To optimise profitability and growth, businesses need to fully understand all the factors that impact the costs of the products or services they provide. Should Cost Modelling is utilised to take a bottom up approach to produce accurate granular level cost calculation for a product or service. The insight gained from effective Should Cost Modelling is hugely valuable when negotiating with suppliers, providing comprehensive evidence that enables a business to source its products or services at prices more closely aligned with its targets.
Our Should Cost Modelling approach is used in various ways. Two of the core areas where it delivers significant benefit for clients are:
● Zero-based estimates (ZBE): Identifying suppliers or commodities where we believe there are the most significant opportunities.
● Supplier-based estimates (SBE): Leveraging Should Cost analysis when negotiating with suppliers to deliver maximum benefits.
At Vendigital we combine our strategic sourcing and manufacturing expertise with our industry knowledge to support clients with comprehensive should cost models.
We take a bottom-up approach when carrying out Should Cost Modelling, focusing on the six areas outlined below. In this way, we help clients understand cost drivers at a microscopic level, analyse existing and future supply chain opportunities and conduct ‘fact based’ negotiations with suppliers.
This first step ensures that all necessary data and models are available for costing. If there is any missing information, we plan how this can be acquired.
ZBE (Zero-based estimates)
Our experienced cost and value engineers review the information to establish where there is potential for cost reduction, ensuring that these estimates are aligned internally within the business.
Share ZBE (Zero-based estimates)
At this stage, we present our data-backed zero-based estimates to the client, along with the calculation logic and assumptions made. Once the ZBEs have been approved, we can agree on the next steps in the Should Cost Modelling process.
Supplier visit or discussion
Our consultants then liaise with suppliers to gather the necessary facility data to create SBEs (supplier-based estimates). If any costing data is missing, we create a plan to acquire it.
Create SBE (Supplier-based estimates)
Using the costing data gathered from suppliers, our cost and value engineers create an information pack to support supplier negotiations. In briefing the client, we ensure approval of the remaining cost gaps and provide supporting calculation logic to enable a coherent approach to supplier negotiations. The roles and strategy for negotiations are also agreed upon at this point.
The supplier negotiations are carried out, as agreed, with the objective of closing the cost gaps identified in the SBEs. Successful negotiations will result in receiving an updated quote from the supplier that is more closely aligned with the client’s target price. We then ensure that cost models or databases are updated accordingly.
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The benefits of best practice
Should Cost Modelling is a complex process, with many influencing factors on a product’s or service’s cost that can fluctuate with market conditions. However, with our data and digital capabilities and extensive industry experience, we can ensure the Should Cost Modelling process is meticulously carried out, sourcing and analysing data at a minute level. With this approach, Should Cost Modelling can achieve the ultimate goal of reducing the cost gap, bringing supplier costs in line with target prices. The benefits of our approach can be further broken down into three key advantages:
Providing a platform for fact-based negotiation
By delivering comprehensive Should Cost Modelling, we put our clients in a strong position when negotiating with suppliers. Furnished with this cost data, we can support our clients in ensuring the prices agreed accurately reflect the market and reduce the cost gap for their business.
Reduces costs and drives profitability
Fully understanding all the costs involved in delivering a product or service enables opportunities for current and future cost-savings to be identified. These could be with current suppliers or through identifying future options. Should Cost Modelling also eliminates unnecessary costs and maverick spending. With supply costs reduced, profit margins improve, supporting better overall profitability.
Improves supplier relationships
Having the information provided from Should Cost Modelling, we can support our clients in identifying suppliers who are positioned to offer their products or services at the optimal cost. With a transparent approach to negotiations, which involves collaborating with suppliers to leverage their market insights, clients can build trust with their suppliers and create long-term mutually beneficial partnerships.
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While calculating carbon emissions can be fairly simple at a site level it can be difficult to get a full breakdown of the carbon content of products.