After years of prices surging across virtually every category, the disruption has slowed, but many procurement teams don’t have a clear view of what they should be paying for goods and materials – negatively impacting their ability to negotiate. In this multi-part series, we explore how Should Cost Modelling can help.
With prices constantly changing, procurement teams can’t afford to accept them at face value. They need to ask a number of questions: Is the pricing aligned with industry standards? What are the key cost drivers and to what extent do they impact the price? Are any price hikes or revision claims made by suppliers valid and just?
A good starting point for answering these fundamental questions is Should Cost Modelling (SCM).
Delivering Value Through SCM
SCM helps build a holistic picture of the economics behind the production of a product, enabling stronger procurement cost analysis and more accurate cost estimation.
The main use of this intelligence is to provide evidence to support supplier and cost negotiation conversations. However, should cost analysis can be applied more widely to aid strategic decision-making and forecast future impacts on product prices.
Here, we explore these scenarios, with examples of how companies have derived real business benefits from SCM.
1. Providing Leverage in Supplier Negotiations
When procurement teams enter negotiations with suppliers, it’s essential they understand whether current pricing accurately reflects production and distribution-based costs. SCM provides a clear product cost breakdown analysis, forming a solid foundation for discussions. This transparency empowers procurement organizations by highlighting potential areas of buyer advantage and strengthening their negotiating position.
SCM for a global CPG company
WNS Procurement recently worked with a global CPG company that faced significant inflationary pressures during the COVID-19 pandemic that forced it to increase product prices. However, as raw material costs fell in the years that followed, the company noticed that prices charged to customers did not decrease proportionally.
To help the company tackle that challenge, we implemented Should Cost Models for various direct and indirect categories, giving category managers a true view of production costs. The models helped identify discrepancies between actual production costs and supplier prices, enabling the company to secure 12% price reductions from suppliers over a spend of $20 million.
This approach helped stabilize profit margins, strengthened supplier relationships, and allowed the company to rebuild its competitive advantage.
2. Enabling Proactive Global Decision-Making
Today, procurement teams are frequently challenged to think beyond their own region and evaluate prices and suppliers from across the globe. As they make global buying decisions, SCM helps teams build a complete view of potential global cost savings and shows if and where both offshoring and nearshoring supply are viable, value-adding options.
Cost estimation for a multinational F&B company
Without a structured approach to production cost estimation, one multinational food and beverage company faced challenges in sourcing packaging cost-effectively. To help, WNS Procurement developed a global Should Cost Model for corrugated boxes that enabled the company to identify the best source countries, incorporate industry best practices, and estimate the cost of new and existing SKUs (stock keeping units).
This global tool assisted the company’s category managers in assessing supplier quotes, ensuring better-informed negotiations across regions, and making optimized global sourcing decisions. With this capability, the procurement team realized an 8% cost-saving opportunity, equating to a saving of around $24 million in just a single sourcing category.
3. Forecasting Future Product Prices
A Should Cost Model can help teams estimate future product prices when integrated with price forecasts for all the commodities used to manufacture a product.
As organizations manage increasingly complex supply portfolios, Should Cost Models are being augmented using commodity price forecasts – helping them make proactive cost-saving decisions. This empowers teams with visibility of not only how much a product should cost to produce today in a specific region, but how that cost will change over the coming weeks and months.
Projected prices can impact a wide range of strategic decisions, from manufacturing approaches to material selection. These insights extend far beyond procurement’s traditional focus on cost savings, positioning the function as a strategic partner that informs product design, operational planning, and long-term value creation across the business.
4. Supporting Sustainability and Green Sourcing
As teams switch to green, recycled or sustainable materials, SCM helps procurement experts understand how much they should really pay for them and model the overall impact on production costs. Using this insight, organizations can ensure they don’t overpay and achieve their ESG goals at the lowest possible cost.
This is also good news for consumers, as it ensures companies don’t need to drive prices up when making a switch to more environmentally friendly materials or ingredients — giving more consumers the power to choose sustainably produced products.
Unlocking Long-Term Value with SCM
SCM isn’t just a tool for cost negotiations, it’s a strategic capability. By performing a should cost analysis, procurement teams can drive smarter decision-making across the entire supply chain. By building a detailed, data-driven view of production costs, organizations can enhance supplier relationships, optimize global sourcing strategies, forecast future price trends, and support sustainable procurement goals.
With SCM, teams can anticipate cost fluctuations, identify the most cost-effective sourcing regions, and make informed investment decisions that balance profitability, resilience, and sustainability. Moreover, as businesses face increasing scrutiny on cost transparency, ESG commitments, and supply chain agility, SCM provides the cost breakdown analysis and control needed to navigate these challenges. By integrating this methodology into procurement strategies, organizations can elevate procurement from a back-office function to a key driver of competitive advantage and long-term business success.
Stay tuned for the second part of this multi-part blog series, exploring the next generation approach to SCM. To explore how your procurement team can leverage SCM for smarter sourcing, deeper cost visibility, and greater savings, reach out to us today.
FAQs
1. What is Should Cost Modelling and how does it help procurement teams?
Should cost modelling is a proactive procurement technique used to estimate what a product or service ought to cost based on its underlying cost drivers, such as raw materials, labor, overheads, and profit margins. It helps procurement teams by shifting the focus from "market price" to "fact-based pricing." This transparency allows teams to identify potential overpayments, validate supplier quotes, and discover areas for joint process improvements, ultimately leading to more predictable and competitive spend management.
2. How can procurement cost analysis improve supplier negotiations?
A robust procurement cost analysis provides negotiators with a "fact-based" leverage point, moving conversations away from purely emotional or historical price comparisons. By understanding a supplier's cost structure, procurement professionals can engage in more collaborative discussions, such as identifying where a supplier's inefficiencies are driving up prices. This granular visibility allows for targeted negotiations on specific cost components, fostering a "win-win" environment where suppliers maintain fair margins while the buyer achieves optimal value.
3. What is the difference between Should Cost Modelling and Should Cost Analysis?
While often used interchangeably, should cost modelling refers to the technical creation of the bottom-up cost estimate using data and mathematical simulations. In contrast, should cost analysis is the broader strategic evaluation of that model against the supplier's actual quoted price. The analysis phase involves interpreting the variances between the model and the quote to identify negotiation levers, evaluate market volatility, and assess the commercial viability of a supplier's proposal within the current economic landscape.
4. How does cost breakdown analysis contribute to smarter sourcing decisions?
Cost breakdown analysis contributes to smarter sourcing by dissecting a total price into its constituent elements, such as direct materials, logistics, and manufacturing energy. This allows sourcing teams to compare suppliers on a "like-for-like" basis, revealing hidden costs that might be masked in a lump-sum quote. By identifying which supplier has the most efficient cost structure—rather than just the lowest initial price—organizations can make data-driven decisions that account for long-term total cost of ownership (TCO) and operational resilience.
5. Can Should Cost Modelling support sustainable and green procurement initiatives?
Yes, should cost modelling is an essential tool for sustainable procurement. By incorporating "green" cost drivers—such as the price of carbon offsets, sustainable materials, or renewable energy sources—into the model, procurement teams can quantify the financial impact of ESG goals. This allows organizations to evaluate the true cost of shifting to eco-friendly suppliers and provides a roadmap for collaborating with partners to reduce environmental impact without sacrificing commercial transparency or financial viability.
6. How does WNS Procurement’s automated should-cost engine reduce the cycle time of a strategic sourcing event?
WNS Procurement leverages automated engines to significantly accelerate the "Should Cost" process, reducing time-to-insight from weeks to days. By utilizing pre-built category templates and real-time global commodity feeds, WNS allows sourcing teams to generate high-fidelity models instantly. This rapid baseline creation enables faster RFP evaluations and immediate negotiation readiness, ensuring that strategic sourcing events remain agile and responsive to shifting market conditions.