What Is Should-Cost Analysis?
Should-cost analysis is a detailed methodology for calculating what a product should cost based on materials, manufacturing processes, labour rates, overhead, and reasonable profit margins. Unlike a supplier quote, it is built from the ground up using actual manufacturing data, calculated for efficient production processes, and updated regularly as conditions change. Organisations implementing structured should-cost methodologies reduce product costs by 15–25% and negotiate more effectively with suppliers. EMUSKI's cost engineering consulting team builds these models as part of every engagement.
Should-Cost vs. Target Cost
Target cost is the market-driven price a product must achieve to meet profit goals. Should-cost is the manufacturing-driven estimate of what production actually costs under efficient conditions. The gap between them drives design optimisation work — when should-cost exceeds target cost, the engineering team must redesign, re-source, or re-engineer to close the gap.
Step-by-Step Should-Cost Methodology
- Step 1 — Material cost: finished weight plus scrap allowance × material price per kg
- Step 2 — Machining time: estimate cycle time from geometry and process parameters
- Step 3 — Machine hour rate: depreciation + maintenance + utilities + floor space amortised
- Step 4 — Secondary operations: heat treatment, surface finishing, CMM inspection, deburring
- Step 5 — Overhead and profit: factory overhead 25–60% of direct costs; profit 5–20% depending on complexity and volume
EMUSKI's should-cost modeling service applies this exact methodology for US OEMs sourcing from India.
Common Cost Estimation Mistakes
- Ignoring secondary operations — inflates actual costs by 20–40%
- Using prototype pricing for production volumes
- Underestimating scrap and yield rates
- Using outdated material pricing
- Skipping tooling amortisation across production quantity
- Not involving suppliers during the design phase
Using Should-Cost in Supplier Negotiations
Should-cost enables collaborative negotiation: "We calculate material at $45, machining at 3.2 hours at our benchmarked rate. Can you help us understand your approach?" This typically yields 10–20% price reductions while maintaining supplier goodwill. For automotive components, a typical cost breakdown is: material 35–45%, manufacturing 25–35%, quality and compliance 8–12%, tooling amortised 5–10%, overhead and profit 15–20%. Design-phase integration of should-cost achieves 80%+ cost target success versus 40–50% when treated as a late-stage procurement activity.
