In today’s economic landscape, companies—whether SMEs or large enterprises—are increasingly focused on cost reduction to enhance profitability, stay competitive, and navigate an ever-changing market. Revenue growth alone is no longer enough to ensure success, particularly in an environment where businesses operate on ever-thinner margins.
One emerging and highly effective strategy for cost control is Should Costing. This approach, which enables proactive evaluation and estimation of product or service costs, is rapidly gaining traction among companies of all sizes, especially in the context of product design and development.
What is Should Costing?
Should Costing is an analytical methodology designed to determine the optimal production cost of a product or service. It stands out for its attention to detail and its ability to pinpoint savings opportunities, offering a clear understanding of the costs associated with each phase of a product’s lifecycle.
Unlike a “top-down” approach, which relies on estimates or past orders, Should Cost analysis focuses on creating an optimal forecast based on efficient production practices and current market costs.
The importance of Should Costing in strategic procurement and cost management
To reduce costs, businesses often adopt approaches like strategic sourcing, which seeks to optimize expenses by selecting low-cost suppliers from regions such as China, India, or Brazil. However, in more complex sectors with lower production volumes—such as aerospace or energy—sourcing becomes challenging due to limited and hard-to-compare supplier offers.
Should Cost analysis proves to be a versatile and invaluable tool applicable across various industries. It provides a deep understanding of cost drivers and facilitates price negotiations. This methodology is especially useful when sourcing teams must negotiate with sole or exclusive suppliers, where information about production processes may be scarce or difficult to obtain. In such cases, the focus is on determining what production should cost, considering variables like materials, manufacturing processes, overhead, general expenses, and profit margins. This detailed cost breakdown helps identify inefficiencies in production processes, leading to significant savings.
The should costing process
Implementing Should Costing requires a structured approach and the use of advanced analytical models. Here are the main steps companies follow to leverage this methodology effectively:
- Define the scope of analysis
The first step involves determining the scope of analysis by segmenting costs based on production processes, including materials, manufacturing techniques, required quality, and assembly operations. This identifies areas that need a deeper review. - Data collection and cost driver analysis
Once the scope is defined, detailed data on current costs and the variables influencing the final price of the product are collected. This includes information on materials, manufacturing processes, labor, and equipment. During the design phase, data on product specifications, quantities, and quality standards are also crucial.Software tools like LeanCOST streamline this process by automatically extracting data from 3D CAD models and analyzing cost components for each part. The next step is analyzing cost drivers—variables that impact the final product price. These drivers can include material selection, process complexity, technology used, production volumes, and more. This analysis identifies areas where costs can be reduced without compromising product quality. - Calculate Should Cost and compare with actual costs
Based on collected data and cost drivers, the Should Cost—the optimal cost to produce a product—is calculated, factoring in best production practices, process efficiency, and material quality. This serves as a benchmark for evaluating whether current costs align with maximum possible efficiency.A critical part of the process is comparing the estimated optimal cost with actual production costs. If actual costs exceed the ideal (i.e., they are “outliers”), businesses can adopt corrective strategies to enhance competitiveness, such as revising production processes, optimizing the supply chain, or redesigning the product. - Continuous improvement
Should Costing is not a one-time exercise but should be applied continuously throughout the product lifecycle. Companies must monitor costs regularly and seek improvement opportunities, adapting to changes in supplier markets, production technologies, and regulations.
Benefits of Should Costing for SMEs and large enterprises
Adopting Should Costing offers numerous advantages. Key benefits include:
- cost reduction: detailed analysis of cost drivers provides clear insights into the factors that have the greatest impact. This enables companies to negotiate more effectively with suppliers using objective data;
- identification of inefficiencies and process optimization: Should Costing highlights inefficiencies in production processes, improving profit margins and suggesting more efficient alternatives. For example, if labor or material costs exceed estimates, the company can explore more economical options or adjust processes to reduce waste;
- Product design optimization: during development, Should Cost analysis helps engineers evaluate the economic impact of design and material choices, guiding them toward cost-effective solutions without sacrificing quality or functionality;
- enhanced financial control: Should Costing supports informed, strategic decision-making. By understanding costs clearly, companies can allocate resources more effectively and make more accurate cash flow and investment forecasts;
- improved competitiveness: companies that adopt Should Costing gain better visibility into their costs, enabling them to set more competitive prices and increase market share, especially in highly competitive industries.
Optimize costs and strengthen competitiveness with Hyperlean’s Should Costing service
Hyperlean’s Should Costing service, powered by the LeanCOST software, delivers precise and in-depth analysis of every cost driver, pinpointing all factors that influence total production costs. Our methodology goes beyond simple analysis: we emphasize continuous dialogue with clients from kickoff to delivery, ensuring tailored solutions that optimize costs and enhance competitiveness.
Want to learn more? Contact our team of experts and discover the solution that best fits your company: Should Cost Analysis | Costing Solutions | Hyperlean
