Businesses tend to gravitate towards value analysis, value engineering, strategic sourcing, and other benchmarking methods to identify new cost-cut opportunities. Given the rapid pace of development across industries, businesses can no more rely on traditional cost analysis methodologies but adopt newer should cost modeling approaches.
In the realm of procurement and price negotiation, businesses are constantly seeking effective strategies to optimize costs and enhance negotiation outcomes. One such powerful tool gaining prominence should cost Modeling. This methodology involves a comprehensive analysis of the various cost components associated with a product or service, providing businesses with a strategic advantage during price negotiations. Let’s delve into the nuances of Should Cost Modeling, understanding its approach, challenges, and the significant benefits it brings to the table.
Advancements in technology and analytics have made it possible for businesses to adopt structured cost modeling approaches. Moreover, advanced modeling solutions like should cost modeling also enable companies to identify and optimize cost drivers. Therefore, should costing is a widely accepted approach that helps the procurement and sourcing teams gain actionable insights that aid price negotiation. It also helps designers and product developers achieve their target costs by offering detailed cost and pricing insights early, i.e., in the initial product development phase. To increase competitiveness and gain a leading edge through effective product pricing, contact our analytics experts today.
What is Should Cost Analysis?
Should cost modeling is an advanced analytics methodology that helps determine a product’s cost based on different factors that impact pricing. It includes the cost of raw materials, manufacturing and process overheads, and other costs contributing to the overall price.
What is the Purpose of Should-cost Modeling?
Often, product designers do not analyze the cost products themselves but instead bank upon sourcing and procurement teams for pricing information. The lack of should-cost models leads to sourcing teams negotiating with suppliers with minimal information, resulting in price mismatches and high margins. Should cost models empower businesses to analyze design concepts focusing on the target cost during the development phase, i.e., before the negotiation phase, thereby establishing a practical fail-proof approach to sourcing.
A data-driven pricing plan focused on identifying the ideal product costs can help you succeed in the long run. Request a FREE proposal for personalized insights on how should cost modeling can benefit your organization.
Challenges in Should-Cost Analysis
1. Data Accuracy and Availability:
- Obtaining accurate and comprehensive data for all cost components can be challenging.
- Addressing this challenge involves leveraging advanced data analytics and sourcing strategies.
2. Dynamic Market Conditions:
- The volatility of market conditions poses a challenge for accurate scenario modeling.
- Overcoming this challenge requires continuous monitoring and agile adaptation to changing market dynamics.
3. Cross-Functional Collaboration Barriers:
- Ensuring seamless collaboration across diverse business functions can be a hurdle.
- Implementing effective communication channels and fostering a culture of collaboration is essential.
4. Modeling Complexity:
- Should Cost Models can become intricate due to the complexity of cost structures.
- Simplifying models without compromising accuracy involves leveraging advanced analytics and modeling tools.
Benefits of Should Cost Analysis
1. Cost Optimization:
- Should Cost Analysis empowers businesses to identify cost-saving opportunities across the supply chain.
- By optimizing costs, organizations can enhance their profitability and competitiveness.
2. Negotiation Leverage:
- Armed with comprehensive cost insights, businesses gain a strategic advantage in price negotiations.
- Should Cost Analysis enables informed and data-driven negotiations, leading to favorable outcomes.
3. Supplier Relationship Management:
- Building transparent and collaborative relationships with suppliers is facilitated through Should Cost Modeling.
- Organizations can work closely with suppliers to achieve mutual cost efficiencies.
4. Risk Mitigation:
- Identifying potential risks in the supply chain becomes more effective with Should Cost Analysis.
- Proactive risk mitigation strategies can be implemented to ensure continuity.
5. Strategic Decision-Making:
- Should Cost Modeling provides a foundation for strategic decision-making.
- Businesses can align their procurement strategies with overall organizational goals.
6. Continuous Improvement:
- Regular Should Cost Analysis allows for ongoing refinement of cost models.
- Continuous improvement becomes a key aspect of cost management strategies.
Should Cost Analysis Model: Quantzig’s Approach
Since should cost modeling primarily focuses on analyzing the elements that make up the cost of a product or service, businesses must have a robust should cost analysis model or cost breakdown analysis model to price their products competitively.
To help our clients address this issue, we’ve developed a comprehensive approach to should cost modeling, which involves the following phases –
Phase 1: Data Acquisition
The ‘data acquisition’ phase revolves around gathering data from various sources, including ERP platforms, bill of materials database, spend data, purchasing invoices, and other information on raw materials.
Phase 2: Methodical Data Expansion
The second phase focuses on analyzing the collected data sets and cost drivers, including raw materials costs, manufacturing overheads, logistics, and labor costs.
Phase 3: Classification of Cost Drivers
Once all the data has been analyzed, cost drivers identified in the previous steps are classified into homogenous groups.
Phase 4: Cost Modeling
The cost modeling phase revolves around outlining annual volumes, batch quantities, and unit of measure. In this phase, processes and materials are selected and cost parameters are defined with respect to geographical locations.
Phase 5: Generation of Should Costing Insights
By leveraging the data obtained from the mentioned sources, we develop crucial cost insights using our proprietary cost analysis models and price analytics platforms.
Phase 6: Reporting
The final stage in should cost modeling revolves around generating reports with a detailed breakdown of processes, material costs, non-recurring engineering costs (NRE), and authorization costs.
Request more info to learn how Quantzig’s should cost modeling solution helped a Fortune 500 industrial manufacturing company realize 15% percent savings.
Quantzig’s team of 550+ seasoned analytics experts have the expertise and skill it takes to design and build should cost models tailored to your business’s needs and equip you with data-driven, actionable insights for prudent decision-making. Our approach to should cost modeling also helps clients reverse engineer product costs to accurately estimate the price of components. Equipped with detailed pricing insights, businesses will be well-positioned to forge better, more effective contractual agreements and boost overall market competitiveness
