Should-Cost Analysis
Definition
An estimate of what a product or service ought to cost, built bottom-up from materials, labor, overhead, and margin, used to evaluate supplier prices objectively.
In Practice
A should-cost model decomposes an item into its cost elements: raw material weight times market price, cycle time times machine and labor rates, tooling amortization, overhead allocation, logistics, and a reasonable margin. Comparing the model to a supplier's quote reveals whether the price is fair, where the gaps are, and turns negotiation from haggling into a fact-based discussion of specific cost lines.
Should-cost models also drive design decisions. If the model shows 60 percent of a part's cost is a machining operation, engineering knows exactly where design simplification pays off. Cost drops when models are refreshed as commodity prices move, giving buyers timely triggers to renegotiate.
Example: a supplier quotes 14.20 dollars for a die-cast bracket. The should-cost model, using current aluminum prices and regional machine rates, totals 10.90. Walking through the model line by line, the buyer and supplier settle at 11.60, and the supplier fixes an inefficient secondary operation the model exposed.
Related Terms
The structured process of reaching agreement with suppliers on price, terms, and conditions, using preparation, market data, and leverage to secure the best total-value outcome.
Total Cost of AcquisitionThe complete cost of acquiring an item from a supplier, including price, logistics, transaction costs, quality costs, and inventory costs, not just the quoted unit price.
Purchase Price VarianceThe difference between the standard or budgeted price of a purchased item and the price actually paid, multiplied by the quantity bought.