Interorganizational Cost Management in the Exchange Process
Henrik Agndal (corresponding author)
Department of Marketing and Strategy
Stockholm School of Economics
PO Box 6501
SE-113 83 Stockholm, Sweden
Phone + 46 (0) 8 7369532
Fax + 46 (0) 8 334322
Email: henrik.agndal@hhs.se
Ulf Nilsson
Graduate School of Management
Sabanci University
349 56 Istanbul
Turkey
Phone + 90 216 4839673
Fax + 90 216 4839699
Email: nilsson@sabanciuniv.edu
Abstract
This paper explores interorganizational cost management (IOCM) practices in the
exchange process. IOCM can be defined as buyers’ and suppliers’ coordinated efforts to
reduce costs. Past research has primarily argued that such practices depend on
component characteristics, relationship characteristics, and characteristics of the
transaction. Based on a study of three buyer-supplier relationships, this article finds that
IOCM practices also vary between six phases of the exchange process. In this process,
the supplier’s management accounting is found to be more important than recognized
by prior research. The deepest collaboration around IOCM issues and the greatest joint
use of suppliers’ management accounting typically occurs in earlier phases of the
exchange process, including supplier selection, joint product design and joint
manufacturing process development. In later phases, during full-speed production as
well as in product and manufacturing process redesign, suppliers’ managerial
accounting appears to play a lesser role.
Key words: target costing, interorganizational cost management, open books, exchange
process, purchasing
1
Interorganizational Cost Management in the Exchange Process
1. Introduction
In many firms, between 60 and 70 percent of manufacturing costs are made up by
purchased goods and services (van Weele and van der Vossen, 1998; Ask and Ax,
1997). Therefore, in their efforts to reduce costs, a lot of buying firms are looking more
closely at the products and manufacturing processes of their suppliers (Ansari et al.,
1997; Dyer, 1996; Seal et al., 1999). Attempts to coordinate activities of buyers and
suppliers to reduce costs are often referred to as interorganizational cost management
(Cooper and Slagmulder, 1999).
Although the importance of the supplier is often highlighted (Ellram, 2000; Cooper and
Slagmulder, 1999), the IOCM (also purchasing cost management) literature tends to
study the process from the buyer’s perspective. How the buyer applies IOCM
techniques and the benefits of IOCM for the buyer is almost always in focus (Ellram,
2000; Seal et al., 1999). Knowledge about supplier’s role and how the supplier acts in
regard to IOCM, is, therefore, limited. In particular, the use of the supplier’s
management accounting is largely unexplored in the context of interorganizational cost
management (Puxty, 1993; Kulmala et al., 2002; Nilsson, 2004).
Research has primarily explained IOCM practices as a function of relationship
characteristics (Cooper and Slagmulder, 2004; Kajüter and Kulmala, 2005), component
characteristics (Cooper and Yoshikawa, 1994a; Cooper and Slagmulder, 1999) and
2
characteristics of the transaction (Ansari et al., 1997; Ellram, 1996). For example, it has
been found that high levels trust and resource commitment are associated with intense
IOCM (Cooper and Slagmulder, 2004; Seal et al., 1999). The same has been found in
the case of high degrees of joint R&D as well as high component cost (Cooper and
Slagmulder, 1999). Further, studies indicate that repeat purchases are more commonly
associated with interorganizational cost management than single purchases (Ellram,
1996). Within relationships, in regard to individual components and in relation to
specific transactions, however, a great number of different activities are carried out as
firms go through a process of exchange (cf. Fisher, 1995). For example, suppliers’
capabilities have to be matched to buyers’ needs and there may be joint development
work (Hameri and Paatela, 2005). Deliveries might also span long periods of time,
during which products and manufacturing process may have to be refined. Throughout
this, suppliers’ cost data may play different roles and suppliers’ management accounting
may be used in different ways. In effect, the activities carried out during different
phases of the exchange process may also play a part in determining IOCM practices.
This is sparsely addressed in the IOCM literature, though.
In summary there are two important gaps in the literature on IOCM. Firstly, it focuses
on the role of the buyer, largely ignoring the supplier in general, and the suppliers’
management accounting in particular. Secondly, extant studies have largely ignored
how IOCM practices vary in different phases in the exchange process. The purpose of
this paper is to address these gaps. More specifically, it aims to identify how and when
suppliers and buyers jointly utilise suppliers’ management accounting for IOCM
purposes in the exchange process.
3
The remainder of this paper breaks down into five principal sections. Firstly, the
literature on IOCM and the exchange process is discussed. Then, the method of an
empirical inquiry into the phenomenon is presented. Subsequently, the results of that
study are presented and analysed. A discussion follows and, in the final section of the
paper, some conclusions are presented. Limitations and implications of the study are
also addressed.
2. A Framework for the use of suppliers’ management accounting for IOCM
This section discusses phases in the exchange process and addresses IOCM techniques.
2.1 The exchange process
Various models have been proposed to describe the process of exchanging a product or
service. These often take the view of the buying firm, considering the exchange to be a
purchasing process (see Laois and Moschuris, 2001). When looking at exchange as a
process where both buyers and sellers play important roles, though, a number of phases
can be identified (e.g., Christopher, 1998; Lamming, 1993). For the purpose of this
paper, we identify six phases where costs are likely to be calculated using suppliers’
cost data. These phases represent a synthesis of the literature (e.g., Fisher, 1995;
Nilsson, 2004) since no models of the exchange process specifically consider the
suppliers’ role in interorganizational cost management. (It should be noted that we
ignore phases prior to and after exchange).
4
1. Supplier evaluation and selection. In this phase, the buyer evaluates offers and
selects supplier. One difficulty lies in making offers equivalent, since different
offers may be based on different solutions. Then, suppliers’ cost data might be
crucial (Seal et al., 1999; Rajagopal and Bernard, 1993). Supplier selection is
not necessarily a question of choosing the lowest bidder, however. Rather, given
certain cost restraints it often focuses around selecting the supplier whose
business processes and suggested solutions offer the best possibilities of
becoming integrated with the processes and solutions of the buyer (Axelsson and
Wynstra, 2002). Supplier selection is, to a large extent, a matching process
between supplier capabilities and buyer needs. Ellram (2000) points out that in
the case of strong time constraints or when the seller’s product is unique, the
selection process puts the buyer in a position of dependence on the supplier.
2. Concept discussion. Since supplier selection often is not a question of simply
choosing a complete offer from the lowest bidder, it may be necessary to more
closely establish a joint basis for calculating costs (Seal et al., 1999; Nilsson,
2004). This can take place before and simultaneously with the supplier selection
phase. This is especially important when complex products are involved that
require that buyers and sellers cooperate in R&D, i.e. when suppliers are
selected based on general proposals or early prototypes (e.g., Fisher, 1995).
During this early phase, general or main features of the product are, thus, in
focus, and many details require further joint development work.
5
3. Joint product design. Even if the supplier has proposed a general solution to the
buyer’s problem, issues may remain before the final component is developed.
The product design phase is in many cases critical for cost reduction, since a
large share of costs is determined at this time (e.g., Ansari et al., 1997). Ellram
(2000) points out that activities related to design changes can, especially when a
high degree of interaction is required, be among the most time and resource
consuming of the entire exchange process. While joint product design has been
studied (see, e.g., Lynch and O’Toole, 2006), few authors have looked at cost
management (Fisher, 1995, is an exception).
4. Joint process development. Along with product design alternatives,
manufacturability and related costs are addressed in this phase. Different design
decisions normally involve a number of trade-offs, concerning e.g. quality, ontime delivery, investment requirements, and cost associated with these (Ansari et
al., 1997; Christopher, 1998). Arguably, in this phase decisions are taken
concerning machinery, tools, sub-contracting and forms of interaction between
supplier and buyer. Also joint process development has been studied to some
extent (Fisher, 1995).
5. Price revisions. Also interaction between the buyer and seller during full-speed
production is highly relevant (Axelsson and Wynstra, 2002; Nilsson, 1998).
From the point of view of a specific project this phase might span years, during
which the buyer and supplier might require price adjustments. The purpose is to
offset costs or changes in the market, both over longer periods of time and
6
changes occurring between signing of initial agreement and commencement of
full-speed production. Revisions can also be based on expected continuous
improvements (Ansari et al., 1997).
6. Product and process redesign. Since deliveries might go on for years, changes
may also have to be made regarding product features such as materials and
design elements. Manufacturing processes may also have to be changed, either
as a consequence of changes in design or as a consequence of the introduction of
new manufacturing technology (e.g., Christopher, 1998). All these changes,
thus, take place after full-speed production has started, during the delivery stage.
To estimate the feasibility and effects of such changes, logically supplier cost
data would seem to play an important role.
Naturally, in real life the exchange process is less sequential than implied by the six
phases. In fact, several phases may be expected to occur simultaneously. In some
exchange processes, certain phases likely do not occur at all. We are less concerned
with the sequence of events, though, than with the types of activities or decisions
involved in the exchange processes.
2.2 IOCM techniques
Interorganizational cost management can be defined as “[…] a structured approach to
coordinate the activities of firms in a supplier network so that total costs in the network
are reduced” (Cooper and Slagmulder, 1999:145). IOCM is often described as a
7
number of methods or techniques. Some of these are not used only for IOCM purposes,
although they are still frequently mentioned as tools for cost management in an
interorganizational context. IOCM techniques can be broken into three blocs: (1) target
costing, (2) trade-off techniques and continuous improvement, and (3) philosophies and
techniques related to suppliers’ costs (for the sake of simplicity these are all henceforth
referred to as techniques).
2.2.1 Target costing
Target costing (TC) aims to identify the cost at which a product should be manufactured
by determining the expected selling price, derived from the market (as opposed to the
costs), before the product is developed, and then subtracting the expected profit (Kato et
al., 1995; Ellram, 2000; Sakurai, 1989). Therefore, the TC process covers the entire life
cycle of a product, although the focus in the literature is on pre-production stages (Kato,
1993; Koga, 1999). Main challenges are to plan a product which satisfies customers,
establish the target cost, and then realise the target costs by applying various techniques
and philosophies (Monden and Sakurai, 1989). Kato (1993) points out that when
designing the product to meet the cost target, detailed cost information is required. The
bulk of the TC literature is based on Japanese companies. In this context not exceeding
allowable costs is stressed (Sakurai, 1996).
When the target cost is broken down to component level, the supplier is usually
involved (Ibusuki and Kaminski, 2007). This makes target costing one of the most
important parts of IOCM; one of its most prominent characteristics is that it tends to
push cost pressure further upstream in the supply chain (Tanaka et al., 1993). The
8
importance of the supply chain is therefore often stressed in the TC literature. For
example, Ansari et al. (1997:86) argue that “An optimized supply chain is one of the
most critical elements in attaining the target cost.” Sakurai, (1996:52) even goes as far
as claiming “the primary objects of target costing are direct material costs and direct
conversion costs”. It is therefore surprising that most stage models of TC do not deal
with the supplier or the purchasing function (Ellram, 2000).
In the “purest form” of TC, the price of the product is decided by the market rather than
by cost. This means that the target cost at component level should be based on a broken
down market price rather than the costs of the supplier (Cooper and Slagmulder, 1999).
Consequently, the TC can be viewed as an arms-length cost management technique
(Cooper and Slagmulder, 2001). Nevertheless, Ellram (2000) underlines that the target
cost should be achievable, indicating that the buyer’s design team considers suppliers’
costs. Cooper and Slagmulder (1999) identify four methods for obtaining information
regarding suppliers’ costs, including review of suppliers’ early price estimates,
obtaining cost information directly from the supplier, obtaining indirect cost
information, and analysis of historical trends. However, they do not specify why, how
or when supplier costs or cost data are used. When trying to reach the target costs at
component level, the buyer can approach its suppliers in various ways and the degree of
cooperation varies. Ellram (2000, 2006) points out that if the purchased component has
significant economic impact, more efforts will be spent on supplier selection and
changes in design and materials. Less important components lead to more distant
approaches, e.g. competitive bidding. Activities related to product development are
often critical (Ellram, 2006) and during this process cooperation between buyers and
9
sellers can become very close. It may include techniques such as quality-function-price
trade-offs, interorganizational cost investigations and concurrent engineering to reach a
target cost.
2.2.2 Trade-off techniques and continuous improvements
Due to lock-in effects of costs during the pre-production phases of a product’s life cycle
(e.g., Raffish, 1991), most efforts at reaching the target cost appear to be conducted
while designing the product or component (Yoshikawa et al., 1989; Ibusuki and
Kaminski, 2007). Techniques applied here all deal with trade-offs between product
features, one of which is normally cost (Yoshikawa et al., 1989).
Quality-function-price trade-off (QFP) has been studied in a number of cases (Cooper,
1995; Cooper and Slagmulder, 1997, 1999, 2004; Cooper and Yoshikawa, 1994a,
1994b). It represents a model of how a seller attempts to negotiate with a buyer in terms
of quality, target price and functionality (Cooper and Yoshikawa, 1994a). Since it deals
with three dimensions, it can be used as a negotiation tool, but also to reduce the impact
of the target price since three variables can be negotiated (Cooper, 1995). This increases
chances of reaching a solution suitable for both parties. Koga (1999), though, claims
that in many cases the QFP analysis can be modified by replacing quality with leadtime, since time to market is increasingly important, while often high quality is not a
negotiable variable but a prerequisite.
Interorganizational cost investigations and concurrent engineering (also concurrent cost
management) are similar to QFP analysis. The difference is the degree of joint R&D
10
and interaction between the two parties’ engineers. QFP analysis involves less dramatic
changes of the product while interorganizational cost investigations reflect more
fundamental changes of the product. Concurrent engineering increases the scope of
design changes and involves the most intense cooperation between the parties (Cooper
and Slagmulder, 2004).
Value engineering (VE) and value analysis (VA, also referred to as “kaizen” or
“continuous improvements”) are two further techniques mentioned in the literature as
important tools for reaching the target cost. The basic logic of VE is to relate the cost to
what the buyer is willing to pay for a product with certain characteristics. VE, therefore,
supports efforts to manage the trade-off between the characteristics of the product and
cost (Ibusuki and Kaminski, 2007). Monden (1992) points out that in this process both
the purchasing department and the supplier can play important roles. The difference
between VE and VA is at what stage of the product’s life cycle efforts are undertaken
(Ansari et al., 1997; Monden, 1992; Monden and Hamada, 1991). While there is no
consensus in the literature, most authors argue that VE is carried out before the product
is developed while VA takes place during production (e.g., CIMA, 1996).
Finally, minimum cost investigations (MCI) covers the phenomenon of multilevel
supplier meetings when parties from different firms in the supply chain jointly
investigate how the product can be designed for efficient manufacturing (Cooper, 1995;
Cooper and Slagmulder, 1997, 1999, 2004; Cooper and Yoshikawa, 1994a, 1994b). In
Japan, MCI is initiated by the company at the top of the supply chain when one firm is
11
unable to meet the target cost. Cost data are then shared when negotiating about profit
margins throughout the supply chain.
2.2.3 Techniques related to suppliers’ costs
These techniques are related to and focus on the supplier’s costs for interorganizational
purposes. Cost tables were originally developed to support estimation of the cost of
direct material to support the purchasing function of the buyer (Tani, 1994). This
technique has an interorganizational origin since cost tables have been extended to a
decision support system based on different production activities undertaken by the
buyer and the supplier. According to Sakurai (1996), cost tables are a valuable tool for
companies using TC. They contain data regarding direct material and conversion
activities, and can include very specific data on both suppliers’ and buyers’
manufacturing processes (Ansari et al., 1997). Major cost drivers are identified and
documented, and conventional allocation bases are common (Yoshikawa et al., 1990).
There are different types of cost tables, though, depending on when and where they are
used (Yoshikawa et al., 1990; Tani, 1994). Some are employed at early stages of the
development while others are used for purchasing and production cost management.
Cost tables can also be employed to show the supplier how much more efficient it is to
use the most suitable production equipment (Yoshikawa et al., 1990). It is worth noting
that even if cost tables deal with the supplier’s costs, calculations are carried out by the
buyer.
Disclosed cost data, cost split-up and cost breakdown are alternative terms used for
costs specified in certain forms designed by the buyer. The term cost analysis is
12
occasionally also used to show the supplier’s costs to the buyer in a certain form
(Bailly, 1987). The cost data provided by the supplier is presented in a certain form
specifying the structure of the cost object in different categories (Cooper, 1995; Bailly,
1987; Munday, 1992a, 1992b). The way costs are calculated (e.g., depreciation or profit
margin) is specified by the buyer.
Another technique is open books (also cost transparency, open book accounting, or
open books policy), the purpose of which is for the buyer to help the supplier reduce
costs by identifying critical areas, particularly through improved R&D (Seal et al.,
1999). In effect, cost data are shared to achieving benefits for both parties (Ellram,
1996; Seal et al., 1999). Open books is therefore a way for two (or more) organizations
to work together (McIvor, 2001; Mouritsen, et al., 2001), rather than a costing
technique. This also means that opening the books can be seen as manifestation of two
organizations moving closer through increasing transparency (Christopher, 1998). Open
books, thus, requires that the supplier provides the buyer with access to accounting data,
which could also be harmful to the supplier (Christopher, 1998; Ellram, 2000; Kulmala,
2004; Kajüter and Kulmala, 2005). Therefore, one can expect to find open books
primarily in relationships exchanging a product offering possibilities of cost reduction
through cooperation around presented cost data (Kajüter and Kulmala, 2005).
According to Ellram (1996), open books are applied in long-term and/or highly critical
relationships with a high degree of cooperation. Further, Carr and Ng (1995:359), argue
that open books represent a continuum, from those who are “totally open book” to those
who are “down right awkward” in sharing information. Cooper and Slagmulder (1999)
13
present similar notions, referring to “partial open book” and “full open book” when
discussing willingness to provide information to the buyer.
2.3 Suppliers’ management accounting, IOCM and phases in the exchange process
From the review of interorganizational cost management techniques, we can see that
IOCM practices tend to depend on the context (Cooper and Slagmulder, 2004). An
important factor determining the application of IOCM techniques is degree of R&D
(e.g., Ellram, 1996) and other pre-production activities of the particular project. This
also reflects the strong focus on R&D in the IOCM literature. Degree of collaboration
cannot only be studied at the level of the relationship, though. Different phases in the
exchange process may also entail different levels of collaboration. We may, therefore,
suspect that different IOCM practices occur in different phases. To study IOCM in the
exchange process we will focus on the six phases identified above.
Management accounting can fulfil various functions (Mellemvik et al., 1988). In
particular, the control function has been widely recognized in the literature (Dekker,
2003, 2004; Seal et al., 2004; Mouritsen et al., 2001). How management accounting
supports decision making has hardly been studied at all, though, in spite of the fact it is
one of its traditional functions (Horngren, 1995, 2004). More precisely we will study
the main purposes of calculating costs for decision making, as well as when this occurs.
In summary, in regard to each of the six phases we will explore (1) the main purpose of
costing, i.e. why suppliers’ costs are calculated and presented, (2) when costing is
undertaken, and (3) the type of IOCM technique(s) involved.
14
3. Method of research
3.1 Research design
This paper investigates the use of IOCM techniques during phases in the exchange
processes between organizations. Due to limited prior knowledge, a relatively open and
exploratory approach was deemed appropriate (see, e.g., Ferreira and Merchant, 1992;
Otley and Berry, 1994; Kaplan, 1986). To avoid what Hägg et al. (1988:535) refer to as
the study of management accounting in “technical isolation”, a case approach was
chosen where the relationship in question was considered the case and the main unit of
analysis. Multiple cases were selected to this allowed contrasting, substantiation and
replication of findings. This serves to distinguish idiosyncrasies from findings of more
general prevalence.
The choice of three cases represents a trade-off between desired depth and time
constraints. For the sake of comparison and analysis, certain aspects of the cases are
held constant, including the fact that they are related to the Swedish automotive
industry. Variation between cases was sought mainly regarding the degree of
interaction, since Ellram (1996) implies that this is an important determinant of IOCM
technique usage. A relatively cheap product requiring little R&D was chosen when
searching for a more distant relationship with less interaction. This corresponds to the
first relationship (R1). The second relationship (R2) was built on a product which
required a larger degree of interaction, while the third relationship (R3) contained a
15
product which required a significant amount of cooperation between the two parties.
This approach case selection may be referred to as theoretical replication (Yin, 1989).
3.2 Data collection
One advantage of case studies is that they allow for a variety of data collection methods
(Yin, 1989). Here data were collected through semi-structured interviews, open
discussions and direct observations (at meetings, manufacturing plants, discussions,
products). Internal reports and other forms of written material provided by the firms and
available in the public domain were also consulted. This was useful not only to generate
as rich a picture of the cases as possibly. It also allowed for comparisons to ensure
reliability, and occasionally served to improve respondent recall. To the same end,
multiple respondents were interviewed.
Nine interviews were held at supplier one (S1), eleven at supplier two (S2), and eight at
supplier three (S3). Five interviews were carried out at buyer one (B1), four at buyer
two (B2), and four at buyer three (B3). A total of 41 interviews were, thus, conducted.
Respondents included purchasers (both of the buyer and supplier), key account
managers, accountants, market managers, managing director, customer project
coordinator and staff dealing with logistics and quality programs All interviews were
tape recorded. Data regarding the three cases were collected during a period of one-anda-half years.
3.3 Data analysis
16
The extensive case material was compiled and sorted in such a way that the use of
IOCM techniques within each relationship could be clearly identified. Tables were
constructed and the empirical data were scoured for evidence of IOCM practices. A
summary of this is provided in the article (see Table 1). The analysis process was
greatly facilitated by the use of the semi-structured questionnaire and the analytical
framework. Secondly, the findings from each case were contrasted in a process of crosscase analysis.
Several measures were taken to safeguard the quality of the analysis process and the
findings. Efforts were consistently made to interview more than one respondent about
the same issue, to allow for comparisons between respondents’ statements. Written
material from and about the firms were used to the same end. The semi-structured
questionnaire ensured that respondents were interviewed about the same issues across
firms. Finally, respondents were confronted with findings to improve internal validity
(Yin, 1989). External validity of the study was primarily of concern in regard to its
ability to allow for theoretical generalization (Yin, 1989), and no claims are laid on
generalizability in a statistical sense. The structured analysis process was the main
measure undertaken to safeguard theoretical generalization.
For reasons of confidentiality, no company names, specific products, turnover numbers
or numbers of employees are revealed. This was a requirement from the firms for
participation.
17
4. IOCM in the exchange process in three buyer-supplier relationships
4.1 The three relationships
Each relationship is introduced and an overview of IOCM practices is presented (see
Table 1).
4.1.1 Relationship one
S1 was founded in the 1940s and has 80 employees. Throughout its history, the firm has
primarily worked in the automotive industry, manufacturing various forms of clamps
and other fastening equipment. The manufacturing process is relatively simple with a
low degree of automation, treating the component in one or a few steps. S1 sells about
45 percent of its production to B1, a large Swedish vehicle manufacturer. Joint projects
usually follow a particular vehicle model, which means that they have natural start and
end points.
The firms have been working together since the 1960s, and B1 helps S1 improve
products and business processes. This benefits B1 as well as other buyers. B1 is heavily
involved with S1’s quality assurance, administrative and logistics processes as parts of
B1’s supplier development program. S1 faces strong competition and strict
requirements from its buyers, so the value of B1’s involvement is recognised by
management. B1 also derives benefits from this collaboration, since poor quality or
delays at S1 would cause serious problems.
18
In the relationship between S1 and B1, costs are presented and used occasionally. The
main factor in determining this is price of the order; S1’s costs in case of small orders
are hardly discussed whereas large orders motivate more discussions. Another reason
for discussing S1’s costs is if there are reasons to suspect misunderstandings. S1 uses
mainly its costing system, with occasional modifications, when preparing an offer. The
price is based on the full costs calculated in a traditional way in accordance with the
Swedish costing tradition.
4.1.2 Relationship two
S2 develops and manufactures load carrier systems for cars and supplies only the
automotive industry. The firm is one of the market leaders and has a number of
subsidiaries world wide. B2, a large Swedish car assembler, in turn, serves many of the
largest car manufacturers. Every order corresponds to a project that lasts for about three
years of development work, followed by a number of years of production related to a
specific car model.
S2 possesses important information about the preferences of end customers, knowledge
valued by B2. Representatives of both firms describe the relationship as “open”,
“special” or “different from traditional buyer-seller relationships”. This relates largely
to the intense cross-functional work carried out across company boundaries, particularly
during the pre-production phases. S2 even has a member of staff permanently stationed
at B2’s plant. The two firms have been working together to increase information
exchange and reduce time to market with a strong focus on cost reductions. This both
requires and creates a great deal of trust, and both parties claim that the relationship is
19
characterised by a problem-solving atmosphere. Improved quality, support to find
cheaper suppliers, continuous productivity improvements, and prestige are important
benefits that S2 gains from working with B2. Any delays in delivery would be very
costly for B2, and quality problems could prove disastrous, especially if the product
fails to meet stress requirements.
In the relationship between S2 and B2, all phases in the exchange process take place in
more or less every project. Choice of supplier is more of a formality than a struggle with
competitors, though. This privileged position is due to the fact that B2 regards S2 as
being a “favoured supplier”. During a project, two coordinators arrange meetings for
pooling of interests. The most intense cooperation takes place during concept
discussions, joint product design and joint process development. S2 calculates its costs
frequently and in a number of different ways, depending on whether the meeting serves
to solve a particular problem or if it is a “milestone meeting”, which is more formal in
character.
4.1.3 Relationship three
S3 manufactures a wide range of products for the automotive industry, and is part of a
large company group. The firm is divided into a number of business units. The one in
focus here delivers individual components and complete assemblies of gearshift
systems. B3 is a large Swedish car assembler.
In the relationship between S3 and B3 the project is the main building block. Nearly all
commercial discussions are related to projects, the life cycles of which follow a car or
20
truck model. Since it is difficult for competitors without previous contacts or a very
strong reputation to take over a customer, the relationship has survived many projects.
S3 holds a market position where they are perceived to manufacture exclusive and
expensive products.
The relationship has a long history and B3 has invested a lot of time to help S3 develop
a strong position as preferred supplier. Further, both parties have invested a
considerable amount of time getting to know each other, intending to maintain and
improve their relationship. Both are well acquainted with the other’s business processes.
The relationship is relatively well regulated and formal, with tasks clearly defined by
both parties.
In R3, costs play an important role, particularly at the beginning of a new project. The
start-up phase is relatively formal, despite the long-term relationship. The product is
expensive and complex, and requires considerable R&D. Thus, cooperation during
concept discussions, joint product design and joint process development is critical and
involves considerable efforts from both parties. S3 works relatively independently,
though, and then presents and discusses proposed solutions with B3. Both parties stress
that during the pre-production phase, specifications of the components often change
dramatically as the project develops. Interestingly, S3 does not allocate indirect costs in
its routine costing. As the costs discussed with B3 are normally full costs, indirect costs
are allocated outside the costing system. To the extent possible, previous products or
modules are also used as a basis on which changes are calculated, i.e., only changes are
calculated, rather than calculating costs from the start.
21
--- Please insert table 1 about here ---
4.2 Interorganizational cost management in the exchange process
4.2.1 Supplier selection
Not all projects start with formal supplier evaluation, but when it takes place in any of
the three relationships, suppliers’ costs are presented and discussed. This is typically an
important part of the offer. In R1, though, costs are calculated less frequently, and when
this happens costs are typically presented in a relatively simple form. Compared to the
other two relationships, costs are presented primarily when large amounts are involved
or when there is reason to believe that some kind of misunderstanding may have
occurred. Small and/or repeat orders usually neither warrant presenting costs nor joint
cooperation around related issues. In R2 costs are used to a greater extent on those rare
occasions when competitors are invited to submit offers. When S2 is the only supplier,
costs are largely treated as a formality in supplier selection. It should be noted, thought,
that long before any formal supplier selection decision, the two parties have been
working together with rough outlines of the project and initial blue prints. During this,
S2’s costs are used. In R3, when a new project is initiated (as opposed to being based on
previous components), S3 faces competition. Cost data are used both for evaluating
S3’s offer as such and to compare it with competing offers. This is most important in R3
due to greater product complexity.
22
The main IOCM technique observed in this phase is a form a target costing; the buyer
deduces a cost, mainly derived from the market. However, the supplier plays an active
role in setting target costs, since it is largely derived from suppliers’ cost data presented
for the project (cost split-ups). Also previous experience gained through open books is
important in this. The target cost serves the purpose of setting a goal and to signal
expectations. This is particularly important in R3, and to some extent in R2, since in
most cases in this phase neither the buyer nor the supplier knows in detail what the
finished product will look like. It would therefore be impossible or irrelevant to set a
component level target cost.
4.2.2 Concept discussion
R1 exchanges a relatively simple product, and therefore the parties do not discuss
functions in broader terms and, accordingly, costs are not discussed. In R2 and R3,
though, the product as such is open to greater discussion and its functions can be
achieved in different ways. Due to time constraints, this phase is closely linked to and
often carried out simultaneously with supplier selection. Also, in many cases S2 and S3
are actually the ones with knowledge about end customers’ preferences. In both these
relationships, costs are, therefore, of greater importance in initial discussions about
design and price-function trade-offs. Depending on how the work is carried out in this
phase, the frequency of cost calculations varies. In R2 the product is developed jointly.
Meetings are frequent, and cost is one of many issues discussed. In R3, the early
development work is carried out mainly by S3. After certain tasks are completed,
though, issues relating to design and functionality are presented to B3. The buyer
reviews the supplier’s suggestion(s) – and costs related to these – and provides S3 with
feedback. Although discussions deal with the early stages of product development, in
23
both R2 and R3 costs of different design solutions are a main concern. B2 and B3 have
a target cost they expect suppliers to reach. Nevertheless, suppliers’ cost data play an
important role in decisions regarding major functions. In both these relationships, the
use of cost data is supported by mutual trust developed in previous transactions.
The main IOCM technique employed is a form of functional analysis. The target cost
from the buyer is also used as an overall goal. In both R2 and R3, a “cost platform” is
established early on. I.e., costs, often in the form of a cost split-up, are set for a product
or a module with certain characteristics. When changes are discussed, the impact of
those changes are added to or deducted from the platform. This is particularly frequent
in R3, where changes between initial offer and finished product are often substantial,
and where modules are used for multiple products when possible. The cost platform
also serves other purposes. The first is to summarize costs and clarify what agreements
have been made, as well as to establish what has been achieved so far within the project.
S3 also stresses that this is a way of controlling costs of a product not yet designed,
since future cost changes will only be accepted by the buyer if they are motivated by
changes in the product. Consequently, even if the product will change dramatically
during future design meetings, the supplier is committed to the platform.
4.2.3 Joint product design
In all three relationships, at least to some degree the design of the product is carried out
jointly. Then, costs are a main joint concern. Differences can be noted between the
relationships, however. In R1, costs are presented in connection with alternative
solutions, suggested either by S1 or B1. Since the function is set from the beginning of
24
the project while the product is relatively uncomplicated, discussions regarding design
are limited. Different cost alternatives are, therefore, not discussed greatly. Rather, costs
are normally just presented when the buyer, or less frequently the seller, has reason to
believe that there are possibilities to reduce costs without compromising other aspects
of the product. The IOCM techniques used are mainly those dealing with VE and QFP
trade-offs. They are conducted in rather simple forms and only occasionally.
When it comes to R2, the design phase is more intense and the design of the component
is more challenging; a number of requirements and demands have to be met. The
product is also more costly than in R1. This means that greater benefits, including cost
reductions, can be achieved by designing the product efficiently. In R2, this process is
largely conducted jointly, and suggestions from both parties are frequently exchanged.
For example, B2 keeps highly advanced quality testing equipment placed at S2’s plant,
since it is more practical to test proposed solutions directly. The IOCM techniques
applied in this phase, simultaneous concurrent engineering, VE, cost split-ups, limited
minimum cost investigations and open books, all involve intense cooperation between
the two parties. Both parties perceive this phase to be the most important one in which
costs are discussed A respondent at B2 also stresses how important it is for S2 to
present “honest” cost data. All those involved are under considerable pressure and
“there is no time to play around”.
Possibilities to reduce costs in R3 are significant. This, along with a highly complex
product, places considerable pressure on S3 and B3 regarding joint design. At meetings,
different trade-offs are discussed with the goal of reaching a cost target. In order to
25
reduce costs, S3 uses components or modules from previous products, for which costs
have already been established. Also, since the cost platform plays such an important
role in cost calculations, typically only the costs of a particular change need to be
calculated. Between meetings S3 works relatively independently and the relationship
involves less intense joint cooperation around IOCM and R&D. Therefore, consistency
in cost calculations is perceived as crucial, since mainly costs of adding or removing
attributes are involved. The main ICOM techniques seen are parallel concurrent
engineering, VE, limited minimum cost investigations and cost split-ups and, to a lesser
extent, open books.
A similar approach to IOCM can, thus, be seen in all relationships in the sense that
design trade-offs are discussed. However, suppliers’ cost data are used differently and
different IOCM techniques are relevant in the different relationships. The frequency of
usage and IOCM technique refinement increase the more complex and costly the
product involved.
4.2.4 Joint process development
Since different design solutions tend to be related to different manufacturing processes
and purchased components, process development is closely related to product design. In
R1, costs are presented and discussed only to a limited extent. Costs are studied in detail
when only S1 or B1 expects that something can be manufactured or purchased
differently, or when the order is very large. Then, discussions often concern a designquality trade-off. Neither party regards the presenting of costs as playing a major role
26
when deciding on only manufacturing processes, though, even if large cost savings have
been achieved after suggestions from B1.
In R2 the main decisions in process development are connected to component design
changes. Discussions regarding manufacturing processes as such do not involve cost
data to any large extent. When costs are presented, the purpose is to show those
differences between various manufacturing techniques. Costs are presented in relation
with S2’s purchasing of components and tools, which is seen as important in efforts to
reach the target cost. It should be noted, though, that in regard to purely internal
manufacturing decisions, S2 has a great deal of freedom and sharing costs is of less
importance.
In R3, often the suppliers’ suppliers are involved in manufacturing process discussions.
Meetings concerning design costs take place regularly and tend to be formalized.
Manufacturing costs not relating to product design are rarely shared, though, except for
decisions concerning new tools that involve high costs. The cost of S3’s purchased
material is also often discussed since B3 in heavily involved in selection of materials.
Although pure manufacturing process decisions only involve S3’s cost data to a limited
extent, S3 finds such discussions important since they direct attention towards potential
investments needed to maintain manufacturing technology at a suitable level.
Due to these differences in supplier-buyer interaction and different purposes of costing
data, some differences in IOCM technique usage can also be noted; the IOCM technique
used and use of the suppliers’ costing both relate to the joint process. In the simpler
27
collaboration in R1, costs are not discussed to such a great extent as in the other two
relationships. The same can be seen when R2 and R3 are compared. R3 has a more
complex supplier base, and along with this we can observe minimum cost
investigations, cost split-up and open books, which are all related to the suppliers’
management accounting.
4.2.5 Price revisions
Decisions relating to price revisions tend to focus around profit sharing. The three
relationships are similar in this respect. The contract between the buyer and the seller
regulates two issues related to this: (1) expected annual price reductions, based on the
assumption that the supplier should be able to increase its efficiency at a certain rate
each year; (2) conditions that change during the project, such as significant deviations in
number of units purchased and changes in the price of raw materials. Since all three
suppliers are relatively sensitive to the latter while profit margins are slim (and open for
the buyer to see!), changes in costs for raw materials and quantities are compensated for
by the buyer. All parties involved perceive this as a very important phase in the
exchange process, although tend to treat it mainly as a formality. The conditions are
similar in most projects the suppliers are involved in, and all parties involved claim that
to undertake price revisions is industry standard among vehicle assemblers.
The main IOCM techniques used in this phase are value analysis and target costing in
the sense that price reductions are based on the expectation that the supplier manages to
reduce costs in line with price reductions. The suppliers claim, though, that normally it
is only possible to match price reductions with cost reductions the first years. After that,
28
price reductions lead to slimmer profit margins. This technique also tends to impact on
the profitability of future products, particularly if the product is largely based on
modules. This is raised as a critical issue by S3; since modules from previous products
have already gone through annual price reductions, it can be difficult to reach
profitability for such components.
4.2.6 Product and process redesign
During full-speed production, changes often cause significant costs, not only regarding
suppliers’ manufacturing costs (new tools and set-up costs), but also due to new buying
routines, new mounting equipment, new article numbers, etc. However, changes in
manufacturing processes, supply management and product design can be seen in all
three relationships. There are no major policy differences between the three suppliers. In
R1, changes are easiest to implement, although potential cost savings tend to be fairly
limited. In R2 and R3, where manufacturing processes are designed for larger numbers
of products, changes are costly. Therefore, major changes only take place when either
party believes that significant benefits can be achieved through new technology or
product redesign.
Even if this type of costing situation rarely occurs, there are still joint efforts in
improving suppliers’ manufacturing and administrative processes. All three suppliers
are involved in various supplier developments programs orchestrated by the buyers.
These programs tend to have a clear focus, such as improvements in logistics, quality
and manufacturing speed. The costing of the supplier apparently plays no major role in
this phase in any of the three relationships, though. Therefore, only simple forms of
29
IOCM techniques – largely drawing on previous joint costing – are used, such as simple
forms of value analysis and target costing.
5. Discussion
Although not always explicitly stated, prior research implies that potential cost benefits
in a broad sense predict IOCM practices (e.g., Cooper and Yoshikawa, 1994; Cooper
and Slagmulder, 2004; Hameri and Patela, 2005). Similar observations are made here.
In R1, where the product is relatively cheap and there is limited joint R&D, cost savings
are less obvious than in R3, which in many respects represents an opposite case. There,
the product is complex and costly, there is a great deal of R&D, and potential cost
savings are greater. Consequently, more efforts are spent to reduce cost and more
refined IOCM practices can be observed in R3 than in R1. However, IOCM practices
are not simply a function of potential cost savings at the level of the product (see, e.g.,
Cooper and Yoshikawa, 1994; Cooper and Slagmulder, 2004) or a function of
relationship characteristics (Cooper and Slagmulder, 2004; Kajüter and Kulmala, 2005).
When breaking the exchange process down into phases and looking more carefully at
the role of the supplier, it becomes apparent that IOCM practices vary within
relationships and in relation to specific products. More specifically, we see different
degrees of collaboration around IOCM in different phases. Similarly, the extent to
which suppliers’ management accounting is used also seems to vary throughout the
exchange process. Sometimes there is intense collaboration around IOCM, and the
supplier’s management accounting is used extensively. At other times, the opposite is
the case. However, we also note situations where there is intense IOCM collaboration
30
but limited use of suppliers’ management accounting, and vice-versa. In effect, four
generic situations characterizing different phases can be noted. These are the starting
point for our continued discussion.
5.1 High level of cooperation and high importance of suppliers’ managerial accounting
This has been noted particularly in the supplier selection phase, in concept discussions,
and in joint design of products. It also occurs when significant changes in product or
manufacturing technology are discussed during later phases.
In the case of complex products where relationships involve a great deal of joint R&D,
suppliers typically have to be selected based on a proposal or prototype that everybody
involved knows will change dramatically. When this is the case the supplier selection
process is combined with functional analysis in order to specify main functions of the
component. This also means that costs cannot be precisely calculated by any of the
parties and prices cannot be set at the beginning of a joint project. Therefore, when
buying firms at an early stage present an expected price or price range, cost data from
suppliers’ managerial accounting typically play a very important role. As an illustration,
none of the sourcing decisions in the study where a simple question of suppliers
accepting or rejecting a target cost. In R1 costs shared by the supplier played a relatively
less important role, though, partly because they were easier to predict by the buyer than
in R2 and R3, and partly because the product was less complex and less costly. In
effect, it seems that willingness to accept the buyer’s target cost is not the only or even
the main criterion for supplier selection. Other factors such as trust, capabilities,
31
previous experience, the seller’s track record, ability to work together, and time pressure
are important. In fact, these factors appear to be more important the more complex and
R&D intense the project, meaning that the supplier selection phase becomes more
complex for both buyer and seller than often implied by the literature.
Further, the target cost at component level facing the supplier to some extent loses its
importance as it is subject to a number of trade-offs. Our study, therefore, questions the
assumption that target costing is most beneficial when the product requires planning and
trade-offs during pre-production phases (Fisher, 1995); high R&D levels clearly give
rise to challenges when it comes to deciding on a target cost at the early stage of the
project. Thereby the target cost also becomes embedded in a complex supplier selection
situation, as opposed to just selecting the supplier based on willingness to accept the
component target cost.
Our findings also clearly indicate that suppliers’ management accounting plays an
important role in supplier selection, particularly in relationships involving a high degree
of R&D. Joint functional analysis is undertaken even before the supplier is formally
selected, especially in the case of R2 and R3, and presented costs serve as a cost
platform. In establishing and using such a platform, cooperation around suppliers’ cost
data is absolutely crucial.
Joint product design is carried out in different ways in the three relationships. Efforts to
reach the target cost are also applied differently. Cooper and Slagmulder (1999: 224)
note that “In theory, under target costing, customers are unaware of the profits that
32
their suppliers earn on the products they sell”. The results of this study, however,
indicate a different way of cooperating around target costing. Not only cost and profit at
product level are known by the buyers, but the costs of virtually every single operation,
process, material, module etc. are disclosed through the suppliers’ costing. By using
supplier cost data, the target cost broken down to component level by the buyer is
further broken down in a cost hierarchy at single operation and component level,
occasionally even involving suppliers’ suppliers. From a pricing point of view, this
contrasts to the market-based target-costing which is one of the main foundations of
target costing (e.g., Sakurai, 1989). In effect, here we see a cost-based pricing approach
that considers virtually every single cost item of the component.
It is apparent how suppliers’ management accounting supports IOCM techniques. In R1,
basic forms of trade-offs are occasionally discussed and cost data then play a much
smaller role compared to R2, where S2’s managerial accounting is involved in frequent
meetings supporting simultaneous concurrent engineering. The use is relatively
informal, though, as opposed to R3 where the product is mainly designed by S3. R3
involves a number of milestone meetings at which different suggestions are presented
and decided. This is a form of parallel concurrent engineering, where cost data take on a
formal character. The importance of accuracy is especially pertinent, since S3 is
strongly committed to presented costs.
5.2 Low level of cooperation and low importance of suppliers’ managerial accounting
33
The findings suggest that some phases, given certain relationship characteristics, are
relevant here. The first deals with price revisions during full-speed production in all
three relationships. The second includes the earlier phases of R1, where there is less
collaboration.
Continuous improvements are an important part of target costing (Sakurai, 1989) and
the literature points out that buyers support cost reduction efforts in the supply chain.
E.g., Carr and Ng (1995:360) state that buyers “reduce costs by reducing our costs”.
Interestingly, in all three cases buyers are hardly involved in this at all. Instead, such
improvements are delegated to the supplier. Nonetheless, expected price revisions are
supposed to be based on cost reductions. What we see here are examples of value
analysis/kaizen philosophy (e.g., Ansari et al., 1997), even if the parties do not find
detailed discussions useful. It is also worth noting that cost tables, which can be used as
a reference point concerning use of state of the art manufacturing technology
(Yoshikawa et al., 1990; Sakurai, 1996; Tani, 1994) and thereby indicate possible
improvements, are not used in any of the relationships. The reason is that the buyers are
well acquainted with the suppliers’ machinery and procedures. Consequently, the
suppliers’ managerial accounting would add little not already known by the buyer.
We also see this situation occurring in the earlier phases of the exchange process in R1.
Limited cooperation and use of S1’s managerial accounting can be explained by the
small size of the order and the limited R&D involved. S1 gets the order based on a
proposed “fair” price, which is easy to predict, or occasionally when B1 states a price
they are willing to pay. When the product is inexpensive, it is simply not worth
34
spending resources on supplier screening. It is also often perceived as risky to simply
accept the lowest bid from an unknown supplier. This could be called black-box target
costing and is in line with the view that the buyer simply sets a target cost, leaving
meeting it up to the supplier (Caputo and Zirpoli, 2002).
5.3 High level of cooperation and low importance of suppliers’ managerial accounting
Based on earlier discussions, it might be tempting to draw the conclusion that a high
degree of cooperation around interorganizational cost management should automatically
lead to a higher degree of use of supplier’s cost data. However, our results indicate that
it is possible to find intense cooperation around cost reduction in which suppliers’
managerial accounting is hardly used at all. This occurs mainly in joint process
development and in the full-speed production phases when carrying out extensive
supplier development (SD) programs (cf. Monden, 1992). Joint process development is
largely a consequence of joint product design and therefore cost data are less important
even if there is intense IOCM cooperation.
Two types of SD programs have been identified in the study: (1) There are
improvements of a particular component, e.g. concerning speed of production, quality
and investments in special equipment. This can be seen in all three relationships. Then,
sharing costs between the parties appears to be the only function of suppliers’
managerial accounting. (2) There are also more general SD programs that do not focus
on solving a specific problem. Rather, such projects may concern logistics, quality
levels, administrative issues, certain supplier policies, reporting standards etc.
35
Suppliers’ managerial accounting plays a very minor role in this, and such programs are
infrequent. Interestingly, the literature on IOCM has not explicitly dealt with this. Since
it occurs after the initiation of full-speed production, however, it might be seen as a
form of kaizen or value analysis (cf. Tani, 1994; Sakurai, 1996). On the other hand, our
findings indicate that this is carried out in project form and often has a dramatic effect,
while kaizen is a continuous process characterized by minor improvements.
5.4 Low level of cooperation and high importance of suppliers’ managerial accounting
This is an uncommon situation in all three relationships, and the main purpose is to
inform buyers about cost issues rather than to trigger any specific action. This can be
seen in two different situations. Firstly, at the very beginning of a project in R1 cost
data are presented along with blue prints and other parts of the offer. S1 presents how
costs are calculated and structured. This is done mainly in case of large orders or if B1
suspects that there has been some misunderstanding. It is, thus, part of the first phase of
the exchange process, and usually takes the form of cost tables, representing a simple
type of open books.
The second situation can be seen in all three relationships; costs are calculated with the
purpose of assuring the buyer that costs are reasonable. The purpose is mainly to foster
a good working environment. Although this may occur in any phase in the exchange
process, all three suppliers note that this is relatively unusual and it is not perceived as
very important. The use of suppliers’ management accounting with the sole purpose of
building trust is, thus, limited and the significance of open books in building trust as
36
attested to in the literature (e.g., Kajüter and Kulmala; 2005; Mouritsen et al., 2001)
finds limited support in our study.
5.5 Summary
Based on the discussions above, a two-by-two matrix of interorganizational cost
management practices in the exchange process can be created (see Figure 1).
----- Insert Figure 1 about here please ------
Additionally, we find two important activities that are not related to any specific phase.
These are supplier development programs where suppliers’ managerial accounting may
play a minor role even if collaboration around IOCM is intense. Also, activities relate to
the development of the relationship between buyer and seller – although occurring
relatively infrequently in the studied firms – entails limited IOCM cooperation but
suppliers’ managerial accounting plays a large role. This is, for example, done to ensure
buyers that sellers charge a reasonable price.
6. Conclusion
This study makes five main points regarding interorganizational cost management:
First, IOCM practices vary not just with different types of components, relationship
characteristics, and type of transaction. In different phases in the exchange process,
37
different IOCM techniques are used, the extent to which suppliers’ managerial
accounting is used varies, and collaboration around issues relating to IOCM differs
significantly.
Second, there is no automatic connection between the degree of cooperation around
IOCM and the extent to which suppliers’ managerial accounting is used in this process.
While the most common situation entails either high levels of cooperation and use of
suppliers’ managerial accounting, we find both situations where high levels of
collaboration are associated with limited use of suppliers’ managerial accounting and
vice-versa.
Third, IOCM practices in different phases of the process are clearly a function of
several factors. Overall, those phases perceived as offering the greatest opportunities for
cost savings and those phases that have the greatest impact on the final cost of the
product, motivate the deepest collaboration on IOCM issues and the greatest joint use of
supplier’s management accounting. This typically occurs in earlier phases of the
exchange process. In later phases, during full-speed production, suppliers’ managerial
accounting appears to play a lesser role.
Fourth, even if the nature of the relationship and component complexity by themselves
do not necessarily determine how IOCM is implemented, they still moderate practices
in different phases of the exchange process. Low degree of product complexity and,
consequently, lower degrees of interaction required in product development imply that
collaboration around interorganizational cost management is less intense, and that
38
suppliers’ cost data play a less important role in the exchange process. More superficial
relationships - a possible consequence of less complexity - have similar effects.
Fifth, unlike much of prior research we find that IOCM is not something that is only
implemented by the buyer for the buyer’s benefits. Rather, suppliers play important and
active roles in interorganizational cost management. Management accounting of the
supplier clearly supports joint work around IOCM. Sharing cost data through the use of
various IOCM techniques benefit sellers as well as buyers.
This study has some implications for management. It shows that negative perceptions
among many suppliers towards IOCM may often be unwarranted. It also shows that
applying target costing is more problematic than implied by the literature. Many authors
argue that target costing is especially appropriate in the case of selecting suppliers for
complex components that require a great deal of R&D. To the contrary, our findings
indicate that this situation presents serious difficulties in applying the “pure” target
costing logic, since neither party can specify the component in detail in this phase.
Consequently, pushing the market-derived price further up the supply chain is almost
impossible.
The study also has limitations that may be addressed in future research. It is difficult to
establish the relevance of our findings for other firms and contexts. We, therefore,
suggest that the external validity of our findings be tested on a large sample of
relationships. This study has also focused on relationships as they are relevant for
particular projects. An important issue for future research is whether IOCM is relevant
39
for firms in the wider context of relationship building. The sharing and joint use of cost
data may serve purposes outside specific projects. Additionally, future studies should
continue to recognise that IOCM is a joint process that involves, can be driven by and
benefits both parties in the relationship.
References
Ansari, S., Bell, J.E., the CAM-I Target Costing Group, 1997. Target costing – the next
frontier in strategic cost management. Irwin, Chicago.
Ask, U., Ax, C., 1997. Produktkalkylering i teori och praktik (Product costing in theory
and practice). Dissertation, Gothenburg School of Economics and Commercial Law,
Sweden.
Caputo, M., Zirpoli, F., 2002. Supplier involvement in automotive component design:
outsourcing strategies and supply chain management. International Journal of
Technology Management, 23 (1-3), 129 – 159.
Axelsson, B., Wynstra, F., 2002. Buying business services. Wiley, Chichester.
Baily, P.J.H., 1987. Purchasing and supply management, 5th Edition. London:
International Thomson Business Press.
Carr, C., Ng, J., 1995. Total cost control: Nissan and its UK supplier partnerships.
Management Accounting Research, 6, 347-365.
Christopher, M., 1998. Logistics and supply chain management, 2nd Edition.Financial
Times Pitman Publishing, London.
CIMA, 1996. Management accounting official terminology. CIMA, London.
Cooper, R., 1995. When lean enterprises collide. Harvard Business School Press,
Boston.
Cooper, R., Slagmulder, R., 1997. Target costing and value engineering. Productivity
Press, Portland.
Cooper, R., Slagmulder, R., 1999. Supply chain development for the lean enterprise –
Interorganizational cost management. Productivity Inc., Portland.
Cooper, R., Slagmulder, R., 2001. Interorganizational cost management and relational
context. INSEAD working paper series, 2001/109/AC, http://ged.insead.edu/fichiersti/
inseadwp2001/2001-109.pdf.
40
Cooper, R., Slagmulder, R., 2004. Interorganizational cost management and relational
context. Accounting, Organizations and Society, 29, 1-16.
Cooper, R., Yoshikawa, T., 1994a. Interorganizational cost management systems: the
case of the Tokyo-Yokohama-Kamakura supplier chain. International Journal of
Production Economics, 37, 51-62.
Cooper, R., Yoshikawa, T., 1994b. Yokohama Corporation Ltd., (a) The Yokohama
production system, case study 9-195-070. Harvard Business School, Boston.
Dekker, H., 2003. Value chain analysis in interfirm relationships: A field study.
Management Accounting Research, 14, 1-23.
Dekker, H., 2004. Control of inter-organizational relationships: Evidence on
appropriation concerns and coordination requirements. Accounting, Organizations and
Society, 29, 27-49.
Dyer, J.H., 1996. Specialized supplier networks as a source of competitive advantage:
evidence from the automotive industry. Strategic Management Journal, 17(4), 271-291.
Ellram, L.M., 1996. A structured method for applying purchasing cost management
tools. International Journal of Purchasing and Materials Management, 32, 11-19.
Ellram, L.M., 2000. Purchasing and supply chain management’s participation in the
target costing process. Journal of Supply Chain Management, 36, 39-51.
Ellram, L.M., 2006. The implementation of target costing in the United States: Theory
versus practice. Journal of Supply Chain Management, Winter, 13-25.
Ferreira, L.D., Merchant, K.A., 1992. Field research in management accounting and
control: a review and evaluation. Accounting, Auditing and Accountability Journal, 5,
3-34.
Fisher, J., 1995. Implementing target costing. Journal of Cost Management, 9 (2), 5059.
Hameri A-P., Paatela, A., 2005. Supply network dynamics as a source of new business.
International Journal of Production Economics, 98 (1), 41-55.
Horngren, C.T., 1995. Management accounting: This century and beyond. Management
Accounting Research, 6, 281-286.
Horngren, C. T., 2004. Management accounting: Some comments. Journal of
Management Accounting Research, 16 (1), 207-211.
Hägg, I., Magnusson, Å., Samuelson, L.A., 1988. Research on budgetary control in the
Nordic countries – a survey. Accounting, Organizations and Society, 13, 535-547.
41
Ibusuki, U., Kaminski, P.C., 2007. Product development process with focus on value
engineering and target-costing: A case study in an automotive company. International
Journal of Production Economics, 105 (2), 459-474.
Kajüter, P., Kulmala, H., 2005. Open-book accounting in networks. potential
achievements and reasons for failure. Management Accounting Research, 16, 179-204.
Kato, Y., 1993. Target costing support systems: Lessons from leading Japanese
companies. Management Accounting Research, 4 (1), 33-47.
Kato, Y., Böer, G., Chow, C.W., 1995. Target costing: An integrative management
process. Journal of Cost Management, 9, 39-51.
Koga, K., 1999. Determinants of effective product cost management during product
development: Opening the black box of target costing. Dissertation, Harvard University,
USA.
Kulmala, H., Paranko, J., Uusi-Rauva, E., 2002. The role of cost management in
network relationships. International Journal of Production Economics, 79 (1), 33-43.
Kulmala, H., 2004. Developing cost management in customer-supplier relationships:
three case studies. Journal of Purchasing and Supply Management, 10, 65-77.
Lamming, R., 1993. Beyond partnership – Strategies for lean supply. Prentice Hall,
New York.
Laois, L., Moschuris, S., 2001. The influence of enterprise type on the purchasing
decision process. International Journal of Operations and Production Management, 21
(3), 351-372.
Lynch, P., O’Toole, T., 2006. Involving external users and third parties in the new
product development process. Irish Marketing Review, 18 (1/2), 29-37.
McIvor, R., 2001. Lean supply: the design and cost reduction dimensions. European
Journal of Purchasing and Supply Management, 7, 227-242.
Mellemvik, F., Monsen, N., Olson, O., 1988. Functions of accounting – A discussion.
Scandinavian Journal of Management, 4, 101-119.
Monden, Y., 1992. Cost Management in the New Manufacturing Age. Productivity
Press, Portland.
Monden, Y., Sakurai, M., 1989. Cost management of Japanese automobile companies.
Productivity Press, Portland.
Monden, Y., Hamada, K., 1991. Target costing and kaizen costing in the Japanese
automobile companies. Productivity Press, Portland.
42
Mouritsen, J., Hansen, A., Hansen, O., 2001. Inter-organizational controls and
organizational competencies: Episodes around target cost management/functional
analysis and open book accounting. Management Accounting Research, 6, 221-244.
Munday, M., 1992a. Accounting cost data disclosure and buyer-supplier partnerships –
A research note. Management Accounting Research, 3, 245_250.
Munday, M., 1992b. Buyer-supplier partnerships and cost data disclosure. Management
Accounting, June, 28-35.
Nilsson, U., 1998. Produktkalkyleringens utformning och användning hos en mindre
underleverantör i fordonsbranschen. Licentiate Dissertation, Jonkoping International
Business School, Sweden.
Nilsson, U., 2004. Product costing in interorganizational relationships. JIBS
Dissertation series No. 019. Dissertation, Jonkoping International Business School,
Sweden.
Otley, D.T., Berry, A., J., 1994. Case study research in management accounting and
control. Management Accounting Research, 5, 45-65.
Puxty, A.G., 1993. The social and organizational context of management accounting.
London: CIMA/Academic press.
Raffish, N., 1991. How much does that product really cost? Management Accounting,
March, 36-39.
Rajagopal, S., Bernard, K., 1993. Cost containment strategies: challenges for strategic
purchasing in the 1990’s. International Journal of Purchasing and Materials
Management, Winter, 17-24.
Sakurai, M., 1989. Target costing and how to use it. Journal of Cost Management for
the Manufacturing Industry, Summer, 39-50.
Sakurai, M., 1996. Integrated cost management. Portland: Productivity Press.
Seal, W., Berry A., Cullen, J., 2004. Disassembling the supply chain: Institutionalized
reflexivity and inter-firm accounting. Accounting, Organizations and Society, 29, 7392.
Seal, W., Cullen, J., Dunlop, A., Berry, T., Ahmed, M., 1999. Enacting a European
supply chain: a case study on the role of management accounting. Management
Accounting Research, 10, 303-322.
Tanaka, M., Yoshikawa, J., Innes, J., Mitchell, F., 1993. Contemporary Cost
Management. Chapman and Hall, London.
43
Tani, T., 1994. How are Japanese companies preparing and using cost tables. Working
paper presented at the 17th annual congress for the European Accounting Association.
Van Weele, A., van der Vossen, G.J., 1998. Purchasing DuPont analysis of some major
Dutch companies. Holland consulting group, research report.
Yin, R., 1989. Case Study Research. Design and Methods. Sage Publications, Newbury
Park etc.
Yoshikawa, T., Innes, J., Mitchel, F., 1989. Cost management through functional
analysis. Journal of Cost Management, Spring, 11-19.
Yoshikawa, T., Innes, J., Mitchel, F., 1990. Cost tables: A foundation of Japanese cost
management. Journal of Cost Management for the Manufacturing Industry, Fall, 30-36.
Figure 1: IOCM practices in phases in the exchange process
Degree of cooperation around IOCM issues
High
Low
- Supplier selection1
- Supplier section4
High
- Concept discussion1
- Relationship development3
Importance
- Joint product design
of suppliers’
- Product and process redesign2
management
- Joint process development
- Price revisions
accounting
- Supplier development projects3
- Supplier selection5
in IOCM
Low
- Joint product design5
- Joint process development5
- Product and process redesign5
1
2
3
Notes: When complex product, When significant changes, Throughout the process, 4Part of
offer package, 5When mainly carried out by supplier and alternatives are presented along with
cost data.
44
Table 1 – Phases in the exchange process, costing and IOCM techniques used
Phase in the exchange
process
1. Supplier Purpose
selection
When
Relationship two
- to make different offers equivalent
- primarily in regard to larger orders
- when the buyer suspects that there is some kind of
misunderstanding due to differences in offers
- to make offers equivalent ( which vary significantly)
- Formal cost specification is always a part of new
project - Mainly a formality when there are no
competitors
In case of larger orders, a cost target is normally
included in the offer; Simple forms of open books main
in form of a cost split-up
- not perceived by respondents as relevant in
Relationship One
A cost target is included; Cost split-ups; Open books
When
- normally triggered by the buyer
- only when there are cheaper ways of achieving the
same or similar function
- costs are calculated frequently at joint meetings
- one of several issues discussed at design and
manufacturing meetings
Techniques
Simple forms of VE and QFP trade offs; Simple forms of Functional analysis; VE; Concurrent cost management
open books; (all occur only occasionally)
(simultaneous); Cost split-ups; Minimum cost
investigations (limited); Open books
Techniques
2. Concept Purpose
discussion
When
Techniques
3. Joint
product
design
Relationship one
Purpose
- to begin determining main characteristics of
component or certain details
- basis for changes in existing products, i.e. costs are
added or deducted based on these changes
- to summarize the project to avoid confusion or errors
regarding cost calculations and other technical and
commercial aspects
- serves as a basis and generates commitment for
further cooperation during the project
- conducted for every project
- costs are only one of several factors, although usually
discussed intensively
The first steps of a functional analysis; Cost split-up and
limited open books; A cost target is considered as a
goal
- costs are presented to discuss alternative designs and - to determine design and manufacturing details
manufacturing techniques
- many respondents consider this the most important
- to compare design solutions with manufacturing costs stage when costs are used
45
Relationship three
- to evaluate suppliers’ offers
- takes place every time a new project begins
- costs are discussed at a number of meetings
- occurs rarely in projects that are partly or largely
based on products delivered previously
A cost target is mentioned; Cost split-ups; Preliminary
functional analysis
- to discus main functions of the product
- to calculate for alternative solutions proposed to buyer
- to establish platform (due to significant changes in the
product between supplier selection and full-speed
production) in relation to which costs are added or
subtracted as design changes are discussed (can also
be based on previous products)
- critical for S3 to maintain profitability since it might also
impacts potential future projects
- conducted for every project
- costs are one of several factors discussed frequently
at joint meetings when deciding on main features
The first steps of a functional analysis; Cost split-up and
limited open books; A cost target is considered as a
goal
- design and cost reduction (key element as design
nears completion)
- to commit supplier to cost estimates (therefore, highly
reliable data are crucial)
- supplier works largely independently and presents
suggestions along with related costs
- costs are a major concern and are discussed often
- cost data of alternative production methods, designs
and materials are discussed
Functional analysis; VE; Concurrent cost management
parallel); Cost split-ups; Minimum cost investigations
(limited); Open books
4. Joint
process
development
Purpose
- to decide which machines and tools to use
- to highlight high raw material prices
- to motivate price changes
When
- presenting costs for manufacturing processes and raw
material not a part of standard procedure in every
project - only takes place when one of the parties
believes that improvements can be achieved
- occurs rarely just to motivate price/cost
Techniques
5. Price
revisions
Purpose
When
6. Product
and
process
redesign
Techniques
Purpose
When
Techniques
- to decide which machines and tools to use
- to coordinate the supplier’s supply base
- to ensure that the supplier is not overcharging
- costs are rarely presented since manufacturing
process decisions are largely left to the supplier
- costs of raw materials are rarely discussed, although
occasionally serves as basis for supply mgmt
discussions
- calculating costs to show that the supplier is not
overcharging only happens when there is risk of conflict
Simple forms of VE and QFP trade offs; Simple forms of Functional analysis; VE; Concurrent cost management
open books (all occur only occasionally)
(simultaneous); Cost split-ups; Minimum cost
investigations; Cost split ups; Open books
- to calculate and discuss price changes based on
- to calculate and discuss price changes based on
changed conditions (quantities or raw material prices)
changed conditions (quantities or raw material prices)
- to calculate and discuss price changes based or
- to calculate and discuss price changes based on
predetermined annual rate (based on assumed cost
expected efficiency improvements
reductions of the supplier)
- although conditions have been decided on at the
- although relatively uncomplicated, calculations have
beginning of the project, this is still seen as an important
great economic significance for the supplier
stage by buyer and seller
- normally conducted once per year, unless there are
- normally conducted once per year, unless there are
dramatic changes
dramatic changes
A simple form of TC; value analysis
A part of the TC process
- to reduce costs through process improvements
- to reduce costs through process improvements
- to reduce costs through design changes
- to reduce costs through design changes
- to decide on investments in new technology
- typically not planned and happens only occasionally
- product design is typically finished before full-speed
production starts
- typically not considered as very important
Simple form of value analysis
- changes after full-speed production occur only if major
improvements are possible
- design changes are costly and disruptive
- supplier’s cost data play a minor role
TC; value analysis
46
- to decide on tools, machinery and quality
- to discuss coordination of the supplier’s suppliers
- to decide on the final price after design and
manufacturing process are set (mainly a formality)
- occurs less frequent than product development
- due to required coordination, purchasing costs are
frequently discussed between supplier, supplier’s
suppliers and buyer
Functional analysis; VE; Concurrent cost management
(parallel); Cost split-ups; Minimum cost investigations
(limited); Cost split ups; Open books
- to calculate and discuss price changes based on
changed conditions (quantities or raw material prices)
- to calculate and discuss price changes based or
predetermined annual rate (based on assumed cost
reductions and efficiency gains of the supplier)
- although relatively uncomplicated, both buyer and
seller perceived this as important
- normally takes place once per year
A part of the TC process
- to increase efficiency of all of processes, including
design, logistics, administration and production
- calculations also serve to divide cost reductions
- does not follow a certain procedure or plan
- occurs when supplier or buyer expect that a change in
technology, design and/or investment are feasible
- design changes or major investments are rare, though
TC; value analysis