Should Cost analysis determines what a product should cost based on materials, labor, overhead, and profit margin. The tool was initially developed by the Department of Defense (DoD) to assist procurement officers with determining fair and reasonable pricing. It was later embraced by the commercial industry and is now widely used for product costing and teardown analysis. The use in services sourcing continues to be limited.
3S Consulting has been using Should Cost modeling for complex service categories like marketing, production, professional services, R&D, facilities, transportion, and others. You can think of the approach as reverse engineering supplier pricing assumptions to negotiate better outcome or lower costs.
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 arrangement
- Operationalize a sustainable agreement
While the emphasis is on cost-cutting, we believe 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 run open book negotiation with providers, focuses on developing a win-win solution, and reduces negotiation time by as much as half. We have always received praise from both customers and providers on the approach. Subsequently, some providers have even used the models in their discussions with other customers.
The below infographic provides an overview of our approach and how it was used to improve a customer’s call center operations.