Advances in accounting
review the journal article and present a concise and well-balanced critique of it.
Your work will be assessed on the basis of two main criteria:
a) the clarity and coherence of your arguments, and
b) your ability to support your arguments by reference to other works published after or in parallel to this article.
yiWhat motivated the authors to write this article at the time?
yiWhat is the research problem / question?
yiWhy is this paper interesting / important?
yiWhat are the key motivating literatures for this study?
yiWhich research method has been chosen?
yiHow has the sample been selected?
yiHow have the results been analysed?
yiAre the conclusions consistent with the findings?
Your View/Opinion:
yiFinally, and very importantly, whatas your own view about the issues/arguments
yiDo you agree with any of the arguments presented? Why?Your answer to these questions can form the rationale and platform for your own study
supply chains
230
sbr 63 J uly 2011 230-251
andreas hoffjan/ s ebastian lührs/anja Kolburg*
Cost transparen C y in s upply C hains :
D emystifiC ation of the C ooperation tenet
* *
a bs t r aC t
Recent studies on open-book accounting focus mainly on the functions and conse-quences, difficulties, and determinants of interorganizational cost
management.
Research is also generally based on case studies. To offer a new direction, we seek to
detect and systematize applications of open-book accounting. We follow a qualita-tive approach to analyze why and how open-book accounting is being
used in prac -tice. Data were obtained from 59 interviews conducted with purchasing experts and
analyzed through content analysis. We find that, besides being used for interorga-nizational cost management, open-book accounting is used in price
management.
This includes increasing negotiation pressure on a supplier. Based on this finding, we
develop a framework to systematize different open-book accounting uses according
to both underlying motives for cost transparency and purchasing strategies.
JE l- classification: M11, M41.
Keywords: c ost Transparency; i nterorganizational cost Management; Open-book
accou nting; supplier.
1 i n t r o D u C t i o n
Companies across industries must consistently improve their production processes and
reduce costs. While focusing on their core competencies as a means of competitive advan-tage (Prahalad and Hamel (1990)), companies are increasingly trying to gain
access to
suppliers’ capabilities (Barney (1999)) and purchase goods and services that have previ -ously been provided for in-house. As a result, a company’s competitive
advantage is based
not 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 Hoffjan, Professor at Technical University Dortmund, Chair of
Accounting and Management Control,
Otto-Hahn-Str. 6a, D-44227 Dortmund, Germany, e-mail: andreas.hoffjan@tu-dortmund.de. Sebastian Lührs.
Anja Kolburg, Technical University Dortmund, Chair of Accounting and Management Control, Otto-Hahn-Str. 6a,
D-44227 Dortmund, Germany, e-mail: anja.kolburg@tu-dortmund.de.
** We thank two anonymous referees for helpful comments.
supply chains
sbr 63 J uly 2011 230-251 231
nities for 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 an interorganizational
cost management (IOCM) that requires suppliers and customers to find ways to collabora -tively reduce costs. Mutual dependence, trust, and extensive information-
sharing between
the corporations involved have been identified as prerequisites for an IOCM to work
(Cooper and Slagmulder (2004)).
Information-sharing not only assumes distributing supply and demand information across
supply chain members but, also includes sharing sensitive cost information, which is
usually kept secret by any company (Kajüter and Kulmala (2005)). Intuitively, providing
such sensitive data within an open-book accounting (OBA) agreement (Hoffjan and Kruse
(2006)) requires the expectation of cooperative behavior from the supply-chain partner
and trust between those companies involved. Although many scholars underscore the
point that cooperative and close supplier relationships are more advantageous than adver -sarial, arms-length relationships (e.g., Lamming (1993); Maloni and Benton
(1997); Carr
and Pearson (2002)), empirical observations indicate that in reality, supplier relation -ships are, in many cases, less cooperative than theory might assume (Cox
(1996); Parker
and Hartley (1997); Gibbs (1998)). The question remains as to what relevance OBA
has in a competitive environment that is not normally characterized by cooperative and
trusting relationships between suppliers and buyers. To answer this question, we gather
and categorize the practical uses of OBA on a larger scale. From this data, we derive an
OBA framework that systematizes uses, and which can also be seen as an implementation
cornerstone for practitioners.
2 l i t e r at u r e r e v i e w
Most publications on IOCM and OBA focus on one of the following pairs of issues:
functions and consequences or difficulties and determinants. The established literature
also assumes the main function of 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 Hoffjan (2009)). Accordingly, all
relevant publications indicate that cost transparency between customers and suppliers can
lead to cost reductions. Another function mentioned only occasionally is the justification
of prices and price changes. Carr and Ng (1995) provide an example in which a supplier
substantiates a sales price increase with increases in raw material costs. Similarly, Seal
et al. (1999) argue that the objective justification of prices and price changes based on
transparent accounting data may facilitate price negotiations. Such “legitimate changes”
may also include increased fixed cost allocations resulting from a reduced sales volume
(Agndal and Nilsson (2009)). The improvement of the relationship (Carr and Ng (1995))
and the creation of trust between the customer and the supplier (Seal et al. (1999)) have
been identified as consequences rather than as functions of OBA. Finally, Dekker (2003)
suggests that OBA may also serve to improve the company’s management accounting.
a . hOff J an/ s . lühR s/ a . K O l B u R g
sbr 63 J uly 2011 230-251 232
Another focus of research is the inherent difficulty associated with OBA. Because
purchasing costs equal supplier revenues, the use of OBA might also lead to increased
margin pressure on the supplier. By knowing the suppliers’ cost structures, customers can
make use of this knowledge during price negotiations (Dekker (2003)). Although the
established literature presents some examples that suggest open-book agreements do not
reduce supplier margins (“we don’t erode their profit margin – only their costs” Carr and
Ng (1995)), there is considerable evidence that companies use OBA to the disadvantage
of the supplier (e.g., Munday (1992); Lamming et al. (2001); McIvor (2001); Seal, Berry,
and Cullen (2004); Lamming et al. (2005)). In terms of price pressure on the supplier,
a certain aspect of using OBA addresses performing cost benchmark analyses between
different suppliers and basing price negotiations on a theoretical optimal cost structure
(Hoffjan and Kruse (2006)). Kajüter and Kulmala (2005) explicitly mention bench-marking as a potential reason for failure of OBA practices. Other researchers mention
concerns regarding the potential circulation of data to competitors to induce them to
lower quotes as a further difficulty of OBA (e.g., Lamming et al. (2005); Free (2008)).
Another conflict arises regarding the distribution of benefits from IOCM projects between
the companies involved. In many cases, it is the more powerful company that can extract
most of the benefits (Cooper and Slagmulder (1999)), a position usually assumed to
be held by the customer (McIvor (2001); McIvor and Humphreys (2004); Kajüter and
Kulmala (2005); Lamming et al. (2005)). Suppliers can often only try to make use of the
cost reductions in other customer relationships (Ellram (2002)).
There might also be operational implementation obstacles attributable to OBA. Even if a
supplier is generally positive about opening up his books to his customer, OBA may fail
because relevant accounting data are not readily available to the supplier himself (Seal et al.
(1999); McIvor (2001); Kulmala, Paranko, and Uusi-Rauva (2002); Kajüter and Kulmala
(2005)). A similar issue occurs if data cannot be sensibly analyzed due to differences in
accounting 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 perform the analyses (McIvor and Humphreys
(2004); Kajüter and Kulmala (2005)). Additionally, interorganizational cost models might
simply be too complex and thus heavily impede cost analyses (Tomkins (2001)).
Caglio and Ditillo (2008) mention the intentional exchange of manipulated data as
an issue not yet covered in the established literature. Indeed, there is only very limited
coverage of this problem. Both Lamming et al. (2001) and Lamming et al. (2005) state
that such behavior is rational and must be expected from any supplier as long as the infor-mation flow is only one way.
As we have noted, the primary focus of previous research has been the determinants of
OBA, especially within the context of the underlying relationship between the supplier
and the customer. Cooper and Slagmulder (2004) investigate what IOCM techniques
firms use in the process of product design, depending on the relationship observed
between the companies involved. Similarly, Kulmala (2004) analyzes the impact of power,
trust, and mutual business volume on the development of an IOCM. Dekker (2004)
analyzes the relevance of trust and the adoption of formal control mechanisms for the
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sbr 63 J uly 2011 230-251 233
control of interorganizational relationships and the prevention of opportunistic behavior.
Möller and Isbruch (2008a) show that IOCM has a positive impact on corporate success
if certain relationship conditions are met. Focusing less on the type of relationship, Agndal
and Nilsson (2009) investigate the different stages of exchange processes as determinants
of IOCMs. They find that IOCM collaboration is strongest in the early phases of an
exchange relationship, such as during supplier selection and product development. Seal
et al. (1999) discuss the constitutional role of OBA for the development of strategic
partnerships.
The role of trust as an integral determinant in the introduction of OBA has received
considerable attention in the literature. Many scholars regard a trusting relationship as a
prerequisite to introducing OBA (e.g., Carr and Ng (1995); Ellram (1996); Mouritsen,
Hansen, and Hansen (2001)). Tomkins (2001) assumes the need for 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 of trust is a key determinant
in open-book failure. Trust has thus been considered both a prerequisite and a conse -quence of OBA. Dekker (2003) as well as Kajüter and Kulmala (2005) try to solve
this
conflict by stating that there must be a minimal level of trust before cost information
can be exchanged, and then, further increases in trust are made possible.
Another determinant of OBA discussed is the existence of commitment devices, for
which the mutual disclosure of cost information has received the most attention (e.g.,
Seal et al. (1999); McIvor and Humphreys (2004)). Lamming (1993) states: “Cost
transparency is of no value […] unless it is two-way”. Interdependence between the
companies involved has also been identified as a commitment device (Cooper and Slag-mulder (2004)), as has the threat of loss of reputation as a consequence of
opportunistic
behavior (Dekker (2003)). Piontkowski and Hoffjan (2009) show that the offer of a
relationship-specific investment can also serve as a commitment device that increases
the partner’s willingness to engage in OBA. Aside from commitment devices, positive
financial incentives, such as a fair division of benefits, can help to increase the will -ingness to introduce OBA. A long-term contractual obligation or increased
purchase
volumes may also serve as financial incentives (e.g., Carr and Ng (1995); Cooper and
Slagmulder (2004)).
These determinants of OBA influence the willingness to engage in OBA through posi-tive incentives or trust-based mechanisms. But scholars also mention the impact of
power asymmetry. “Of course, open-book relations may not be based on partnership
and trust but may be forced ” (Seal et al. (1999)). Similar observations have been made
by Carr and Ng (1995) and Seal, Berry, and Cullen (2004). In this context, Kajüter and
Kulmala (2005) argue that power-induced OBA cannot safeguard a reduction of supply
chain costs. Often enough, it will be difficult to decide if a certain behavior originates
from power or from other influences, such as a trusting relationship (Seal, Berry, and
Cullen (2004)).
a . hOff J an/ s . lühR s/ a . K O l B u R g
sbr 63 J uly 2011 230-251 234
3 r e s e arC h
3.1 Re se aR ch O bjec t i v e s
Our key objective in this paper is to present a full picture of why and how firms use
OBA. Thus, we not only include an analysis of the actual uses of cost transparency in
customer-supplier relationships, but also examine the importance of those determinants
for influencing the interorganizational use of accounting data.
We analyze the common assumption that OBA can only work in a trusting relationship
in greater detail. Given that business relationships are usually not likely to be charac -terized by high levels of trust and cooperative behavior between all parties
involved,
the trust prerequisite would severely limit the application range of cost transparency.
In such a context, we ask what relevance the power structure between the companies
has from a practitioner’s point of view. We also examine the potential manipulation
of data that does not fit with cooperative relationship theory. Given that such invalid
data will impede using OBA as planned, firms will need mechanisms to cope with this
difficulty.
3. 2 Re se aR ch D e si gn
We use a qualitative research design supplemented by quantitative analysis. We do so
because the research objectives defined above require incorporating a broad range of expe-riences 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 of the aspects indicated above.
First, 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 from
Phase One. We accomplish this task by using an online questionnaire that we designed to
either affirm or contradict the results obtained from the interviews and to allow for certain
quantitative analyses. From a total of 59 interviewees, we received 46 completed question-naires. The insights gained from these two steps are the main topic of this
paper.
Our third step was to take into account the reverse perspective. To support the results,
especially for data manipulation, we conducted 18 interviews with sales experts. Due to
the 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)
) and not those who were suppliers to the interviewed
customers. We use the data retrieved from the third step to validate our results from
research Phases One and Two, 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
and managed.
supply chains
sbr 63 J uly 2011 230-251 235
keep the paper focused on OBA uses
. Table 1 summarizes objectives and data evaluation
measures applied in Phases One and Two.
Table 1: r esearch design summary
Expert Interviews Online Questionnaire
Objectives comprehensive discussion of the
derived questions regarding
open-book accounting
identification of exceeding approaches
°
°
Quantitative validation and
contrasting of interview results
supplemental identification of
existing relationships
°
°
Data Collection 272 interview inquiries
59 qualitative, open interviews
average interview duration:
53 minutes
Written record of interviews
°
°
°
°
i nquiries with 57 of 59 experts
from interviews with standardized
questionnaire
46 completely filled in
questionnaires returned
Estimated time for completion:
10 minutes
°
°
°
Data Evaluation classification of statements in
categories and analysis of answer
patterns
as far as possible, quantitative aggrega -tion and analysis of answer frequencies
°
°
statistical analysis with spss °
Starting in Phase One, we set up interview guides to structure the interviews and to
ensure the comparability of different expert statements during the analysis phase. Because
most of the problems arising in the context of OBA are due to some kind of opportu-nistic behavior on the customer side, we targeted purchasing experts for
participation in
the research project. We based our recruiting of interview partners on personal contacts,
referrals from interview partners, and cold-calling relevant experts identified based on
their personal profiles on the XING business network. We recruited more than 90% of
all interview partners from the business community website. To ensure that the inter-views contained the whole spectrum of opinions, experiences, and ideas on OBA from
the customer perspective, we set no constraints or requisitions for potential interview
partners, except for practical knowledge in the field of strategic purchasing. To broaden
our focus, our sampling was aimed at representing all industries and company sizes in
which OBA is of importance. Whereas former studies mostly chose an industry-specific
focus (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 identification of
different ways in which OBA is used. Following Patton (2002), our selection of interview
candidates aimed at securing a broad range of perspectives on the subject. Therefore, we
did not choose purchasing experts based on their knowledge about OBA, but only on
2 For results on the supplier perspective please refer to Hoffjan and Lührs (2010).
a . hOff J an/ s . lühR s/ a . K O l B u R g
sbr 63 J uly 2011 230-251 236
their general purchasing experience. We also stated explicitly that persons not familiar with
OBA should also take part in the research project. We identified 272 potential interview
partners who met these specifications and contacted each one with an interview request.
We conducted interviews until a point of saturation, such that additional interviews did
not yield any further insights (Kvale (1996)). To discern this point, only one interviewer
led all interviews and kept a record of main aspects mentioned. Furthermore, our inter -view design ensured that the sample also met the criterion of inner
representation, under
which the sample had to contain both different as well as typical cases (Helfferich (2005)).
This requisite was ensured by including different industries and company sizes, as stated
in Figure 1. In comparison to other qualitative research concerned with OBA, the realized
sample can be seen as fairly large (e.g., Kajüter and Kulmala (2005); Agndal and Nilsson
(2010)).
Figure 1: Purchasing expert interviews: Sample
Number of inter view s
* Consulting, C onsumer produc ts , Telecommunications, Energy & Utilities , Tr anspo rt ation, Defense
59
O thers*
Technolog y
Indust ry Sales
Category (€M)
Position In terview
duration (min)
Industrial
Machiner y
Automotive
Purchasing
Manager
Purchasin g
directo r
Specialist cost analysis/
cost reduction
Management consultant
Chemicals &
Healthcare
20%
40%
60%
80%
100%
59
> = 5,000
> = 60
45 – 59
30 – 44
1,000 – 4,99 9
500 – 999
100 – 499
< 100
59 59
Since the exchange of cost information is a sensitive subject for potential interview
partners and because experience from former research projects shows that willingness
to provide information is generally low, we decided to conduct the interviews without
recording them. Although tape recordings are common in the social sciences (Scholl
(2003)), they can and should be avoided if the interview partner has reservations against
such a recording or will refuse to take the interview (Yin (2003)). Because there was no
need to analyze the wording in detail, the omission of tape recordings was considered
appropriate.
Despite the fact 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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sbr 63 J uly 2011 230-251 237
on the phone. We chose this approach for a variety of reasons. There is only limited
evidence regarding quality differences between telephone and personal interviews (Sturges
and Hanrahan (2004)). However, in the context of sensitive questions within qualitative
interviews, Sturges and Hanrahan (2004) identify advantages for telephone interviews.
Scholl (2003) asserts that, due to the more anonymous interview situation, statements
in a telephone interview are more likely to be genuine than during personal interviews.
Another advantage of telephone interviews is the easier access to relevant experts (Fenig et
al. (1993)). Moreover, the willingness to be interviewed has been shown to be higher for
telephone interviews (Sturges and Hanrahan (2004)). Further, many scholars acknowl -edge the higher cost efficiency of telephone interviews compared to personal
interviews
(e.g., Frey (1989); de Leeuw, Mellenbergh, and Hox (1996); Scholl (2003); Sturges and
Hanrahan (2004)).
Between December 2008 and March 2009 we interviewed individuals from large and
medium-sized companies. These individuals either had purchasing backgrounds or were
purchasing managers. Each of the 59 interviews lasted between 30 and 90 minutes (average
= 53 minutes). The reason for including so many experts was to not only comprehensively
explore the research subject, but also to identify uncommon applications of OBA and to
allow for some quantitative analyses.
The subjects of the online questionnaires were the assessment of supplier relationships and
the willingness to disclose cost information, intention, and focus of disclosure, from the
purchaser perspective, as well as the conditions and effects of disclosure. Answer categories
included either assessment of the importance of certain items or approve/disapprove state-ments. Aside from one question, for which items had to be ordered by their
importance
in a forced ranking, we used a five-stage Likert scaling. The sample of purchasing experts
from Phase One is composed of the returned questionnaires (80.7%).
When the interviews were completed, we analyzed each interview and reported the
results to the original interview partner with a request that they complement and validate
results.
3. 3 a nalysis and e valuat i O n
We analyzed the interview transcripts using content analysis (Mayring (2008)). We
combined qualitative analyses with quantitative measures, such as taking answer frequen -cies as an indicator of relative importance of certain items. Based on the
detailed research
questions that were the foundation of the interview guides, we set up an initial category
scheme and, following 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 also
included freely phrased answers. We describe our framework deduction as a “counter-current process”: first, we derived our categories top-down from the established
literature
and then refined them during the coding process.
As noted above, we validated the results from the interviews through an online ques -tionnaire. We evaluated the answers statistically using SPSS 16. The measures we
use
are frequencies, correlations between individual variables, and differences in the mean
value of individual variables depending on the value of an independent variable (one-way
ANOVA).
We evaluated the analysis according to the criteria Krippendorff (2004) specifies for reli-ability: stability, reproducibility, and accuracy. To address stability, one
author coded the
data twice. However, the second coding process could not verify the first coding satis-factorily because classifications for purchasing strategies and the key
motivations of the
interviewed experts varied. This deviation also made the derived framework questionable
and led us to build a new framework based on the results of the second coding. To assess
the new framework, we applied reproducibility by recoding the material with a second
author who had not thus far been involved in the research. This recoding resulted in high
congruence with the second coding, with classification varying only up to 10%. Thus,
we were able to conclude that the reliability criterion was sufficiently fulfilled. Accuracy
measures could not be applied because the objective standards against which our analysis
might 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. The topic of this paper can be seen
as exploratory, and causal relationships are not our main focus. Because of this aspect and
following Yin (2003), the problem of internal validity is only of secondary importance.
Nevertheless, disruptive factors that cannot be controlled may impact the results, e.g., data
collection occurred during the financial crisis of 2008/2009. The techniques we use to
ensure construct validity include establishment of a clear chain of evidence and triangula -tion (Gibbert, Ruigrok, and Wicki (2008)). The chain of evidence in our
study is based
on qualitative statements of persons interviewed and is supported by quantitative analysis
of the respective subject, which makes it easy to understand. Additionally, we confirmed
interview results through a standardized survey and subsequently supplemented it by a
complete change of perspective, when we took the supplier perspective into account.
Construct validity can be seen as partly fulfilled. Due to the applied research design,
a statistical generalization of results, which would allow drawing inference conclusions
about a population, is not possible (Gibbert, Ruigrok, and Wicki (2008)). The presented
sample is comparatively large for a qualitative study; thus, we can derive certain conclu -sions regarding patterns in the basic population. The analysis of answer
frequency, as we
applied it, is seen as a good possibility to confirm qualitative impressions (Dubois and
Araujo (2007)). On all accounts, analytical generalization for this study is possible. We
brought together experiences and opinions of a multitude of experts, contrasted those and
explored them for similarities.
Our analysis shows that OBA is highly relevant in today’s purchasing world: 91% of our
interviewees state that they would like to have transparency regarding their suppliers’
costs, which indicates that they expect distinct advantages from the use of OBA. However,
purchasing managers obviously expect that advantages primarily accrue to the customer.
On the question of willingness to provide cost information to their customers if 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% clearly
indicated they would try to avoid cost transparency as a supplier.
We find that one third of the managers interviewed do not have any transparency
concerning their suppliers’ costs, but 26% state that they do have some kind of cost-based
view for more than 50% of their purchase volume. Industry analysis shows that there is
considerable difference between industries. The automotive and technology industries have
the highest levels of transparency. Some automotive purchasing experts even state that they
have cost transparency for their total purchasing volume. Purchasing experts who use
OBA often require their suppliers to provide cost information through so-called supplier
cost breakdown forms that differ in structure and in level of detail, but usually provide
cost information for every component of the bill for materials, including both materials
and production costs and the cost of items that comprise them. Moreover, overhead costs
and profits are usually explicitly mentioned.
We find that sharing customer cost information with suppliers is the exception. Although
the customer often has detailed knowledge about suppliers’ costs and profits, the supplier in
general does not have such knowledge. Obviously, the risk profile for such a unidirectional
exchange of cost information is heavily weighted toward the disadvantage of the supplier.
Previous research indicates that the primary reason for cost transparency is to reduce costs
in the course of IOCM. But our interviews draw another picture. The reason mentioned
most often is safeguarding an optimal price by improving the own negotiating position
(see Figure 2). In this context, a potentially positive impact on the supplier’s cost structure
is not targeted by purchasing managers with OBA, but often, managers seek to avoid
undue supplier margins.
“The reason for cost transparency is to realize an optimal purchase price. […]
We use supplier cost information as a basis for price negotiation.”
Purchasing manager, automotive OEM
“Of course we make sure that the supplier’s profit margin is adequate, even if he offers the
lowest price. It must not happen that he has too large a profit margin.”
Purchasing manager, manufacturer of dental products
The interviewees clearly expressed a desire for increased negotiation pressure on suppliers’
prices. However, in some situations, negotiations may also be facilitated through OBA.
This relation is true if cost transparency helps to justify supplier price increases.
“Cost transparency is important to understand if supplier price increases are justified. You
don’t want to pay too much, but you don’t want to knock him down either.”
Purchasing manager, plant construction company
Even though OBA might support suppliers’ arguments for cost increases for which they
are not responsible, suppliers must be aware that often even justified price increases are
not accepted by customers. A purchasing management consultant describes the situation
as follows: “Think of the situation where a customer orders less than the planned volume,
which leads to idle capacity at the supplier. If now the supplier tries to put through price
increases based on resulting increased fixed cost allocations, the customer does not neces -sarily accept those. Business simply is not fair! Cooperation romance is
not real!”
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sbr 63 J uly 2011 230-251 241
Aside from using OBA to improve one’s own negotiation position, purchasing managers
also try to identify and implement cost reduction opportunities through cost transpar-ency, which is the second most often mentioned reason. In general, the
identification of
supplier cost disadvantages either results from benchmarking analyses carried out between
suppliers, or by comparing supplier cost information with industry benchmarks. Another
use of cost information in terms of cost reductions is to develop cost-efficient products.
Through cost transparency, purchasing managers may be able to determine why a newly
developed product has certain costs based on the specifications given and what cost reduc-tions can be expected through product design changes.
Although the reasons mentioned thus far have all been discussed at some stage in the estab-lished literature, a function of OBA that has not yet been covered is its
use in supporting
risk management. Customers gain insight into, and are able to evaluate, supplier profit -ability to avoid insufficient profitability levels of the supplier, who then
might be forced
to 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 of risk management, which
has been mentioned by the interviewees as a separate factor.
valid i t y O f c O s t i nfO Rmat iO n
Because suppliers may manipulate cost information disclosed to their customers, we asked
the interviewees if they believed the cost information their suppliers provided them was
truthful. Indeed, 89% of the interviewees stated they do not believe the information, and
in general critically question their suppliers’ cost information. Purchasing experts have
developed a variety of approaches to verify the cost information they get. In most cases,
purchasing experts try to set up a so-called “shadow calculation” in which they calcu-late estimated costs for the product based on their own business knowledge and on
the
data available from reliable public sources or company files. However, we found strongly
varying levels of sophistication in this approach. While in the lowest form managers could
make only a rough estimation of certain cost positions based on personal knowledge, in
more advanced cases purchasing experts make use of highly sophisticated software solu-tions that include comprehensive and regularly updated cost data on a variety of
processes
and materials. In this context, large corporations as well as companies in the automotive
industry are more sophisticated than others.
i m P ac t O f p OWe R and R el at i O nshiP c O n t e x t
As noted above, many scholars consider a trusting relationship as a prerequisite for OBA.
Our research generally confirms that trust between a customer and supplier positively
influences the supplier’s willingness to engage in OBA and the validity of information
exchanged. Assuming that trust can only develop over the course of a long-term business
relationship, we would expect that a supplier’s willingness to engage in OBA is greater in
long-term customer-supplier relationships. On the contrary, our results indicate that in
purchasing managers’ experiences, the likelihood of receiving supplier cost information
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sbr 63 J uly 2011 230-251 242
was greatest in new relationships (48% of respondents). Only 37% of the purchasing
managers interviewed stated that OBA can be implemented more easily with older, well-established supplier relationships. One reason for the expectation that cost
transparency is
more easily implemented with new suppliers is that suppliers from older, well-established
supplier relationships may fear that customers will realize that they have been paying
too high a price in the past, or suppliers may simply not be willing to change anything
that has been working well for them in the past. Additionally, OBA is regularly made a
precondition for the award of a contract, which also favors new relationships. Making
OBA a precondition can be regarded as an application of power that underscores cost
transparency. It is often not realized in the course of establishing trusting and coopera-tive relationships, but instead is forced. Forty-five interview partners
state that exercising
power is relevant for supplier cost disclosure, but only 34 say that the relationship context
is relevant. The stronger focus by practitioners on exerting power as a way to achieve
supplier cost disclosure emphasizes the need to include this confrontational approach to
realizing supplier cost data disclosure in academic research.
4. 2 d e v elO Pmen t O f an O P en- b O Ok a ccO un t ing f R ameWO Rk
Our research shows that purchasing experts not only use cost transparency to identify
cost reduction opportunities but also in terms of price management, and that by exerting
purchasing power supplier cost disclosure is realized despite the lack of trusting or coopera -tive relationships. Given that the uses and relationship backgrounds are
highly divergent,
we expect to find that there is not a single type of OBA, but that there are various types
that need to be made explicit and arranged according to an OBA framework. To do so,
we analyze the interviewees’ key motivation for cost transparency and compare this to the
purchasing strategy applied by those purchasing experts in the respective context. We follow
the approach and complement the results of Agndal and Nilsson (2010), who analyze OBA
practices for different purchasing strategies (transactional compared to relational).
P R ima R y M O t i vat i O n f O R O P en- b O Ok a ccO un t ing
We first analyzed interview statements for their primary motivation for OBA in terms
of price or cost management orientation. As long as the interviewee gave motivations
for both cost and price management applications but no primary motivation could be
clearly identified, we allocated the case to a third category between those of cost and price
management. Table 2 provides an overview of statements that we used to identify the
interviewees’ primary motivations for OBA, considering the respective interview contexts
they were given.
Overall, we can state that the motivation for price management strongly outweighs the
motivation for cost management. We identified price management as the key motiva-tion for 36 interviewees, but identified an explicit cost management focus for only
five
respondents. Another seven interviewees cannot be clearly assigned to any single type of
motivation, so we allocate them to a position between price and cost management.
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Table 2: Examples of statements used as a guideline for the classification of the
primary motivation for open-book accounting between price manage-ment and cost management
Primary motivation: price manage-ment
Primary motivation: cost management
“Reason is to realize an optimal price.” “Because you can only realize savings if you identify
where they are!”
“We want to understand the suppliers’
calculations.”
“We must optimize product costs early in product devel -opment – to do so we definitely need cost transparency.”
“ i n order to snatch a better price!” “ i dentify and realize savings opportunities: […]
We might well do some engineering changes.”
“To validate plausibility of supplier price
increases.”
“To understand and identify cost drivers, such that we
can perform product changes.”
“ i n the end, open-book accounting is only
another negotiation strategy.”
“Moreover, descriptions of how cost transparency is being
used in collaborative cost management projects.”
P u R cha sing s t R at egy a PPlied
We subsequently analyzed what purchasing strategy is being followed, i.e., whether
managers tend to follow a transactional or relational purchasing strategy with their
suppliers, based on the comments of the purchasing experts. Analogous to our approach
in determining the primary motivation for cost transparency, we analyzed statements with
respect to the purchasing strategy when confronted with OBA. Again, a third category
between transactional and relational purchasing strategies was used in case both transac -tional and relational elements were identified without being able to disclose
the primarily
targeted purchasing strategy. Table 3 gives example statements that we used to determine
the applied purchasing strategy.
Table 3: Examples of statements as a guideline for the classification of the
purchasing strategy between a transactional and relational approach
Transactional purchasing strategy r elational purchasing strategy
“We aren’t talking about fairness!” “We are interested in collaboration based on
partnership.”
“ you obviously have a different leverage.
There are simply more starting points to
any negotiation.”
“ for us it is important to have long-term supplier
relationships.”
“Overall, cost transparency certainly results
in pressure on supplier margins.”
“[ s uppliers that disclose] will definitely receive more
sales volume from us, which gives them planning
reliability as well as higher capacity utilization.”
“Whoever refuses to disclose is likely to
be shown the door.”
“ i t’s important the supplier has fun working with us.”
“ i t is massively used in favor of the customer.
[…] i ’m not a friend of win/win-talk. h ow do
you think should that work?”
“We’d never take all the savings, but always aim for
a win/win-situation.”
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We identify characteristics of relational purchasing strategies for a total of 16 interviewees,
but find a more transactional purchasing strategy for ten cases. For another 12 interview
partners, the observed purchasing strategy had both transactional and relational elements,
but in 17 cases an allocation to any category was not possible because the interviewee did
not give us relevant statements.
i den t ifi c at i O n O f O P en- b O Ok a ccO un t ing a PPROache s
Based on the descriptions of different OBA uses collected during the interviews, we
derive in a third step three different approaches to cost transparency and determine what
approaches are primarily targeted by the purchasing managers we interviewed.
We consider type A OBA as the classical use of cost transparency to increase pressure
on supplier prices. Theoretical prices based on cost benchmarks are used as a negotia-tion baseline, where the potential to realize such an optimal cost base is
irrelevant to the
customer. Suppliers in this context are generally given maximum overhead rates and profit
margins. All cost changes favoring the customer are followed by price reduction claims,
but requests for price increases due to increased costs are generally not accepted by the
customer. However, the supplier may benefit from the cost benchmarks supplied by his
customer and might actually improve his cost position. Type A OBA uses are indicated
by purchasing managers through expressions such as increase pressure on supplier margins ,
calculating best-of-offers , cherry picking, and bargaining.
Type B OBA aims only at reducing transaction costs related to price negotiations.
Reducing product costs or prices are not the focus of this OBA approach. Instead, price
negotiations are facilitated by defining a common cost baseline and by rules that define
price changes based on cost changes at later stages of the exchange relationship. Thus, both
companies benefit from easier and more objective price negotiations. When interview
partners referred to this OBA approach, they often used expressions such as objectifica -tion , increased objectivity, or facilitation of price negotiations. As
one interview partner
mentioned: “You simply get rid of all the haggling.”
Type C OBA describes the commonly discussed IOCM approach. It targets substantial
cost savings and not only highlights theoretical opportunities (such as in type A OBA),
but also focuses on factual implementation. Moreover, not only does it analyze supplier
cost deficits, but, more generally, it targets the most cost-efficient aggregate solution. Both
companies realize measurable financial advantages from the project.
We find that most interviewees do not follow a single OBA approach, but usually use
more than one. Therefore, we identify both primary and secondary uses based on the
descriptions purchasing managers provided regarding their uses of cost transparency. We
find that all of the approaches identified are commonly used by purchasing managers when
they consider both primary and secondary uses. However, when focusing on primary uses
only, it becomes obvious that objectification and facilitation of price (change) negotiations
(type B OBA) and increasing price pressure through cost transparency (type A OBA) get
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sbr 63 J uly 2011 230-251 245
the most attention. This finding highlights that using cost transparency in terms of IOCM
(type C OBA) cannot be regarded as the main goal of cost transparency from a purchasing
practitioner’s perspective.
c O ns t i t u t iO n O f O P en- b O Ok a ccO un t ing f R ameWO Rk
Drawing on the purchasing strategy and the key motivation for cost transparency overall,
Figure 3 illustrates the way in which we can differentiate the three uses of OBA, and in
what contexts we can expect to find their applications.
Figure 3: Approaches to open-book accounting in relation to the key motivation
for cost transparency and purchasing strategy
Transactional Relational
Purchasing strategy
Type A
Pr ic e pr essu re
Type B
Objectification and fa ci litation of
price (change) negoti at ions
Type C
Inter -orga niza ti onal
cost
man agement
Key motivation for
cost transparency
Pr ic e
management
Cost
management
Type A
Pr ic e pr essu re
Type B
Objectification and fa ci litation of
price (change) negoti at ions
Type C
Inter -orga niza ti onal
cost
man agement
The framework shows that cost transparency is not used just to support IOCM. On the
contrary, in many cases it becomes a means to increase pressure on supplier prices within
the context of a transactional purchasing strategy. Moreover, we also see that often, OBA
also facilitates price negotiations by giving them an objective foundation. This application
of cost transparency can be found within both transactional and relational purchasing, but
has a somewhat more relational orientation.
For type C OBA, we can determine not only a strong focus on cost management as a
key motivation for cost transparency, but also as a strong force within a highly relational
purchasing strategy context. Thus, we can state that true IOCM is indeed being performed
on the basis of cooperative supplier relationships.
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5 i m pliC at i o n s
P R i ce managemen t i s g i v en s ubs tan t ial i m PO R tance
Although accounting scholars thus far have largely identified OBA as a means to support
ICOM, we have found that practitioners strongly value cost transparency to be used for
price management. In this context, researchers have identified both increasing negotiation
pressure on the supplier and facilitating discussions on price changes as objectives of OBA.
Ramsay and Croom (2008) criticize the fact that academic researchers perceive purchasing
negotiation approaches as having low importance, and argue that those bargaining activities
may well have strategic impact. This scholarly misconception of purchasing functions and
associated purchasing approaches may be a reason why recent research has focused so strongly
on purely collaborative uses of OBA. Reality shows that increased price pressure is not only a
potential consequence of OBA that arises after cost transparency has been provided to allow
for IOCM projects, but it often is the key motivation for requesting cost information from
suppliers. If we accept this idea, then other aspects of OBA also require reconsideration.
d emystificati O n O f cOOP eR atiO n and TRust as pR eR equisites O f O Pen- b OOk accOunting
The 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 of IOCM indeed
requires
suppliers and customers to follow collaborative relationships. However, OBA is not limited
to such applications that necessarily benefit both parties involved. Instead of trust, power
asymmetry has a significant impact on the likelihood that a supplier will open his books to
his customers. Trust cannot be sensibly expected in highly competitive (transactional), often
adversarial business relationships, but OBA is still being used in those contexts – not to
perform IOCM projects but, more commonly, to increase negotiation pressure, which may
include the identification of potential cost disadvantages at the supplier. While the customer
behaves opportunistically with supplier cost information for negotiation purposes, the supplier
may in turn manipulate his cost information, thus also acting opportunistically. One may
argue that suppliers only do so to protect themselves, but they may also aim at realizing profit
margins higher than those agreed upon with their customers (Hoffjan and Lührs (2010)).
This can well be regarded as an opportunistic act because the customer is expecting to close a
(from his point of view) fair deal that he does not get. In the end, both parties try to individu -ally maximize their profits and accept that this commonly is to the
disadvantage of the other
party. However, relationship improvements may occur even in those contexts. Objectifying
and thus facilitating price change discussions is a cost transparency function that prevents
customers and suppliers from otherwise having often strongly subjective price negotiations.
O PPO Rt uni t ie s f O R f u t u R e R e se aR ch
Because price management is an important application of OBA, future research on cost trans-parency could extend the perspective from IOCM to this aspect. Currently,
the impacts of
OBA on price management in customer-supplier relationships have not been systematically
supply chains
sbr 63 J uly 2011 230-251 247
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 focus more on the opportunistic behavior to be expected from both
customers and suppliers. Experimental, analytical, and additional evidence from field research
can help to understand the incentives associated with OBA more comprehensively.
Because our research is exploratory in nature, future empirical research might focus on testing
hypotheses on the uses of OBA. To better understand what type of OBA is preferable in
which particular business situation, researchers should determine what impact the application
of each of the three types of OBA has on company success. Variables likely to influence the
success of individual OBA uses are the relationship context observed, power asymmetries,
past experiences with OBA, business situations of both respective companies, the overall
industry market situation, the strategic importance of the products analyzed, and the time
at which OBA was implemented in the product life cycle. This analysis should also require
quantifying all costs associated with OBA on the side of the supplier and customer.
Our research is also limited concerning the supplier perspective, because data sensitivity
precluded setting up a full dyadic design. Another opportunity for future research could
take this into account and focus on OBA uses and their impact on mutual customer-supplier relationships. Further, confirming distinct differences between industries on
the
uses of OBA was not a main objective of our research. Thus, using a cross-industry sample,
our results for industries were not homogeneous. For example, we can confirm that in
industries with more standardized purchased goods and significant cost pressure, such as
the 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 of
OBA implementation has higher significance in these industries than in others. To verify
these indications for special industries and to disclose other relationships, future research
might use a sample that focuses more on industry comparability.
Our study is limited to the application of OBA in product industries only. We assume
that cost transparency can also be useful for service industries. Because until now research
has not covered this specific area of its application, further exploratory research is needed
to identify similarities and differences compared to the product realm presented here.
Given that services have less precisely defined specifications than products (Ellram, Tate,
and Billington (2004)), and definitions of the underlying costs are assumed to be more
complicated than for products (Zeithaml, Parasuraman, and Berry (1985)), researchers
should expect and carefully examine additional difficulties on the use of OBA.
P R ac t i c al c O n tR ibu t i O ns
Our empirical findings and our framework of OBA uses hold several implications for
practitioners. Purchasing departments that are deciding whether to use OBA and in which
way to implement it might use this framework as an implementation cornerstone. The
framework offers two dimensions for consideration: whether the approach should be
focused on cost or price management and which purchasing strategy fits best.
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sbr 63 J uly 2011 230-251 248
Purchasing decisions on which approach to follow in terms of focus must consider various
aspects. First, managers must determine if and how supplier competition can be increased
through OBA. Second, the manager’s decision must also consider the strategic importance
of the respective product. Because additional price pressure may lead to the supplier
changing product characteristics (e.g., quality) to improve his cost structure, this approach
is not suitable for strategic products. The choice between cost or price management is also
influenced by the time horizon available for the realization of the cost reductions and by
the personnel capacity available for project management. Negotiated price reductions can
have short-term bottom-line impact and can be implemented with few resources, but cost
management projects require more time and human resources.
The use of OBA must also consider the purchasing strategy. But, as the framework shows,
this relation cannot be seen as independent of the chosen cost or price management
approach. Since the targeted purchasing strategy will vary between suppliers and may
even be different for certain products purchased from the same supplier, and because the
primary objective of OBA may also be either price or cost management, implementation
must follow a systematic and context-specific approach.
Within the process of actually implementing OBA, two problematic aspects encountered
by most purchasers and customers interviewed need to be addressed: cost definitions and
cost breakdown forms. Differing cost definitions lead to misunderstandings and undesir -able cost discussions between suppliers and customers. Although qualification
programs
may sensitize purchasing managers to the problem, the problem itself – a missing stan-dardization of cost accounting systems – is not solved. The problem of
inconsistent, and
hence impossible to analyze cost information between companies, has not yet been the
focus of research. Although Wente (2008) urges management accounting to develop a
common information system for all members of automotive supply networks, specific
propositions on how to realize this claim are still lacking.
Further administrative efforts and errors results from the variety of cost breakdown forms
used. Although the specific structure of the forms is usually different, in many cases
identical cost items are being requested by the supplier to be disclosed. Coordinating
form structure and cost items would require developing IT interfaces, such that break-down forms could either be filled out automatically from cost calculation
software or
information even be transferred automatically into the customers’ IT system. Obviously,
systematized cost definitions are the premise of such an endeavor. Manual administrative
effort of OBA might be significantly reduced, especially for the supplier, but the customer
would also benefit from fewer cost information errors as well as fewer deviations from the
customer cost definition.
6 C o nC lus i o n
In this paper we show that the range of applications of OBA is wider than recent litera -ture would suggest. We find that cost transparency can be used successfully to
support price
management, and that it does not necessarily require a cooperative and trusting customer-
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sbr 63 J uly 2011 230-251 249
supplier relationship. Using the open-book framework as an implementation guideline can
help to systematically determine how open-book accounting should best be applied in any
given business situation. However, opportunistic behavior must be expected both by customers
and suppliers. OBA requires both parties to take safeguarding actions, which include suppliers’
manipulations of cost information and customers’ efforts to identify those manipulations.
Our study has certain limitations. First, because it is exploratory in nature it does not allow
statistically relevant statements. However, including the experiences of a large number of
experts from a variety of industries and different corporate backgrounds should allow for
well-founded conclusions about the current uses of OBA, its determinants and its difficul -ties. Nevertheless, future empirical research can add to the results
presented here by testing
hypotheses developed from this research. Such an endeavor would also allow for the inclusion
of control variables in the analysis. Second, our strong focus on price management may also
be due to the time frame of this research, which we performed during the economic crisis in
2009/2010. Further research may show what impact the business situations of both the respec-tive companies and the overall industry market situation have on the uses
of OBA. Because
the focus of this and other research is on the application of OBA for products, future research
should also analyze the implications of using cost transparency in service industries.
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