Cost Models”. It is very important that a clean sheet represent a particular region of the world as the cost structures are different in the United States vs. Mexico vs. China vs. India vs. Western Europe vs. Eastern Europe.

In most cases the Clean Sheet costing tool will get you close to what the part cost and price should be.

What are the advantages and disadvantages of each type of cost model and more importantly, when to apply each type of cost model.

COLLABORATIVE OPEN BOOK COST MODELS
Advantages:

1. By definition the collaborative open book cost model is considered collaborative vs combative with clean sheet cost models.
2. You have agreement on the cost model with your strategic and partner suppliers right from the beginning
3. The leverage to implement the target pricing is very high as the target pricing is develop with a cost model that has the support and approval of the actual manufacturer.

Disadvantages:

1. The time and effort to develop these Collaborative Open Book Cost Models together with suppliers is much greater than the Clean Sheet Cost Models

When to Apply Collaborative Open Book Cost Model:

1. When your spend is significant
2. When you have options and leverage