Cost Transparency in Supply Chains - Literature review Example

Cost Transparency in Supply Chains Number Introduction A research carried out by Andrea Hoffjan and Sebastian Luhrs in the journal “cost transparency in supply chain” was done to find statistical evidence to suggest new directions in detection and applications of open book accounting. The research followed some approaches in their analysis of data. The research also reviewed how the open book accounting is being used practically by the chosen companies. The information was extracted from data of 59 companies interviewed by purchase experts and later analyzed through content analysis. The research found that open book accounting was being used in price management together with interrogational cost management. Consequence of it was an increase in negotiation pressure to the supplier. This essay is a critique of the results of Andrea Hoffjan and Sebastian Luhrs referencing relevant researches, studies and appropriate literature reviews. Arguments supporting Andrea Hoffjan and Sebastian Luhrs Ancarani and Zsidisin (2011) agrees with the Andrea and Sebastian study about consideration of the purchasing plans with the use of open book management. However both studies have indicated that the relationship is not independent in price management approach. This due to the differences of suppliers purchase plans in the market and differences of products being bought. Most of the studies on inter-organizational cost management and open book accounting are in agreement with Andrea and Sebastian cost openness in supply chains. The study focused on two main issues: difficulties and determinants in establishment of literature in open book management. The main assumption in those studies is that, the main purpose of open book accounting is to support the inter-organizational management. Accordingly most important publications about cost transparency indicates that, openness between customers and suppliers can result to cost reductions in the future Another area in agreement with Andrea and Sebastian study of cost transparency is the price changes and price justifications (Agndal, Nilsson, 2005). Further Tempe and Ariz (2003) Argues in the same way as Andrea and Sebastian study in that, justification of price and their changes are based on openness of cost. The transparency in accounting data as seen in Andrea and Sebastian study can facilitate price negotiations between customers and suppliers. The improvement of openness/transparency between those two parties has increased trust between the customer and suppliers. Most publications are in agreement that those changes in trust between customers and suppliers are as a consequence of open book accounting. Finally open book management also results in improvement of the organization’s accounting. Windolph and Moeller (1996) agrees that there are some common problems associated with open book accounting. Generally the purchasing costs must equal to the supplier profits for maximum operations. Including open book accounting system may increase the margin pressure on supplier. With cost openness, the customer is aware of the supplier costs and consequently will use it during price negotiations. This openness puts the customer in a more suitable position for negotiation for better prices. Tempe and Ariz (2003) agrees with Andrea and Sebastian study on price problems on the supplier. Some aspect of open book accounting addresses the issue of performing cost benefit analysis. These will be done on different suppliers while basing price negotiations on theoretical cost structure which is optimal. The output of such analysis will be used to measure the kind of pressure imposed on suppliers by the customer through price negotiation. Additionally the organization may lack skilled personnel capable of performing such activity. Finally additional costs are incurred in inter-organizational cost models. Those models are difficult and consequently expensive to install and maintain. Agndal and Nilsson (2005) agrees with Andrea and Sebastian study regarding the problems in operation of the open book accounting. Even with suppliers accepting to adopt this policy of opening his/her books to the customer there still some difficulties. Some aspect of the accounting information is not even available to the supplier and thus cannot be available to the customer. Another issues arises when that accounting data cannot be easily understood because of the differences in accounting methods applied by different companies. Most of the relevant publications on open book accounting agrees with Andrea and Sebastian study regarding alteration of information to be exchanged. Although this issue has not been fully covered in many of the literature established. Majority of those published literature contains very limited coverage of this issue. Many of those publications are in agreement regarding acceptance of such action. Such alteration is expected especially in cases where information is one way (Agndal, Nilsson, 2005). Most studies are in agreement with Andrea and Sebastian study regarded trust as one of the important factor in open book accounting. Long lasting trust relationship is the ingredient for inter-organizational exchange of good information. Agndal and Nilsson (2005) agrees with Andrea and Sebastian study that long term relationship is crucial for exchange of sensible information. Absence of this trust will be the main source of failure in open book accounting. Trust between firms is therefore considered both prerequisite and also a consequence of open book accounting and its success. Therefore for success in open book accounting, minimal level of trust must be adhered to before cost information can be exchanged. Arguments against cost transparency in supply chain Tempe and Ariz (2003) in “supply management” clearly illustrate how benchmarking as we have seen in as the major source of open book accounting failure. Other relevant sources on open book accounting express fears of sharing information with the competitors. These competitors may undertake to lower their prices thus hindering open book accounting further. Another argument against this study arises on issue of distribution of the benefits arising from inter-organizational management. These benefits are not shared equally among the players involved in inter-organizational management as the study of Andrea and Sebastian. In most cases it’s the big organizations who extract the biggest share of those benefits. This discredit the study by Andrea and Sebastian (Windolph, Moeller, 1996). Ijiri and Kelly (2002) argues against Andrea and Sebastian study in relations to accounting methods. Accounting job has many regulatory bodies that ensures a certain level of uniformity in methods used in accounting and preparation of financial statements. Therefore open book accounting should not fail because of those differences in methods. Further accounting information available to the supplier is easy enough for a customer to interpret understand. Aggarwal and Jorion (2009) in “cost transparency” Have argued against the willingness to exchange cost information through positive means and incentives. They argues that power factor plays a role in open book accounting. Cost information will be forced out of small companies by bigger dominating companies. Relevant publications has also revealed the effects of power in open book accounting. Many of these scholars agrees that power induced open book accounting cannot safeguard reduction of the supply chain costs. Conclusion Andrea and Sebastian study was designed to investigate the effects of open book accounting on inter-organizational management. The study showed that open book accounting not only could it be used in inter-organizational management but also in price management. Their research finding was used to develop a framework of different uses of open accounting methods. Different publications and scholars have supported or argued against this study in different areas. Arguments for Andrea and Sebastian study are basically concerned with information sharing for a good open book accounting among other things. Information sharing assumes two things. First, distribution of supply and demand information. This information is supplied to all members of a particular supply chain members. Second, it involves sharing of sensitive cost information of companies. Arguments for open book account have illustrated the need of trust for the success of this system. Sharing of sensitive information can only be achieved when members of a particular supply chain trust each other. Although many scholars underscore trust as a prerequisite of open book accounting, in the long run it’s the most suitable way of invoking information sharing. This study like many others faced a number of problems. The nature of the study to some extent is easy to understand and use of statistics was small, consequently relevant statistical statements were not used even though were made through statistical findings. However, Andrea and Sebastian focused on experiences of large corporation’s backgrounds to develop well-founded conclusions on open book accounting. The data from those companies was analyzed and Andrea and Sebastian were able to gather determinants and difficulties associated with open book management. This research can be used in the future to test it as a key study in open book management efficiency and to make judgments based on the outcome. Finally this study had strong focus on price management. This due to the factors of time period and the economic conditions as of the time of the study. Further studies on this area should illustrate the impact of open book management on business situations. Additionally that study will indicate the impact of open book management on the overall market situation. Bibliography Aggarwal, R., and Jorion, P. (2009). Is There a Cost to Transparency? Financial Analysts Journal, p108-123. Agndal, H., and Nilsson, U. (2005). Different Open Book Accounting Practices for Different Purchasing Strategies. Management Accounting Research, p147-166. Ancarani, A., and Zsidisin, G. (2011). Advancing research in purchasing and supply management: Future directions for the Journal of Purchasing & Supply Management. Journal of Purchasing and Supply Management, p73-74. Elsevier Science (1994) .European journal of purchasing & supply management. Ijiri, Y., and Kelly, E. (2002). Multidimensional accounting and distributed databases: Their implications for organizations and society. Accounting, Organizations and Society, p115-123. Tempe, Ariz (2003). National Association of Purchasing Management. The journal of supply chain management. Windolph, M., and Moeller, K. (1996). Open-book accounting: Reason for failure of inter-firm cooperation? Management Accounting Research, p47-60. Read More