🛒 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.
Should-cost analysis consists in analytically rebuilding the theoretical cost of goods for a product or service (materials, labour, machines, overheads, normal margin) in order to establish what the item “should cost” an efficient supplier. This fact-based estimate becomes the anchor of the price negotiation: it replaces intuitive haggling with a discussion of quantified, documented gaps. The buyer no longer contests a price as “too expensive” in a subjective way but breaks down the cost structure line by line. Done well, the method shifts the balance of power towards whoever masters the cost information.
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 method draws on two converging lineages. On the one hand, target costing (genka kikaku), a design-to-cost practice born among Japanese manufacturers, notably Toyota, in the early 1960s (first documented uses around 1963), formalised academically by Robin Cooper and Regine Slagmulder in “Target Costing and Value Engineering” (Productivity Press, 1997) and by Yasuhiro Monden. On the other hand, “should-cost analysis”, a supplier-cost auditing tool formalised in US defence public procurement (should-cost reviews written into the Department of Defense acquisition regulations from the 1970s, then revived by the Better Buying Power initiative from 2010). Consulting firms, McKinsey foremost among them, popularised should-costing as a cross-cutting procurement lever (the “Using should-costs to reduce does-costs” article series).
The should-cost is a bottom-up modelling of an item’s cost of goods: the product is broken down into its components and stages, and each line is then costed from objective data, material cost (weight × commodity price), machine cycle time and hourly rate, labour time and loaded cost, tooling depreciation, scrap rate, overheads and structural costs (SG&A), transport, and a “reasonable” margin for an efficient supplier. The sum yields the should-cost. The buyer then compares this rebuilt cost with the price asked (the does-cost): the gap identified, line by line, structures the negotiation. The operational principle is to shift the debate from the overall “how much” to the “why” of each cost line, onto factual ground where the seller must justify their gaps rather than defend an overall margin.
Application by context
On the sales side, a salesperson anticipates the should-cost the buyer will confront them with and prepares the justification for each line (higher material quality, tighter tolerances, cost of non-quality avoided) so as to defend their price on value rather than submit to the breakdown.
This is the native terrain: the buyer rebuilds the cost of goods of a mechanical part (kilos of steel × LME price, machining time × workshop hourly rate, scrap, SG&A, 8% margin) and negotiates the 14% gap found against the supplier price, line by line.
In labour negotiation, the logic transposes by objectifying the “real cost” of a demand (the quantified impact of a bonus, of an extra day off) so as to discuss on a shared basis rather than on postures, with the employer opening up its modelling of the payroll.
In supplier crisis management (an invoked +20% increase on a component), the should-cost makes it possible to check whether the material rise genuinely justifies the increase demanded or masks a margin rebuild, and to counter-propose an adjustment indexed on the only line actually affected.
In public procurement, cost analysis serves to contest the price of a contract or an amendment: the administration rebuilds the cost of a defence system to rule out an excessive margin, as the US Department of Defense should-cost approach does.
For a property or construction purchase, the buyer builds a construction cost per square metre (structural works, finishing works, fees, developer margin) in order to show that the price asked embeds a negotiable premium, line by line, beyond the mere play of supply and demand.
In a cross-cultural context, relying on a neutral quantified breakdown offers a common language that transcends local bargaining styles; it must nevertheless be introduced with tact where displaying the partner’s costs may be perceived as an intrusion or a sign of distrust.
In a family negotiation (dividing an asset, a renovation budget among heirs), objectively rebuilding the real cost of each line defuses the impressions of “it’s too expensive” and grounds the discussion in verifiable amounts rather than in emotion.
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 anchors the negotiation in verifiable facts, which shifts the balance of power towards the informed buyer; it turns adversarial haggling into joint problem-solving (where to reduce the cost together); it precisely identifies the saving levers and over-specifications; it stands up well to opportunistic price increases by isolating the line actually affected; it feeds design-to-cost upstream. Weaknesses: it is very data-hungry and demanding in technical expertise (cost engineering, process knowledge); the model remains an estimate, never the supplier’s real cost, and can be wrong if the assumptions are poor; it can antagonise a supplier who experiences the exercise as an intrusion into their margin; it often ignores development cost, innovation and perceived value; it is time-consuming and therefore best reserved for high-stakes purchases.
Best suited to recurring, high-volume purchases or those with high financial stakes, where the modelling effort pays off; to products that are technically decomposable and whose processes are known (industrial parts, manufacturing subcontracting, components); when facing a price increase to be verified or a supplier in a dominant position that one wants to challenge with facts; in the design phase (design-to-cost) to set a cost objective before launching the product; and in preparing a tender to assess the credibility of the offers received. Less relevant for one-off, highly innovative or intangible purchases, or those whose value rests mainly on brand and use.
Political · The US Defense “should-cost reviews”, The US administration institutionalised cost analysis in its arms procurement: rather than accepting the price proposed by contractors (the “will-cost”, the trend cost), buyers rebuild what the programme “should cost” (should-cost) by tracking inefficiencies. The Better Buying Power initiative, driven from 2010 by the acquisition under-secretariat (Ashton Carter then Frank Kendall), generalised these should-cost reviews as a savings lever, setting programme managers cost objectives below the trend estimates and negotiating the gaps with industry. The approach is public and documented in the Department of Defense acquisition guidance.
Company · Automotive target costing (genka kikaku), Among Japanese carmakers, the inverse logic of the target cost took hold as early as the 1960s: you start from the price the market will accept, subtract the intended margin, and the resulting target cost is broken down component by component. Each supplier receives a cost objective per part, built from value analysis and a modelling of manufacturing costs. The supplier negotiation no longer bears on “make an effort on the price” but on “here is the achievable cost of this part, let’s work together to reach it”. This practice, described by Cooper and Slagmulder, made cost a design variable rather than an outcome to be endured.
On the seller’s side, you recognise the technique when the buyer breaks the price down line by line and puts forward precise cost figures. To defend against it: never passively validate the other side’s model, but discuss its assumptions (the commodity price used, the cycle time, the real scrap rate, the tooling investments amortised, the R&D and cost of non-quality omitted); reframe the discussion around value and total cost of ownership rather than manufacturing price alone; document your own specific costs (quality, service, warranties, lead times) that the generic model ignores; and, if the exercise becomes intrusive, recall that margin is the condition of durability and investment. The best defence remains to know your own costs better than the buyer does.
The should-cost remains an external reconstruction: it never knows the supplier’s real costs (negotiated material contracts, economies of scale, proprietary know-how) and can result in a “theoretical” price that is untenable and weakens the supplier or degrades quality. Ethically, the method is legitimate as long as it serves to negotiate a fair price and a shared improvement; it drifts when it aims to squeeze the margin below the viability threshold, to unduly appropriate the partner’s productivity gains, or to exploit a power asymmetry to asphyxiate a dependent subcontractor. It also assumes not demanding of the supplier a transparency on their costs that one would not grant oneself, and respecting the confidentiality of the data disclosed.
Variants and related techniques: target costing / design-to-cost (starting from the market price and the intended margin to deduce the target cost in design); value analysis and value engineering (reducing cost without degrading function); cost breakdown / linear performance pricing (statistical modelling of price as a function of characteristics); total cost of ownership (reasoning in terms of full cost of ownership rather than purchase price); open-book costing and cost transparency (the supplier opens up its cost accounting); kaizen costing (continuous reduction in production); and clean-sheet costing, an advanced form of should-cost starting from a “blank sheet” of ideal design.
Quick exercise
Answer in your head, then reveal the solution. Memory is built through active recall.
Frequently asked questions
Should-cost analysis consists in analytically rebuilding the theoretical cost of goods for a product or service (materials, labour, machines, overheads, normal margin) in order to establish what the item “should cost” an efficient supplier. This fact-based estimate becomes the anchor of the price negotiation: it replaces intuitive haggling with a discussion of quantified, documented gaps. The buyer no longer contests a price as “too expensive” in a subjective way but breaks down the cost structure line by line. Done well, the method shifts the balance of power towards whoever masters the cost information.
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 "Should-Cost (Target Costing)" 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 "Should-Cost (Target Costing)" 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 "Should-Cost (Target Costing)" 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.
On video
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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.
Spot its signals, neutralise it and turn it around with the defensive playbook on this page.
See the counter-techniquesShould-cost analysis consists in analytically rebuilding the theoretical cost of goods for a product or service (materials, labour, machines, overheads, normal margin) in order to establish what the item “should cost” an efficient supplier. This fact-based estimate becomes the anchor of the price negotiation: it replaces intuitive haggling with a discussion of quantified, documented gaps. The buyer no longer contests a price as “too expensive” in a subjective way but breaks down the cost structure line by line. Done well, the method shifts the balance of power towards whoever masters the cost information.
Name the manoeuvre: said out loud, a technique loses most of its power.
Reacting emotionally instead of coming back to the facts.
Our programmes turn theory into a concrete advantage.