What is Cost Modeling?

Cost modeling is a strategic tool used to analyze the price movements of key cost drivers and monitor their impact on the finished products or services. It enables an organization to identify cost saving opportunities and optimize their procurement spend.

Steps involved in developing a cost model in organizations include analyzing purchases and categorizing them to understand the spending patterns,  identifying and estimating various cost components, using cost drivers, building supplier-level cost models, and generating item-level cost tables.

Cost modeling provides various benefits including improved profitability, informed decision-making, effective negotiation strategies, and managing operating expenses.