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Should Cost Analysis

What is should cost analysis?

Product manufacturers use should cost analysis to calculate the “true” cost of a product or component based on the most efficient production methods, materials, product designs (DFM), current costs for materials, manufacturing rates, and other cost drivers.

The goal of should cost analysis is to develop a detailed, accurate, and actionable product cost estimate using the most cost-effective and efficient methods. Manufacturers use should cost estimates as a benchmark for negotiations and decision-making processes throughout the product life cycle.

Effective should costing can help product manufacturers increase their profit margins and maintain a competitive advantage by making informed procurement decisions.

What is the methodology for should cost analysis?

Should cost analysis, also known as cost breakdown analysis, examines costs at a granular level and then adds up all costs to establish an accurate “should cost” of manufactured products.

Should cost analysis applies a “bottom-up” methodology to analyze all materials, processes, and service costs for production. By contrast, a “top-down” approach relies on previous estimates (or manufacturing orders) as the baseline cost for new orders or initiatives.

What are the benefits of should cost analysis?

There are numerous benefits to conducting effective should cost analysis, including:

  • Reduce costs: Identify cost outliers and improve supplier collaboration to capture cost savings
  • Accelerate design: Generate internal estimates and evaluate design and manufacturing alternatives rapidly
  • Streamline quoting: Use accurate should cost estimates to streamline procurement operations
  • Pinpoint redesign opportunities: Apply cost outlier analysis to prioritize design iterations

How do I conduct a should cost analysis?

A should cost analysis for manufacturing involves a systematic approach to determine the cost at which a product should be manufactured. Here are the steps to conduct a should cost analysis for discrete manufacturing:

  1. Define Objectives and Scope: Establish should cost analysis goals by determining which products, components, or materials will be analyzed and the specific aspects of the cost structure you aim to understand or improve.
  2. Gather Data: Collect information about the product or component, including materials, design specifications, manufacturing processes, labor requirements, and other cost drivers. This step may involve analyzing blueprints, 3D CAD models, and other technical documentation.
  3. Analyze Material Costs: Evaluate the costs of raw materials required for manufacturing the product. This includes considering various suppliers, material grades, and potential alternatives that could offer cost savings without compromising quality.
  4. Assess Manufacturing Process Costs: Examine the manufacturing processes involved, including machining, assembly, finishing, and any special processes. Estimate the costs associated with each process, considering labor, machine usage, energy consumption, and overheads.
  5. Evaluate Labor Costs: Determine labor costs by analyzing the time required for each manufacturing step and the associated labor rates. Consider automation or process improvement opportunities to reduce labor hours and expenses.
  6. Calculate Overhead and Additional Costs: Include overhead costs, such as facility costs, equipment depreciation, and administrative expenses. Also, consider additional costs like packaging, transportation, and tariffs.
  7. Utilize Cost Modeling Software: Employ advanced manufacturing cost modeling software to integrate and analyze data from 3D CAD files and evaluate various cost drivers. These automated tools can simulate manufacturing processes, integrate with enterprise product lifecycle management (PLM) systems, generate digital twins of the product, and provide detailed should cost estimates.
  8. Identify Cost-Reduction Opportunities: Analyze the should cost model to identify areas where costs exceed benchmarks or where improvements can be made. This may involve exploring alternative materials, manufacturing processes, or design changes.
  9. Develop Action Plans: Based on the analysis, formulate action plans to achieve cost reductions. This may include negotiating with suppliers, redesigning the product, optimizing manufacturing processes, or changing material specifications.
  10. Implement Changes and Monitor Results: Incorporate the identified cost-reduction strategies and monitor their impact on product costs. Continuously update the should cost model with new data and insights for ongoing cost optimization.
  11. Collaborate with Suppliers: Engage with suppliers to discuss should cost analysis findings and work collaboratively to explore cost-reduction opportunities. This can lead to more transparent and mutually beneficial relationships.
  12. Adopt a Plan for Continuous Improvement: Treat should cost analysis as an ongoing and iterative process. Market conditions, material prices, and manufacturing technologies are constantly evolving, requiring regular updates to the should cost model and a continuous search for cost-reduction opportunities.

Manufacturers following these steps can develop a comprehensive understanding of their product costs, identify inefficiencies, and implement strategies to optimize costs throughout the product life cycle. This approach helps to reduce costs and enhances value for customers.

How do manufacturers automate should cost analysis?

Advanced manufacturing cost modeling software plays a significant role in this analysis, offering detailed insights into the cost structure that can significantly influence supplier negotiations and procurement strategies.

Digital manufacturing simulation technologies are instrumental in generating should cost models. These technologies analyze 3D CAD files to create digital twins of the parts or products, simulating production in a digital factory to gain in-depth insights into manufacturability and cost structure. Digital manufacturing insights (simulations) consider all aspects of a product’s cost, enabling procurement teams to engage in fact-based negotiations with suppliers, moving away from adversarial approaches to collaborative cost-reduction efforts.

Who is responsible for managing a should cost analysis?

A dedicated cost engineering team traditionally manages should cost analysis. This department is responsible for providing estimates to the product development team, helping them make cost-effective design and strategic sourcing decisions that drive potential savings.

How do souring teams use should cost analysis?

Through should cost analysis, sourcing teams can gain greater transparency of the fundamental cost elements of a product. By evaluating the cost structure, including raw materials and overhead, they can acquire a comprehensive understanding of the true costs associated with the product. This enables them to compare the should cost breakdown with the supplier’s quoted price, leading to informed discussions and ensuring fair pricing.

Furthermore, sourcing teams can enhance supplier relationship management and make data-driven decisions when selecting partners for their supply chain.

How is should cost related to design to cost (DTC)?

In the manufacturing industry, there are two complementary approaches used for cost management optimization throughout the product life cycle – should cost and DTC. Together, these methodologies ensure that cost considerations are integrated throughout the product life cycle, from initial design to final production.

Should cost analysis occurs after the design phase and establishes a baseline for the cost of manufacturing a product. This approach enables manufacturing organizations to identify and take advantage of opportunities for cost reduction during supplier negotiations.

Alternatively, DTC happens during the early product design stage, allowing teams to ensure that products are designed within cost targets from the outset. Further, DTC enables companies to deliver cost-effective innovations without compromising on product quality. It also empowers manufacturers to avert expensive end-stage engineering change orders (ECOs) required to make design iterations.

How is spend analysis different from should cost evaluation?

In manufacturing, spend analysis refers to the evaluation of what innovators have spent on raw materials while identifying areas for potential cost optimization. Alternatively, should costing estimates the ideal cost of a product based on various criteria, such as its components, materials, and production processes.

How are manufacturers conducting more effective supplier negotiations for savings?

See how GE Appliances uses aPriori for should cost modeling excellence

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