CGN Edge Blog

Should-Costing: A Solution to Filling Traditional Sourcing Gaps

May 28, 2019 Posted by: Sriman Ravikanti
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By Sriman Ravikanti

Global trade wars and cost competition are forcing original equipment manufacturers to design and manufacture a high value product at competitive prices. Delivering a product and meeting cost targets is a common constraint in the industry today. Most companies use traditional sourcing methods to overcome cost challenges. Traditional sourcing is the process of requesting quotes in a competitive cost environment, and has demonstrated success for a long period of time.

Challenges in Traditional Sourcing:

traditional sourcing1Per basic laws of supply and demand, product cost increases proportionately with the complexity of the part, and decrease with the increase in supply. However, increasing the competitive supply for the complex product won’t happen overnight. Traditional sourcing tends to lose its strength when the products being procured are of a medium to high complexity, low volume, and have a few qualified suppliers. Should-cost modeling is one solution to cover the gap.

Should-Cost Modeling:

The 4 elements of any product cost are material, variable, over-head and margins. Should-cost modeling is a process that estimates the cost of a product or service by considering all elements of cost. Should-cost helps companies select the right material, process, investment, and supplier.

Should-Cost Modeling Challenges :

Real success of should-costing is attainable only when original equipment manufacturers takes necessary actions to control costs. Accuracy is the key parameter for a successful cost model. In fact, you need to have more knowledge of supplier business than the supplier himself. It is obvious that supplier will challenge your assumptions, and you should encourage that because, “your model is working now”. This gives us an opportunity to discuss “what is wrong in my assumptions and what it is to be?”. Because of these conflicting discussions, often companies think should cost as a theoretical exercise. But this is not true, should cost is not a negotiation tool, rather it is leveraging tool.

Should-Costing & Its Application Across Product Life Cycle:

Though should-costing sounds like a procurement activity, it actually can assist development in your skills and knowledge to improve visibility and control of cost across product life cycle.

Should Cost Modeling

Concept stage:

  • Sets target cost
  • Linear performance costing
  • Go - No Go decisions


  • Determine engineering and manufacturing alternatives
  • Off-the-shelf components vs. custom design decisions
  • Track design to cost target
  • What-is and what-if analysis

Make vs. Buy:

  • Investment cost vs potential supplier profit comparisons
  • Total cost of ownership comparison to drive supplier decisions
  • Capital asset justification

Process optimization/ production ramp-up:

  • Design for manufacturing feedback
  • Optimized process plan

Supplier negotiation:

  • Sets the stage for negotiation
  • Power of detail data cost estimation makes buyer strong
  • Helps in understanding the supplier quotient

Value engineering:

  • Cost driver identification for cost out opportunities
  • Feature based cost analysis
  • Competitive benchmarking

Cost roll-up:

  • Provide support for quote generation
  • Keeps track on production costs


  • Set competitive sales price
  • Profit margin decisions
  • Go-to market strategy support

CGN Global's Cost Model Framework:

The CGN Global Virtual Manufacturing Method (VMM) cost model is a rigid framework, in which all costs are allocated and recorded as if you were really making the part yourself.

cost model framework


Other unique features of the CGN VMM cost model include:

  • Linear performance pricing comparisons
  • Database repository for off-the shelf material costs
  • Automated process selection/cost estimation within in same part family
  • Rule-based self thinking machine parameters selection based on selected material
  • What if scenario analysis, TCO analysis
  • Auto sync with the market material rates and Labor rates
  • One click- full update cost models

CGN also has capability and certified experts using market ready cost estimation software aPriori, Costimator, DFMA, SEER, Cleansheet.

Recently, CGN Global partnered with one of the top fortune 100 original equipment manufacturers to develop a cost strategy and accelerate a cost reduction initiative for their large casting and forgings group. The challenge was to develop cost models within a short time.


CGN leveraged Virtual Manufacturing Method (VMM) cost model framework to:

  • Develop product cost estimates with detailed material, variable, period and burden cost breakdown
  • Support sourcing team in selecting best supplier based on total cost of ownership (TCO) model
  • Identify the gaps in estimated manufacturing process and quoted process
  • Analyze gap in should cost with supplier quote
  • Understand the economic order quantity (EOQ) and batch size

CGN facilitated client with significant cost savings by:

  • Finishing negotiations with suppliers and closed the deal at 11% cost reduction over the span of 3 years
  • Generating inventory model to understand lead time reduction and associated cost savings
  • Reduction in machining process time