Should-Cost Model – The Ultimate Guide

To ensure that you get the best value for your money, it is essential that you get an understanding of the costs involved in producing a product or service. This is what this article will be about. 

By the end of this article, you will clearly understand should-cost modeling and how it can help you achieve cost savings for your organization. So, let’s dive in and learn how to reduce procurement costs. 

What is a Should Cost Model?

A should-cost model is a tool used by businesses to determine the estimated ideal cost of a product or service. It provides a breakdown of the various cost elements involved such as the cost of materials, labor, and other factors that are used in manufacturing a good or delivering a service.

The model is also used to compare the actual cost of production to the estimated cost and to identify areas where costs can be reduced.

It is a powerful tool that helps procurement and supply chain professionals to evaluate and negotiate pricing with suppliers effectively and favorably and achieve cost savings.

Importance of Should Cost Model

A should-cost model is an essential tool for procurement and supply chain organizations. It enables organizations to effectively negotiate and collaborate with suppliers.

Understanding the drivers behind raw materials and manufacturing costs is imperative to creating cost savings opportunities for the procurement and supply chain industry.

A should-cost model helps you identify areas where you can reduce costs and negotiate better deals with your suppliers.

How to Create a Should Model for Your Own Products?

Creating a should-cost model involves a systematic approach to analyzing and evaluating the cost components of a product or service. It can be a daunting task but it is crucial to ensure that you are getting the best value for your money. Below are the steps to create a should-cost model:

1. Identify the scope

When creating a should-cost model, the first step is to determine the product or service that you want to analyze and identify the key cost drivers.

2. Gather Data

After you identify the scope of your model, the next step is to gather data. Research and collect data on material costs, labor costs, overhead costs, and profit margins. Accurate and up-to-date information is essential for a should-cost model to be effective. Thus, to achieve this consult with suppliers, market research, industry reports, or internal cost data.

3. Analyze Cost Drivers

Identify the key factors that impact each cost element. For instance, in the case of raw materials, identify factors such as market demand, availability, transportation cost, and market fluctuations as this can significantly influence the prices for each material.

4. Quantify Cost Drivers

This step requires a deep understanding of the market dynamics and supplier relationships as you will assign weights or percentages to the identified cost drivers based on their impact on the overall cost.

5. Create Your Model 

The last step is to create your should-cost model by using the cost insights or data you have. This will provide you with an overall estimation of the product or service

6. Compare Estimated Cost

The last and bonus step is to compare the estimated cost to the actual cost of the product or service to identify the areas where you can reduce costs.

Should Cost Model: An Example Template

Take note! The values provided in this template are hypothetical and are solely for the purpose of illustrating what a should-cost template looks like. The numbers/figures used in this template should be customized based on actual data and analysis for a specific product/service.

Ways to Track Raw Material Prices

Raw material costs are a significant factor in a should-cost model. To ensure that your model is accurate, you need to track the prices of raw materials especially since we are in the golden era. Here are some tips for tracking prices:

1. Subscribe to industry publications and newsletters to stay up-to-date on market trends
2. Use online resources such as commodity price indexes to track prices.
3. Monitor the prices of raw materials from your suppliers.
4. Use should-cost model software that can aggregate data from multiple sources and automate the analysis.

To keep updated with the price of raw materials you can check our price tracker. 

Should Cost Model Tooling/Software

There are several should-cost model tools/software available in the market that can help you create and manage your should-cost models. These tools typically include features such as data collection, analysis, and reporting. Some of the popular software are the following:

1. aPriori

aPriori is a cloud-based should-cost modeling software that enables supply chain organizations to determine the true price of goods and services.

2. GEP

GEP is a procurement software that includes a should-cost modeling tool that helps organizations achieve cost savings.

3. Costimator

Costimator is a cost-estimating software that includes a should-cost modeling tool that enables organizations to create accurate cost estimates.

4. SEER

SEER is a project management tool from Galorath that enables you to create an accurate should-cost model that enables you to effectively negotiate with suppliers.

5. Planergy

Planergy is a procurement software that includes a should-cost modeling tool that can be used to optimize procurement.

Conclusion

In conclusion, a should-cost model is a strategic asset for organizations seeking to optimize procurement costs.

By employing a systematic approach to analyze cost components, businesses can enhance negotiation strategies, collaborate effectively with suppliers, and identify opportunities for cost savings.

The should-cost model’s significance in procurement and its potential impact on organizational efficiency cannot be overstated.