cost transparency in supply chains

8/13/2019 Cost TransparenCy in Supply Chains

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SUPPLY CHAINS

Andreas Hofan/Sebastian Lührs/Anja Kolburg*

COST

TRANSPARENCY

IN

SUPPLY

CHAINS

:D EMYSTIFICATION OF THE C OOPERATION TENET * *

A BSTRACT

Recent studies on open-book accounting ocus mainly on the unctions and conse-quences, di iculties, and determinants o interorganizational cost management.Research is also generally based on case studies. To o er a new direction, we seek todetect and systematize applications o open-book accounting. We ollow a qualita-tive approach to analyze why and how open-book accounting is being used in prac-tice. Data were obtained rom 59 interviews conducted with purchasing experts andanalyzed through content analysis. We ind that, besides being used or interorga-nizational cost management, open-book accounting is used in price management.This includes increasing negotiation pressure on a supplier. Based on this inding, wedevelop a ramework to systematize di erent open-book accounting uses accordingto both underlying motives or cost transparency and purchasing strategies.

JEL-Classi ication: M11, M41.

Keywords: Cost Transparency; Interorganizational Cost Management; Open-bookAccounting; Supplier.

1 I NTRODUCTION

Companies across industries must consistently improve their production processes andreduce costs. While ocusing on their core competencies as a means o competitive advantage (Prahalad and Hamel (1990)), companies are increasingly trying to gain access tosuppliers’ capabilities (Barney (1999)) and purchase goods and services that have previ-ously been provided or in-house. As a result, a company’s competitive advantage is basenot only on its own capabilities but also on its suppliers’ abilities to a high degree (Arnold(2000)). Since in many cases cost reduction programs have already tapped most opportu-

* Andreas Ho jan, Pro essor at echnical University Dortmund, Chair o Accounting and Management Control

Otto-Hahn-Str. 6a, D-44227 Dortmund, Germany, e-mail: andreas.ho [email protected]. Sebastian Lührs. Anja Kolburg, echnical University Dortmund, Chair o Accounting and Management Control, Otto-Hahn-Str. 6a,D-44227 Dortmund, Germany, e-mail: [email protected].



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nities or cost reductions within any single corporation, today’s efforts to improve compet-itiveness must adopt a supply-chain perspective and include both suppliers and customers.

In this context, the existing literature suggests that companies set up aninterorganizationalcost management(IOCM) that requires suppliers and customers to nd ways to collabora-tively reduce costs. Mutual dependence, trust, and extensive in ormation-sharing betweenthe corporations involved have been identied as prerequisites or an IOCM to work(Cooper and Slagmulder (2004)).

In ormation-sharing not only assumes distributing supply and demand in ormation acrosssupply chain members but, also includes sharing sensitive cost in ormation, which isusually kept secret by any company (Kajüter and Kulmala (2005)). Intuitively, providingsuch sensitive data within anopen-book accounting (OBA) agreement (Hofan and Kruse

(2006)) requires the expectation o cooperative behavior rom the supply-chain partnerand trust between those companies involved. Although many scholars underscore thepoint that cooperative and close supplier relationships are more advantageous than adver-sarial, arms-length relationships (e.g., Lamming (1993); Maloni and Benton (1997); Carrand Pearson (2002)), empirical observations indicate that in reality, supplier relation-ships are, in many cases, less cooperative than theory might assume (Cox (1996); Parkerand Hartley (1997); Gibbs (1998)). Te question remains as to what relevance OBAhas in a competitive environment that is not normally characterized by cooperative andtrusting relationships between suppliers and buyers. o answer this question, we gatherand categorize the practical uses o OBA on a larger scale. From this data, we derive anOBA ramework that systematizes uses, and which can also be seen as an implementationcornerstone for practitioners.

2 L ITERATURE REVIEW

Most publications on IOCM and OBA ocus on one o the ollowing pairs o issues:unctions and consequences or difficulties and determinants. Te established literature

also assumes the main unction o OBA is to support IOCM measures (e.g., Munday(1992); Axelsson, Laage-Hellman, and Nilsson (2002); Kulmala, Paranko, and Uusi-Rauva (2002); Dekker (2003); Cooper and Slagmulder (2004); Kajüter and Kulmala(2005); Agndal and Nilsson (2008); Piontkowski and Hofan (2009)). Accordingly, allrelevant publications indicate that cost transparency between customers and suppliers canlead to cost reductions. Another unction mentioned only occasionally is the justicationof prices and price changes. Carr and Ng (1995) provide an example in which a suppliersubstantiates a sales price increase with increases in raw material costs. Similarly, Sealet al. (1999) argue that the objective justication o prices and price changes based ontransparent accounting data may acilitate price negotiations. Such “legitimate changes”may also include increased xed cost allocations resulting rom a reduced sales volume(Agndal and Nilsson (2009)). Te improvement o the relationship (Carr and Ng (1995))and the creation of trust between the customer and the supplier (Seal et al. (1999)) havebeen identied as consequences rather than as unctions o OBA. Finally, Dekker (2003)suggests that OBA may also serve to improve the company’s management accounting.



A. HOFFJAN/S. LÜHRS/A. KOLBURG

Another ocus o research is the inherent difficulty associated with OBA. Becausepurchasing costs equal supplier revenues, the use o OBA might also lead to increased

margin pressure on the supplier. By knowing the suppliers’ cost structures, customers canmake use o this knowledge during price negotiations (Dekker (2003)). Although theestablished literature presents some examples that suggest open-book agreements do notreduce supplier margins (“we don’t erode their prot margin – only their costs” Carr andNg (1995)), there is considerable evidence that companies use OBA to the disadvantageo the supplier (e.g., Munday (1992); Lamming et al. (2001); McIvor (2001); Seal, Berry,and Cullen (2004); Lamming et al. (2005)). In terms o price pressure on the supplier,a certain aspect o using OBA addresses per orming cost benchmark analyses betweendifferent suppliers and basing price negotiations on a theoretical optimal cost structure(Hofan and Kruse (2006)). Kajüter and Kulmala (2005) explicitly mention bench-

marking as a potential reason or ailure o OBA practices. Other researchers mentionconcerns regarding the potential circulation o data to competitors to induce them tolower quotes as a urther difficulty o OBA (e.g., Lamming et al. (2005); Free (2008)).

Another conict arises regarding the distribution o benets rom IOCM projects betweenthe companies involved. In many cases, it is the more power ul company that can extracmost o the benets (Cooper and Slagmulder (1999)), a position usually assumed tobe held by the customer (McIvor (2001); McIvor and Humphreys (2004); Kajüter andKulmala (2005); Lamming et al. (2005)). Suppliers can o ten only try to make use o thcost reductions in other customer relationships (Ellram (2002)).

Tere might also be operational implementation obstacles attributable to OBA. Even i asupplier is generally positive about opening up his books to his customer, OBA may ailbecause relevant accounting data are not readily available to the supplier himsel (Seal et al(1999); McIvor (2001); Kulmala, Paranko, and Uusi-Rauva (2002); Kajüter and Kulmala(2005)). A similar issue occurs i data cannot be sensibly analyzed due to differences inaccounting systems between the companies involved (McIvor (2001); Kulmala, Paranko,and Uusi-Rauva (2002); Kajüter and Kulmala (2005)) or because the organization lacks(capable) personnel with the capacity to per orm the analyses (McIvor and Humphreys(2004); Kajüter and Kulmala (2005)). Additionally, interorganizational cost models mightsimply be too complex and thus heavily impede cost analyses ( omkins (2001)).

Caglio and Ditillo (2008) mention the intentional exchange o manipulated data asan issue not yet covered in the established literature. Indeed, there is only very limitedcoverage o this problem. Both Lamming et al. (2001) and Lamming et al. (2005) statethat such behavior is rational and must be expected rom any supplier as long as the in ormation ow is only one way.

As we have noted, the primary ocus o previous research has been thedeterminants oOBA, especially within the context o the underlying relationship between the supplierand the customer. Cooper and Slagmulder (2004) investigate what IOCM techniquesrms use in the process o product design, depending on the relationship observedbetween the companies involved. Similarly, Kulmala (2004) analyzes the impact o powertrust, and mutual business volume on the development o an IOCM. Dekker (2004)

l h l d h d i l l h i h



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control o interorganizational relationships and the prevention o opportunistic behavior.Möller and Isbruch (2008a) show that IOCM has a positive impact on corporate success

i certain relationship conditions are met. Focusing less on the type o relationship, Agndaland Nilsson (2009) investigate the different stages of exchange processes as determinantso IOCMs. Tey nd that IOCM collaboration is strongest in the early phases o anexchange relationship, such as during supplier selection and product development. Sealet al. (1999) discuss the constitutional role o OBA or the development o strategicpartnerships.

Te role o trust as an integral determinant in the introduction o OBA has receivedconsiderable attention in the literature. Many scholars regard a trusting relationship as aprerequisite to introducing OBA (e.g., Carr and Ng (1995); Ellram (1996); Mouritsen,

Hansen, and Hansen (2001)). omkins (2001) assumes the need or a long-term rela-tionship between companies as a requirement to exchange sensible data. Kulmala (2004)and Seal, Berry, and Cullen (2004) argue that the absence o trust is a key determinantin open-book ailure. rust has thus been considered both a prerequisite and a conse-quence o OBA. Dekker (2003) as well as Kajüter and Kulmala (2005) try to solve thisconict by stating that there must be a minimal level o trust be ore cost in ormationcan be exchanged, and then, further increases in trust are made possible.

Another determinant o OBA discussed is the existence o commitment devices, or which the mutual disclosure o cost in ormation has received the most attention (e.g.,Seal et al. (1999); McIvor and Humphreys (2004)). Lamming (1993) states: “Costtransparency is o no value […] unless it is two-way”. Interdependence between thecompanies involved has also been identied as a commitment device (Cooper and Slag-mulder (2004)), as has the threat o loss o reputation as a consequence o opportunisticbehavior (Dekker (2003)). Piontkowski and Hofan (2009) show that the offer o arelationship-specic investment can also serve as a commitment device that increasesthe partner’s willingness to engage in OBA. Aside rom commitment devices, positivenancial incentives, such as a air division o benets, can help to increase the will-ingness to introduce OBA. A long-term contractual obligation or increased purchasevolumes may also serve as nancial incentives (e.g., Carr and Ng (1995); Cooper andSlagmulder (2004)).

Tese determinants of OBA inuence the willingness to engage in OBA through posi-tive incentives or trust-based mechanisms. But scholars also mention the impact opower asymmetry. “O course, open-book relations may not be based on partnershipand trust but may be forced ” (Seal et al. (1999)). Similar observations have been madeby Carr and Ng (1995) and Seal, Berry, and Cullen (2004). In this context, Kajüter andKulmala (2005) argue that power-induced OBA cannot sa eguard a reduction o supplychain costs. O ten enough, it will be difficult to decide i a certain behavior originates

rom power or rom other inuences, such as a trusting relationship (Seal, Berry, andCullen (2004)).




3 R ESEARCH

3.1 R ESEARCH O BJECTIVES

Our key objective in this paper is to present a ull picture o why and how rms useOBA. Tus, we not only include an analysis o the actual uses o cost transparency incustomer-supplier relationships, but also examine the importance o those determinantsfor inuencing the interorganizational use of accounting data.

We analyze the common assumption that OBA can only work in a trusting relationshipin greater detail. Given that business relationships are usually not likely to be charac-terized by high levels o trust and cooperative behavior between all parties involved,

the trust prerequisite would severely limit the application range o cost transparency.In such a context, we ask what relevance the power structure between the companieshas rom a practitioner’s point o view. We also examine the potential manipulationo data that does not t with cooperative relationship theory. Given that such invaliddata will impede using OBA as planned, rms will need mechanisms to cope with thisdifficulty.

3.2 R ESEARCH DESIGN

We use a qualitative research design supplemented by quantitative analysis. We do sobecause the research objectives dened above require incorporating a broad range o experiences and opinions from practitioners and given that OBA research can still be consid-ered immature.

We set up a three-tiered design that allows us to evaluate all o the aspects indicated aboveFirst, we consider that expert interviews are the appropriate research approach (Scholl(2003)). Second, we analyze this data and mirror the main results to the interviewees romPhase One. We accomplish this task by using an online questionnaire that we designed toeither affirm or contradict the results obtained rom the interviews and to allow or certainquantitative analyses. From a total o 59 interviewees, we received 46 completed questionnaires. Te insights gained from these two steps are the main topic of this paper.

Our third step was to take into account the reverse perspective. o support the results,especially or data manipulation, we conducted 18 interviews with sales experts. Due tothe sensitive data contained in this study, we could not set up a complete dyadic design

with a matched sample. Instead, we contacted sales experts through a business commu-nity website (XING AG (2009)1 ) and not those who were suppliers to the interviewedcustomers. We use the data retrieved rom the third step to validate our results romresearch Phases One and wo, but do not present the results separately, since we wish to

1 XING is a predominantly German, web-based portal, through which mainly business contacts can be acquired



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keep the paper ocused on OBA uses2 . Table 1 summarizes objectives and data evaluationmeasures applied in Phases One and wo.

Table 1: Research design summary

Expert Interviews Online Questionnaire

Objectives Comprehensive discussion o thederived questions regardingopen-book accountingIdentication o exceeding approaches

°

°

Quantitative validation andcontrasting o interview resultsSupplemental identication oexisting relationships

°

°

Data Collection 272 interview inquiries59 qualitative, open interviewsAverage interview duration:53 minutesWritten record o interviews

°

°

°

°

Inquiries with 57 o 59 expertsrom interviews with standardized

questionnaire46 completely lled inquestionnaires returnedEstimated time or completion:10 minutes

°

°

°

Data Evaluation Classication o statements incategories and analysis o answerpatternsAs ar as possible, quantitative aggrega-tion and analysis o answer requencies

°

°

Statistical analysis with SPSS°

Starting in Phase One, we set up interview guides to structure the interviews and toensure the comparability o different expert statements during the analysis phase. Becausemost o the problems arising in the context o OBA are due to some kind o opportu-nistic behavior on the customer side, we targeted purchasing experts or participation inthe research project. We based our recruiting o interview partners on personal contacts,re errals rom interview partners, and cold-calling relevant experts identied based ontheir personal proles on the XING business network. We recruited more than 90% oall interview partners rom the business community website. o ensure that the inter-views contained the whole spectrum o opinions, experiences, and ideas on OBA romthe customer perspective, we set no constraints or requisitions or potential interviewpartners, except or practical knowledge in the eld o strategic purchasing. o broadenour ocus, our sampling was aimed at representing all industries and company sizes in

which OBA is o importance. Whereas ormer studies mostly chose an industry-specicocus (e.g., Carr and Ng (1995); Free (2008); Möller and Isbruch (2008b)), obtaining a

cross-industry sample was also important, since our research targets the identication odifferent ways in which OBA is used. Following Patton (2002), our selection o interviewcandidates aimed at securing a broad range o perspectives on the subject. Tere ore, wedid not choose purchasing experts based on their knowledge about OBA, but only on




their general purchasing experience. We also stated explicitly that persons not amiliar withOBA should also take part in the research project. We identied 272 potential interview

partners who met these specications and contacted each one with an interview request. We conducted interviews until a point o saturation, such that additional interviews didnot yield any further insights (Kvale (1996)). o discern this point, only one interviewerled all interviews and kept a record o main aspects mentioned. Furthermore, our inter-view design ensured that the sample also met the criterion o inner representation, under

which the sample had to contain both different as well as typical cases (Helfferich (2005))Tis requisite was ensured by including different industries and company sizes, as statedin Figure 1. In comparison to other qualitative research concerned with OBA, the realizedsample can be seen as fairly large (e.g., Kajüter and Kulmala (2005); Agndal and Nilsson(2010)).

Figure 1: Purchasing expert interviews: Sample

Number of interviews

* Consulting, Consumer products, Telecommunications, Energy & Utilities, Transportation, Defense

59

Others*

Technology

Industry SalesCategory (€M)

Position Interviewduration (min)

IndustrialMachinery

Automotive

PurchasingManager

Purchasingdirector

Specialist cost analysis/cost reduction

Management consultant

Chemicals &Healthcare

0

20%

40%

60%

80%

100%59

> = 5,000> = 60

45 – 59

30 – 44

1,000 – 4,999

500 – 999

100 – 499

< 100

59 59

Since the exchange o cost in ormation is a sensitive subject or potential interviewpartners and because experience rom ormer research projects shows that willingnessto provide in ormation is generally low, we decided to conduct the interviews withoutrecording them. Although tape recordings are common in the social sciences (Scholl(2003)), they can and should be avoided if the interview partner has reservations againstsuch a recording or will re use to take the interview (Yin (2003)). Because there was noneed to analyze the wording in detail, the omission o tape recordings was consideredappropriate.

Despite the act that qualitative interviews in social sciences are generally held in person(Sturges and Hanrahan (2004)), we base our research on expert interviews conducted



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on the phone. We chose this approach or a variety o reasons. Tere is only limitedevidence regarding quality differences between telephone and personal interviews (Sturges

and Hanrahan (2004)). However, in the context o sensitive questions within qualitativeinterviews, Sturges and Hanrahan (2004) identi y advantages or telephone interviews.Scholl (2003) asserts that, due to the more anonymous interview situation, statementsin a telephone interview are more likely to be genuine than during personal interviews.

Another advantage o telephone interviews is the easier access to relevant experts (Fenig etal. (1993)). Moreover, the willingness to be interviewed has been shown to be higher ortelephone interviews (Sturges and Hanrahan (2004)). Further, many scholars acknowl-edge the higher cost efficiency o telephone interviews compared to personal interviews(e.g., Frey (1989); de Leeuw, Mellenbergh, and Hox (1996); Scholl (2003); Sturges andHanrahan (2004)).

Between December 2008 and March 2009 we interviewed individuals rom large andmedium-sized companies. Tese individuals either had purchasing backgrounds or werepurchasing managers. Each o the 59 interviews lasted between 30 and 90 minutes (average= 53 minutes). Te reason or including so many experts was to not only comprehensivelyexplore the research subject, but also to identify uncommon applications of OBA and toallow for some quantitative analyses.

Te subjects o the online questionnaires were the assessment o supplier relationships andthe willingness to disclose cost in ormation, intention, and ocus o disclosure, rom thepurchaser perspective, as well as the conditions and effects o disclosure. Answer categoriesincluded either assessment o the importance o certain items or approve/disapprove state-ments. Aside rom one question, or which items had to be ordered by their importancein a orced ranking, we used a ve-stage Likert scaling. Te sample o purchasing expertsfrom Phase One is composed of the returned questionnaires (80.7%).

When the interviews were completed, we analyzed each interview and reported theresults to the original interview partner with a request that they complement and validateresults.

3.3 A NALYSIS AN D E VALUATION

We analyzed the interview transcripts using content analysis (Mayring (2008)). Wecombined qualitative analyses with quantitative measures, such as taking answer requen-cies as an indicator o relative importance o certain items. Based on the detailed researchquestions that were the oundation o the interview guides, we set up an initial categoryscheme and, ollowing Gläser and Laudel (2009), we constantly updated the scheme when content analysis yielded additional content that had not yet been included. Answer(sub-)category values were mostly dichotomous (mentioned/not mentioned) but alsoincluded reely phrased answers. We describe our ramework deduction as a “counter-current process”: rst, we derived our categories top-down rom the established literatureand then rened them during the coding process.




As noted above, we validated the results rom the interviews through an online ques-tionnaire. We evaluated the answers statistically using SPSS 16. Te measures we use

are requencies, correlations between individual variables, and differences in the meanvalue o individual variables depending on the value o an independent variable (one-wa ANOVA).

We evaluated the analysis according to the criteria Krippendorff (2004) species for reli-ability: stability, reproducibility, and accuracy. o address stability, one author coded thedata twice. However, the second coding process could not veri y the rst coding satis-

actorily because classications or purchasing strategies and the key motivations o theinterviewed experts varied. Tis deviation also made the derived ramework questionableand led us to build a new framework based on the results of the second coding. o assess

the new ramework, we applied reproducibility by recoding the material with a secondauthor who had not thus ar been involved in the research. Tis recoding resulted in highcongruence with the second coding, with classication varying only up to 10%. Tus,

we were able to conclude that the reliability criterion was sufficiently ullled. Accuracymeasures could not be applied because the objective standards against which our analysismight be tested are not available.

Applying validity measures, we used the test criteria suggested by Gibbert, Ruigrok, and Wicki (2008): internal, construct, and external validity. Te topic o this paper can be seenas exploratory, and causal relationships are not our main ocus. Because o this aspect an

ollowing Yin (2003), the problem o internal validity is only o secondary importance.Nevertheless, disruptive actors that cannot be controlled may impact the results, e.g., datacollection occurred during the nancial crisis o 2008/2009. Te techniques we use toensure construct validity include establishment o a clear chain o evidence and triangulation (Gibbert, Ruigrok, and Wicki (2008)). Te chain o evidence in our study is basedon qualitative statements o persons interviewed and is supported by quantitative analysisof the respective subject, which makes it easy to understand. Additionally, we conrmedinterview results through a standardized survey and subsequently supplemented it by acomplete change o perspective, when we took the supplier perspective into account.Construct validity can be seen as partly ullled. Due to the applied research design,a statistical generalization o results, which would allow drawing in erence conclusionsabout a population, is not possible (Gibbert, Ruigrok, and Wicki (2008)). Te presentedsample is comparatively large or a qualitative study; thus, we can derive certain conclu-sions regarding patterns in the basic population. Te analysis o answer requency, as weapplied it, is seen as a good possibility to conrm qualitative impressions (Dubois and

Araujo (2007)). On all accounts, analytical generalization or this study is possible. Webrought together experiences and opinions o a multitude o experts, contrasted those andexplored them for similarities.



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4 E MPIRICAL O BSERVATIONS

4.1 P URCHASING PERSPECTIVES ON OPEN - BOOK ACCOUNTING

W IS H FO R COS T TRANSPARENCY AN D CURRENT DIFFUSION

Our analysis shows that OBA is highly relevant in today’s purchasing world: 91% of ourinterviewees state that they would like to have transparency regarding their suppliers’costs, which indicates that they expect distinct advantages rom the use o OBA. However,purchasing managers obviously expect that advantages primarily accrue to the customer.On the question o willingness to provide cost in ormation to their customers i they

were in the supplier’s position, only 30% answered they would do so in any case. Another

50% stated they would decide case by case whether to provide such data, and 20% clearlyindicated they would try to avoid cost transparency as a supplier.

We nd that one third o the managers interviewed do not have any transparencyconcerning their suppliers’ costs, but 26% state that they do have some kind o cost-basedview or more than 50% o their purchase volume. Industry analysis shows that there isconsiderable difference between industries. Te automotive and technology industries havethe highest levels o transparency. Some automotive purchasing experts even state that theyhave cost transparency or their total purchasing volume. Purchasing experts who useOBA o ten require their suppliers to provide cost in ormation through so-called suppliercost breakdown orms that differ in structure and in level o detail, but usually providecost in ormation or every component o the bill or materials, including both materialsand production costs and the cost o items that comprise them. Moreover, overhead costsand prots are usually explicitly mentioned.

We nd that sharing customer cost in ormation with suppliers is the exception. Althoughthe customer o ten has detailed knowledge about suppliers’ costs and prots, the supplier ingeneral does not have such knowledge. Obviously, the risk prole or such a unidirectionalexchange o cost in ormation is heavily weighted toward the disadvantage o the supplier.

Previous research indicates that the primaryreason for cost transparency is to reduce costsin the course of IOCM. But our interviews draw another picture. Te reason mentionedmost o ten is sa eguarding an optimal price by improving the own negotiating position(seeFigure 2 ). In this context, a potentially positive impact on the supplier’s cost structureis not targeted by purchasing managers with OBA, but o ten, managers seek to avoidundue supplier margins.




Figure 2: Customer reasons for cost transparency

0

10

20

30

40

50

41

25

12

53

9

Number of responses(multiple answers possible)

0

10

20

30

40

50

41

25

12

53

9

Number of responses(multiple answers possible)

Identificationof cost reduction

opportunities

Safeguardingoptimal prices/

management ofprice changes

Risk-management

Disclosingsupplier

calculationerrors

Developmentof cost-efficient

products

Others

“ he reason or cost transparency is to realize an optimal purchase price. […] We use supplier cost information as a basis for price negotiation.”

Purchasing manager, automotive OEM

“O course we make sure that the supplier’s prot margin is adequate, even i he offers thlowest price. It must not happen that he has too large a prot margin.”

Purchasing manager, manufacturer of dental produc

Te interviewees clearly expressed a desire or increased negotiation pressure on suppliersprices. However, in some situations, negotiations may also be acilitated through OBA.Tis relation is true if cost transparency helps to justify supplier price increases.

“Cost transparency is important to understand i supplier price increases are justied. Youdon’t want to pay too much, but you don’t want to knock him down either.”

Purchasing manager, plant construction compan

Even though OBA might support suppliers’ arguments or cost increases or which theyare not responsible, suppliers must be aware that o ten even justied price increases arenot accepted by customers. A purchasing management consultant describes the situationas ollows: “Tink o the situation where a customer orders less than the planned volume, which leads to idle capacity at the supplier. I now the supplier tries to put through priceincreases based on resulting increased xed cost allocations, the customer does not necessarily accept those. Business simply is not fair! Cooperation romance is not real!”



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Aside from using OBA to improve one’s own negotiation position, purchasing managersalso try to identi y and implement cost reduction opportunities through cost transpar-

ency, which is the second most o ten mentioned reason. In general, the identication osupplier cost disadvantages either results rom benchmarking analyses carried out betweensuppliers, or by comparing supplier cost in ormation with industry benchmarks. Anotheruse o cost in ormation in terms o cost reductions is to develop cost-efficient products.Trough cost transparency, purchasing managers may be able to determine why a newlydeveloped product has certain costs based on the specications given and what cost reduc-tions can be expected through product design changes.

Although the reasons mentioned thus ar have all been discussed at some stage in the estab-lished literature, a unction o OBA that has not yet been covered is its use in supporting

risk management. Customers gain insight into, and are able to evaluate, supplier prot-ability to avoid insufficient protability levels o the supplier, who then might be orcedto increase prices at a later stage in the exchange process or simply not deliver. In addition,disclosing supplier calculation errors can be regarded a means o risk management, whichhas been mentioned by the interviewees as a separate factor.

VALIDITY OF COS T INFORMATION

Because suppliers may manipulate cost in ormation disclosed to their customers, we askedthe interviewees i they believed the cost in ormation their suppliers provided them wastruth ul. Indeed, 89% o the interviewees stated they do not believe the in ormation, andin general critically question their suppliers’ cost in ormation. Purchasing experts havedeveloped a variety o approaches to veri y the cost in ormation they get. In most cases,purchasing experts try to set up a so-called “shadow calculation” in which they calcu-late estimated costs or the product based on their own business knowledge and on thedata available from reliable public sources or company les. However, we found stronglyvarying levels o sophistication in this approach. While in the lowest orm managers couldmake only a rough estimation o certain cost positions based on personal knowledge, inmore advanced cases purchasing experts make use o highly sophisticated so tware solu-tions that include comprehensive and regularly updated cost data on a variety o processesand materials. In this context, large corporations as well as companies in the automotiveindustry are more sophisticated than others.

IMPACT OF POWER AN D RELATIONSHIP CONTEXT

As noted above, many scholars consider a trusting relationship as a prerequisite or OBA.Our research generally conrms that trust between a customer and supplier positivelyinuences the supplier’s willingness to engage in OBA and the validity o in ormationexchanged. Assuming that trust can only develop over the course o a long-term businessrelationship, we would expect that a supplier’s willingness to engage in OBA is greater inlong-term customer-supplier relationships. On the contrary, our results indicate that in

h i ’ i h lik lih d i i li i i




was greatest in new relationships (48% o respondents). Only 37% o the purchasingmanagers interviewed stated that OBA can be implemented more easily with older, well-

established supplier relationships. One reason or the expectation that cost transparency ismore easily implemented with new suppliers is that suppliers rom older, well-establishesupplier relationships may ear that customers will realize that they have been payingtoo high a price in the past, or suppliers may simply not be willing to change anythingthat has been working well or them in the past. Additionally, OBA is regularly made aprecondition or the award o a contract, which also avors new relationships. MakingOBA a precondition can be regarded as an application o power that underscores costtransparency. It is o ten not realized in the course o establishing trusting and coopera-tive relationships, but instead is forced. Forty-ve interview partners state that exercisingpower is relevant or supplier cost disclosure, but only 34 say that the relationship contex

is relevant. Te stronger ocus by practitioners on exerting power as a way to achievesupplier cost disclosure emphasizes the need to include this con rontational approach torealizing supplier cost data disclosure in academic research.

4.2 D EVELOPMENT OF AN OPE N - BOOK ACCOUNTING FRAMEWORK

Our research shows that purchasing experts not only use cost transparency to identi ycost reduction opportunities but also in terms o price management, and that by exertingpurchasing power supplier cost disclosure is realized despite the lack o trusting or cooperative relationships. Given that the uses and relationship backgrounds are highly divergent,

we expect to nd that there is not a single type o OBA, but that there are various typesthat need to be made explicit and arranged according to an OBA ramework. o do so,

we analyze the interviewees’ key motivation or cost transparency and compare this to thpurchasing strategy applied by those purchasing experts in the respective context. We ollowthe approach and complement the results o Agndal and Nilsson (2010), who analyze OBApractices or different purchasing strategies (transactional compared to relational).

P RIMARY MOTIVATION FO R OPE N - BOOK ACCOUNTING

We rst analyzed interview statements or their primary motivation or OBA in termso price or cost management orientation. As long as the interviewee gave motivations

or both cost and price management applications but no primary motivation could beclearly identied, we allocated the case to a third category between those o cost and pricmanagement. Table 2 provides an overview o statements that we used to identi y theinterviewees’ primary motivations or OBA, considering the respective interview contextthey were given.

Overall, we can state that the motivation or price management strongly outweighs themotivation or cost management. We identied price management as the key motiva-tion or 36 interviewees, but identied an explicit cost management ocus or only verespondents. Another seven interviewees cannot be clearly assigned to any single type o

i i ll h i i b i d



SUPPLY CHAINS

Table 2: Examples of statements used as a guideline for the classification of theprimary motivation for open-book accounting between price manage-

ment and cost managementPrimary motivation: price manage-

ment Primary motivation: cost management

“Reason is to realize an optimal price.” “Because you can only realize savings i you identi ywhere they are!”

“We want to understand the suppliers’calculations.”

“We must optimize product costs early in product devel-opment – to do so we de initely need cost transparency.”

“In order to snatch a better price!” “Identi y and realize savings opportunities: […]We might well do some engineering changes.”

“To validate plausibility o supplier priceincreases.”

“To understand and identi y cost drivers, such that wecan per orm product changes.”

“In the end, open-book accounting is onlyanother negotiation strategy.”

“Moreover, descriptions of how cost transparency is beingused in collaborative cost management projects.”

P URCHASING S TRATE GY APPLIED

We subsequently analyzed what purchasing strategy is being ollowed, i.e., whethermanagers tend to ollow a transactional or relational purchasing strategy with theirsuppliers, based on the comments of the purchasing experts. Analogous to our approachin determining the primary motivation or cost transparency, we analyzed statements withrespect to the purchasing strategy when con ronted with OBA. Again, a third categorybetween transactional and relational purchasing strategies was used in case both transac-tional and relational elements were identied without being able to disclose the primarilytargeted purchasing strategy.Table 3 gives example statements that we used to determinethe applied purchasing strategy.

Table 3: Examples of statements as a guideline for the classification of thepurchasing strategy between a transactional and relational approach

Transactional purchasing strategy Relational purchasing strategy

“We aren’t talking about airness!” “We are interested in collaboration based onpartnership.”

“You obviously have a di erent leverage.There are simply more starting points toany negotiation.”

“For us it is important to have long-term supplierrelationships.”

“Overall, cost transparency certainly resultsin pressure on supplier margins.”

“[Suppliers that disclose] will de initely receive moresales volume rom us, which gives them planningreliability as well as higher capacity utilization.”

“Whoever re uses to disclose is likely tobe shown the door.”

“It’s important the supplier has un working with us.”

“It is massively used in avor o the customer.[…] I’m not a riend o win/win-talk. How doyou think should that work?”

“We’d never take all the savings, but always aim ora win/win-situation.”



SUPPLY CHAINS

the most attention. Tis nding highlights that using cost transparency in terms o IOCM(type C OBA) cannot be regarded as the main goal o cost transparency rom a purchasing

practitioner’s perspective.

C ONSTITUTION OF OPE N - BOOK ACCOUNTING FRAMEWORK

Drawing on the purchasing strategy and the key motivation or cost transparency overall,Figure 3 illustrates the way in which we can differentiate the three uses o OBA, and in

what contexts we can expect to nd their applications.

Figure 3: Approaches to open-book accounting in relation to the key motivationfor cost transparency and purchasing strategy

Transactional Relational

Purchasing strategy

Type APrice pressure

Type BObjectification and facilitation of

price (change) negotiations

Type CInter-

organizationalcost

management

K e y

m o t i v a t i onf or

c o s t t r an s p ar en c yP

r i c e

m

a n a g em en t

C o s t

m a n a g em en t

Type APrice pressure

Type BObjectification and facilitation of

price (change) negotiations

Type CInter-

organizationalcost

management

Te ramework shows that cost transparency is not used just to support IOCM. On thecontrary, in many cases it becomes a means to increase pressure on supplier prices withinthe context o a transactional purchasing strategy. Moreover, we also see that o ten, OBAalso acilitates price negotiations by giving them an objective oundation. Tis applicationo cost transparency can be ound within both transactional and relational purchasing, buthas a somewhat more relational orientation.

For type C OBA, we can determine not only a strong ocus on cost management as akey motivation for cost transparency, but also as a strong force within a highly relationalpurchasing strategy context. Tus, we can state that true IOCM is indeed being per ormedon the basis of cooperative supplier relationships.




5 I MPLICATIONS

P RICE M ANAGEMENT IS G IVEN S UBSTANTIAL I MPORTANCE

Although accounting scholars thus ar have largely identied OBA as a means to supporICOM, we have ound that practitioners strongly value cost transparency to be used oprice management. In this context, researchers have identied both increasing negotiationpressure on the supplier and acilitating discussions on price changes as objectives o OBARamsay and Croom (2008) criticize the act that academic researchers perceive purchasingnegotiation approaches as having low importance, and argue that those bargaining activitiesmay well have strategic impact. Tis scholarly misconception o purchasing unctions andassociated purchasing approaches may be a reason why recent research has ocused so strong

on purely collaborative uses o OBA. Reality shows that increased price pressure is not onlypotential consequence o OBA that arises a ter cost transparency has been provided to allowor IOCM projects, but it o ten isthe key motivation or requesting cost in ormation rom

suppliers. I we accept this idea, then other aspects o OBA also require reconsideration.

D EMYSTIFICATION OF COOPERATION AND TRUST AS PREREQUISITES OF OPEN -BOOK ACCOUNTING

Te research we present here indicates that OBA may well be used in a trusting and coop-erative relationship. We have shown that cooperation in terms o IOCM indeed requiressuppliers and customers to ollow collaborative relationships. However, OBA is not limitedto such applications that necessarily benet both parties involved. Instead o trust, powerasymmetry has a signicant impact on the likelihood that a supplier will open his books tohis customers. rust cannot be sensibly expected in highly competitive (transactional), o tenadversarial business relationships, but OBA is still being used in those contexts – not toper orm IOCM projects but, more commonly, to increase negotiation pressure, which mayinclude the identication o potential cost disadvantages at the supplier. While the customerbehaves opportunistically with supplier cost in ormation or negotiation purposes, the suppliemay in turn manipulate his cost in ormation, thus also acting opportunistically. One mayargue that suppliers only do so to protect themselves, but they may also aim at realizing protmargins higher than those agreed upon with their customers (Hofan and Lührs (2010)).Tis can well be regarded as an opportunistic act because the customer is expecting to close a( rom his point o view) air deal that he does not get. In the end, both parties try to individually maximize their prots and accept that this commonly is to the disadvantage o the otherparty. However, relationship improvements may occur even in those contexts. Objecti yingand thus acilitating price change discussions is a cost transparency unction that preventcustomers and suppliers rom otherwise having o ten strongly subjective price negotiations

O PPORTUNITIES FO R FUTURE RESEARCH

Because price management is an important application o OBA, uture research on cost transparency could extend the perspective rom IOCM to this aspect. Currently, the impacts oOBA i i li l i hi h b i ll



SUPPLY CHAINS

researched, although they have been shown to be highly relevant in practice. Both experi-mental and (analytical) research on OBA should incorporate not only the price management

application, but also ocus more on the opportunistic behavior to be expected rom bothcustomers and suppliers. Experimental, analytical, and additional evidence rom eld researchcan help to understand the incentives associated with OBA more comprehensively.

Because our research is exploratory in nature, uture empirical research might ocus on testinghypotheses on the uses o OBA. o better understand what type o OBA is pre erable in

which particular business situation, researchers should determine what impact the applicationo each o the three types o OBA has on company success. Variables likely to inuence thesuccess o individual OBA uses are the relationship context observed, power asymmetries,past experiences with OBA, business situations o both respective companies, the overall

industry market situation, the strategic importance o the products analyzed, and the timeat which OBA was implemented in the product li e cycle. Tis analysis should also requirequanti ying all costs associated with OBA on the side o the supplier and customer.

Our research is also limited concerning the supplier perspective, because data sensitivityprecluded setting up a ull dyadic design. Another opportunity or uture research couldtake this into account and ocus on OBA uses and their impact on mutual customer-supplier relationships. Further, conrming distinct differences between industries on theuses o OBA was not a main objective o our research. Tus, using a cross-industry sample,our results or industries were not homogeneous. For example, we can conrm that inindustries with more standardized purchased goods and signicant cost pressure, such asthe automotive industry, cost transparency is more common than, e.g., in plant construc-tion. Our results also indicate that increased negotiation pressure as a consequence oOBA implementation has higher signicance in these industries than in others. o veri ythese indications or special industries and to disclose other relationships, uture researchmight use a sample that focuses more on industry comparability.

Our study is limited to the application o OBA in product industries only. We assumethat cost transparency can also be use ul or service industries. Because until now researchhas not covered this specic area o its application, urther exploratory research is neededto identi y similarities and differences compared to the product realm presented here.Given that services have less precisely dened specications than products (Ellram, ate,and Billington (2004)), and denitions o the underlying costs are assumed to be morecomplicated than or products (Zeithaml, Parasuraman, and Berry (1985)), researchersshould expect and carefully examine additional difficulties on the use of OBA.

P RACTICAL C ONTRIBUTIONS

Our empirical ndings and our ramework o OBA uses hold several implications orpractitioners. Purchasing departments that are deciding whether to use OBA and in which

way to implement it might use this ramework as an implementation cornerstone. Teramework offers two dimensions or consideration: whether the approach should be

f d i d hi h h i b




Purchasing decisions on which approach to ollow in terms o ocus must consider variouaspects. First, managers must determine i and how supplier competition can be increased

through OBA. Second, the manager’s decision must also consider the strategic importanceo the respective product. Because additional price pressure may lead to the supplierchanging product characteristics (e.g., quality) to improve his cost structure, this approachis not suitable or strategic products. Te choice between cost or price management is alsoinuenced by the time horizon available for the realization of the cost reductions and bythe personnel capacity available or project management. Negotiated price reductions canhave short-term bottom-line impact and can be implemented with ew resources, but costmanagement projects require more time and human resources.

Te use o OBA must also consider the purchasing strategy. But, as the ramework shows,

this relation cannot be seen as independent o the chosen cost or price managementapproach. Since the targeted purchasing strategy will vary between suppliers and mayeven be different for certain products purchased from the same supplier, and because theprimary objective o OBA may also be either price or cost management, implementationmust follow a systematic and context-specic approach.

Within the process o actually implementing OBA, two problematic aspects encounteredby most purchasers and customers interviewed need to be addressed: cost denitions andcost breakdown orms. Differing cost denitions lead to misunderstandings and undesir-able cost discussions between suppliers and customers. Although qualication programsmay sensitize purchasing managers to the problem, the problem itsel – a missing stan-dardization of cost accounting systems – is not solved. Te problem of inconsistent, andhence impossible to analyze cost in ormation between companies, has not yet been the

ocus o research. Although Wente (2008) urges management accounting to develop acommon in ormation system or all members o automotive supply networks, specicpropositions on how to realize this claim are still lacking.

Further administrative efforts and errors results rom the variety o cost breakdown ormused. Although the specic structure o the orms is usually different, in many casesidentical cost items are being requested by the supplier to be disclosed. Coordinating

orm structure and cost items would require developing I inter aces, such that break-down orms could either be lled out automatically rom cost calculation so tware orinformation even be transferred automatically into the customers’ I system. Obviously,systematized cost denitions are the premise o such an endeavor. Manual administrativeeffort o OBA might be signicantly reduced, especially or the supplier, but the custome

would also benet rom ewer cost in ormation errors as well as ewer deviations romcustomer cost denition.

6 C ONCLUSION

In this paper we show that the range o applications o OBA is wider than recent literature would suggest. We nd that cost transparency can be used success ully to support price

d h i d il i i d i



SUPPLY CHAINS

supplier relationship. Using the open-book ramework as an implementation guideline canhelp to systematically determine how open-book accounting should best be applied in any

given business situation. However, opportunistic behavior must be expected both by customersand suppliers. OBA requires both parties to take sa eguarding actions, which include suppliers’manipulations o cost in ormation and customers’ efforts to identi y those manipulations.

Our study has certain limitations. First, because it is exploratory in nature it does not allowstatistically relevant statements. However, including the experiences o a large number oexperts rom a variety o industries and different corporate backgrounds should allow or well- ounded conclusions about the current uses o OBA, its determinants and its difficul-ties. Nevertheless, uture empirical research can add to the results presented here by testinghypotheses developed rom this research. Such an endeavor would also allow or the inclusion

o control variables in the analysis. Second, our strong ocus on price management may alsobe due to the time rame o this research, which we per ormed during the economic crisis in2009/2010. Further research may show what impact the business situations o both the respec-tive companies and the overall industry market situation have on the uses o OBA. Becausethe ocus o this and other research is on the application o OBA or products, uture researchshould also analyze the implications o using cost transparency in service industries.

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