Using A Should Cost Model In Negotiation<\/h1><\/div><\/div><\/div>How Can You Ensure A Custom Item Price Is Fair?<\/h2><\/div><\/div><\/div>When buying a custom item that only one supplier can produce, using a should cost model is one way of determining whether the price is fair. A should cost model is a documented calculation of an estimated price that you create by researching all material costs, labor costs, overhead costs, and profit margins that would apply to an item. Essentially, you are behaving as if you were responsible for manufacturing the item yourself.<\/p>\n
![\"\"](\"data:image\/svg+xml,%3Csvg%20xmlns%3D%27http%3A%2F%2Fwww.w3.org%2F2000%2Fsvg%27%20width%3D%27110%27%20height%3D%27175%27%20viewBox%3D%270%200%20110%20175%27%3E%3Crect%20width%3D%27110%27%20height%3D%27175%27%20fill-opacity%3D%220%22%2F%3E%3C%2Fsvg%3E\")
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If a supplier’s quoted price exceeds your estimate, your “should cost model sets the stage for future negotiations,” according to Tim Reis, SPSM, a Sourcing Manager for Continental Commercial Products. When using should cost models in negotiations, Reis notes that accuracy is key “because you know with 100% certainty that the supplier will challenge your assumptions in attempt to turn the cost discovery negotiation process back to their side.” The credibility you need to negotiate successfully can be lost with a poorly researched model, so you need to “be more knowledgeable about the supplier’s business than the supplier is” he says.<\/p>\n
To maximize accuracy, Reis advises peers to “study every aspect of the item being modeled to assure that the supplier can raise only minor objections rather than to be able to challenge the integrity of the model itself.” In addition, he proposes enlisting the help of your Finance team in the role of devil’s advocate. “You should encourage a cost accountant to try and poke holes in your model to fine tune your estimates” Reis suggests.<\/p>\n
Even a well-researched should cost model isn’t exempt from scrutiny, though. However, “you want to encourage the supplier’s challenge,” Reis says. “When a supplier challenges the model, the model is beginning to work for you because the supplier is now using your model and your data.”<\/p>\n
In this regard, Reis uses a favorite line to get suppliers to reveal cost data that they typically protect: “If you think that my data is wrong, then please tell me where I’m in error.” He says that this forces a supplier to either admit that your data is correct or to tell you “exactly where your model is in error thereby turning your estimates into known, factual data.” You then revise the should cost model and base negotiations on even better data.<\/p>\n<\/div><\/div><\/div><\/div><\/div>
Do You Want a More Rewarding Procurement Career?<\/h5><\/div>![](\"https:\/\/www.certitrek.com\/nlpa\/wp-content\/uploads\/sites\/5\/2020\/12\/spsm_verify.jpg\" "\\"spsm_verify\\"")
<\/span><\/div>Are you tired of not getting enough opportunities, respect, and money out of your procurement career? Well, guess what? Nothing will change unless you take action towards becoming a world-class procurement professional.<\/p>\n
Earning your SPSM Certification is the action to take if you want to bring the most modern procurement practices into your organization and achieve your career potential. Download the SPSM Certification Guide today to learn how to get started on your journey to a more rewarding procurement career!<\/p>\n<\/div>
Download<\/span><\/a><\/div><\/div><\/div>Need Better Performance From Your Procurement Team?<\/h5><\/div>![](\"https:\/\/www.certitrek.com\/nlpa\/wp-content\/uploads\/sites\/5\/2020\/12\/services.jpg\" "\\"services\\"")
<\/span><\/div>Are you a procurement leader whose team isn\u2019t achieving the results you know are possible? Maybe it\u2019s not enough cost savings. Or frustrating performance from the supply base. Or dissatisfied internal customers.<\/p>\n
You need a performance improvement plan that\u2019s easy to implement and quick to produce results. The NLPA can help.<\/p>\n
Download our whitepaper \u201cThe Procurement Leader\u2019s Guide To A More Successful Team.\u201d You\u2019ll learn the 7 steps for transforming your staff into a results-producing, world-class procurement team.<\/p>\n<\/div>
How Can You Ensure A Custom Item Price Is Fair?<\/h2><\/div><\/div><\/div>When buying a custom item that only one supplier can produce, using a should cost model is one way of determining whether the price is fair. A should cost model is a documented calculation of an estimated price that you create by researching all material costs, labor costs, overhead costs, and profit margins that would apply to an item. Essentially, you are behaving as if you were responsible for manufacturing the item yourself.<\/p>\n
<\/p>\n
If a supplier’s quoted price exceeds your estimate, your “should cost model sets the stage for future negotiations,” according to Tim Reis, SPSM, a Sourcing Manager for Continental Commercial Products. When using should cost models in negotiations, Reis notes that accuracy is key “because you know with 100% certainty that the supplier will challenge your assumptions in attempt to turn the cost discovery negotiation process back to their side.” The credibility you need to negotiate successfully can be lost with a poorly researched model, so you need to “be more knowledgeable about the supplier’s business than the supplier is” he says.<\/p>\n
To maximize accuracy, Reis advises peers to “study every aspect of the item being modeled to assure that the supplier can raise only minor objections rather than to be able to challenge the integrity of the model itself.” In addition, he proposes enlisting the help of your Finance team in the role of devil’s advocate. “You should encourage a cost accountant to try and poke holes in your model to fine tune your estimates” Reis suggests.<\/p>\n
Even a well-researched should cost model isn’t exempt from scrutiny, though. However, “you want to encourage the supplier’s challenge,” Reis says. “When a supplier challenges the model, the model is beginning to work for you because the supplier is now using your model and your data.”<\/p>\n
In this regard, Reis uses a favorite line to get suppliers to reveal cost data that they typically protect: “If you think that my data is wrong, then please tell me where I’m in error.” He says that this forces a supplier to either admit that your data is correct or to tell you “exactly where your model is in error thereby turning your estimates into known, factual data.” You then revise the should cost model and base negotiations on even better data.<\/p>\n<\/div><\/div><\/div><\/div><\/div>
Do You Want a More Rewarding Procurement Career?<\/h5><\/div><\/span><\/div>Are you tired of not getting enough opportunities, respect, and money out of your procurement career? Well, guess what? Nothing will change unless you take action towards becoming a world-class procurement professional.<\/p>\n
Earning your SPSM Certification is the action to take if you want to bring the most modern procurement practices into your organization and achieve your career potential. Download the SPSM Certification Guide today to learn how to get started on your journey to a more rewarding procurement career!<\/p>\n<\/div>
Download<\/span><\/a><\/div><\/div><\/div>Need Better Performance From Your Procurement Team?<\/h5><\/div><\/span><\/div>Are you a procurement leader whose team isn\u2019t achieving the results you know are possible? Maybe it\u2019s not enough cost savings. Or frustrating performance from the supply base. Or dissatisfied internal customers.<\/p>\n
You need a performance improvement plan that\u2019s easy to implement and quick to produce results. The NLPA can help.<\/p>\n
Download our whitepaper \u201cThe Procurement Leader\u2019s Guide To A More Successful Team.\u201d You\u2019ll learn the 7 steps for transforming your staff into a results-producing, world-class procurement team.<\/p>\n<\/div>
When buying a custom item that only one supplier can produce, using a should cost model is one way of determining whether the price is fair. A should cost model is a documented calculation of an estimated price that you create by researching all material costs, labor costs, overhead costs, and profit margins that would apply to an item. Essentially, you are behaving as if you were responsible for manufacturing the item yourself.<\/p>\n
![\"\"](\"https:\/\/www.certitrek.com\/nlpa\/wp-content\/uploads\/sites\/5\/2021\/02\/should-cost-model.jpg\")
If a supplier’s quoted price exceeds your estimate, your “should cost model sets the stage for future negotiations,” according to Tim Reis, SPSM, a Sourcing Manager for Continental Commercial Products. When using should cost models in negotiations, Reis notes that accuracy is key “because you know with 100% certainty that the supplier will challenge your assumptions in attempt to turn the cost discovery negotiation process back to their side.” The credibility you need to negotiate successfully can be lost with a poorly researched model, so you need to “be more knowledgeable about the supplier’s business than the supplier is” he says.<\/p>\n
To maximize accuracy, Reis advises peers to “study every aspect of the item being modeled to assure that the supplier can raise only minor objections rather than to be able to challenge the integrity of the model itself.” In addition, he proposes enlisting the help of your Finance team in the role of devil’s advocate. “You should encourage a cost accountant to try and poke holes in your model to fine tune your estimates” Reis suggests.<\/p>\n
Even a well-researched should cost model isn’t exempt from scrutiny, though. However, “you want to encourage the supplier’s challenge,” Reis says. “When a supplier challenges the model, the model is beginning to work for you because the supplier is now using your model and your data.”<\/p>\n
In this regard, Reis uses a favorite line to get suppliers to reveal cost data that they typically protect: “If you think that my data is wrong, then please tell me where I’m in error.” He says that this forces a supplier to either admit that your data is correct or to tell you “exactly where your model is in error thereby turning your estimates into known, factual data.” You then revise the should cost model and base negotiations on even better data.<\/p>\n<\/div><\/div><\/div><\/div><\/div>
Do You Want a More Rewarding Procurement Career?<\/h5><\/div><\/span><\/div>Are you tired of not getting enough opportunities, respect, and money out of your procurement career? Well, guess what? Nothing will change unless you take action towards becoming a world-class procurement professional.<\/p>\n
Earning your SPSM Certification is the action to take if you want to bring the most modern procurement practices into your organization and achieve your career potential. Download the SPSM Certification Guide today to learn how to get started on your journey to a more rewarding procurement career!<\/p>\n<\/div>
Download<\/span><\/a><\/div><\/div><\/div>Need Better Performance From Your Procurement Team?<\/h5><\/div><\/span><\/div>Are you a procurement leader whose team isn\u2019t achieving the results you know are possible? Maybe it\u2019s not enough cost savings. Or frustrating performance from the supply base. Or dissatisfied internal customers.<\/p>\n
You need a performance improvement plan that\u2019s easy to implement and quick to produce results. The NLPA can help.<\/p>\n
Download our whitepaper \u201cThe Procurement Leader\u2019s Guide To A More Successful Team.\u201d You\u2019ll learn the 7 steps for transforming your staff into a results-producing, world-class procurement team.<\/p>\n<\/div>
<\/span><\/div>Are you tired of not getting enough opportunities, respect, and money out of your procurement career? Well, guess what? Nothing will change unless you take action towards becoming a world-class procurement professional.<\/p>\n
Earning your SPSM Certification is the action to take if you want to bring the most modern procurement practices into your organization and achieve your career potential. Download the SPSM Certification Guide today to learn how to get started on your journey to a more rewarding procurement career!<\/p>\n<\/div>
Need Better Performance From Your Procurement Team?<\/h5><\/div><\/span><\/div>Are you a procurement leader whose team isn\u2019t achieving the results you know are possible? Maybe it\u2019s not enough cost savings. Or frustrating performance from the supply base. Or dissatisfied internal customers.<\/p>\n
You need a performance improvement plan that\u2019s easy to implement and quick to produce results. The NLPA can help.<\/p>\n
Download our whitepaper \u201cThe Procurement Leader\u2019s Guide To A More Successful Team.\u201d You\u2019ll learn the 7 steps for transforming your staff into a results-producing, world-class procurement team.<\/p>\n<\/div>
<\/span><\/div>Are you a procurement leader whose team isn\u2019t achieving the results you know are possible? Maybe it\u2019s not enough cost savings. Or frustrating performance from the supply base. Or dissatisfied internal customers.<\/p>\n
You need a performance improvement plan that\u2019s easy to implement and quick to produce results. The NLPA can help.<\/p>\n
Download our whitepaper \u201cThe Procurement Leader\u2019s Guide To A More Successful Team.\u201d You\u2019ll learn the 7 steps for transforming your staff into a results-producing, world-class procurement team.<\/p>\n<\/div>
![](\"https:\/\/www.certitrek.com\/nlpa\/wp-content\/uploads\/sites\/5\/2020\/12\/services-contracting.jpg\" "\\"services-contracting\\"")
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