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Part Cost ( Should Cost)

While “Should Cost” seems straightforward on the surface, it’s a nuanced concept with layers of complexity. As mentioned, the supplier’s price estimate is just one piece of the puzzle, and it may not always accurately reflect the true cost of the product.

Here are some reasons why:

1

Hidden Costs

Suppliers may only present direct costs (material, labor) while overlooking indirect costs (overhead, depreciation) or contingency buffers. This can lead to an underestimation of the actual cost.

2

Transfer Pricing

In complex supply chains, costs can be manipulated through transfer pricing, where different entities within the same organization
charge each other artificial prices for internal transactions. This can make it difficult to track the true cost of a product across various stages.

3

Strategic Pricing

Suppliers might employ various pricing strategies like loss leaders, penetration pricing, or bundling to achieve specific business goals.
These strategies might not reflect the actual cost of a product but rather serve a broader market positioning objective.

4

Negotiation Tactics

The supplier’s cost estimate can be a starting point for negotiation, and both parties may employ various tactics to influence the
final price. This can further introduce discrepancies between the “Should Cost” and the negotiated price.

Should cost anlysis reports helps customers in the following

  • Detailed analysis and reports for design benchmarking,
  • Meet NPD cost target
  • Launch of competitive product

Provides detailed cost breakups to the Category team for better negotiation .

  • Decision support for Global sourcing strategy (selecting low-cost manufacturing country/ region)

  • Opportunity for cost comparison with different supplier proposals to choose the right supplier with the correct cost

Opportunities for cost reduction in materials, processes, similar parts
and alternative sources.

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