Cost Savings

Should Cost Model

A should cost model is a documented calculation of an estimated price that you create by researching all material costs, labor costs, overhead costs, and profit margins that would apply to an item. Essentially, you are behaving as if you were responsible for manufacturing the item yourself.

Application

When buying a custom item that only one supplier can produce, using a should cost model is one way of determining whether the price is fair.

If a supplier’s quoted price exceeds your estimate, your “should cost model sets the stage for future negotiations,”

Uses a favorite line to get suppliers to reveal cost data that they typically protect: “If you think that my data is wrong, then please tell me where I’m in error.” He says that this forces a supplier to either admit that your data is correct or to tell you “exactly where your model is in error thereby turning your estimates into known, factual data.” You then revise the should cost model and base negotiations on even better data.

https://www.nextlevelpurchasing.com/articles/should-cost-model.php

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