Should-cost analysis: What is the cost of your BOM?

What is the cost of your BOM? It is a simple question, yet difficult to answer.
Calculating product costs is essential for financial guidance and strategic planning. Knowing that it can make all the difference when it comes to the profitability of your products, it is important to choose the right method to calculate product cost. Although companies used to rely on partner and supplier quotes, should-cost analysis is now more widely used by top organizations.

What is a should-cost analysis?

Product cost is a complex concept including a wide array of costs, from supplier and transportation margins to materials prices. Companies operating worldwide also have to deal with taxes, labor regulation, and heterogeneous standards. They can vary a lot depending on the season of the year or the country where your operations are based. However, these costs often have nothing to do with the core price of the product.

So to remove the parasitic parameters from the equation companies are now turning to should-cost analysis.

A should-cost analysis is a way to assess what a product should cost based on raw materials, manufacturing processes, and distribution costs. Unlike strategic sourcing, which relies on partner and supplier quotes, should-cost analysis can use reverse-engineering and calculations performed internally to predict the price of a product more accurately.

How accurate is should-costing?

It is important to understand that the goal of should-costing isn’t to give perfect estimations of product costs. It is a leverage tool to use for supplier negotiation. Suppliers might correct some aspects of the calculations, but that is where the negotiations come in. The basis for the discussions will be set by you, giving you the upper hand on the situation.

In the end, this will ensure that even if you don’t end up paying the prices you projected, you will still significantly drive the costs down and most likely put you ahead of your competition, whether you choose to then rethink your product margins or lower the selling price of your products.

How to perform a should-cost analysis

The first step in a should-cost analysis is to determine where the calculation comes in during the product design process. Depending on the stage, you will have to cope with non-optimal decisions: material choices, design options, and so on. The closest you are to the beginning of the product design process, the easier it will be to deal with these parameters.

The second step is to list all the materials and processes involved in your product composition. Some knowledge of product manufacturing is important here: the more you understand the whole value chain, the more your estimations will be close to reality. The should-cost analysis relies on a lot of assumptions, so results can only be as good as your hypotheses.

Finally, once the list is complete, cost management, engineering, and design teams need to gather data and perform calculations to estimate the product price.

Why choose should-cost analysis?

This method presents a lot of benefits to companies. Used correctly it is a growth driver as it is a useful tool for supplier negotiations: negotiations plus should costing is proven to be more efficient than negotiation alone, with potential savings going from 5% up to 20% according to product costs experts. When translated into profit gain,reducing product costs by just 5% can drive an 85% increase.

Yet should-cost analysis can typically take weeks to complete and quickly become obsolete if it is not supported by appropriate tools and data.

Fortunately, new technologies like data fusion and artificial intelligence emerged that can change the story. It is now possible to confront hundreds of data streams updated every day in seconds, transforming outdated analysis in dynamic reports.

The next generation of product costing

Makersite combines the best of modern technologies to help companies worldwide to improve their cost management processes. All you need to do is to import your Bill of Materials (BOM) and we do all the rest!
Our platform is intuitively designed to quickly evaluate product performance across several dimensions: cost, but also sustainability, environmental impact, and compliance.

We gather hundreds of product data sources, from raw material cost to manufacturing and distribution. With more than 20 product databases included, Makersite is constantly updated to reflect changes in costs, markets, competitors, science, regulations, and product evolutions.

So if you want to perform extensive and dynamic should-cost analysis, we would be happy to hear from you and set up a personalized demo!