How to negotiate the rates of hot forgings logically
- Arvind Dang
- 12 minutes ago
- 9 min read
What is included in this Presentation?
1. What are Forgings, their purpose, and the technologies to produce these
2. What influences the costs of Hot forgings
3. Approach for negotiating the costs of Hot forgings based on an illustration
4. How to Estimate Raw Material Costs?
5. How to estimate and apportion Plant and machinery costs
6. How to estimate and apportion manpower costs?
7. How to estimate Tool, Jigs/fixtures cost
8 How to estimate and apportion manufacturing variable costs?
9. How to Estimate Marketing Variable Costs?
10. How to compute overheads?
11. How to Estimate Vendor Margin and Taxes?
12. Standard unpopulated template to estimate costs using FPC-Bought out material (Cat 1)
13. Estimated costs for Hot forgings in our illustration
14. Final Negotiation Strategy for Forgings
15. Pitfalls in negotiations
16. Key Takeaways
1. What are Forgings, their purpose, and the technologies used to produce them?
Definition:
Forgings are Components shaped by compressive forces. Metal is deformed plastically using dies or hammers, which improves its strength and grain structure.
Depending on the size, shape, and quality of the forgings, various types of forging processes are employed, including hot forging, Cold forging, upset forging, Press forging, Open die forging, and Close die forging.
In this article, we will focus on negotiating rates for hot forgings using the first-principles costing approach.
Purpose:
Forgings provide High strength and durability. They are used in the automotive, aerospace, industrial machinery, and other high-load, safety-critical applications.
Examples:
Crankshafts, Camshafts, Gears, Crown-wheel pinions, Shafts for gearbox, and so on
Forging Technologies:
1. Hot Forging (metal above recrystallization temp).
2. Cold Forging (at or near room temperature).
3. Warm Forging (intermediate temp).
4. Open-Die Forging (simple shapes, large parts).
5. Closed-Die Forging (precise shapes using impression dies).
6. Roll Forging, Press Forging, Upset Forging, etc
2. What influences the costs of Hot Forgings?
Technical aspects | Commercial aspects |
Size of Forging in terms of dimensions, design complexity and weight | Quantity or number of pieces |
Specifications of material. Eg i)Alloy steel ASTM A29 (SAE 8620) AISI/SAE Standard EN 10084 (20MnCr5) DIN Standard ii) Carbon Steels Examples: AISI 1020, AISI 1045, C20, C45 and so on | Rates of Raw Material Type & Size and their availability & volatility |
Quality requirements like: i) Chemical composition (via spectrometry) Grain size and inclusion content ii) Hardness (Brinell, Rockwell) iii) Mechanical properties (Yield strength, UTS, elongation Ultrasonic testing (UT) iv)Macro/microstructure – especially in critical forgings | Skilled Labour availability and rates |
\Manufacturing technology, as mentioned earlier, Post forging heat treatment etc | Competition |
Die/Tool cost and life | Payment terms and vendor relationships etc |
3 Approaches for Negotiating Hot Forgings
Different types of Forgings are in use as follows:
· General-purpose forgings, automotive parts, shafts –Made out of Carbon steel
· High-stress components, gears, axles, connecting rods: Made out of alloy steels
· Corrosion-resistant components, valves, and surgical tools made of stainless steel
· Dies, moulds, punches (often used in forging dies themselves) : Made out of tool steel
In this article, we shall focus on negotiating rates for Hot forgings using the first principle costing approach, using carbon steel or alloy steel
Please refer to my YT presentation for these details as per link below.
The first principle of costing -9 elements
· Raw materials
· Plant & machinery
· Tools, Jigs, and Fixtures
· Manpower
· Manufacturing variable costs
· Marketing variable costs
· Overheads
· Margins
· Taxes
Who should negotiate
A team of competent professionals with the necessary skills (as mentioned in my 9th Blog, posted on April 11, 2025, on YouTube and LinkedIn) needs to negotiate the rates and terms.
A similar approach can be pursued for other types of Forgings, with the key difference being variations in raw materials, plant and machinery, tools/jigs, fixtures, manpower, etc.
4 How to Estimate Raw Material Costs in Hot Forgings?
Key raw materials for Forgings
· Primary input: Steel Ingot or Billet
· Grade: Carbon steel C45 /EN9 or alternate as mentioned in the drawing of the component
· Billet Size: as appropriate
Assumptions in our illustrations
· Estimated annual consumption from P&L statement of cupola-based foundry vendor or budgetary estimates =Rs 975 Lacs(all types) considering 1500 MT (@ 5MT Production /day x 300 working days of production)
· Yield may be 85-90%, depending on the hammer design. Die design and Flash cutting
Estimated raw material Cost /Kg
· So, the cost of raw materials = Rs 65 /kg ( Total annual consumption value of Rs 975 Lacs divided by total production tonnage 1500MT)
· This can be captured in a resource template RT (2) –Row 1 as enclosed.
· This resource template RT2 is exactly like resource template RT1 for GI castings, but numbered as RT2 just for distinction between castings and forgings
5 How to estimate and apportion Plant and machinery costs?
Key Plant & machinery for Hot forging manufacturing
Major equipment includes: Forging Press, Induction Heater, Hammer, etc and Handling Equipment & so on
Assumptions in our illustration -for apportioning P&M Costa (annual basis)
· Investment=Rs 300L ,
· Depriciation@10%,
· AMC @3%,
· Finance cost=10.0%
So Depreciation=30L, AMC=9L, Finance cost=Rs 30L Total=Rs 69L based on
Estimated P&M Cost/Kg
Rs 4.60/kg @ Total cost of Rs 69 L divided by 1500M
This can be captured in a resource template RT (2) –Row 2 as enclosed
6. How to Estimate and Apportion Manpower Costs?
Key Manpower required for Hot Forged manufacturing
Payroll/welfare, Die Makers, Punch Makers, Metallurgists, Quality Control Inspectors, Maintenance Technicians, and so on
Assumptions in our illustration -for apportioning Manpower Costa (annual basis)
· Say 40 numbers @Avg Rs 25000/pm (average of all types as this may vary considerably)
· Manpower cost estimates =Rs 120 L. @40 x 25000 x12
Estimated Manpower Cost/Kg
· Rs 8/Kg based on Rs 120L divided by 1500MT
· This can be captured in a resource template RT(2) –Row 3 as enclosed.
7 How to estimate and apportion tools, Jigs & fixture costs?
Key tools, Jigs & fixtures for Hot forged manufacturing
· Tools: Forging Dies, Punches, etc
· Jigs/fixtures: Tongs, Anvils, and so on
Assumptions in our illustration -for apportioning Tools, J&F costs (annual basis)
· Expenses = Say 4% of the Investment of Rs 300L
· Amount =Rs 12L
Estimated Cost/Kg
· Rs 0.80/kg @ Total cost of Rs 12L divided by 1500MT
· This can be captured in a resource template RT (2) –Row 4 as enclosed
8 How to Estimate Manufacturing Variable Costs?
Key cost elements for the Manufacturing variable for Hot forging are :
Power, Furnace Oil, lubricants and coatings, Water, Compressed Air, Labor wages (Forging Press Operator, Die Setter, Furnace operator, flash remover, etc), QC gauges,% rejection of forgings and so on
and so on
Assumptions in our illustration -for apportioning manufacturing variable costs (annual basis)
· Expenses = Rs 105L
Estimated Cost/Kg
· Rs 7.0/Kg @ Total cost of Rs 105L divided by 1500MT
This can be captured in a resource template RT (2) –Row 5 as enclosed
9 How to estimate Marketing variable costs?
· Key cost elements for Marketing variable for Hot forging are :
Packaging materials, Protective coatings, Labeling and branding, Mandatory Certification if applicable, Costs for freight, Insurance, Warranty and so on
· Assumptions in our illustration -for apportioning marketing variable costs (on an annual basis)
Expenses = Rs 90L
· Estimated Cost/Kg
Rs 6.0/Kg @ Total cost of Rs 90 L divided by 1500MT
This can be captured in a resource template RT(2) –Row 6 as enclosed
10 How to estimate overheads?
Overheads include shared services and fixed facility expenses.
Examples are :
· Admin & Office Staff
· Rent, Software, Security
· Testing, Certification, Utilities
· and so on
These are usually taken as % of costs as the vendor may not be willing to give a cost break, and or may have some other products for other customers where common heads are not apportioned pro rata
This is to be captured in resource template - RT(2) –Row 8
(Row 7 is reserved for any other costs like statutory, etc & here assumed nil)
11. How to Estimate Vendor Margin and Taxes?
Vendor margins:
· These are usually based on the type of technology used in manufacturing, vendor infrastructure, in terms of equipment, processes, tools, jigs and fixtures, location, and competition
· Hence, it is also charged as % of costs
· This is to be captured in resource template - RT(2) –Row 9
Taxes
· The HSN classification of the material governs these - in this case, GI casting, and hence, the % rate is applicable as Goods and Services Tax
· This is to be captured in resource template - RT(2) –Row 10
12 Standard unpopulated template to estimate Forging costs using FPC-Bought out material-Cat 1
Sn | Direct Cost Heads | Cost /unit To populate | Suggested approach for estimating cost/unit in col 3 |
Col 1 | Col 2 | Col 3 | Col 4 |
1 | Material costs |
| Based on the estimated costs of the bill of materials required |
2 | Plant & machinery cost |
| Based on the design/specs process sequence, throughput time and equipment cost, AMC costs & % depreciation rate, financing costs, number of shifts, and equipment used |
3 | Manpower costs |
| Based on process sequence, manpower rates –skilled and unskilled (manufacturing//assembly and QC) |
4 | Tools, Jigs and Fixtures |
| Based on the design/specs of , process sequence, throughput time, and Tools/Jigs - cost, tool resharpening costs & wear rate/consumption |
5 | Manufacturing or & assembling variable costs |
| Based on direct power, fuel/ consumables, inward Freight, marine premium, rejection rate at receipts stage + in-house manufacturing/assembly stage at buyer end |
6 | Marketing variable costs |
| Based on direct packing costs, labelling,markings, and estimated warranty costs |
7 | Any other costs relevant to the material |
| Based on relevance to material -Industry and including any QC, Statutory costs etc |
| Sub total |
| Sum from 1 to 7 above |
8 | % Overheads |
| To be negotiated as per the profile of vendor |
9 | % Markup |
| To negotiate as per Industry practice /affordability of the buyer and to be applied on subtotal |
10 | Taxes extra |
| As per statutory requirement |
13. Estimated costs in our illustration for Hot Forgings (By Populating Resource Template RT2 )
1. Raw material costs =. Rs 65/kg
2. Plant & machinery cost=Rs 4.60/kg
3. Manpower costs=Rs 8/kg
4. Tools/ jigs /fixtures cost= 0.80/kg
5. Manufacturing variable costs = Rs 7.00/kg
6. Marketing variable costs =Rs 6/kg
7. Any other costs = Rs 0/kg
Subtotal = Rs 91.40/kg
8. Add Overheads = as %
9. vendor margin = as %
10. Taxes extra = = as %
Total landed cost of Forgings = Rs 91.40/kg + Overheads + vendor margin + Taxes
14 Final Negotiation Strategy for Hot Forgings
i)Post-RFQ Evaluation: Conduct a two-part comparative analysis of vendor offers:
a)Technical Evaluation: Assess compliance with specifications and evaluate the technical infrastructure of each shortlisted vendor.
b)Commercial Evaluation: Compare quoted rates, payment terms, and contractual conditions and assess each vendor's financial stability.
ii)Vendor Negotiation Process: Invite each shortlisted vendor for structured negotiations, using the following inputs:
a)Comparative Bid Charts: Visual representation of received and negotiated bids.
b)First-Principles Cost Estimations: Reference cost benchmarks based on the methodology detailed in this presentation.
iii)Outcome:
This structured approach ensures a transparent, data-driven negotiation process that fosters mutual value creation and win-win outcomes.
15 Pitfalls in Negotiations
1. Strategy: Use First-Principles Costing to Break Down Component Cost
Pitfall:
· The supplier may dispute assumptions or input data (e.g., material, yield,
· Overconfidence in cost breakdown may lead to rigid negotiation, reducing flexibility.
2. Strategy: Encourage Transparency on Input Costs (Billet, Dies, Energy, Labour)
Pitfall:
· Suppliers may feel threatened or become defensive, fearing exposure of margins.
· They may provide vague data to maintain information asymmetry
3 Strategy: Understand Tooling Costs and Amortization
Pitfall: Tooling costs might be inflated or recovered too quickly in a few parts.
4. Strategy: Discuss Manpower and Handling Efficiencies
Pitfall: Labour norms may be outdated or differ significantly across suppliers.
5. Strategy: Validate Energy and Fuel Costs (especially for furnace/presses)
Pitfall: Allocation on energy may be arbitrary.
6. Strategy: Insist on Overheads and Margin Segregation
Pitfall: Suppliers may club overheads and profit, making it harder to distinguish cost drivers.
7. Strategy: Include Reasonable Scrap and Rework Allowance
Pitfall: Vendors may initially quote low rejection rates to win business.
8. Strategy: Formalize Price Revision Formula (raw material/other cost elements linkage)
Pitfalls: Absence of a price variation clause exposes the buyer to inflation risks.
16 Key takeaways
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