How to negotiate the rates of Grey Iron Casting?

Definition: Grey iron castings are metal components made by pouring molten grey cast iron into molds. Known for their good machinability, vibration damping, and wear resistance.

Purpose: Used in applications requiring strength, thermal conductivity, and cost-effectiveness.

Examples:

• Engine blocks

• Gearbox housings

• Brake drums

• Pump bodies

Casting Technologies:

• Moulding: Hand moulding (low volume) vs Machine moulding (high volume)

• Melting: Cupola furnace (traditional, cost-effective) vs Induction furnace (cleaner, precise)

What influences the costs of GI castings?

Technical aspects	Commercial aspects
Size in terms of dimensions, design complexity and weight	Quantity or number of pieces
Grade /specifications (As per IS 210:2009) e.g, FG 150 or FG 220, or FG 220  or FG 260 or FG 300, which represent their strength, Hardness, machinability etc	Rates of pig iron, scrap  and ferro alloys and their  availability & volatility
Quality requirements like: Tensile Strength, Hardness (BHN), Dimensional Accuracy, surface defects, etc	Skilled Labour availability and rates
Manufacturing technology- Cupola vs Induction furnace, etc	Competition
Pattern/tooling cost	Payment terms  and vendor relation ships, etc

Approach for negotiating Grey Iron casting

1. Different types of castings are required in Manufacturing and other industries, such as Grey iron, Malleable Iron, Ductile Iron, Steel, Aluminum, and other non-ferrous types.

2. In this article, we will focus on negotiating rates for Grey iron casting using the first-principles costing approach.

3. An exactly similar approach can be pursued for other types of casting, with the key difference being variations in raw materials, plant and machinery, tools and jigs, fixtures, and manpower, among others.

4. The first principle of costing elements

   1.  Raw materials

   2. Plant & machinery

   3. Tools, Jigs, and Fixtures

   4. Manpower

   5. Manufacturing variable costs

   6.  Marketing variable costs

   7. Overheads

   8. Margins

   9. Taxes

Please refer to my YT Video for details on this article.

Who should negotiate 

1. A team of competent professionals, possessing the necessary skills (as outlined in my 9th Blog, posted on 11th April 2025), needs to negotiate the rates and terms.

4. How to estimate raw material costs in Grey Iron  Castings?

Key raw materials for cupola-based castings are

1 Pig Iron (60-65 %), 2 Scrap (30-35%), and 3 additives (4-6%) like ferro alloys. 4. Fluxes, 5. Coke, 6. Additives, 7. Binders, and so on, as required. Coke or coal is used in cupola melting, and minor fluxes are needed for impurity removal.

Assumptions  in our illustrations

1. Estimated annual consumption from P&L statement of cupola-based foundry vendor or budgetary estimates  =Rs 1200 Lacs, considering 3000MT of production

2. Yield may be 80-90%, depending on the Gating/ riser design and losses

Estimated raw material  Cost /Kg

1. So, the cost of raw materials  = Rs 40 /kg ( Total annual consumption value of  Rs  1200Lacs divided by total production tonnage  3000MT)

2. This can be captured in a resource template RT (1) –Row 1 as enclosed.

   The unpopulated template, ready to use, is depicted below.

   
   

Sn	Direct Cost Heads	Cost /unit	Suggested approach  for estimating  cost/unit in col 3
Col 1	Col 2	Col 3	Col 4
1	Material costs	To populate	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 costs		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 + inhouse manufacturing/assembly stage at buyer end
6	Marketing variable costs		Based on direct packing costs, labelling ,markings, estimated warranty costs
7	Any other cost relevant to material		Based on relevance to material -Industry  and including any QC, Statutory costs etc
8	% Overheads		To be negotiated  as per profile of vendor
9	% Markup or vendor margin		To negotiate as per Industry practice /affordability of buyer and to be applied  on subtotal
10	Taxes extra		As per statutory requirements
11	Total costs		The sum of the above

5. How to estimate and apportion Plant and machinery costs?

Key Plant & machinery for Cupola-based manufacturing

Major equipment includes: :1 Cupola Furnace,, 2 Ladles, 3 Moulding Machines, 4 Core making Machines, 5 Shakeout Machines, 6 Tumbling Machines, 7 Sand Handling Equipment, and so on.

Assumptions in our illustration -for apportioning P&M Costa (annual basis)

1. Investment=Rs 400L ,

2. Depriciation@10%,

3. AMC @3%,

4. Finance cost=11.5%

  So Depreciation=40L,  AMC=12L, Finance cost=Rs 46L Total=Rs 98L based on

Estimated P&M Cost/Kg

1. Rs 3.25/kg @  Total cost of Rs 98L divided by 3000M

2. This can be captured in a resource template   RT (1) –Row 2 as enclosed

 6. How to Estimate and Apportion Manpower Costs?

Key Manpower required for Cupola-based manufacturing

Foundry Engineers, Metallurgists, Quality Control Inspectors, Maintenance Technicians, Labor (Mould Makers, Core Makers, Pattern Makers, etc), and so on

Assumptions in our illustration -for apportioning Manpower  Costa (annual basis)

1. Say 50 numbers @Avg Rs 25000/pm

2. Manpower cost estimates =Rs 150 L. @50 x 25000 x12

Estimated P&M Cost/Kg

1. Rs  5/Kg based on Rs 150L divided by 3000MT

2. This can be captured in a resource template   RT(1) –Row 3 as enclosed.

7. How to estimate and apportion tool, jig, and fixture costs?

Key tools, Jigs & fixtures for Cupola-based manufacturing

1. Tools: 1 Hand Tools, 2 Power Tools, 3 Measuring and Inspection Equipment,

2. Jigs/fixtures: 1 Pattern Equipment, 2 Core Boxes,  3 Gating and Risering Systems,4 Moulding Boxes, 5 Pouring Ladles, and so on

Assumptions in our illustration -for apportioning Tools, J&F costs (annual basis)

1. Expenses = Say 4% of the Investment of Rs 400L

2. Amount =Ra 16L

Estimated Cost/Kg

1. Rs 0.50/kg @  Total cost of Rs 16L divided by 3000MT

2. This can be captured in a resource template   RT (1) –Row 4 as enclosed

8. How to Estimate Manufacturing Variable Costs?

Key cost elements  for the Manufacturing variable for GI castings are :

Power, Furnace Oil, Natural Gas, Water, Compressed Air, QC gauges,% rejection of casting, and so on  

Assumptions in our illustration -for apportioning manufacturing variable costs (annual basis)

Expenses =  Rs 285L

Estimated Cost/Kg

Rs  9.50/Kg @  Total cost of Rs 285L divided by 3000MT

This can be captured in a resource template   RT (1) –Row 5 as enclosed

9. How to Estimate Marketing Variable Costs?

Key cost elements  for Marketing variable for GI castings are :

Packaging materials, Protective coatings, Labeling and branding, Mandatory Certification, Costs for freight, Insurance,  Warranty, and so on

Assumptions in our illustration -for apportioning marketing variable costs (on an annual basis)

Expenses =  Rs 150L

Estimated Cost/Kg

Rs  5.0/Kg @  Total cost of Rs 150 L divided by 3000MT

This can be captured in a resource template   RT(1) –Row 6 as enclosed

10 How to compute overheads?

Overheads include shared services and fixed facility expenses.

Examples are :

1. Admin & Office Staff

2. Rent, Software, Security

3. Testing, Certification, Utilities

4. 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(1) –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 :

1. 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

2. Hence, it is also charged as % of costs

3. This is to be captured in resource template - RT(1) –Row 9

Taxes

1. The HSN classification of the material governs these - in this case, GI casting and hence % rate is applicable as Goods and service tax

2. This is to be captured in resource template - RT(1) –Row 10

   
   

   13. Estimated costs in our illustration for GI Castings (By Populating Template  RT1 )

   1. Raw material costs  =.  Rs 40/kg           

   2. Plant & machinery cost=Rs 3.25/kg

   3. Manpower costs=Rs 5/kg

   4. Tools/ jigs /fixtures costs 0.50/kg

   5. Manufacturing variable costs = Rs 9.50/kg

   6. Marketing variable costs =Rs 5/kg

   7. Any other costs = Rs 0/kg

         Subtotal = Rs 63.25/kg

   8. Add Overheads  = as %

   9.  vendor margin = as %

   10.  Taxes  extra = = as %

   11. Total landed cost of GI castings= Rs 63.25/kg + Overheads + vendor margin + Taxes

 14. Final Negotiation Strategy for GI Castings

1. Post-RFQ Evaluation: Conduct a two-part comparative analysis of vendor offers:

   1. Technical Evaluation: Assess compliance with specifications and evaluate the technical infrastructure of each shortlisted vendor.

   2. Commercial Evaluation: Compare quoted rates, payment terms, and contractual conditions, and assess each vendor's financial stability.

2. Vendor Negotiation Process: Invite each shortlisted vendor for structured negotiations, using the following inputs:

   1. Comparative Bid Charts: Visual representation of received and negotiated bids.

   2. First-Principles Cost Estimations: Reference cost benchmarks based on the methodology detailed in this presentation.

3. Outcome:

This structured approach ensures a transparent, data-driven negotiation process that fosters mutual value creation and win-win outcomes.

Pitfalls while negotiating the rates of grey iron castings  

The estimated cost above and historical costs can serve as very useful input to the negotiating team before initiating vendor negotiations. However, the following are the pitfalls

1. Ignoring Raw Material Volatility: Failing to account for fluctuations in pig iron, scrap, and coke prices can lead to unrealistic cost expectations.

2. Overlooking Yield Losses: Underestimating process losses (such as gating, risers, or fettling waste) skews the true part cost.

3. Underestimating Tooling Impact: Neglecting the cost or lifespan of patterns and core boxes can affect long-term cost accuracy.

4. Inaccurate estimation of Quality costs: Failing to factor in quality control costs for porosity, shrinkage, and machining allowances.

5. Over-Reliance on Historic Costs: Using outdated benchmarks without factoring in inflation, energy, or labour rate changes.

6. Ignoring Capacity Constraints: Not considering foundry load and lead time pressures, which can affect pricing flexibility.

7. Neglecting Tolerance Needs: Complex design, tight tolerances, or grade requirements can significantly affect costs.

8. Misjudging Freight and Packaging: Ignoring logistics costs, especially for heavy castings, can distort total landed cost.

9. Inadequate Specification Clarity: Vague drawings or specs can cause hidden cost additions due to incorrect assumptions by suppliers.

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