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 procurement teams to estimate real product costs.
The main use of this intelligence is to provide evidence to support supplier and cost negotiation conversations. However, SCM 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, 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 that empowers procurement teams to 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 clarity 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.