Should Costing - Why and How to Perform

A: To start a Should Costing analysis, first gather detailed information about the product or service, including design specifications, materials, labor, overhead, and manufacturing processes. Next, break down the cost elements and estimate the cost of each component or process step. Validate your assumptions by using industry benchmarks or supplier quotes. Finally, aggregate the costs to arrive at an estimated 'should cost' figure. This helps you identify cost-saving opportunities. More detailed guidelines are available at the [Suggested Reading by APICS](https://www.apics.org/docs/default-source/certification/cpim-cpim-fundamentals-of-supply-chain-management.pdf).

A: Companies benefit from Should Costing by gaining transparency into product costs, which aids in negotiating better prices and contracts with suppliers. It drives cost reduction efforts, supports make-or-buy decisions, improves budgeting accuracy, and enhances supplier collaboration. Additionally, it fosters innovation in sourcing strategies and can shorten product development cycles by identifying cost drivers early. For practical insights, see McKinsey's article on procurement cost transformation: https://www.mckinsey.com/business-functions/operations/our-insights/procurement-cost-transformation.

A: Challenges in Should Costing include obtaining accurate and detailed data, complexity of cost structures, resistance from suppliers who may be reluctant to share information, and the technical expertise required to analyze manufacturing and process costs accurately. Moreover, hidden costs such as logistics, quality issues, or indirect expenses may be difficult to quantify. Overcoming these requires collaboration, transparent communication with suppliers, and the use of specialized tools. For strategies on tackling these challenges, consider the insights from Deloitte's procurement practice: https://www2.deloitte.com/us/en/pages/operations/articles/cost-reduction-strategies.html.

A: Yes, there are several software tools available that facilitate Should Costing analysis by helping model cost structures, perform benchmarking, and simulate cost scenarios. Examples include aPriori, Costimator, and Hiller Associates' Should Cost software. These tools help automate data collection, analysis, and reporting, making the process more efficient and accurate. Vendors often provide case studies and tutorials on their websites for further learning. For instance, see aPriori's overview: https://www.apriori.com/products/should-cost-estimating-software.

A: Traditional costing methods typically focus on accounting records and historical data to allocate costs, mainly from the seller's perspective. Should Costing, on the other hand, is a forward-looking, analytical approach that estimates the cost based on engineering and process analysis, often from the buyer's perspective, to determine what a product or service should cost. This difference enables more strategic procurement decisions and cost savings. For a comparative study, see this article from Harvard Business Review: https://hbr.org/2013/06/rethinking-cost-accounting.

A: Yes, Should Costing can be applied in services and other non-manufacturing sectors to estimate the fair cost of services such as IT outsourcing, consulting, logistics, and maintenance. The approach involves breaking down the service into its core components like labor hours, skill levels, materials, and overhead, and analyzing each to determine a reasonable cost baseline. This helps clients negotiate contracts more effectively and control expenses. For examples, visit this report from CIPS on applying cost models in services procurement: https://www.cips.org/knowledge/procurement-topics-and-skills/should-costing/.

A: Should Costing supports sustainable procurement by helping organizations evaluate the full cost of products, including environmental and social impact costs, not just purchase price. By understanding cost drivers related to sustainability factors, companies can prioritize suppliers who demonstrate responsible practices and identify opportunities to reduce waste, energy consumption, or unethical sourcing. This comprehensive cost perspective aligns procurement strategies with corporate social responsibility goals. For more on this, explore the insights from the Sustainable Procurement Guide by the UN Global Compact: https://www.unglobalcompact.org/library/573.