What Is Should-Cost Modelling in Packaging? A Practical Guide for Procurement Teams
Most packaging procurement teams know their costs. Very few know what their costs should be. That gap, between actual spend and theoretically achievable spend, is where should-cost modelling operates. For FMCG and consumer goods procurement, it is one of the highest-return analytical tools available, and one of the most underutilised.
What is should-cost modelling?
Should-cost modelling is an analytical method used by procurement teams to independently calculate what a product or component ought to cost, based on its constituent materials, conversion processes, supplier overhead, and margin, without relying on a supplier's quoted price. In packaging, should-cost analysis provides a defensible cost benchmark that procurement teams use to negotiate with suppliers, evaluate quotes, identify cost reduction opportunities, and validate the commercial logic of packaging design decisions.
Why Should-Cost Modelling Matters in Packaging Procurement
Packaging spend is a significant and structurally opaque cost line. For a mid-size FMCG company, packaging typically represents 10-40% of total COGS depending on category, yet most procurement teams negotiate it without independent cost visibility.
The consequence is predictable: supplier margins are higher than they need to be, and procurement has no analytical basis to challenge them. When a supplier quotes a 12% price increase citing raw material inflation, the procurement team without a should-cost model has two options: accept it or push back on instinct. Neither is a defensible commercial position.
Should-cost modelling changes this dynamic fundamentally. With a credible should-cost analysis for packaging, procurement can interrogate a supplier's cost build-up component by component, material grade, conversion efficiency, overhead allocation, margin, and negotiate from a position of genuine knowledge rather than informed guesswork.
Where Cost Leakage Concentrates
In packaging procurement, cost leakage is not distributed evenly. Based on Packfora's work across FMCG and consumer goods clients, the highest-concentration leakage points are:
- Supplier margin on short-run SKUs: Suppliers routinely apply standard-volume margins to low-volume runs, where their actual overhead recovery is significantly higher. Should-cost models surface this by modelling run-length-adjusted conversion costs.
- Material specification over-engineering: Brands frequently specify material grades, weights, or finishes that exceed functional requirements, driven by legacy specs rather than current performance data. A spec-driven cost modelling approach identifies where specification is adding cost without adding value.
- Payment terms and inbound logistics bundling: Suppliers often embed premium recovery for extended payment terms and complex inbound logistics into unit prices rather than itemising them. Should-cost models unbundle these to reveal true manufacturing cost.
- Currency and commodity hedging passed through at full cost: In international supply chains, suppliers may pass through hedging costs in full even when the brand's payment terms do not warrant the exposure they are being charged for.
Procurement insight:
McKinsey analysis of industrial procurement functions found that should-cost modelling consistently delivers negotiated savings of 5–15% on complex category spend. For packaging, where supplier relationships are long-standing and quote comparison is the primary negotiation tool, the savings potential is often at the upper end of that range
The 5-Step Should-Cost Modelling Process for Packaging
The methodology below applies across pack formats, flexible, rigid, corrugated, glass, and secondary packaging. The data inputs vary; the analytical logic is consistent.
- Deconstruct the Packaging Component into Cost Elements
Begin by breaking the packaging component into its constituent cost elements: primary material (substrate, weight, grade), secondary materials (inks, adhesives, coatings), conversion process (print method, forming, assembly), packaging of packaging (master cartons, palletisation), and supplier overhead and margin. This deconstruction is the foundation, a should-cost model is only as accurate as the cost architecture it is built on. - Source Independent Material Price Benchmarks
Material cost is typically 40–65% of total packaging cost. Independent commodity pricing data, resin indices for plastics, pulp price benchmarks for paper and board, aluminium spot prices for foils, provides the anchor for material cost modelling that does not depend on supplier disclosure. The key discipline here is using the correct grade specification: modelling virgin LDPE when the supplier is quoting on a 30% PCR blend will produce a meaningless benchmark. - Model Conversion Costs Against Production Parameters
Conversion cost modelling requires production parameters: machine speed (units per hour), run length, changeover time, scrap rate, and energy cost per unit of output. These inputs allow the analyst to calculate a machine-hour cost and apply it to the component's specific process requirements. For complex packs with multiple conversion steps, a laminated flexible pouch, for example, each step is modelled separately and summed. - Apply Overhead and Margin Assumptions
Supplier overhead (SG&A, depreciation, factory burden) and margin are typically modelled as a percentage of manufacturing cost. Industry benchmarks suggest that for packaging manufacturers, overhead allocation ranges from 15–25% of manufacturing cost, and target net margin from 5–15% depending on market and relationship. Packfora's Packfora's packaging procurement service incorporates supplier-specific margin intelligence built from active market engagement, allowing benchmarks to reflect actual category dynamics rather than published averages. - Validate the Model Against Market Quotes and Stress-Test Assumptions
A should-cost model is a hypothesis until it is tested. Run competitive RFQ processes alongside model development and compare received quotes against your modelled should-cost. Systematic variances, where all suppliers quote significantly above model, indicate either a model input error or a genuine structural cost that the model has not captured. Variances where one supplier quotes close to the model confirm the model's validity and identify the preferred supplier. The design-to-value cost engineering process applies the same logic at the design stage, stress-testing cost assumptions before tooling commitments are made.
Tools and Data Sources for Packaging Should-Cost Analysis
The right should-cost modeling tools for packaging procurement fall into four categories. What matters is not which specific platforms you use, but that each category is covered in your analytical stack:
Commodity Price Databases
Independent indices for resin, pulp, board, aluminium, and glass pricing provide the material cost anchors that make a should-cost model credible. These are available through commodity exchanges, trade associations (ICIS, RISI/Fastmarkets for pulp and paper, CMAI/IHS for polymers), and specialist packaging market intelligence providers. Subscription access to at least one current commodity index is non-negotiable for serious should-cost work.
Spreadsheet-Based Cost Build-Up Models
For most procurement teams, the primary modelling tool is a well-structured spreadsheet, with material cost modules, conversion cost calculators, and sensitivity analysis built in. The value is not in the tool's sophistication; it is in the rigour of the cost architecture and the quality of the input data. A poorly-populated advanced platform delivers less insight than a well-maintained spreadsheet model.
PLM and Specification Management Systems
Packaging specification data, substrate weights, print colours, coating types, feeds directly into should-cost inputs. Teams that have invested in structured specification management systems can pull this data accurately and consistently. Teams working from spreadsheet specs will introduce variability at this stage.
Supplier Benchmarking and Market Intelligence
Competitive RFQ data, supplier audit outputs, and market rate cards from active procurement processes provide the ground-truth validation layer. Should-cost models built entirely from published indices and theoretical inputs are less reliable than those calibrated against live market data.
Packaging Cost Driver Reference Table
The table below maps the primary cost drivers in packaging should-cost analysis to their key variables and procurement implications:
| Cost Driver Category | Key Variables to Model | Procurement Implication |
|---|---|---|
| Material | Raw material grade, recycled content %, certifications (FSC, food-grade), commodity market index | Accounts for 40–65% of total packaging cost in most FMCG categories. The highest-leverage driver for should-cost analysis. |
| Conversion | Manufacturing process, machine speed, tooling depreciation, scrap rate, energy cost per unit | Varies significantly by substrate and run length. Short runs (under 50k units) can double effective conversion cost vs. high-volume equivalents. |
| Packaging Design Complexity | Number of colours, substrate layers, print process (offset, flexo, digital), structural complexity, finish type | Design decisions made at brief stage can add 15–30% to unit cost. Evaluated via the design-to-value lens before tooling commitment. |
| Supplier Overhead & Margin | Factory overhead allocation, SG&A, profit margin, payment terms premium | Typically 20–35% of quoted price. The primary negotiation target once material and conversion costs are independently benchmarked. |
| Logistics & Inbound | MOQ-driven freight cost, import duties, lead time buffer, packaging-in-packaging waste | Often excluded from cost models. For India-based brands sourcing internationally, inbound logistics can add 8–15% to landed unit cost. |
| Compliance & Certification | EPR registration costs, recyclability testing, food-contact compliance (FSSAI, EU FMR), sustainability certification fees | A growing cost line as regulatory requirements expand. Should be modelled as a fixed overhead allocation across compliant SKUs. |
Common Mistakes Procurement Teams Make with Should-Cost Models
Using the Model as a Target Rather Than a Benchmark
Should-cost models produce a theoretically achievable cost, not a guaranteed price. Teams that enter negotiations with should-cost as a fixed demand, rather than an analytical anchor for discussion, damage supplier relationships without improving outcomes. The model informs the negotiation; it does not replace it.
Modelling at Commodity Spot Price Rather Than Contracted Rate
Commodity indices reflect spot market pricing. Suppliers typically buy materials on contracted terms that may be above or below spot, depending on their purchasing sophistication and forward cover position. Should-cost models that use spot price without a contracted-rate adjustment can be systematically wrong in either direction.
Ignoring Run-Length Effects on Conversion Cost
Conversion cost per unit is not linear with volume. The relationship between run length and unit cost is steep at low volumes and flattens significantly above threshold quantities that vary by process. A model built on high-volume conversion assumptions applied to short-run SKUs will understate achievable cost, and produce an unwinnable negotiating position.
Building the Model Once and Not Maintaining It
A should-cost model reflects a point-in-time view of material prices, conversion economics, and supplier market conditions. Models built 18 months ago and not updated for commodity cycles, energy cost shifts, or changes in supplier capacity are liabilities rather than assets. Should-cost modelling is a recurring process, not a one-time project.
Failing to Connect Should-Cost to Specification Review
The most powerful use of should-cost analysis is upstream, at the design and specification stage, rather than downstream in supplier negotiation. When should-cost analysis reveals that a design decision (an additional print colour, a higher-grade laminate, a non-standard structural form) adds disproportionate cost for marginal functional benefit, the correct response is to change the specification, not to negotiate harder on the inflated cost base.
Frequently Asked Questions
What is should-cost modelling in packaging?
Should-cost modelling in packaging is an analytical method used by procurement teams to independently calculate what a packaging component ought to cost, based on raw materials, conversion processes, supplier overhead, and margin, without relying on the supplier's quoted price. The resulting should-cost figure is used as a negotiation benchmark, a design validation tool, and a basis for supplier performance assessment.
How do you build a should-cost model for packaging?
The process has five steps: (1) deconstruct the packaging component into cost elements, material, conversion, overhead, margin; (2) source independent material price benchmarks from commodity indices; (3) model conversion costs using production parameters such as machine speed, run length, and scrap rate; (4) apply overhead and margin assumptions based on category benchmarks; and (5) validate the model against competitive market quotes. The model is then used as an anchor in supplier negotiations.
What data do you need for packaging should-cost analysis?
The key data inputs are: commodity pricing indices for the relevant substrates (resin, pulp and board, aluminium, glass); full packaging specifications including substrate weight, print specification, and structural format; conversion process parameters (machine speed, run length, scrap rate); and supplier overhead and margin benchmarks for the category. Specification data quality is often the limiting factor, teams without a robust specification management system will find should-cost inputs variable and time-consuming to compile.
How does should-cost modelling reduce packaging procurement costs?
Should-cost modelling reduces packaging procurement costs through three mechanisms: it provides a defensible analytical basis for supplier negotiation, typically delivering 5–15% savings on benchmarked spend; it identifies where design decisions are adding cost disproportionate to functional value, enabling specification changes that reduce the cost base rather than just negotiating margin on an inflated one; and it creates transparency on commodity cost pass-through, allowing procurement to challenge price increases that exceed actual input cost movements.
Packfora works with procurement teams at FMCG and consumer goods companies to build and apply should-cost models across packaging categories. If your team is operating without cost visibility on a significant packaging spend category, speak with the Packfora team to understand how structured cost modelling can change the commercial dynamics of your supplier relationships.
