Should-cost modeling for negotiations is a technique used in supply chain analytics to determine the optimal price and quantity to offer to a supplier in a...
Should-cost modeling for negotiations is a technique used in supply chain analytics to determine the optimal price and quantity to offer to a supplier in a negotiation. This is done by considering various factors, including the supplier's cost of production, the value of the buyer's desired goods or services, and the market price of similar products.
Key principles of should-cost modeling include:
Balancing costs: The goal is to find a price that balances the buyer's cost of purchase and the supplier's cost of production.
Considering multiple factors: Beyond cost, other factors such as market demand, supplier capabilities, and payment terms also need to be considered.
Using simulation: The model is often used in a simulation environment to test different scenarios and find the optimal price and quantity that will result in the best outcome for both parties.
Example:
Suppose a buyer is considering two options for sourcing a certain product. Option A offers a lower cost but has a higher risk of quality issues. Option B offers a higher cost but has a lower risk of quality issues. Should the buyer choose Option A or Option B? By using a should-cost model, they can determine which option is more suitable based on the specific cost and risk parameters relevant to their situation