January 28, 2019
Using should-cost analysis for purchasing success
By: Timothy Klahs

It’s Going to Cost You!

The perpetual question is, how much? You got better pricing last year than the year before, but legacy is a tough taskmaster. What has gone before can be a hard act to follow, and improving on it can be nearly impossible. Yet every company, every year, wants to deliver more operating profit, and by every rule in accounting, you must either raise revenue or lower costs. You are mandated to lower costs.

Your CFO asks, “Why are all of our suppliers doing so well? Their returns are superior to ours, and yet we keep them in business. Tell them all to accept 5 percent less! And don’t take no for an answer!”

You could sacrifice product quality, but you know that will not work. You have used every negotiating trick to push supplier prices down. In fact, you really do not understand why you should get a 5 percent reduction. The real problem is that you really do not know what that product you have been purchasing for so long actually should cost.

Once you understand the problem, the course of action is simple. You need to set realistic and achievable cost-reduction goals by asking from your supplier’s perspective, “What should this input cost be?” Not only is should-cost analysis a better tool than traditional, arbitrary budget trimming, but it also yields better results.

In should-costing, you will develop a partnership with each supplier to have a detailed look at what it truly costs to deliver the product or service with a reasonable profit. This approach fosters negotiating success, keeps planning realistic, and provides sustainable reduction in both immediate and longer-term costs. Should-cost analysis at the design phase of a new product gives your engineers better data and insight into the cost implications of various designs and materials. Adopting a should-cost analysis also will enable you to adapt dynamically to the changing prices of raw materials and processes.

Now you can tell your CFO, “I have a better approach. No one is going to sell to me below their cost or without a profit that allows them to stay in business. But with some time and resources, I will find the lowest price at which our suppliers can sell. I will also work with them to improve their operations and sustain or lower those prices further.” What else can she say but, “I can’t ask for more than that—let’s go!”

The Accenture Academy courses Areas for Exploration in Should-Cost Analysis, Impact of Should-Costs on Product Design, Benefits of Should-Cost Analysis in Adapting to Dynamic Conditions, and Impact of Supplier Cost Structure on Negotiating Outcomes will help you develop an effective approach to achieving significant, rational, and sustainable cost savings in a win-win partnership with your suppliers. Adopting a should-cost approach can help you identify potential should-cost reductions and benefit your company using should-cost analysis during integrated product development. It will help you become a successful reality-based negotiator and enable your organization to become proactive and forward-looking. You will no longer ask, “What does it cost?” but instead ask, “What should it cost?”

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