Sep 7, 2020 in Analysis

Negotiations Using Should Cost Analysis

Introduction

Should cost analysis is an objective approach to the determination of the rational prices of goods and services. Currently, organizations and governments mostly apply the should cost concept in procurement procedures when the rational bidding price is determined through the analysis of the confounding factors, which include the availability of raw materials, demand, geography and other economic aspects. In most cases, the product cost of an item is determined by either the production or acquisition cost. The should cost approach is one of the oldest and most applicable approaches to the assessment of the most objective price in the highly dynamic market. The purpose of this paper is to examine various aspects of should cost and its applicability to price negotiations. 

Literature Review

Carter (2011) defines should cost analysis as the acquisition incentive that seeks to reduce the procurement costs as well as the overall cost of production. The central assumption is that with time, the implementation or acquisition costs will outgrow the independent costs due to various market powers, which are dynamic and unpredictable. Therefore, the application of should cost process insures that an investor eliminates inefficiency of all programs and embraces all cost-saving opportunities. Similarly, should cost concept is appropriate for the determination of the cost of services, especially in electronic production where labor, technicality and time resources are the most evident production inputs. The approach is also applicable while pricing goods and services with hidden production costs. According to Tapper et al. (2014), hidden production costs are the resources used in production yet untraceable in the end products or services. 

Negotiations

Negotiations are a type of dialogue between two parties with the aim of reaching a mutually advantageous outcome. The major purpose of business negotiations is to resolve conflicting interests and gain advantage from individuals or collective parties while crafting outcomes that are satisfactory to every shareholder in the deal (Cullen, Muros, Rasch, & Sackett, 2013). In order to satisfy the central goal of negotiations, an individual must possess empirical skills that work to their advantage while providing arguments in a dialogue, thereby increasing the possibility of a fruitful agreement. The effectiveness of sales and negotiation techniques involve the conversation with the right people, utilization of the right words as well as concentration and research to learn what they want to acquire. 

Basic Negotiation Skills

Having much in common with any other profit-oriented process, negotiations require some basic interpersonal communication skills as well as technical knowledge of the subject matter. To begin with, it is crucial to give one’s preferences of desires careful consideration and be conversant with one’s goal in order to settle an argument. Negotiations require a systematic analysis of all viable options before presenting the most mutual settlement. Therefore, before offering remuneration for the desired good or services, the negotiator must examine the third party position from a neutral perspective so as to determine the level of utility offered by every possible settlement (Fawcett, Ellram, & Ogden, 2014).

Secondly, it is vital for a negotiator to apply to the right people to avoid irrational and oppressive bargaining. In a highly dynamic market, organizations and suppliers offer their goods at different prices as dictated by should cost analysis. Therefore, the skill in addressing the right party is a vital approach toward achieving the negotiation goals, which is to acquire the maximum utility at the lowest possible prices while considering the position of the seller. On the other hand, when negotiating as a third party or a supplier, one seeks to receive rational remuneration for the available goods and services. In an attempt to achieve this, the supplier must understand the needs of the client so as to have the necessary bargaining, which often convince the client of the benefits that accompany the acquisition of the desired services. Therefore, it is vital for the supplier to have an in-depth understanding of the subjective client’s need before initiating the negotiations (Trim, 2014).

Furthermore, notwithstanding the personal managerial skill necessary for successful negotiations, a supplier must possess the technical and managerial skills such as the understanding of market flexibility, comparison of other viable options for the buyer and assessment of the palpable budget for the deal. Apparently, the supplier assumes that the client has the necessary information about the goods and services (Tapper et al., 2014). The same as the supplier, the client seeks to minimize the acquisition costs through an objective should cost analysis. The process places the customer at an advantaged position when they have sufficient information about the table prices. Therefore, the objective of a supplier is to convince the client to purchase the goods despite their expected costs. In a bid to achieve this, one must be highly flexible to amicably and advantageously handle every counterargument presented by the other party. 

Lastly, it is important for a supplier to create positive rapport with a client, which is a vital requirement for successful negotiations. In fact, the relationship between the two parties must incorporate both professional and subjective aspects. For instance, the improvement of the client’s mood gives them confidence and the feeling of appreciation. As a result, it helps to persuade them that the supplier has put them in perfect accord and that they value their participation and desires. Consequently, they contentedly express their views and interests (Sen, 1998). 

What Is Should Cost?

Should Cost Analysis History

The should cost concept was first introduced in accounting by an industrial engineer Lawrence Gantt in 1915. Gantt argued that at the wake of industrialization, more products and services were joining the market as new commodities with no referral point to determine the rational prices. Therefore, there was an eminent need to devise a way of determining the rational market prices. However, the concept remained unutilized until early 1970s when the USA Department of Defense (DOD) adopted the approach to the examination of the rational procurement prices for bulky purchases (Carter, 2011). The application of the should-cost analysis by the DOD followed the industrial market policy, which is different from an open and competitive market. After the regulation on arms manufacturing, the few suppliers operated in oligopoly market and thus set the price market. Thus, the application of accounting analysis insured that costs offered by the manufacturers are rational. 

Major organizations adopted the concept mostly between the 1980 and 1990, following the existence of non-quantifiable goods. Currently, the process is adopted by the best outsourcing corporation such as Apple Inc., Cisco and Microsoft Inc. (Amoako-Tuffour & Martínez-Espiñeira, 2012). Nevertheless, in the modern application, accounting analysis seeks to meet the accurate needs of an organization. For instance, most organizations use strategic outsourcing as a major field in should-cost analysis. Hereby, strategic outsourcing is the use of professional analysts to compare and contrast all potential suppliers by examining factors such as size, quality, and capabilities after sales costs and other confounding factors. 

Should Cost Analysis Review

Should cost analysis is a process to determine the cost of a product based on the cost of the production process, the cost of the raw materials used, and production overhead costs. In fact, it is achieved by conducting a thorough analysis of the engineering models to provide a better understanding of the raw material required and the entire manufacturing processes. Moreover, rate data on the material and processing costs facilitate the calculation of the total costs. The zero-based costing method has been in existence for quite some time (Sen, 1998).Talking about the effectiveness of should costing analysis, it receives a significant boost from digital engineering models and other specialized software used for costing. The main goal of should cost analysis is to enable organizations to realize maximum profits.

Should Cost Analysis in Supply Chain

As explained above, the core purpose of the should cost analysis is to increase the returns of any expenditure through acquisition at a rational price (Barney, 2012). Therefore, in any supply chain, investors use the should cost in purchases. In fact, should cost analysis has various negotiating models that are applicable in supply chain operations for some reasons. In application, the should-cost approach assumes two distinctive ends, which indicate the buyer and the seller. With regard to the seller, they use the model to estimate the value of the goods and services, thereby increasing the chances of acquiring them at the right price. On the other hand, the suppliers use the model in the supply chain to estimate the rational price by including all the production costs and the desired profits. The adoption of the model is advantageous to both the suppliers and the customers in the same supply chain. 

It is worth mentioning that the analysis gives both the client and the supplier a rough idea of the market prices even before a quotation. The existence of a common idea about the prices allows the parties to arrive at a mutual agreement without unnecessary negotiations. Moreover, the analysis aids in cost monitoring to avoid market fluctuations. For instance, with non-viable price evaluation, the lower suppliers are vulnerable to loss if the main supplier lowers the price in disregard of the existing market stock. 

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Summary

Should cost analysis is an integral necessity for any organization aiming to remain relevant in the ever-competitive business field. As a form of negotiation techniques, should cost analysis requires creativity and a critical approach. With various supply chains put into consideration, it translates into a checked production process and, as a result, a checked cost control of products. The result is a healthy working environment for all parties involved.  

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