September 12, 2022 | Spend Management Blogs
Should cost modeling and analysis is a method of arriving at a pre-determined cost estimate for a finished product by breaking down various cost dependencies and finding a pre-determined final price.
Should-cost models allow us to measure what it takes to build a finished product. The name 'should cost’ says it all — what something should cost versus what it actually costs.
These costs can include:
In all honesty, should-cost models, if done right, provide simplicity in costing.
That being said, one should also be aware that these cost models (which we will come to later) will not provide 100% cost accuracy.
They provide a near-accurate cost estimate by using various factors on how that cost is determined, through one or more than one should-cost model and/or analysis.
To be more precise, it gives the user a ballpark figure of what should the cost be.
Let’s take the example of the cost of making a simple product like a jump rope or skipping rope that everyone uses to stay active.
The design of a jump rope and the quality of the rope determines how efficient and effective your jump rope is going to be. Therefore, you have heavy ropes, speed ropes, beaded ropes, leather ropes, etc.
Now, based on the fundamental cost estimate, let’s figure out the should cost.
Now, try to estimate the cost of one rope by adding your margin from a manufacturing point of view. You, of course, need economies to scale.
Try adding a cost to your rope now with the margins you need.
The user in Model 2 will now want to estimate what the cost of each rope should be if she contracted the manufacturer from Model 1. You get the point here.
Yet, should cost remains a good starting point in any organization, and best-in-class procurement and supply chain platforms are an excellent way to leverage these models.
We all need guidance, a benchmark to know where to start, how to start and when to start. How do I gather data? Is there any historical data within my organization? If I don’t have it, how do I proceed? If there is no internal historical data, there is data available in the market. A lot of consulting firms can help provide such data, and soon you can start capturing data internally and maintain a repository for future use.
Have the right people analyze the data. They can find out missing parts, gaps, risks and improve key data indicators that will help with any should-cost model.
Remember: should cost can be applied anywhere and everywhere. It’s not complicated unless you make it.