Should Cost analysis determines what a product should cost based on materials, labor, overhead, and profit margin. The tool was originally developed by the Department of Defense to assist procurement officers with determining fair and reasonable pricing. It was later adopted by the commercial industry and is now widely used for product costing and tear down analysis. The use in services sourcing has been limited.
3S Consulting has been using Should Cost modeling to complement strategic sourcing for complex service categories such as marketing, manufacturing, professional services, R&D, facilities, transportation and others.
The goal of the modeling effort is to –
- Identify the underlying cost drivers
- Optimize them to deliver better business outcomes while reducing costs
- Negotiate a win-win agreement
- Operationalize a sustainable agreement
While the emphasis is on cost-cutting, we think an equally important objective is to improve performance and service. At 3S Consulting, our Should Cost modeling effort identifies areas where costs can be redirected to improve our clients’ overall operations.
Our team uses the Should Cost modeling tool to conduct open book negotiation with suppliers, focuses on developing a win-win solution, and reduces negotiation time by as much as half. We have consistently received praise from both customers and suppliers on the approach. In turn, some suppliers have even used the models in their own negotiations with other customers.
The below infographic provides an overview of our approach and how it was used to improve a client’s call center operations.