OEM Annual Price Down Margin Erosion Calculator
Most automotive supply agreements carry an annual price reduction, often called productivity give back. This calculator compounds that price down against the cost savings you can actually deliver, so you can see whether piece margin holds, shrinks or disappears before the program ends.
Your numbers
Price you invoice today.
Purchased material including scrap allowance.
Labor, burden, machine and overhead per piece.
Annual reduction in the LTA, often 1 to 3 percent.
Yield, sourcing and design savings you can realistically deliver.
Cycle time, labor and OEE gains.
Your results
Simplified compounding model on a per piece basis. It ignores volume change, inflation, tooling and indexed material clauses.
Piece margin percent by program year
Sweeps Years into program from 0 to 10, holding your other inputs fixed.
Program margin review from your ERP data
Optional: have an expert review how standard cost and price down data could be combined in your ERP.
Optional. The tool and every export work without this. No spam.
How to use the calculator
Enter today's piece price and your material and conversion cost per piece. Set the contractual price down and the yearly savings you believe you can deliver on each cost bucket, then move the years slider. The chart sweeps year zero to year ten so you can find the year margin crosses your minimum acceptable level.
- Use standard cost from your ERP, not a quote estimate
- Keep material and conversion savings separate, they behave differently
- Run it twice: once with commitments, once with proven savings only
The math behind it
Price in year n equals price times (1 minus price down) to the power n, which is how a percentage reduction compounds. Each cost bucket compounds the same way with its own savings rate. Margin percent is price minus cost over price. If the price falls faster than the combined cost, margin shrinks every year, and the gap widens because the reduction applies to the whole price while savings apply to cost.
Reading the result
A flat margin line means your savings keep pace with give back. A falling line shows the year you must reopen the cost structure, ask for an indexed material clause, or request a resourcing conversation with the customer. Compare the annual profit output with your fixed program costs to see when the program stops covering its overhead.
Common mistakes
Suppliers often assume savings land on day one. They arrive late, after tooling changes, validation and customer approval. Also remember that price down in the contract is usually applied to the current price, not the original, which is exactly what compounding captures. Do not mix indexed commodity pass through into this model without adjusting the material cost line.
Frequently Asked Questions
Is price down the same as a PPAP price change?
No. Price down is a contractual yearly give back agreed in the LTA or nomination. A PPAP revision concerns a design or process change, though a customer approved cost saving may be shared with them under the contract terms.
Should I use percent of price or fixed dollars?
Contracts differ. Many state a percentage of the current price, which compounds. If yours states a fixed amount per year, use the percent equal to that amount over your price and note it will drift.
Can material savings be negative?
The slider starts at zero, but if commodity inflation is expected enter the base case at zero and model the increase separately, or use an indexed pass through clause to protect margin.
What margin should I aim to keep?
It depends on your overhead recovery and fixed cost. Compare the annual profit output with the program's share of fixed cost and with your corporate hurdle rate rather than relying on one percentage.
If standard costs and quoted price downs live in separate systems, Netray can help surface program level margin by part from your ERP data so this check is not a spreadsheet exercise.
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