What is Should Costing?
Defining Should Costing
Should Costing is similar and relies on some of the same principles of the typical Cost Estimating but is entirely different.
Should Costing is an attempt to predict the cost / price of your supplier based on Best In Class processes. Once you have this established you then use Fact Based Negotiations your purchased components, assemblies or services.
“Should Costing” is not the be all and end all to all procurement’s issues. It is merely a means to start having intelligent cost based discussions. A good negotiator will see where to ask questions and how to understand a suppliers quote if they understand a cost model.
When developing a SHOULD COST, certain ground rules need to be set first. The idea is to develop a defendable, repeatable, possible but unobtainable “SHOULD COST”. Let’s look at each qualifier in more detail.
Why must the SHOLD COST be defendable? Imagine going into a negotiation trying to defend a fictitious process or material. You have no credibility. You would lose all respect and anything you say going forward would be meaningless.
When developing a “SHOULD COST”, one should use as much verifiable data as possible. There are numerous places to gather data. Various specialized “SHOULD COSTING” software will come preloaded with things like labor rates, machine cost, energy cost and etc. IF you are developing your own home grown system you can still get this data. For example, you can get labor rates from places like the BLS (Bureau of Labor Statistics) and or ILO (International Labour Organization)
Being repeatable is important. The level of repeatability could be questioned. If a part, process or service is “modeled” today, tomorrow you should be able to get very close to the same SHOULD COST. There will be slight differences.
An organization should strive to minimize the differences by setting guidelines, policies and or templates to minimize user discretion. For example, using standard governmentally provided labor rates is a good practice. However, in these rates are numerous labor categories. Organizations should clearly define when to use one category over another. For example, when do you use Unskilled vs. Skilled Labor. Which one would you use for a CNC operator? Neither is correct or incorrect, but consistency is the key here.
Externally, if the SHOULD COST is based on the impossible (unattainable materials, material that do not work in the product / process, process that do not exist etc.) it will be difficult or near impossible to have a credible fact based discussion with a supplier.
There are multiple reasons for these pushes. The most obvious is, if you assumed a higher cost than a supplier was experiencing, do you really think they would tell you and therefore reduce their selling price just to be nice? A second example and sometimes controversial is the 0% scrap.
Similar to above, if your model contained 5% and the supplier was actually experiencing 2%, why would they tell you? An even better explanation for why 0% is correct would be why are you paying and effectively incentivizing them to create scrap? They should always be striving to reduce it.