Part 4: Creating Efficiency Through Fixed Pre-Production Part Pricing Methodology
Welcome to Part 4 of the Tenet Consulting Value Driver Series, where we highlight overlooked yet impactful opportunities in supplier negotiations. While achieving piece price reductions remains a cornerstone of strategic sourcing, leading manufacturers understand that non-price benefits, when effectively negotiated, can deliver significant operational value and cost avoidance. At Tenet, we go beyond price to help our clients extract maximum value by negotiating holistic supply agreements with all selected suppliers, optimizing both commercial and operational outcomes.
One such opportunity lies in negotiating a fixed and stable methodology for pricing pre-production parts, a value driver that prioritizes predictability and engineering efficiency.
Understanding Pre-Production Part Pricing Methodology
Pre-production part pricing poses unique challenges that differ significantly from serial production. These parts are typically ordered in very low volumes, often just a few units, and must absorb fixed costs such as setup, programming, and material procurement across a much smaller batch size. Additionally, they are produced using preliminary or manual processes, including non-production tooling or limited-capability equipment, which further drives up the cost per unit.
Complicating matters further, pre-production parts are frequently subject to ongoing design changes as products move through development iterations. This instability makes it difficult to standardize pricing or forecast costs. Compounding the challenge, engineering teams operate under tight development timelines, where delays in procuring pre-production parts can jeopardize entire program schedules.
Pre-production parts can generally be grouped into three categories:
- Standard or Off-the-Shelf Parts: Commercially available items requiring little to no customization.
- Prototypes: One-off or low-volume parts made with temporary or manual processes, typically used for form/fit/function checks.
- Pre-Production Samples: Parts manufactured using final production tooling and process, typically in small sample volumes to validate manufacturability.
For both manufacturers and suppliers, this environment is complex. Manufacturers face time pressure, and negotiating each request separately consumes resources and slows progress. Meanwhile, suppliers may be hesitant to invest time and offer cost concessions on small orders when there’s no guarantee of future production business. This lack of alignment can cause miscommunication, inefficiencies, and friction, ultimately impacting program timelines and development budgets.
Tenet’s Approach to Structuring Pre-Production Part Pricing
Tenet helps clients implement a formal pricing structure for pre-production parts that streamlines engagement and reduces administrative friction. A core component of our approach is facilitating early supplier engagement in the design and development process, giving suppliers the opportunity to review and influence part designs before they are finalized. This alignment not only improves manufacturability but also helps avoid costly design changes and rework later in the process.
Our objective is to negotiate no-cost or production-priced pre-production parts whenever possible. If not feasible, pricing discussions are segmented based on part type, resulting in a predictable and scalable methodology such as:
- Standard/Off-the-Shelf Parts: Provided at no cost or standard production pricing, as these require minimal effort from the supplier.
- Pre-Production Samples (at sample volumes): Provided at production pricing, since tooling and process are consistent.
- Prototypes: Priced under a simple cost-plus model (e.g., production price + 20%) to account for additional supplier effort.
Where appropriate, agreements can be contingent on the supplier winning the serial production business, reducing upfront risk for both parties. All pricing structures are documented in the Master Supplier Agreement, ensuring consistency and repeatability across programs.
Value to the Client
This approach delivers immediate and long-term value:
- Stable and Predictable Pricing: Reduces budget uncertainty during early-stage development.
- Faster Procurement Cycles: Minimizes time spent negotiating small, low-volume orders.
- Improved Supplier Collaboration: Leverages supplier expertise early in the design process.
- Engineer Focus on Innovation: Enables engineering teams to stay focused on product development, not part costs.
With Tenet’s support, manufacturers can shift from reactive part pricing to a strategic framework that enhances innovation speed, builds supplier alignment, and removes inefficiencies from the development lifecycle. For example, one of our clients achieved a 25% reduction in procurement cycle time by implementing structured pre-production pricing methodologies, illustrating the tangible benefits of our approach.
Enhance Your Development Efficiency
Are you ready to streamline your pre-production part pricing and drive innovation within your organization? Contact Tenet Consulting today to discover how our structured pricing methodologies can enhance your development efficiency and bolster supplier collaboration!
