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Should Cost Modelling: Building Relationships and Driving Profitability

Jun 8, 2017

With procurement gaining prominence at the top management table, decision makers have recognized the positive impact it has on the organization’s bottom line and the value it creates for every stakeholder. Senior management are constantly looking out for tools and strategies that will not only bring down the overall costs but also improve the quality at every step in the supply chain. As a result, organizations are taking recourse to high level procurement intelligence that delivers actionable insights. Should cost model is a blessing in disguise that helps you realize cost economies, enables strategic sourcing, builds stronger supplier relationships and drives profitability. What is should cost modelling all about, you wonder?

Should Cost – A Cost Estimator in Disguise

 

If we were to explain what should cost analysis is in one word, we would call it a ‘cost estimator’. Should cost modelling is the process of ascertaining what a product should cost taking into consideration the cost of the input materials and the value addition processes along with the profit margins. It is a tool to understand the impact of each individual cost element on a product or service including materials, personnel, manufacturing, production and logistics, thereby driving decisions based on procurement intelligence. It helps in finding answers to critical decisions, for instance whether to make or buy a certain component or part. Should cost modelling changes the entire game and creates a shift in power from the supplier to the buyer  Additionally, it enables better understanding of the effects of pricing dynamics on the supply chain, facilitating a better supplier relationship management and building a strong partnership between the two parties.

Cost Planning – Now You See Me, Now You Don’t

 

While planning and identifying costs, organizations often shy away from making use of should cost tools and procurement intelligence that could help them in taking strategic decisions. Why? Because these tools and models are often looked down as complex and time consuming. But in reality, the concept of should cost is very simple: if you know what a component should cost, you would be able to determine the price you’d pay for it. Should cost model benefits in various ways namely,

  • Identifying mis-quoted components and parts with higher profit margins, thereby benefitting the procurement function to procure materials at the right price
  • Identifying the right supplier who is fit to produce a particular component and thus helping in sourcing from the right supplier
  • It aids in simplifying the requirements and creating an efficient design so as to reduce its complexity and manufacturing costs

Should cost analysis can benefit various industries and sectors, right from healthcare to retail and something as simple as tank cleaning services. It is definitely one of the best procurement practices and is much more accurate than the other cost analysis tools.

To know more about the impact of procurement intelligence and should cost analysis on your business

 

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