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Find cost opportunities with today’s should-cost analysis

Should-cost analysis is becoming a must-have technique for best-in-class procurement organizations.
CPO Bulletin: Find cost opportunities with today’s should-cost analysis

Prashanth Ravishankar leads McKinsey's software infrastructure for should-cost modeling, Cleansheet Solution™. With extensive expertise in both procurement and digital solutions, Prashanth serves a wide range of industries including high tech, pharmaceuticals and medical products, and travel, transport and logistics.

Leads Product Development and Advanced Analytics in APAC and serves clients in the integrated device manufacturing, foundry, and capital-equipment manufacturing sectors.

Should-cost analysis is becoming a must-have technique for best-in-class procurement organizations. Advanced should-cost methodologies serve as a competitive edge to supplier negotiations by revealing what it really costs to design, manufacture, and deliver a product or service. Rooted at the intersection of product development, cost engineering, and procurement work, should-cost analysis reinforces cross-functional collaboration. The resulting insights help procurement leaders understand detailed cost drivers from the bottom up approach, creating an objective, fact-based view not only on expected price points, but also on effective supplier negotiation strategies and broader operations improvement opportunities.

The dynamic nature of modern procurement operations and supplier relationships are raising the bar for operational excellence in procurement organizations. Supported by advanced computing power, should-cost analysis develops powerful capabilities, with digital applications that enable organizations to tackle the latest challenges sustainably and at scale along the entire product lifecycle.

How is should-cost analysis making the latest breakthroughs? By embracing the power of automation using parametric cost models. This solution benefits companies whose large, diverse product catalogues or compressed production cycles made should-cost models seem impractical, especially at large scale. Rapid parametrization, made possible by new analytic techniques, sifts through thousands of component combinations based on only a few inputs, identifying cost opportunities that previously might have taken weeks or months to uncover. That makes should-cost modeling feasible for a whole new range of industries, and even more effective in sectors that were early adopters.

We hope you find these articles insightful and thought-provoking, and we look forward to your comments and questions.

What should it cost?

The should-cost concept can seem relatively straightforward. However, defining exactly what should-cost is (and is not) requires a careful review of the many components that contribute towards the final cost of a product, and the ability of suppliers and buyers to change those costs. Learning the basic concepts of what should-cost really is makes it easier to set a cost expectation that is both reasonable and actionable. For more, visit “What should it cost?

Make cost saving continuous for years to come

Most organizations that implement should-cost analysis see immediate savings in the cost of the products and services they buy. However, only few organizations realize the ongoing cost savings that are possible by combining a robust should-cost capability with an effective vendor-management approach. Procurement leaders implementing should-cost analysis tools needs to remember that it might be a rocky road, with various challenges cropping up along the way – which, with the right interventions, can be overcome. For more, visit “Make cost savings continuous for years to come.”

Cleansheet cost engineering function

To support lasting results from should-cost analysis, most organizations will need to establish a cost engineering function. When effectively implemented, this function becomes central to both procurement and product-development efforts to control costs, boost margins, and deliver the products that customers need. At its core, a successful cost engineering function rests on three pillars: first, people; second, infrastructure, tools and data; and third, integration into operations. For more, visit “Cleansheet cost engineering function.”

Should-cost modeling for everyone: The power of parameters

Should-cost models have historically required significant effort to build. Cost engineering organizations are now on the hunt for automation and other smart ways to get the value of should-cost analysis without heavy expense. Embracing parametric cost models brings the full impact of should-cost analysis to companies with large, diverse product catalogues, reducing the time and expertise required while maintaining best-quality analysis. This approach expands the usage of should-cost analysis from core manufacturing industries (e.g., aerospace, automotive), to new industry sectors (e.g., retail, CPG) that need greater range and strength in their modeling. For more, visit “Should-cost modeling for everyone: The power of parameters.”

Cleansheet excellence – process overview

McKinsey’s Cleansheet Solution analyzes a product’s underlying cost structure to identify efficiency improvement opportunities in purchasing, production, delivery, and design. It enhances bottom-up visibility on material, labor, and machine prices, as well as insight into what contributes to each product’s manufacturing and delivery cost by maintaining a database of input costs, a suite of analytical tools, and a team of experts that analyze competitor products and conducts supplier negotiation workshop.

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