Should Cost Modeling: Ways to Implement your Price Negotiation Initiatives

Introduction to Should Cost Analysis Modeling

Businesses tend to gravitate towards value analysis, value engineering, strategic sourcing, and other benchmarking data methods to identify new cost reduction efforts. Given the rapid pace of development across industries, businesses can no longer rely on traditional should cost analysis methodologies but adopt newer should cost modeling software approaches.

Businesses are increasingly turning to should-cost modeling software to optimize costs and improve negotiations. By analyzing cost components of products or services, this AI-powered tool offers a strategic advantage in procurement and supply chain processes. This article explores the challenges and benefits of this game-changing technique and its impact on the negotiation landscape.

Advancements in technology and analytics have made it possible for businesses to adopt structured approaches. Moreover, advanced should cost modeling tools also enable companies to identify and optimize cost targets. Therefore, this technique is a widely accepted approach that helps the procurement processes and sourcing teams gain actionable insights that aid price negotiation. It also helps designers and product developers achieve their cost targets by offering detailed cost and pricing insights early, i.e., in the initial product development phase.

What is Should Cost Analysis?

It is an advanced analytics methodology that determines product pricing by evaluating factors like raw material costs, manufacturing overheads, and other related expenses.

Using AI-powered technology, this data-driven approach provides a transparent view of true costs through comprehensive should-cost modeling. By analyzing key price drivers, such as market conditions and manufacturing costs, organizations can make informed decisions, identify cost-saving opportunities, and strengthen supplier negotiations. It also promotes cross-functional collaboration among product development, cost engineering, and supply chain teams, enhancing negotiation strategies and fostering long-term supplier relationships.

What is the Purpose of Should Cost Model Template?

Often, product designers do not analyze the cost products themselves but instead bank upon sourcing and procurement teams for pricing information. The lack of accurate models leads to sourcing teams negotiating with suppliers with minimal information, resulting in price mismatches and high margins. These 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.

Calculating Should Cost Model Template: A Comprehensive Analysis

This calculation is a meticulous process that plays a pivotal role in procurement and supply chain strategies. It involves leveraging advanced technology, including AI-powered algorithms, to objectively estimate and analyze the various components contributing to the overall cost of a product or service costs.

1. Key Drivers:

   Analyzes cost elements like raw materials, labor, logistics, and profit margins to determine factors impacting final product prices.

2. Data Collection:

   Combines internal and external data using a top-down approach from ERP systems, invoices, and open sources for accurate cost insights.

3. AI-Powered Technology:

   Utilizes AI algorithms to process vast datasets, enhancing accuracy and reducing manual input for efficient calculations.

4. Cleansheet Costing:

   Breaks down all production costs for transparency, enabling detailed cost structure analysis and informed negotiations.

5. Cost Projections:

   Provides future cost estimates by considering market conditions and raw material price trends, supporting strategic planning.

6. Minimum Manual Input:

   Automation minimizes manual work, reducing errors and streamlining processes for procurement efficiency.

7. Supplier Negotiations:

   Empowers fact-based supplier negotiations with insights on true costs, fostering improved partnerships and outcomes.

Challenges faced while implementing Should Cost Modeling

Even though the advantages or benefits of the service makes Should Cost an absolute choice with incremental-improvement mindset, it comes with few challenges of its own. Some of them are as mentioned below.

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.

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.

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.

Modeling Complexity:

• These 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 incorporating Should Cost Analysis in procurement

Before moving further after going through an understanding of the should cost model meaning, let us also take a quick scan of the benefits that should cost analysis brings to the table for you.

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.

Negotiation Leverage:

• Armed with comprehensive cost insights, businesses gain a strategic advantage in price negotiations.
• Enables informed and data-driven negotiations, leading to favorable outcomes.

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.

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.

Strategic Decision-Making:

• It provides a foundation for strategic decision-making.
• Businesses can align their procurement strategies with overall organizational goals.

Continuous Improvement:

• Regular 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 price of a product or service costs, businesses must have a robust 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 –

Should-cost modeling is a systematic approach to determining the accurate cost of a product or service. This methodology involves multiple phases, each contributing to a comprehensive analysis and effective cost management. The following table outlines the key phases involved in the should-cost modeling process:

Phase	Description
Phase 1: Data Acquisition	Gather data from various sources, including ERP platforms, bill of materials, spend data, purchasing invoices, and information on raw materials.
Phase 2: Methodical Data Expansion	Analyze collected data sets and cost drivers, such as raw materials, manufacturing overheads, logistics, and labor costs.
Phase 3: Classification of Cost Drivers	Classify identified cost drivers into homogeneous groups based on the analysis.
Phase 4: Cost Modeling	Outline annual volumes, batch quantities, and units of measure. Define processes and materials with respect to geographical locations.
Phase 5: Generation of Should Costing Insights	Develop insights using proprietary cost analysis models, cost breakdown analysis, and price analytics platforms.
Phase 6: Reporting	Generate reports with a detailed breakdown of processes, materials, non-recurring engineering (NRE), and authorization costs.

In summary, the should-cost modeling process involves a detailed examination of data, classification of cost drivers, and the development of strategic insights. This structured approach helps businesses gain a clearer understanding of true costs, ultimately supporting better negotiation outcomes and cost management strategies.

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Quantzig’s Impactful Intervention: A Should Cost Analysis Success Story

In the complex landscape of procurement and supply chain optimization, organizations often face challenges in accurately estimating and negotiating product prices. The integration of AI-powered Should Cost Analysis has proven to be a game-changer, and Quantzig, a leading analytics and advisory firm, exemplifies its expertise in transforming businesses through a success story with a global client.

Client Challenge:

The client, a prominent player in the automotive industry, was grappling with the escalating costs associated with manufacturing orders highly intricate machined metal part designs. The fluctuating market conditions, coupled with the complexities of sourcing specialist suppliers, posed a significant challenge. The client sought to optimize price without compromising on quality and sought our expertise to conduct a comprehensive analysis.

Quantzig’s Approach for should cost modeling example:

Our team initiated the project by understanding the intricate details of the client’s product portfolio, focusing on machined metal part designs, and identified key cost drivers, including raw materials, labor, conversion, and overheads. Leveraging advanced AI-powered algorithms, historical and real-time data, we conducted a cleansheet analysis to provide a granular view of the cost structure.

Quantzig's approach:

1. Data Integration and Analysis
2. Market-Driven Projections
3. Cleansheet Costing and Detailed Analysis
4. Automating Quoting Processes

Data Integration and Analysis:

One of the key strengths of Quantzig lay in its ability to seamlessly integrate data from various sources, including enterprise resource platforms, invoices, and third-party databases. This comprehensive data based on should cost model procurement pool ensured an accurate representation of the cost components, minimizing the need for manual input and reducing the risk of errors.

Market-Driven Projections:

Understanding the client’s concerns about market fluctuations, our experts incorporated market-driven projections into the Should Cost Analysis. This involved a meticulous examination of factors influencing the automotive industry, such as changes in the price of steel and global market conditions. The forward-looking perspective, using should cost analysis formula allowed the client to adapt strategies to future expense dynamics.

Cleansheet Costing and Detailed Analysis:

Our application of should cost analysis formula for cleansheet costing was pivotal in providing the client with a detailed breakdown of costs associated with each machined metal part design. This transparency not only facilitated an in-depth understanding of cost structures but also empowered the client to make informed decisions in negotiations and supplier collaborations.

Automating Quoting Processes:

Recognizing the client’s need for agility in responding to market demands, our should cost analysis software solution incorporated the use of AI-powered technology to automate key cost driver analyses. This should cost negotiation not only expedited the quoting process but also enhanced the client’s responsiveness to market changes, providing a competitive edge in the automotive industry.

Impact Delivered by Quantzig:

Quantzig’s solution had a transformative impact on the client’s operations. By accurately estimating the true cost of machined metal part designs, the client was able to engage in fact-based negotiations with suppliers. This not only fostered stronger supplier relationships but also resulted in substantial savings, positioning the client for a competitive advantage in the automotive market.

Our success in assisting the client with Should Cost Analysis underscores the transformative power of advanced analytics in procurement and supply chain optimization. By leveraging AI-powered technology, integrating diverse datasets, and conducting a detailed cleansheet analysis, we not only addressed the client’s immediate challenges but also paved the way for sustained cost optimization and strategic supplier collaborations. This success story serves as a testament to the tangible benefits that organizations can achieve through the implementation of Should Cost Analysis, particularly when guided by the expertise of analytics and advisory partners like Quantzig.

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Conclusion

Quantzig’s team of 550+ seasoned analytics experts have the expertise and skill it takes to design and build should cost data models tailored to your business’s needs and equip you with data-driven, actionable insights for prudent decision-making. Our approach 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.