In this week’s guest soundbite, John Moyer and Bryce Heller from A.T. Kearney Procurement and Analytic Solutions explain how to develop a should-cost model. The full podcast can be heard here: http://www.atkearneypas.com/knowledge/podcast.html
As you all know, every Monday at 12:00 noon EST over the virtual airwaves of the Blog Talk Radio Network, Buyers Meeting Point’s Kelly Barner joins us to share the news and upcoming events from the world of procurement.
Kelly has always been adept at introducing both interesting and controversial subjects each week through our weekly guest soundbite. This Monday’s segment was no different as she shared with us an excerpt of a podcast featuring A.T. Kearney’s John Moyer and Bryce Heller extolling the virtues of utilizing the “should-cost” model.
The should-cost model or analysis process was originally developed by the U.S. Department of Defense to “improve the government’s ability to monitor pricing and drive cost reductions.” Right off the bat this should tell us everything we need to know about the model, including why it is a bad idea in terms of achieving it’s purported desired outcome.
Rather than provide a lengthy dissertation on why I think the way I do about should costing – and based on preliminary comments from the social media world I am not alone – click on the image below to access the segment to hear both my commentary as well as the commentary from Mr. Moyer and Mr. Heller.
As always, I welcome your comments either here in this forum or directly on the segment show page on Blog Talk Radio.
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Procurement Insights 
Kelly Barner
November 7, 2013
Answer: If they don’t, now would be a good time to start.
Traditionally, should cost models have been used to figure out a supplier’s profit margin in advance of a negotiation to gain leverage and contract for competitive pricing. This is hardly in alignment with in today’s more collaborative, relationship-based corporate supply culture.
Rather than making should cost models obsolete, I argue that collaborative supply management makes them more important than ever. When supply partners are working arm in arm to address business challenges or develop innovative new solutions, there must be open and honest visibility into costs. In a 2006 post on the topic (Should-Cost Modeling) Sourcing Innovation quoted vendor Akoya from a Spend Matters post as saying “When a purchaser knows what a part should-cost, then she knows what she should pay for it.”
This statement is absolutely true, and there is no reason why the next step needs to be limited to pressuring a supplier to lower prices, looking at alternative sources, or questioning the viability of requirements. A should cost model can (and should – pardon the pun) be completed together by the buyer and supplier. Any prohibitive or unknown costs can be addressed in a 360° approach – examining the supplier’s raw material costs and the buyer’s requirements as well as alternate sources, inventory management and transportation.
If we are to usher in a new era of collaboration in supply management, a better understanding of costs is essential. How can buyers and suppliers work together on common goals if the flow of information remains broken or one-sided? Charles Dominick, President of the Next Level Purchasing Association, said the following of should cost models, “Essentially, you are behaving as if you were responsible for manufacturing the item yourself” (Using a Should Cost Model in Negotiation).
To that point, if our supply management efforts are to result in synergy, there can be no offloading of responsibilities – let alone something as important as working to determine a workable cost model. If the decision is made to invest significant resources in a category, buyers can not be reliant upon suppliers to figure out the cost model, nor should they be secretive about their efforts to determine an efficient cost. Supply partners want everyone in the chain to make an appropriate margin. There is no reason why collaboration needs to preclude profit.
Does your company use should cost models? Do you feel that they are obsolete in the face of relationship-driven supply management strategy? Comment here to continue the discussion or join us on Twitter: @BuyersMeetPoint.
http://buyersmeetingpoint.com/blogs/bmps-qthe-pointq/entry/is-the-should-cost-model-obsolete
piblogger
November 7, 2013
The operative words in terms of realizing the benefits to which you have referred Kelly are collaboration and transparency.
Unfortunately and as IACCM’s Tim Cummins had pointed out, “the ‘conspiracy’ that leads executives on both sides of the table to ‘lie’ to their trading partners and to create a combined version of ‘the truth’ that leads to mutual delusion over what they can achieve, by when and for how much,” persists to this day.
Looking beyond the viability of the methods employed to gather said intelligence – which is even more difficult in a futuresourcing situation where neither the buyer nor the prospective vendor(s) have any prior experience – until a truly Relational Model is introduced into the acquisition process the temptation on the part of the buyer to use their cost information as a means of leveraging a low price from the vendor will persist at the expense of building a relationship based on trust and mutual gain.
Your article that refers to the Standish Group study which found that over 93% of all large technology projects fail, is proof that we are still a long ways from the level of collaboration and transparency that is needed to effectively utilize industry intelligence such as that provided by a should-cost model.
Market Dojo
November 11, 2013
It is very interesting to read the comments here. Back when I was purchasing at Rolls Royce 15 years ago, times were changing back then. They had a whole team dedicated to working out should ‘cost models’ which were very useful for negotiations. However, there was certainly a trend to look at more collaborative ‘should cost’ exercises especially for new components but these initiatives were far fewer. Understanding the make up on any purchase was invaluable to both the buyers and the suppliers. From the buyer you can not only look at the cost but also better understand potential risk. From the supplier side they gain far more trust from the buyer. If there is a sensible margin then there is no reason not to work in this manner. It was when the supplier would not share any further details that you might start to assume the worst whether it is true or not, and even start checking their accounts! Unfortunately to make these should costs exercises work at Rolls Royce, the people who created them were quite skilful and I am not sure if companies today have that dedicated resource thus the collaborative approach makes even more sense. At the very least buyers should understand the basic cost drivers so future negotiations can be looked at in an objective manner.
piblogger
November 11, 2013
Alun, your comments represent a well-balanced understanding of the complex contracting relationship process.
I would invite you to check out Andy Akrouche’s new book “Relationships First: The New Relationship Paradigm in Contracting,” as he provides a more than 20 year case study history of the practical application of the principles to which you have referred.
Market Dojo
November 11, 2013
Hi Jon, Thanks for the recommendation. I have just been reading the preview on Lulu.com (I think it is only in electronic format?) Seems like it is very well researched and he knows what he is talking about.
piblogger
November 11, 2013
Actually you can get the book in hard copy . . . I will send you an e-mail introducing you directly to the author.
DecisionSigma
September 30, 2017
From several case studies that our DecisionSigma team (http://www.decisionsigma.com) has participated, we have found that should cost model or clean sheet model is one of the best options to negotiate price. Organizations use should cost model to analyze the raw material and get better prepared to take purchasing decision for critical raw material. Decision sigma(http://www.decisionsigma.com) team has developed cloud based pre-built algorithms that leverages artificial intelligence and advanced analytics and allows organizations to create should cost model, provides insights on profitability impact due to market volatility and insights on period over period spend to create opportunity to reduce cost and improve profitability.