Should-Cost Model - How to Build and Conduct a Should-Cost Analysis

Sep 12, 2026

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Accurate cost estimation is difficult for manufacturers under tight product-development schedules and rising profit-margin pressure. The should-cost practice projects the efficient total cost of a component, including labor, materials, overhead, and profit margin, to support smarter design, strategic sourcing, and faster time to market. A should-cost model uses simulation-driven software or spreadsheets to benchmark supplier costs. Paired with spend analysis, it helps identify cost outliers, validate results, and guide collaborative supplier negotiations for measurable cost reductions.

LanguageEnglish

CategoryPresentations

FormatPDF

Pages2

Reading Time1 min

AccessFree to download

Should-Cost Model Basics

Definition and Purpose

How to Build a Should-Cost Model

Spend Analysis and Cost Outlier Identification

Scope and Segmentation

Data Gathering and Benchmarking

Using Should-Cost Results for Supplier Collaboration

Negotiation Approach

Re-engineering and Validation

Should cost model template Should cost model meaning. Should cost model example. Should cost model template excel. Should cost model template excel free download. Should cost model template excel free. How to build a should cost model. What is should cost model. The elusive nature of accurate cost estimates poses a significant challenge for manufacturers, particularly in tight product development windows and with increasing pressure on profit margins. To overcome this uncertainty, companies employ the practice of "should cost," which involves projecting the total cost of a component if manufactured and distributed efficiently. This approach accounts for various factors such as labor, materials, overhead, and profit margin. By defining should-cost, manufacturers can deliver smarter design, strategic sourcing, and faster time to market. A should-cost model is a process and toolset that calculates costs based on simulation-driven software or simple spreadsheets. While estimates may vary, they provide valuable intelligence as a benchmark for supplier cost optimization efforts. To prioritize cost reduction efforts, manufacturers use spend analysis, which involves segmenting spending by manufacturing process and material, analyzing total spend, identifying priorities, and gathering data. Conducting a thorough should-cost analysis can result in substantial dollar savings through negotiation, resourcing, or re-engineering. A high-level overview of conducting a spend analysis includes determining scope, segmenting spending, analyzing total spend, gathering data, and conducting a should-cost analysis to identify cost outliers. Reviewing initial outliers is essential to check for flawed data before diving into cost reduction efforts, which can involve root out different issues causing components to exceed their should-cost. Some cases involve a lack of negotiation or price comparison, leading to expensive production issues due to unique component designs. Re-designing with suppliers may be necessary, and collaborating with them could lead to optimized production processes. Analyzing should-cost estimates can help identify areas where costs exceed targets, such as excess weight or manual welding. Validating the results confirms successful cost reduction. Should-cost negotiations focus on mutually beneficial data rather than gamesmanship. To develop effective supplier relationships, accurate and actionable estimates are essential. This requires detailed insight into material, manufacturing, labor, overhead, and tooling/facilities costs. Calculating these factors can be complex, but it helps to identify opportunities for cost reduction. For instance, a tweaked materialselection may require a different manufacturing process at a different facility. With this knowledge, suppliers' prices can be reevaluated, such as "Could you use laser cutting instead of stamping?" or "Our analysis suggests that part could be 50% cheaper." The goal is not just to reduce component costs but to collaborate with suppliers in cost reduction efforts. Detailed should-cost estimates help move away from accusatory negotiations toward a collaborative approach. should-costing enables faster and more accurate cost estimation, streamlining the quoting timeline and providing a goalpost for re-engineering cost reduction efforts. This technology tool facilitates rigorous analysis by analyzing design-level data, resulting in detailed insight into cost drivers within the product. Manufacturers and procurement leaders use should-cost to build better products, strengthen supplier relationships, and accelerate time to market. Applying these steps can deliver significant value to organizations.

FAQs

What is a should-cost model and what does it include?

A should-cost model projects the efficient total cost of a component if manufactured and distributed effectively. It accounts for labor, materials, overhead, and profit margin.

How is spend analysis used alongside should-cost?

Spend analysis segments spending by manufacturing process and material, analyzes total spend, identifies priorities, and gathers data. It then supports should-cost analysis to find cost outliers.

How do manufacturers use should-cost results in supplier negotiations?

Should-cost negotiations rely on accurate, actionable estimates and mutually beneficial data rather than gamesmanship. The goal is collaborative cost reduction such as re-engineering or adjusting manufacturing approaches.

Sep 12, 2026

Upload by Dozel