Industrial companies are under increasing pressure to reduce procurement costs, improve margins, and respond more quickly to volatile market conditions. Especially in industries such as automotive, material costs account for a significant share of total costs – making procurement one of the most important levers for profitability and competitiveness. At the same time, many companies still operate procurement, spend analytics, and cost engineering in separate silos. While buyers work with ERP, pricing, and spend data, cost engineering teams create detailed cost models and cost breakdown analyses – often in separate systems or Excel files. These models are frequently only used during price negotiations and not revisited afterward, creating a significant transparency gap. Procurement organizations know where they are spending money, but often lack visibility into whether supplier prices actually align with current market developments and realistic manufacturing costs. This becomes particularly problematic during periods of sharp fluctuations in raw material, energy, and labor costs.
Should Costing in Procurement: How Cost Breakdown Analysis and Spend Analytics Work Together
Why spend analytics alone is not enough This is precisely why more and more companies are combining spend analytics, should costing, and cost breakdown analysis in procurement within a unified procurement intelligence approach. Rather than analyzing historical spend data exclusively, procurement organizations can continuously compare supplier prices against target costs and market movements – identifying savings potential early on.
Should costing and spend analytics work hand in hand because procurement organizations need both transparency over their expenditures and detailed cost information to make well-informed decisions. Spend analytics shows where money is being spent and where price deviations exist, while should costing and cost breakdown analyses explain why those deviations arise and which cost drivers are behind them.
By integrating supplier cost structures, should cost models, market intelligence, and procurement data into a single platform, companies can continuously benchmark supplier prices against target costs and current market conditions. This enables procurement organizations to proactively identify negotiation opportunities, benchmark supplier prices, and manage costs across the entire product lifecycle.
What is should costing in procurement? Should costing in procurement describes a cost calculation method for computing realistic target prices for products or components, based on material prices, labor costs, machine costs, overhead, logistics, energy consumption, and supplier margins. A should cost model helps procurement and cost engineering teams understand whether supplier prices align with actual manufacturing costs and current market conditions. The goal of a should cost model is not solely price reduction, but rather creating transparency about the cost drivers behind a supplier's offer.
A typical should cost model in procurement includes, among other elements:
Raw Material: Aluminum, steel, plasticsManufacturing Costs : Cycle times, machine run timesLabor Costs : Machine operators, assemblyEnergy Costs : Electricity, gasOverhead : Administration, SG&ALogistics Costs : Packaging, transportationSupplier Margin : Profit markupMany companies still use should costing exclusively during tenders or price negotiations. However, this approach often limits the long-term value of cost engineering in procurement.
Industrial products frequently remain active for several years, while raw material prices, energy costs, and labor costs continuously change. Without an ongoing reconciliation process, procurement organizations lose visibility into whether supplier prices still reflect the current market situation. That is why modern procurement organizations are increasingly integrating should costing directly into their spend analytics solutions – to continuously align supplier prices with target costs and market movements.
How does should costing work in procurement? Should costing in procurement works by calculating a target price for a product or component and then continuously comparing it against supplier prices.
The process typically begins with a detailed cost model that analyzes the expected cost structure of a product. Procurement and cost engineering teams use material benchmarks, labor rates, machine data, overhead assumptions, and market intelligence to calculate what a realistic supplier price should be.
The process typically includes:
Analysis of supplier and procurement data Creation of a should cost model Execution of a cost breakdown analysis Comparison of supplier prices with target costs Continuous alignment with market movements Identification of negotiation potential Modern procurement organizations are increasingly automating this process through the integration of:
ERP data Supplier offers Raw material market intelligence Material indices Labor benchmarks Energy costs Spend analytics dashboards This creates continuous procurement intelligence rather than static calculations.
What is a cost breakdown analysis? A cost breakdown analysis (CBA) is a method used in procurement to break down supplier prices into individual cost components – for example, material costs, labor costs, overhead, logistics, manufacturing costs, or supplier margins. It is a structured approach that allows procurement organizations to identify savings potential, benchmark supplier offers, and make pricing structures more transparent.
A typical cost breakdown analysis includes:
Raw material costs Labor costs Processing costs Setup times Cycle times Tooling costs Energy consumption Overhead Logistics costs Supplier margins The objective of a cost breakdown analysis (CBA) is to understand which cost drivers are responsible for price deviations. This allows procurement organizations to identify, for example:
excessive setup times, inefficient cycle times, above-average labor assumptions, high overhead, expensive purchased components, unfavorable material utilization. Rather than negotiating solely on the final price, buyers can address individual cost components in a targeted manner. This makes supplier negotiations more transparent, data-driven, and fact-based.
Why are cost engineering and cost breakdown analysis so important in procurement? While spend analytics shows where procurement organizations are spending money, should costing and cost engineering in procurement explain whether those prices are economically justified. Without should costing, spend analytics often remains purely descriptive – procurement organizations can see high spend values or price deviations, but lack sufficient transparency into the actual cost drivers. Without spend analytics, cost models tend to remain isolated within the cost engineering team and are only used on an ad hoc basis.
The real value only emerges when procurement data, market intelligence, cost breakdown analyses, and should cost models are connected.
An integrated procurement intelligence approach combines:
ERP and procurement data Supplier cost structures Should cost models Raw material market intelligence Material price indices Labor and energy benchmarks Historical supplier prices This enables procurement organizations to continuously compare supplier prices against target costs and current market movements. Buyers can then identify, for example:
which suppliers deviate from target costs, which spend categories are affected by market movements, which cost drivers are causing price deviations, where concrete negotiation opportunities exist, which suppliers should be renegotiated. As a result, procurement evolves from a reactive sourcing function into a proactive, data-driven procurement intelligence organization.
Best practices for should costing and cost breakdown analysis in procurement Companies that successfully deploy should costing and cost engineering in procurement typically follow similar principles.
Key success factors include:
a shared data foundation for procurement and cost engineering, continuous use of cost models, integration of market and raw material data, focus on strategic spend categories, combination of technology and procurement expertise, transparent cost breakdown analyses, continuous lifecycle reconciliation. Particularly important is ensuring that cost models are not used only once during tenders, but remain active throughout the entire product lifecycle.
How spend analytics and should costing work hand in hand Spend analytics, should costing, and cost engineering in procurement deliver the greatest value when they work together as an integrated procurement intelligence approach – rather than as isolated functions.
Spend analytics creates transparency about where money is being spent. Should cost models and cost breakdown analyses explain whether supplier prices are economically justified and which cost drivers are causing price deviations. Combined with continuous market intelligence, procurement organizations gain the ability to proactively manage supplier prices across the entire product lifecycle – rather than merely reacting to price demands or tenders.
As raw material markets, energy prices, and labor costs become increasingly volatile, procurement organizations today need more than classic spend reports. They need connected, data-driven procurement intelligence based on spend analytics, should costing, and cost breakdown analysis in procurement – to continuously identify savings potential and sustainably improve supplier negotiations.
Want to go deeper? Here you can find the recording of our webinar together with costdata on the topic "How Spend Analytics and Should Costing Work Hand in Hand in Procurement."
View the recording.
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