The Evolution of Procurement and the Rise of Cost Modelling
Traditional procurement practices largely relied on price comparisons, supplier quotes, and historical spending to guide sourcing decisions. While these methods sufficed in a more stable market environment, modern supply chains are affected by numerous disruptive forces, including inflationary pressure, raw material shortages, geopolitical instability, and fluctuating customer demand.
These challenges demand a more proactive approach, where procurement professionals must justify cost decisions and identify hidden opportunities for efficiency and innovation. This is where should-cost modelling enters the scene. By enabling companies to understand how much a product should theoretically cost rather than just how much it does cost, this method brings transparency and structure to supplier interactions.
Over time, should-cost modelling has evolved from an engineering-centric exercise used primarily in new product development to a procurement cornerstone that supports cost benchmarking, supplier audits, negotiations, and long-term sourcing strategies.
Core Principles of Should-Cost Analysis
Should-cost modelling is predicated on the principle that every cost element in a supplier’s quote can be deconstructed, analyzed, and validated. These cost elements are typically grouped into direct and indirect categories:
- Direct materials: Raw inputs, components, subassemblies
- Direct labor: Manufacturing time, skill level, wage rates
- Overhead costs: Energy, equipment depreciation, maintenance
- Manufacturing processes: Setup time, tooling, waste, and rejects
- Logistics: Freight, duties, storage, packaging
- Non-recurring engineering (NRE): One-time costs for tooling or prototyping
- Margin and markup: The Reasonable profit the supplier adds
By modeling each of these inputs using real-world data and engineering insights, procurement professionals can create a detailed picture of the product’s true economic value. This sets the stage for well-informed negotiations, supplier development, and continuous cost optimization.
Applications of Should-Cost Modelling Across Industries
While should-cost modelling originated in complex manufacturing environments like aerospace, automotive, and heavy machinery, it has since found broader application across industries such as consumer electronics, pharmaceuticals, food processing, and retail.
For instance, a consumer goods company sourcing packaging materials can use should-costing to estimate the fair cost of a plastic bottle by evaluating the price of resin, mold design, manufacturing cycle time, labor, and location-specific factors such as energy tariffs. A pharmaceutical firm might apply it to assess third-party production of blister packs by analyzing equipment use, GMP compliance costs, and chemical inputs.
The versatility of this method lies in its adaptability—it can be used during product development, supplier onboarding, cost benchmarking, or when renegotiating long-term contracts.
Should-Cost Modelling and the Strategic Sourcing Framework
Strategic sourcing is a structured, analytical approach to purchasing that focuses on maximizing value rather than simply minimizing cost. It involves lifecycle thinking, total cost of ownership assessment, supplier relationship management, and demand forecasting.
Should-cost analysis complements and strengthens every aspect of strategic sourcing by:
- Enabling proactive identification of cost-saving opportunities
- Supporting data-driven supplier selection and negotiation
- Helping assess make vs. buy decisions with precision
- Allowing companies to test cost scenarios and sensitivity analyses
- Creating a shared factual baseline in supplier discussions
Rather than relying solely on market prices, which may be volatile or opaque, procurement can use should-cost models to define a target price. This target becomes a reference point for determining whether a supplier quote is realistic, inflated, or missing key value-adding elements.
Key Components of the Modelling Process
To ensure accuracy and effectiveness, the should-cost modelling process typically follows a structured multi-step approach. While the steps can vary depending on industry or software platform used, the general framework includes:
1. Product or Service Decomposition
This involves breaking down the product into individual components or process steps. Each part or activity must be identified and understood in terms of function, materials, and technical complexity. Engineering drawings, CAD files, assembly instructions, and supplier BOMs are often used as inputs at this stage.
2. Data Collection and Input Validation
Accurate and up-to-date data is essential. Procurement teams gather information such as:
- Current raw material prices from commodity databases
- Regional wage rates and labor productivity
- Machine time, tooling requirements, and setup costs
- Overhead multipliers based on factory audits
- Yield rates, waste levels, and downtime data
Cross-functional collaboration with engineering, operations, and finance is critical to ensure the reliability of the assumptions.
3. Process Mapping and Cost Allocation
Next, the model assigns costs to each production process, using assumptions about cycle time, resource usage, and batch size. It accounts for process-specific costs like welding, stamping, coating, or assembly. Cost drivers such as volume scale, location, and compliance standards are also incorporated.
4. Scenario Building and Sensitivity Analysis
This phase involves creating different scenarios to simulate the effect of changes in material choice, supplier geography, production scale, or regulatory requirements. Sensitivity analysis helps identify which variables have the most influence on total cost and where efficiency improvements could yield significant savings.
5. Model Validation and Iteration
Once the initial cost estimate is generated, it must be validated against internal benchmarks, historical data, or supplier feedback. In many cases, models are refined over time as better data becomes available or as supplier operations evolve.
Challenges in Implementing Should-Cost Modelling
Despite its strategic value, the implementation of should-cost analysis is not without challenges. These include:
- Data availability: Many procurement teams struggle to access granular cost data, especially for outsourced components or offshore suppliers.
- Cross-functional barriers: Success depends on collaboration between procurement, engineering, and finance—teams that often operate in silos.
- Tool complexity: Advanced costing software can be expensive and require specialized training to use effectively.
- Supplier resistance: Some suppliers may be hesitant to share detailed cost information or may view cost modeling as adversarial rather than collaborative.
Addressing these challenges requires executive support, a strong data governance framework, and a focus on supplier relationship building.
The Role of Technology in Cost Modelling
Modern cost modelling is increasingly supported by digital platforms that automate data gathering, improve accuracy, and visualize cost drivers in real time. These tools integrate with ERP systems, supplier databases, and product lifecycle management platforms.
They also offer features such as:
- Machine learning for cost prediction based on historical patterns
- Geographical cost indices that adjust for regional labor and overhead
- Templates for standard parts and processes
- What-if analysis tools to explore trade-offs in real time
With such tools, procurement professionals no longer need to build models from scratch, reducing the barrier to adoption and increasing scalability across global categories.
Benefits for Procurement Organizations
The benefits of integrating should-cost analysis into procurement are substantial and go beyond simple cost reduction. These include:
- Greater transparency: Procurement gains a clear understanding of what drives supplier prices.
- Stronger negotiations: Armed with facts, procurement professionals negotiate from a position of strength.
- Improved supplier performance: Joint cost reviews can identify inefficiencies and enable supplier improvement programs.
- Risk mitigation: Better cost visibility reduces exposure to inflation and supply disruptions.
- More informed decisions: Make vs. buy and location decisions become evidence-based.
- Enhanced budgeting: Forecasting accuracy improves when costs are linked to drivers, not just historical trends.
Ultimately, these advantages contribute to a more resilient and agile supply chain.
Should-Cost Modelling in the Broader Spend Management Ecosystem
Should-cost analysis is not a stand-alone tactic—it’s a vital element of a broader spend management strategy. When integrated with procurement analytics, category management, supplier scorecards, and contract management, it creates a comprehensive approach to cost control.
Procurement leaders can track whether negotiated savings are realized, monitor supplier adherence to cost expectations, and adapt sourcing strategies in real time based on new cost insights.
It also plays a vital role in sustainability and compliance. For instance, a company seeking to reduce carbon emissions might use cost modelling to evaluate the financial impact of switching to recycled materials or changing its logistics network.
Importance of High-Quality Data in Should-Costing
At the core of any should-cost analysis lies data. Whether you’re estimating the cost of an individual bolt or a fully assembled device, the precision of the estimate depends on accurate, timely, and contextually relevant data. Poor or incomplete inputs can render a model ineffective and may lead to flawed decision-making.
Several types of data are typically required:
- Material prices: These include current market rates for metals, plastics, fabrics, electronics, or other raw materials.
- Manufacturing processes: Information on cycle times, machine types, tooling requirements, and energy consumption is vital.
- Labor rates: Geographic variations in hourly wages and productivity impact cost calculations significantly.
- Overhead costs: These may include rent, utilities, maintenance, quality control, and indirect labor.
- Volume assumptions: Costs often depend on scale, making batch sizes, annual volumes, and production frequency crucial.
To collect this data effectively, procurement teams must work closely with internal and external stakeholders. Internal data sources include historical procurement records, internal audits, and engineering databases. External sources may consist of suppliers, market analysts, government publications, and third-party research providers.
Collaboration Between Procurement and Engineering
One of the most common pitfalls in should-cost modelling arises when procurement attempts to build a model in isolation. While procurement professionals understand pricing dynamics and supplier ecosystems, engineering teams possess deep knowledge of the product’s technical architecture, manufacturing complexity, and compliance standards.
Successful should-cost initiatives involve close collaboration between these two functions. The process typically follows this pattern:
Cross-Functional Kickoff
The project begins with a joint meeting to define objectives, establish roles, and align expectations. Key questions include:
- What product or service is being modelled?
- What is the desired level of granularity?
- Are we building a new model or refining an existing one?
- Who owns the, a nd how will we validate it?
Shared Product Understanding
Engineering helps procurement understand the product’s design, specifications, and critical features. They may share CAD files, bill of materials, tolerances, and assembly or testing procedures to build a strong technical foundation.
Joint Cost Breakdown
With a shared understanding in place, both teams collaborate to break down the cost structure into components. Engineering focuses on design-driven costs, while procurement adds context related to supplier capabilities, market volatility, and contract terms.
For example, engineering might define the heat treatment process required for a component, while procurement would research suppliers capable of delivering that process within the region at competitive rates.
Cost Review and Feedback
Both teams review the completed cost model together. Engineering checks the technical assumptions, while procurement evaluates pricing logic. If the model deviates significantly from supplier quotes or real-world outcomes, both teams work together to troubleshoot discrepancies.
Using Technology to Support Should-Cost Analysis
Modern procurement organizations increasingly rely on technology to streamline and scale should-costing. Digital tools can automate complex calculations, reduce manual errors, and integrate cost modelling with other enterprise systems.
Key Features of Cost Modelling Tools
- Cost libraries with elements for materials, labor, and overhead
- Geographic indexes that adjust for wage and cost differentials
- Process templates for casting, molding, and machining
- Scenario analysis for changes in material or geography
- Reporting dashboards to visualize cost drivers and breakeven points
These tools reduce manual work and enhance model credibility.
Integration with Other Systems
Cost modelling tools perform best when integrated with enterprise platforms like:
- ERP systems for spend data, supplier contracts, and invoices
- PLM systems for product design and engineering updates
- Supplier portals for data collection and real-time collaboration
- Analytics tools for benchmarking and cost trend insights
This integration ensures that should-cost models reflect real-time, relevant information.
Incorporating External Benchmarks and Intelligence
Internal data can be rich, but external market insights provide a critical reality check. Should-cost models benefit from:
- Commodity pricing forecasts
- Regional labor market data
- Tariff and trade policy impacts
- Supplier financial health indicators
Third-party insights allow companies to validate model assumptions and improve pricing accuracy.
Modeling Direct and Indirect Costs Accurately
Should-costing must reflect both direct and indirect expenses to represent the true economic value.
Examples of Direct Costs
- Raw materials
- Manufacturing labor
- Tooling, setup, and inspection
- Assembly time
Examples of Indirect Costs
- Quality assurance
- Packaging and logistics
- Import duties and insurance
- Non-recurring engineering costs
Each category should be analyzed based on sourcing location, project volume, and risk tolerance.
Common Pitfalls and How to Avoid Them
Despite best intentions, many should-cost models fail due to:
Incomplete or Outdated Data
Models based on old or unverified data risk significant error. Regular updates and proper documentation are essential.
Overengineering the Model
Models that are too detailed become cumbersome. Focus on key cost drivers and keep the model usable.
Lack of Supplier Collaboration
If suppliers are excluded from the process, the resulting model may be unrealistic. Collaboration builds credibility and trust.
Misalignment on Objectives
Procurement, engineering, and finance must agree on what the model is designed to accomplish—negotiation, budgeting, or benchmarking.
Validating and Calibrating the Cost Model
Validation ensures a model’s accuracy. This involves:
- Comparing estimates to historical purchase orders
- Reviewing with stakeholders
- Discussing results with trusted suppliers
- Adjusting assumptions as needed
Models should be revalidated as product designs evolve or supplier costs shift.
Leveraging Should-Cost Models in Supplier Negotiations
When it comes to negotiation, a well-prepared should-cost model is a powerful tool. It enables procurement to:
- Challenge inflated prices with evidence
- Encourage cost transparency from suppliers.
- Suggest alternatives like lower-cost materials or alternate suppliers.
- Propose shared cost reduction initiatives.
These discussions can yield significant savings and strengthen supplier relationships.
Supporting Strategic Sourcing and Category Management
Should-costing can be scaled across procurement categories. This supports:
- Identifying cost outliers
- Rationalizing supplier lists
- Evaluating nearshoring or insourcing opportunities
- Aligning sourcing strategies with business goals
Cost modelling insights help category managers update playbooks and improve long-term cost control.
Future Trends in Cost Modelling
Cost modelling continues to evolve. Notable trends include:
- Artificial intelligence that predicts costs based on past results
- Blockchain for material traceability and authenticity
- Carbon footprint and sustainability scoring
- Crowdsourced cost benchmarking platforms
These innovations will make models smarter, faster, and more responsive to change.
Why Should Cost Modelling Be a Game Changer in Supplier Negotiation
Traditional supplier negotiations often rely on market price comparisons or historical pricing trends. These methods, while sometimes effective, offer limited insight into the cost structures behind the quoted prices. This lack of transparency often results in missed savings opportunities, strained supplier relationships, or acceptance of inflated costs.
Should-cost modelling flips this narrative. By equipping procurement professionals with detailed knowledge of a product’s expected cost breakdown, it levels the playing field in negotiations. Procurement no longer enters discussions blindly but comes prepared with a well-structured, evidence-backed cost framework. This shifts conversations from emotion and guesswork to logic and mutual understanding.
Preparing for Cost-Based Supplier Discussions
The effectiveness of should-cost in supplier engagement depends largely on how the information is presented and the way discussions are framed. Before approaching suppliers with should-cost insights, the procurement team must be ready in several key areas:
Internal Alignment
Ensure internal stakeholders—including engineering, finance, and legal—are aligned on goals and boundaries. Decide:
- What is the acceptable price range?
- How aggressive should negotiation targets be?
- Are there tradeoffs we are willing to accept (lead time, quality, service levels)?
Internal cohesion helps procurement deliver a consistent, unified message to suppliers.
Cost Breakdown Format
Prepare the cost model in a format that’s clear and accessible to the supplier. This might include:
- Unit cost by component or process
- Assumptions used for labor rates, material prices, and overheads
- Volumes and scale factors
- Any historical benchmarks or comparable sourcing examples
Keep the focus on transparency, not confrontation.
Supplier Mapping
Not all suppliers will respond the same way to a cost modelling discussion. Classify them by maturity, strategic importance, and openness to collaboration. With preferred suppliers, the goal is often long-term improvement. With transactional ones, it may be more about immediate pricing correction.
Conducting the Should-Cost Conversation
Once prepared, the procurement team must approach the negotiation in a way that encourages trust and progress rather than defensiveness.
Establishing the Tone
Start the conversation with a collaborative mindset. Emphasize that the model is not a demand, but a tool for shared understanding. Phrases such as:
- “We built this model to understand the cost structure better.”
- “We’d like your input to see where we might have over- or underestimated.”
- “Can you help us validate these figures?”
These show openness and curiosity rather than adversarial intent.
Exploring the Gaps
If there’s a significant variance between the should-cost model and the supplier’s quote, use the model to guide the discussion:
- “We estimated the material cost at $3.50 per unit. Can you help us understand why your quote includes $4.20?”
- “Our model assumes 12 minutes of assembly time. Is there a process step we might have missed?”
This invites the supplier to contribute their perspective and improve the model where appropriate.
Focusing on Win-Win Outcomes
Negotiation shouldn’t only be about reducing price. Use the model to identify areas for process improvement, redesign, or supply chain efficiencies:
- Can batch sizes be increased to reduce setup costs?
- Can a standard material be substituted for a specialty one?
- Is there an alternate factory location with lower overhead?
By turning cost discussions into improvement conversations, procurement and suppliers can find new paths to value.
Overcoming Supplier Resistance
Despite best intentions, suppliers may resist cost transparency. They may fear margin erosion, competitive exposure, or feel accused of profiteering. Procurement must navigate this with tact and confidence.
Building Trust
Trust develops over time. Share cost model assumptions in a way that respects the supplier’s confidentiality. Reinforce the idea that the exercise is about shared efficiency, not squeezing profit.
Consider reciprocal transparency: if you ask a supplier to disclose process costs, be prepared to share forecasts, payment terms, or long-term volume commitments that justify the effort.
Tiered Engagement
With some suppliers—particularly strategic or single-source vendors—more in-depth discussions may be possible. Others may only engage on a limited basis. Adjust the approach accordingly:
- Tier 1: Strategic partners. Invite co-development of the cost model and continuous improvement programs.
- Tier 2: Tactical suppliers. Use the model to benchmark pricing, but expect limited collaboration.
- Tier 3: Commodity suppliers. Focus on cost correction and competitive bidding.
Tailoring the approach by tier helps prioritize effort and preserve relationships.
Handling Pushback
Suppliers may counter with objections like:
- “Your model doesn’t reflect our internal costs.”
- “Labor rates in your model are outdated.”
- “You’ve underestimated our compliance and testing overhead.”
These should be treated as opportunities. Invite the supplier to adjust the model together. The result is often a better model and a more open dialogue.
Leveraging Should-Cost in Sourcing Strategies
Beyond individual negotiations, should-cost models support strategic sourcing decisions at the category level. For example:
- Make vs buy analysis: Should-cost estimates help determine whether internal manufacturing is more cost-effective than outsourcing?
- Location sourcing: Compare the cost impacts of sourcing from low-cost countries versus nearshoring options.
- Supplier rationalization: Identify which suppliers offer true value versus those relying on information asymmetry.
- Component standardization: Find parts that can be standardized or consolidated across SKUs to reduce variation and cost.
By embedding should-cost insights into sourcing strategy, companies can move from reactive price negotiation to proactive cost management.
Driving Supplier Innovation and Process Improvement
Should-cost modelling also provides a foundation for co-innovation. Suppliers often hold valuable ideas for reducing costs, but these ideas may remain hidden unless the buyer initiates a transparent dialogue.
Use cost models to invite supplier suggestions:
- “What changes could we make to reduce tooling or cycle time?”
- “Are there packaging methods that reduce waste and logistics costs?”
- “Would you consider a cost-share model if we invest in volume guarantees?”
These questions shift the relationship from adversarial to collaborative.
Supporting Long-Term Partnerships with Cost Transparency
Transparency does not have to threaten margins. Many leading procurement organizations use should-cost as part of structured supplier development programs. These include:
- Joint business reviews with cost benchmarking
- Shared dashboards for tracking agreed-upon-upon improvements
- Incentive structures linked to cost reduction milestones
- Structured feedback loops where models evolve with the relationship
This long-term orientation builds loyalty, resilience, and shared success. It also makes suppliers more responsive in times of crisis, as they see the customer as a strategic partner rather than a transaction manager.
Avoiding the Pitfalls of Cost-Focused Negotiation
Should-cost modelling is a powerful tool, but it must be used wisely. Procurement professionals must avoid common traps such as:
Overemphasizing Cost at the Expense of Value
Pushing for the lowest possible price can compromise quality, service, or innovation. Instead, balance cost transparency with total value management, including risk, lead time, and sustainability.
Using Models to Pressure Rather Than Collaborate
Cost models should not become weapons. If suppliers feel backed into a corner, they may disengage, reduce service levels, or even walk away. Focus on building cost understanding rather than extracting concessions.
Ignoring Long-Term Relationship Dynamics
Every negotiation has an impact on future interactions. A short-term win achieved through aggressive tactics may cost more in the long run. Use should-cost modelling to build credibility and trust.
Case Example: Negotiation Using Should-Cost Modelling
Consider a manufacturer sourcing aluminum die-cast parts. Supplier quotes have risen 18% in the past year. Procurement builds a should-cost model estimating raw aluminum costs, casting time, machine hours, and post-processing.
The model reveals the supplier’s markup has grown disproportionately. During negotiation, procurement presents the analysis and asks the supplier to explain the increase.
Rather than accusing them of overcharging, they explore reasons together. The supplier discloses a new energy tax that increased overheads. Procurement offers a longer contract to spread fixed costs and agrees to shared investment in more efficient casting molds.
The result is a mutually agreeable price reduction of 6%, plus a roadmap to further savings over the next year. Trust is preserved, and both parties benefit.
Enabling Broader Procurement Transformation
Should-cost modelling doesn’t just improve supplier negotiations. It lays the groundwork for broader procurement transformation:
- Increases budgeting accuracy with real-world assumptions
- Supports digital procurement initiatives through data integration
- Strengthens procurement’s influence within the business
- Helps build a culture of continuous improvement and transparency
Organizations that master cost modelling move faster, operate smarter, and build better supplier ecosystems.
The Role of Performance Measurement in Should-Cost Modelling
To justify the time and resources spent on should-cost modelling, procurement teams must demonstrate tangible results. Key stakeholders, especially those in finance and operations, need to see how the practice contributes to business goals.
Why Measurement Matters
- Demonstrates ROI through measurable value, like savings or risk mitigation
- Supports continuous improvement and refinement of cost models
- Enables strategic alignment with enterprise-wide financial and sourcing goals
Measurement is both a scorecard and a compass—tracking achievements and guiding future decisions.
Core Metrics for Evaluating Should-Cost Modelling Success
Evaluation should be based on a balanced set of financial, operational, and strategic metrics.
Financial Metrics
- Total Cost Savings: Difference between supplier quotes and realized prices after applying the should-cost approach.
- Cost Avoidance: Value retained by preventing unjustified price increases or non-competitive sourcing decisions.
- Return on Investment: Comparison of total benefits against costs of tools, training, and personnel involved.
Operational Metrics
- Cycle Time Reduction: Improvement in sourcing speed due to clearer insights and decisions.
- Model Accuracy: Percentage of cost models that fall within a defined tolerance of actual market pricing.
- Quote-to-Decision Time: Reduction in time taken to finalize supplier selection after modelling.
Strategic Metrics
- Adoption Rate: How often should costing be used across sourcing events and categories?
- Supplier Collaboration Frequency: Number of cost modelling exercises co-developed or validated with suppliers.
- System Integration: Degree to which cost modelling tools are linked with other platforms like ERP or PLM.
Each organization should tailor these metrics to align with its procurement maturity and business priorities.
Building a Governance Framework for Should-Cost Modelling
Scalability requires consistency. That’s where governance plays a central role. Without a defined structure, models become isolated, inconsistent, or inaccurate.
Key Elements of Governance
- Ownership and Accountability: Assign responsibilities for data accuracy, model development, and negotiation outcomes.
- Central Model Repository: Maintain libraries for common parts, materials, and processes for reuse and version control.
- Review Cycles: Establish regular intervals (e.g., quarterly) to update cost assumptions based on market changes.
- Validation Protocols: Define rules for how input data is sourced, verified, and approved.
- Training Programs: Develop courses for procurement, finance, and engineering staff to understand model usage and interpretation.
Governance also promotes transparency and auditability, increasing confidence in should-cost results across the enterprise.
Embedding Should-Cost Modelling into Procurement Culture
For should-costing to endure, it must evolve from a tactical tool to a core practice. This transformation depends on cultural and structural change.
Executive Sponsorship
Leadership must promote cost modelling as a strategic capability. This includes:
- Linking it to objectives like margin growth or cost competitiveness
- Recognizing team success in executive briefings
- Including it in long-term digital procurement roadmaps
Procurement Workflow Integration
Should-costing should be part of standard procurement activities, such as:
- Category management strategies
- Annual supplier reviews
- Product lifecycle costing
- Capital expenditure budgeting
By integrating cost modelling into planning and execution stages, procurement becomes more proactive and informed.
Change Management Strategies
Rolling out should-cost practices often faces initial resistance. Effective change management includes:
- Demonstrating early wins with high-visibility projects
- Providing coaching and ongoing support
- Celebrating team and individual milestones in model adoption
- Encouraging open feedback on tools and processes
Cultural acceptance is achieved when cost models are used routinely, not just when budgets are tight.
Leveraging Technology for Scalability and Efficiency
Manual spreadsheets are limiting. Digital tools are essential for scaling should-costing across regions, categories, and business units.
Must-Have Features in Costing Software
- Drag-and-drop model builders with preloaded cost libraries
- Geographic price indexing for global sourcing comparisons
- Integration with CAD, PLM, and ERP systems
- Supplier collaboration modules
- Dashboards for tracking performance metrics and model evolution
Integration with Broader Systems
- Link with sourcing platforms to automate RFQs based on model outputs
- Sync with supplier portals for real-time bid analysis.
- Connect to BI systems to display cumulative savings and accuracy reports..
With the right software stack, procurement teams can build faster, negotiate smarter, and report with confidence.
Aligning Should-Cost Modelling with Broader Strategic Goals
Should-cost models offer value beyond procurement. They support cross-functional initiatives and contribute to overall business transformation.
Make-or-Buy Decisions
Should-costing allows organizations to calculate not just unit price, but total cost of ownership for in-house vs outsourced production. This includes:
- Direct and indirect labor
- Depreciation on equipment
- Overhead and infrastructure costs
- Risk exposure and flexibility needs
Product Development and Design
Engineering teams can use cost models during early-stage design to avoid costly redesigns later. Procurement provides insight into the cost implications of material choice, production processes, and part standardization.
Sustainability Objectives
Environmental and social metrics—like carbon emissions or energy consumption—can be incorporated into cost models. Procurement teams can assess trade-offs between cost, compliance, and sustainability goals.
Supply Chain Resilience
With predictive cost models, procurement can simulate supplier disruption scenarios, plan for tariffs, or assess currency fluctuations. This supports contingency planning and risk-adjusted sourcing decisions.
Case Study: Global Rollout of Should-Cost Modelling
A European automotive supplier with over 40,000 components in active production decided to embed should-costing as a core capability. Their procurement team partnered with engineering and finance to build a centralized platform that supported over 150 users globally.
Within 18 months:
- Cost savings exceeded $95 million across 300+ projects
- Model accuracy improved from 67% to 93%
- Supplier quote response times decreased by 28%
- New product introduction timelines have been shortened by 21% due to early-stage cost modelling.
The key to their success was a three-pronged approach: executive mandate, digital enablement, and robust training.
Future Directions for Should-Cost Modelling
The future of should-cost modelling is dynamic and technology-driven. Several trends are emerging:
AI-Powered Estimations
Artificial intelligence can analyze historical sourcing data and recommend accurate cost predictions for new items, even with limited input data.
Real-Time Market Data
Platforms are starting to provide real-time commodity pricing, labor trends, and overhead costs based on region, allowing instant updates to cost models.
Industry Benchmarks
Anonymized market-wide data pools enable users to compare their internal costs with peers or industry standards.
Integration with ESG Data
As sustainability becomes central to procurement, environmental impact will be modeled alongside cost for more holistic decision-making.
Conclusion:
Should-cost modelling is no longer optional. In today’s dynamic business landscape, it provides a critical edge, whether in supplier negotiations, cost management, or product development.
To realize its full potential, procurement leaders must:
- Measure impact with clear metrics tied to financial and operational goals
- Create a governance model that ensures consistent application..
- Invest in the right technologies for scalability..
- Foster a culture of transparency, data integrity, and cross-functional collaboration..
Done well, should-cost modelling transforms procurement from a cost center into a value creation engine. It helps organizations make smarter decisions, build stronger supplier relationships, and compete more effectively in global markets.
