How can businesses truly understand and reduce their Supply Chain costs?


Cost Analysis is a structured method that involves breaking down the product’s estimated final price into key components such as:

· Material Costs — Raw materials required for the product

· Labor Costs — Wages for workers involved in the product manufacturing

· Overhead Costs — Expenses like equipment, electricity, rent, etc. and other corporate expenses.

· Profit Margins — A reasonable profit for the supplier

And estimating the value of each component by gathering data on the cost structure of the product and cost drivers of critical cost elements such as Material. This results in a fair price estimate called a Should Cost.

Comparing a Should Cost with Supplier Quotes help question, challenge or validate them.

Once a Should Cost is in place, it can be used to track cost fluctuations over time and agree on fair price adjustments as needed.

Should Cost analysis plays a key role in supply chain cost management by enabling detailed cost analysis, cost reduction, and cost optimization.

Tools like AIMDRIVE-AI simplify the Should Cost analysis process by automating the estimation of cost breakdowns, helping businesses make informed sourcing and negotiation decisions.

 

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