Supply Chain Glossary

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Should-Cost Analysis


Source: Procurement Glossary
Author: Paul Rogers
Institute: CIPS - UK

Courtesy of


 

The development of an internal cost model to allow for comparison with externally provided offers. Cost estimators may use appropriate insight into the processes around design, procurement, manufacture, or assembly and installation to allow the client to develop a realistic estimate of what the project ‘should’ cost.  ‘Should-cost’ estimates are useful when dealing with markets with high levels of transparency regarding processes, rates and timescales.  For example, a team involved in profit, price and cost analysis might commission a ‘should-cost’ estimate on a piece of capital equipment by ‘reverse engineering’ the supplier’s solution into a bill of materials, and then pricing each component. The estimate will be wrong, but it will give the buyer an ‘order of magnitude’ of what the actual manufacturing cost may be.  This can be valuable in negotiations where the supplier’s pricing strategy is value based rather than cost based.  The supplier is pricing on the basis of the value their solution will create for the buyer, rather than the cost of manufacture, and the ‘should-cost’ estimate allows the buyer to use logical persuasion to change the pricing basis.  See also Logic, Pricing Strategy and Profit, Price and Cost Analysis.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 




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