Should-cost analysis: establishing a fair price to regain control of supplier negotiations

Summary:

Should-cost analysis enables any B2B decision-maker to estimate factually what a product or service should cost, even before opening a negotiation. By breaking down the supplier cost structure (materials, labour, overhead, margin), this method turns a balance of power into a factual dialogue. Applicable to indirect procurement as well as to strategic purchases, this method helps to ground negotiations in objective data.

Contents:

• What is should-cost analysis? Definition and principle
• The components of a cost model: what the supplier price really hides
• How to build a should-cost analysis step by step
• Should-cost, ZBC, TCO, will-cost: what are the differences and when to use them?
• Practical applications in indirect procurement: regaining control of your negotiations
• Should-cost analysis and strategic management: what you need to know

Faced with suppliers who master their own cost structure better than their customers do, B2B decision-makers often negotiate blind. Should-cost analysis reverses this balance of power by objectivising what a product or service should really cost. Applicable to indirect procurement as well as to strategic categories, it is accessible as soon as market data and a structured method are available.

What is should-cost analysis? Definition and principle

Should-cost analysis is a method for estimating the theoretical cost of a product or service based on its real components: raw materials, labour, overheads, process costs and reasonable profit margins. It is developed independently of the price proposed by the supplier. Its role in procurement is not to impose a price, but to objectivise the discussion and anchor the negotiation in a factual reality.

A method born in manufacturing, now essential in B2B procurement

Initially developed in aerospace and automotive manufacturing (notably among European Tier 1 suppliers), should-cost analysis has gradually spread to the indirect procurement of SMEs and mid-cap companies. Its strength: it does not require dedicated engineering. A partial market database can provide a useful starting point for building a model to support negotiation, but it is not enough to guarantee its robustness or reliability. The available data makes it possible to establish initial estimates, provided that the assumptions adopted, the potential biases and the level of uncertainty associated with the results are clearly set out. The quality of the model will then depend on the representativeness, completeness and currency of the data used.

Should-cost analysis vs will-cost: what is the concrete difference?

Should-cost refers to what the product should cost according to a factual analysis of its components. Will-cost corresponds to what the supplier will actually charge, factoring in its own constraints, risks and commercial margins. This distinction is the foundation of the method: the gap between the two values reveals the available negotiating ground.

The components of a cost model: what the supplier price really hides

A rigorous cost model breaks down the supplier price following a bottom-up logic: each cost line is estimated separately, then aggregated to obtain the overall theoretical cost. This cost analysis reveals what the headline price conceals, particularly in indirect procurement, where the pricing structure is rarely transparent.

Raw materials, labour, overheads, margin: decoding each line

A structured cost model comprises four main components. Materials (raw materials or components) often represent the most volatile share. Direct labour varies according to the country of manufacture. Overhead[1] groups together indirect fixed costs: premises, energy, administration. In manufacturing especially, these overheads weigh heavily on the final product cost. The margin is an important lever for negotiation, but it is not the only one. Volumes, lead times, specifications, packaging or logistics can also change the final cost. Cost Breakdown Analysis (CBA) makes it possible to visualise how these items are distributed across a given product.

Indirect procurement: how to adapt the breakdown to supplies and services

The cost structure of an office supply or a maintenance contract breaks down differently from that of an industrial part produced in manufacturing. Service time, travel costs, software licences and packaging costs play a decisive role here. To go further in mastering specifications upstream, the design-to-cost approach offers a complementary framework that acts on cost from the very design of the requirement.

How to build a should-cost analysis step by step

Building a should-cost analysis does not require a complex tool. Three structured steps are enough to obtain a reliable, auditable model that can be used directly in negotiations with suppliers.

Step 1: collecting the available cost data (market, suppliers, indices)

The raw material indices published by Eurostat or the European Central Bank are sources accessible without a costly subscription. Market catalogues, data from past tenders and sector benchmarks usefully complete this foundation. Completeness is not a prerequisite: even a partial base brings value in negotiation with a supplier.

Step 2: modelling the theoretical cost component by component

The data collected is assembled in a structured spreadsheet or a dedicated tool. Each line (material, manufacturing process, overhead, reasonable margin) receives an estimated value. Documenting the assumptions is essential: they must remain auditable and shareable with suppliers to establish the credibility of the model.

Expert advice and assistance from Manutan

Building a solid cost model means mastering product specifications and market prices. The Manutan teams can support buyers in validating technical characteristics and identifying suitable products, in order to refine the assumptions of the model. Available through all Manutan's local organisations across Europe, as at the content publication date.

Step 3: comparing the should-cost to the proposed price and preparing the negotiation argument

The gap between the modelled cost and the supplier price translates into factual, non-confrontational arguments. This approach transforms the negotiation into a dialogue about verifiable data rather than a balance of power. Principled negotiation techniques rely precisely on this type of objective data to preserve the supplier relationship while generating measurable cost savings.

Should-cost, ZBC, TCO, will cost: what are the differences and when to use them?

These methods are not mutually exclusive. They answer different questions and are best combined according to the procurement context and the procurement maturity level of the organisation.

Should-cost vs will-cost: the target vs the observed

Should-cost expresses what the product should cost according to a factual cost analysis. Will-cost incorporates the supplier's real constraints, its own risks and its commercial margins. In practice, the former serves to prepare the negotiation; the latter to forecast the real procurement budget.

Should-cost vs ZBC (Zero-Based Costing): two complementary approaches

Zero-Based Costing[2] starts from a blank page to rebuild the cost structure without relying on historical data. Should-cost analysis, for its part, relies on existing market data to estimate a fair cost. The two approaches combine effectively on strategic categories: ZBC challenges the very structure of the product; should-cost analysis anchors the result in market reality.

Should-cost vs TCO: broadening the analysis to the total cost of ownership

Should-cost analysis targets the fair initial purchase price. The total cost of ownership, for its part, incorporates all expenditure over the life cycle: maintenance, consumables, end of life. The two methods are complementary: the first optimises the purchase; the second reveals the hidden costs of an everyday purchase that the headline price never reflects.

Practical applications in indirect procurement: regaining control of your negotiations

Indirect procurement often concentrates the greatest room for manoeuvre, precisely because it is rarely the subject of a structured cost analysis. This is where the method reveals its most direct potential.

Use case: supplies, equipment and services

On a piece of office equipment, the breakdown of materials + assembly + distributor margin makes it possible to pinpoint the fair price precisely. On a maintenance contract, the hourly labour costs, travel costs and the service provider's overhead are the three levers to model. The displayed price is often only a fraction of the real cost incurred, as the savings analyses on everyday purchases show.

Integrating ESG criteria into the cost model without sacrificing competitiveness

A should-cost model can incorporate a “carbon cost” or “production conditions” line to objectivise the real value of a virtuous supplier compared with a lower-bidding competitor. This approach echoes the reflections of Pierre-Olivier BRIAL, Managing Director at Manutan, on redefining the prices in sustainable procurement:

“What we are trying to do is internal work, but I think that, on our small scale, it is something that will have to be carried out in a more holistic way: redefining what we call a price. In the world of procurement, there is a notion of total cost. We have started to observe that some purchases, made at very low prices, actually cost more. I believe we need to incorporate the environmental dimension and the [social] inclusion dimension into this notion of cost. The more visibility we have on this, the more we will be able to tell ourselves that, all things considered, that product is more worthwhile.”[3]

Should-cost analysis and strategic management: what you need to know

Beyond the procurement technique, should-cost analysis is a governance tool. It equips management with a factual reading of the risks linked to suppliers and a clear measure of the value generated by the procurement function.

Reducing supplier dependence and anticipating inflation through cost transparency

Mastering a supplier's cost structure makes it possible to identify which components are exposed to the volatility of materials or energy. Price increases thus become foreseeable and contestable with documented arguments. In the European context of post-2022 volatility, this analytical capability has become a direct lever for supply chain resilience.

Making the procurement function a measurable value centre for management

The gap between should-cost and the price actually paid constitutes quantifiable potential savings, expressible in a financial language understood by the MD and the CFO. The procurement function thus gains strategic credibility. To sustainably reduce indirect procurement costs, this analytical mastery forms the foundation from which to rationalise the supplier portfolio methodically.