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 the accuracy of your analysis 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 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.
Makersite automatically maps cost information to your Bill of Materials (BOM).
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. Some companies report saving up to 50% on the final product assembly cost.
Actually, should-costing can help you detect cost-reduction opportunities. It is a powerful tool to negotiate with your suppliers and if performed correctly, it can also be a driver for innovation.
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.
Easily identify cost reduction opportunities and find relevant improvements with our AI-powered suggestion engine.
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.