🛒 Procurement & Supply Chain
Professional procurement
Procurement tools applied to negotiation: Kraljic matrix (HBR, 1983), total cost of ownership, target costing, auctions, SRM; work by P. Kraljic, A. van Weele, R. Monczka.
Full detail in the “Origin & history” section below.
Author of the library
Negotiation lecturer at KEDGE Business School
A rare threefold background serving negotiation: teaching, commercial justice and audit, backed by experience as a company director in Bordeaux.
Cost breakdown consists of splitting the stated price of a product or service into its elementary components (raw materials, labour, energy, tooling, logistics, overheads, margin) in order to reason about what the thing ought to cost rather than the price being asked. This approach, known as the cost breakdown structure or should-cost modelling, turns an opaque price negotiation into a factual, line-by-line discussion. It shifts the balance of power by giving the buyer a detailed map of the seller's cost structure, on which they can precisely target the overvalued items. It is one of the most powerful tools of mature professional procurement, because it substitutes data for confrontation.
At a glance
Vigilance: low (3.0/10) · Preparation required: 9/10
Indicative profile: it situates the “Procurement & supply chain” family as the Procurement & Supply Chain school practises it, not this technique taken in isolation. Techniques from the same family and school therefore share the same profile. NEGOCOACH editorial rating out of 10, non-experimental · the higher the “relational risk” value, the more costly the technique is to the relationship.
NEGOCOACH assessment
Tactical potential 5.7/10 (effectiveness, impact, discretion) and vigilance low (relational and ethical risk): two distinct readings, deliberately never merged into a single score that would reward risk. NEGOCOACH editorial rating calibrated from the “Procurement & supply chain” family and the “Procurement & Supply Chain” school. Each criterion is rated out of 10; click to understand what it measures.
How far the technique can carry the negotiation in the intended direction when it is well executed.
Strength of the effect produced on the counterpart's perceptions, emotions and decisions.
How hard it is for the other party to notice the technique is being used. A high value = very discreet.
The information, analysis and rehearsal required upfront to use it effectively.
Potential cost to the relationship and to trust if the technique is spotted, refused or fails. A high value = riskier.
Moral acceptability: fairness, transparency and respect for the counterpart's autonomy. A high value = more defensible.
Documented school
The school this technique stems from is documented by recognised work and established practice, without experimental consensus. This indicator qualifies the school, not this technique taken in isolation.
Indicative NEGOCOACH editorial rating, for teaching purposes. For “Relational risk”, a high value signals a cost to the relationship, not a quality.
The technique has its roots in the cost engineering of the major American defence programmes: the concept of the Work Breakdown Structure was formalised by the military standard MIL-STD-881 in 1968, a hierarchical decomposition that would go on to inspire the Cost Breakdown Structure. Parametric estimation, developed by the RAND Corporation and adopted by NASA and the Department of Defense from the 1960s onwards, provided the models for reconstructing costs "from scratch" (clean-sheet). In the 1980s and 1990s, the approach merged with the principles of lean and the Toyota Production System (Japanese target costing), which reconstruct the target cost from the market price. Consulting firms, notably McKinsey with its does-cost / should-cost / could-cost grid, subsequently made it a standard of procurement departments. Should-cost modelling is today codified in dedicated professional works (Chan & Breton, Should-Cost Modeling Handbook, 2021).
Cost breakdown is a method of analysis that dissects the total price of a good or service into identifiable, quantified cost items, and then independently reconstructs what each of them ought to be worth under reasonable production conditions. Three levels are distinguished: the does-cost (what it actually costs the supplier today), the should-cost (what it ought to cost under normal, efficient conditions) and the could-cost (what it could cost after optimisation of the design and the process). Concretely, the buyer establishes a standard cost structure, material (weight x indexed price of the material), direct labour (time x hourly rate of the production region), energy, tooling depreciation, logistics costs, overheads (SG&A) and profit margin, and then compares their model to the price being asked. Each gap becomes a reasoned point of negotiation: one no longer negotiates "the price", but a specific item whose overvaluation has been demonstrated.
Application by context
A B2B seller who has mastery of their own cost structure breaks down their offer to show the buyer that their margin is reasonable and to defend their price line by line, turning a blanket objection on the tariff into a discussion of specific items that they can justify.
The buyer reconstructs the cost of a mechanical part (weight of steel x indexed LME price, machining time x hourly rate of the country of production, tooling depreciation, SG&A + margin) and confronts their should-cost with the 12% margin hidden in the quotation to obtain a targeted reduction without undermining the supplier.
During a pay negotiation, management breaks down the full cost of a role (gross salary, employer contributions, benefits, training, absenteeism) to give an objective picture of what a rise really represents, while the staff representatives break down the value created per employee to anchor their demand.
In an emergency renegotiation with a failing supplier, breaking down the extra cost being claimed (a genuine surge in the material vs. an opportunistic margin) makes it possible to distinguish the legitimate part linked to the external shock from the part being unduly passed on, and to accept only the justified adjustment.
In a budget negotiation or a public procurement contract, breaking down the cost of a programme (studies, works, operation, provisions) item by item makes it possible to challenge the inflated lines and to give an objective picture of the fair price when facing a provider or a ministry.
For a property purchase, breaking down the asking price into land value, reconstructed construction cost per m2, quantified refurbishment works and a market premium reveals the gap between the intrinsic value and the stated price, providing factual support for a counter-offer.
When facing a supplier in a culture where the opening price is heavily inflated and haggling is expected, cost breakdown offers a shared rational language that transcends the codes of face and relationship, refocusing the discussion on quantifiable components rather than on the ritual of haggling alone.
During the division of an estate or the apportionment of a shared expense, breaking down the value of an asset (acquisition price, works financed by each party, upkeep, capital gain) gives an objective picture of what each person has really contributed and defuses conflicts based on blanket perceptions.
Counter-techniques
Negotiation is also played on defence. Here is how to recognise this technique when it is used against you, and turn it around.
The signals that give it away
The counters that defuse it
Turn it into an advantage
Name the manoeuvre: said out loud, a technique loses most of its power.
Reacting emotionally instead of coming back to the facts.
"Strengths: it substitutes data for emotion and shifts the balance of power towards the better-informed party; it creates an objective anchor (the target price) that is very difficult to challenge head-on; it makes a win-win negotiation possible, because the parties can work together to reduce a real cost (design, process) rather than nibble at a margin; it professionalises the supplier relationship and provides an auditable record of decisions. Weaknesses: it is costly in time and skill (reliable data on materials, times and hourly rates are needed); it can give a false sense of precision if the assumptions are poor; it presupposes access to information that the supplier does not always want to share; handled poorly, it is experienced as intrusive and damages trust; it is ill-suited to low-stakes purchases where the analytical effort exceeds the gain."
"Best suited to high-stakes and recurring purchases (industrial components, subcontracting, processed materials), when the price is opaque or appears abnormally high, when the supplier relationship is lasting and allows in-depth work, and as soon as reliable data on the underlying costs is available or can be acquired (material indices, production times, hourly rates by country). Particularly useful ahead of a tender to frame expectations, in an annual renegotiation, or when facing a request for a price increase that needs to be given an objective basis. Of little relevance for one-off, low-value purchases, for highly differentiated or creative services whose value does not reduce to a sum of costs, and in situations where access to the data is impossible."
Company · Should-cost on an injection-moulded plastic part, An industrial procurement department receives a quotation of EUR 3.80 for an injection-moulded plastic part. Rather than negotiating a blanket discount, the team reconstructs the cost: 45 g of polypropylene at ~EUR 1.4/kg (EUR 0.063), an injection cycle time of 18 s on a press whose machine hourly rate is known, mould depreciation spread over the annual volume, plus standard SG&A and margin. The should-cost comes out at around EUR 2.60. Armed with this model, the team does not challenge the price "as a whole" but questions it item by item: the actual grammage, the assumed scrap rate, the margin applied. The supplier, confronted with a credible analysis, revises down to EUR 2.90, and a value-engineering avenue on wall thickness is opened up to aim for EUR 2.60. A scenario representative of should-cost practices in industrial procurement, not attributed to any named company.
Company · The does/should/could-cost grid, Procurement consulting firms formalise the analysis of the cost gap in three layers: the does-cost (the supplier's actual current cost), the should-cost (the cost under normal efficient conditions) and the could-cost (the cost achievable after redesign and process optimisation). This grid enables a buyer to distinguish three distinct negotiating levers: reducing current inefficiency, aligning with the best market conditions, and co-investing with the supplier in an in-depth optimisation. It illustrates how cost breakdown is not merely a tool of pressure but a framework for shared progress.
"Recognising the technique: the other party systematically dissects your price into items, cites material indices and hourly rates, advances a precise target price and asks you to justify each line. To defend yourself: do not yield to the illusion of precision of the opposing model, which rests on debatable assumptions, insist on seeing and challenge its data (actual grammage, scrap rate, small-batch costs, amortised R&D, service and warranty costs that are often forgotten). Reintroduce the value that is not in the sum of the costs: reliability, lead times, innovation, security of supply, total cost of ownership. Refuse to disclose your real cost structure if it is not contractually owed, and reframe on the market price and the value in use rather than on the cost of production. Finally, propose gain-sharing (if we optimise the could-cost together, how is the saving shared?) to turn pressure into cooperation."
"Limits: the reliability of the model depends entirely on the quality of the data, which is often difficult to obtain and quickly out of date; the sum of the costs does not capture the real value (innovation, brand, service, scarcity), so that a price may legitimately exceed the should-cost; the tool presupposes analytical resources that small organisations do not always have. Ethics: demanding total cost transparency (open-book) creates an asymmetry and can be experienced as an intrusion or an abuse of a dominant position, especially towards a dependent supplier; squeezing a supplier below its sustainable cost is counter-productive and can weaken it, or even amount to abusive practices. The healthy approach aims at a fair and sustainable price, with an equitable sharing of the optimisation gains, and not maximum extraction to the detriment of the partner's viability."
"Close variants: should-cost modelling or clean-sheet costing (reconstruction of the cost from scratch); Japanese target costing (a target cost derived from the market price minus the intended margin, fed back into the design); total cost of ownership (TCO), which broadens the analysis to the full cost over the life cycle; the does-cost / should-cost / could-cost grid; value analysis / value engineering, which attacks the cost through functional redesign. Related negotiation techniques: anchoring (the target price serves as an objective anchor), open-book costing (contractual cost transparency), material indexation clauses (price adjustment mechanisms), and competitive benchmarking. Upstream, the Kraljic matrix serves to decide on which purchases to deploy the breakdown effort."
Quick exercise
Answer in your head, then reveal the solution. Memory is built through active recall.
Frequently asked questions
Cost breakdown consists of splitting the stated price of a product or service into its elementary components (raw materials, labour, energy, tooling, logistics, overheads, margin) in order to reason about what the thing ought to cost rather than the price being asked. This approach, known as the cost breakdown structure or should-cost modelling, turns an opaque price negotiation into a factual, line-by-line discussion. It shifts the balance of power by giving the buyer a detailed map of the seller's cost structure, on which they can precisely target the overvalued items. It is one of the most powerful tools of mature professional procurement, because it substitutes data for confrontation.
Yes. Used in good faith it stays within a fair negotiation: it structures the exchange without deceiving the other party. Being transparent about your intentions strengthens the long-term relationship.
Reacting emotionally instead of coming back to the facts. The right reflex: slow down and reformulate.
NEGOCOACH does not assess the experimental validation of this technique in isolation. What we document is the grounding of its source school (Procurement & Supply Chain): documented school. Full detail is in the "At a glance" section of this page.
Practise with AI
Copy, paste into your assistant, replace the [brackets]. Works with ChatGPT, Claude, Gemini, Mistral, Perplexity.
Build your plan before the meeting
You are an expert negotiation coach. Help me prepare to use the "Cost Breakdown" technique in the following situation: [describe your situation]. Give me: the conditions for success, a 3-step script, my counterpart's likely objections and how to answer them.
Rehearse against an AI counterpart
Play the role of my counterpart in a negotiation. I am going to test the "Cost Breakdown" technique. React realistically and with resistance, do not give in too quickly, then at the end analyse my performance and suggest 3 concrete improvements.
Analyse a past negotiation
Here is how my negotiation went: [paste the exchanges]. Analyse whether the "Cost Breakdown" technique was used well, what worked, the mistakes made, and spell out precisely what I could have done better.
References
Founding works of the 🛒 Procurement & Supply Chain school this technique belongs to.
Purchasing Must Become Supply Management (Harvard Business Review)
ArticleP. Kraljic · 1983
Purchasing and Supply Chain Management
BookA. J. van Weele · 2018
Purchasing and Supply Chain Management
BookR. M. Monczka et al. · 2015
Category Management in Purchasing
BookJ. O'Brien · 2019
Procurement tools applied to negotiation: Kraljic matrix (HBR, 1983), total cost of ownership, target costing, auctions, SRM; work by P. Kraljic, A. van Weele, R. Monczka.
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Technique map
Every technique sits within a network: what it draws on, what it combines with, where it applies, and how to defend against it.
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See the counter-techniquesCost breakdown consists of splitting the stated price of a product or service into its elementary components (raw materials, labour, energy, tooling, logistics, overheads, margin) in order to reason about what the thing ought to cost rather than the price being asked. This approach, known as the cost breakdown structure or should-cost modelling, turns an opaque price negotiation into a factual, line-by-line discussion. It shifts the balance of power by giving the buyer a detailed map of the seller's cost structure, on which they can precisely target the overvalued items. It is one of the most powerful tools of mature professional procurement, because it substitutes data for confrontation.
Name the manoeuvre: said out loud, a technique loses most of its power.
Reacting emotionally instead of coming back to the facts.
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