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SHOULD COST ANALYSIS IN PURCHASING & COST ENGINEERING


Why purchasing and cost engineering need should costing

  • Purchasing and cost engineering face increasing cost pressures and complex supply chains.

  • Limited resources require precise identification of cost-saving opportunities. 

  • Technological advancements and rising customer demands increase product complexity. 

  • Understanding supplier costs and identifying optimization opportunities is becoming more complex.

  • A significant part of manufacturing value depends on the cost of purchased components.

  • Should costing provides reliable cost estimates, improves negotiations, and supports data-driven purchasing decisions.

WHAT IS A SHOULD COST ANALYSIS?

Should cost analysis, also known as should costing or cost breakdown analysis, is a method for determining the cost of a product or service. 

By breaking down a product's cost structure, companies determine its "should cost"—what they believe they should pay for it. 

The cost structure often includes:

  • Costs of materials and production processes
  • Employee wages and related expenses
  • Economic and market factors
  • Administrative and operational expenses
  • Investments in equipment and infrastructure

Should costing enables professionals to compare supplier quotes with their own cost expectations. This understanding helps establish fair pricing and fosters collaborative relationships with suppliers.

HOW TO PERFORM A SHOULD COST ANALYSIS


Manufacturing cost analysis is essential to achieving reliable cost estimates and securing the best price for purchased parts. This involves breaking down the prices of individual components and comparing them to target costs to identify opportunities for optimization. 

Should cost analysis takes a “bottom-up” approach, carefully evaluating all the materials, processes, and service costs involved in production. By adding these elements, organizations can determine the accurate “should cost” of a manufactured product.

This process requires cross-functional collaboration across teams, including product development, production, cost engineering, and supply chain teams.

Skilled cost engineers are central to this effort. They focus on identifying and prioritizing the most critical cost drivers. By analyzing these components and acting quickly on their findings, organizations can lower costs and speed up the launch of new products. 

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BENEFITS OF SHOULD COST MODELING

Implementing a robust should cost model delivers measurable benefits in procurement, cost management, and overall business performance. Here’s how it adds value to organizations:

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Improved Cost Control & Transparency
Clear visibility into costs and real-time data ensures better planning and swift decision-making.

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Strengthened Negotiation Leverage
Data-driven insights help identify overpriced components and secure fair pricing with suppliers.

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Efficient Development &
Procurement Processes
Quick cost estimates and streamlined processes reduce development times and improve efficiency.

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Enhanced Supplier Collaboration
Collaborating with suppliers builds trust, aligns methods, and drives joint cost-reduction efforts.

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Greater Market Competitiveness
Optimized costs enable competitively priced products, strengthening market position.

WHY ARE COST TARGETS NOT ACHIEVED IN PURCHASING?

Should cost modeling is challenging due to its complexity and the required collaboration. Here are the main obstacles that complicate purchasing processes and cost engineering:

  • Departments involved in value creation often fail to align their efforts.
  • Processes across multiple locations lack integration and proper coordination.
  • Purchasing teams rely on various file formats and disconnected systems.
  • Knowledge is siloed, restricting organization-wide access.
  • Databases for new materials, technologies, and regional information are often lacking.
  • Limited transparency and access to data make it tough to analyze supplier costs.
  • Suppliers use inconsistent quoting methods, complicating cost comparisons and evaluations.

A strategic approach, combined with the right should-cost modeling tools, can help address these challenges and pave the way for more efficient purchasing processes.

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ENTERPRISE PRODUCT COSTING:
THE KEY TO EFFECTIVE SHOULD COSTING

Enterprise Product Costing (EPC) is a method to consistently manage and control costs at every stage of a product's lifecycle.

Effective cost control begins by engaging all relevant business units from the start. Collaboration kicks off as early as the development phase, laying the groundwork for accurate results.

Calculations must be consistent across all business units and locations. This consistency is achieved by using the same data and methods every time.

This is why enterprise product costing brings together key departments—Development, Production, Purchasing, Sales, Controlling, and Top Management—ensuring seamless collaboration and alignment throughout the process.


Advantages of FACTON EPC Should Costing at a glance

  • Accurate and transparent calculations with a comprehensive database and standardized cost models.

  • Quick and informed decisions through standardized cost evaluations and transparent price analyses.

  • Effective cost control throughout the product lifecycle with realistic target costs and integrated benchmark data.

  • Improved collaboration across departments, especially in procurement, to better understand production processes and negotiate more effectively with suppliers.

  • Efficient communication of cost reduction measures to stakeholders.

HOW CAN PURCHASE PARTS ANALYSES, TARGET COSTING & COSTING PROCESSES BE ACCELERATED

Suppliers often take weeks to return quotes, which can be a significant issue in manufacturing, where minimizing time to market is crucial for success. 

Digitally simulated should-cost models solve this problem by allowing engineers to estimate costs without waiting on suppliers. These models provide quick and accurate cost projections, saving valuable time. 

Engineers can even evaluate multiple design options to receive just one quote within the usual time. 

When responding to customer quote requests, should costing models also help deliver more accurate prices in days instead of weeks. Additionally, when redesigning products to cut costs, engineers can avoid guesswork. Should-cost models give them clear targets to identify and reduce inefficiencies effectively.

Should cost analysis software enables cost analyses to be created quickly. This means that even non-technicians can map a best-practice product price and prepare fast and precise cost analyses.

See in the video how FACTON and consulting firm umlaut quickly unlocked savings potential in purchasing through their collaboration.

How can costs of purchased parts and manufacturing processes be evaluated reliably?

Should cost models are inherently imprecise due to the complexity of cost drivers. 

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Fluctuating material prices or new labor agreements can quickly and unpredictably change a product’s costs. For example, the price of steel can alter costs overnight, making accurate predictions difficult.
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Despite this, robust should cost models serve as vital benchmarks. They are particularly valuable considering that supplier quotes for the same part specification often vary by as much as +/-40%. Should cost models provide a critical reference point, enabling businesses to identify cost disparities and optimize supplier expenses effectively, even in volatile market conditions.
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FACTON EPC Should Costing offers a wide range of data sets on material, salary and overhead costs and machine data. Even without an internal database, buyers are able to determine costs of purchased parts at an early stage and simulate scenarios.
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Cost models help users evaluate manufacturing processes and components with ease. With EPC Cost Model Designer users create, digitize, and instantly share company-specific cost models.
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EPC Should Costing simplifies the evaluation of complex manufacturing processes, ensuring both efficiency and consistency across the company. It utilizes a dedicated environment where cost models are carefully developed, tested, and implemented to maintain accuracy. 
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Furthermore, teams can reuse a centralized library of cost models across multiple locations, reducing duplication of effort and saving valuable time. With all cost models following a standard structure, updates are easy to conduct and the evaluation process remains clear and manageable.

FREQUENTLY ASKED QUESTIONS

What is should costing?
What is a should cost model?
What is the difference between should costs vs. will costs?
Who should conduct a should cost analysis?


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