Should-Cost Analysis

Should-cost analysis is a bottom-up cost model that estimates what a product should cost to produce under reasonable assumptions, independent of any specific supplier quote. It is built from first principles: material costs, processing time, labor rates, overhead, tooling amortization, scrap, logistics, and a target margin for the supplier.

How it works

The analyst breaks the product into its bill of materials and process steps, then assigns realistic cost drivers to each element. Public commodity indices, regional labor rates, and machine-hour benchmarks feed the model, often supplemented by reverse-engineering of competitor products or prior supplier disclosures.

• Decompose the bill of materials and process routing

• Estimate material cost using current commodity prices and yield assumptions

• Estimate processing cost using cycle times and machine-hour rates

• Add overhead, SG&A, tooling amortization, and target margin

• Compare the result to supplier quotes to identify gaps and negotiation levers

Why it matters in procurement

Should-cost shifts negotiation from price-anchored bargaining to fact-based discussion. When a buyer can point to a specific cost element that looks high, suppliers either justify it with data or adjust. Mature category teams build should-cost models for high-spend, high-complexity parts and refresh them as commodity prices move. The discipline also improves design-to-cost collaboration with engineering by exposing which features and tolerances drive the largest cost elements, often surfacing value before sourcing even begins.