The role of cost management in network relationships

*Corresponding author.E-mail address: harri.kulmala@tut." (H.I. Kulmala).

Int. J. Production Economics 79 (2002) 33}43

The role of cost management in network relationships

Harri I. Kulmala*, Jari Paranko, Erkki Uusi-Rauva

Tampere University of Technology, Industrial Management, P.O. Box 541, 33101 Tampere, Finland

Accepted 15 May 2000

Abstract

Recent years have seen rising interest in network economy. The "rst reason is globalization. The world has beenshrunk by information technology and open economies. The second reason is that companies have to take care of costs tomeet the descending price rate of the market. Competition in the mature lines of business especially requires continuousproductivity improvements. This leads to narrow competencies and extensive outsourcing. Cost accounting has beena widely discussed issue during the last years. Traditional cost accounting is changing to cost management. Targetcosting, value engineering and design-to-cost are becoming more and more common. The aim of the paper is to "nd outwhat kind of challenges networking relationships present for cost management. This paper concentrates on two-partyrelationships only. Cost informationmanagement across the supply system of business as a whole is ruled out. The resultsof the study show a wide gap between supplier side quality of cost information and customer side expectations.Networking places a number of demands on cost management. Firstly, a company should know the costs of its ownoperations. Secondly, a company should share part of the cost information with cooperating "rms. Thirdly, part of theinformation #ow should be open to all the companies in the network. Companies rarely know the full costs of eachproduct. This is also the case with the companies analyzed. A lot of development work with suppliers' cost accountingsystems is needed. A win}win relationship creates a need for open book accounting. Only two out of seven suppliers areready for this. There is also a need to create mutually accepted accounting practices. Furthermore, in networkingeconomy the following features of cost management are needed:

� accurate customer pro"tability information,� accurate information on the in#uence of volume on pro"t,� ability to cost new activities.

These "ndings do not present totally new challenges for cost management. However, networking relationships seem toemphasize these features more than traditional relationships. � 2002 Elsevier Science B.V. All rights reserved.

Keywords: Cost accounting; Cost management; Supply chain management; Supply network

1. Introduction

1.1. Background

Networking is more intensive cooperationbetween companies than before. In a true partner-ship the customer has made the supplier a complete

and open participant in the detailed, long-termconduct of his or her business. According toDrucker [1] networking changes business controlbecause of scratching and mixing the ownership ofthe economic units. Nowadays companies do notown their business; the business is rather based oncommon objectives, strategies and teamwork withother competence groups.

0925-5273/02/$ - see front matter � 2002 Elsevier Science B.V. All rights reserved.PII: S 0 9 2 5 - 5 2 7 3 ( 0 0 ) 0 0 0 6 1 - X

Fig. 1. A model of networking companies' supplying relations.

�Gross value includes turnover, change in stock, manufactur-ing for own use and purchasing not related to company's busi-ness.

Globalization is a widely discussed topic oftoday's business environment and it can be seeneither as an opportunity or a threat to companies.Industries actually vary a great deal in thepressures they exert on companies to sell interna-tionally. The structure of some industries favorscompanies that operate on a large scale. Multi-nationals are seeking to exploit global scaleeconomies.

The machine and metal product industry isexperiencing the same trend that the automobileindustry went through earlier: decreasing price rate[2]. This can be seen when comparing productionvolume development and price levels. The produc-tion volume of the Finnish machine and metalproduct industry has risen by 79% from 1990 to1998 and the gross value� has risen only by 49% inthe same time period [3, pp. 9}11]. Hannula [4]states that to maintain a certain level of pro"t-ability a company has to achieve productivityimprovement that is higher than that of competi-tors. Pro"tability consists of productivity and pricerecovery. Product and resource prices are thecomponents of price recovery [5].

The main reason to networking is to "nd newcompetitive advantage. Networking can also beseen as a means of responding to the challenges setby globalization and decreasing price rate. The roleof cost management in network relationships canbe justi"ed by the importance of managing pricerecovery.

1.2. Objectives and method of the study

The aim of the paper is to "nd out what kind ofchallenges networking economy poses for costmanagement. This paper will concentrate on two-party relationships only. Cost information manage-ment across the supply system of business asa whole is ruled out.

The research is conducted with an overview ofthe literature and the method is conceptual analy-sis. The objectives are also approached by a case

study conducted by interviews in the Finnishequipment manufacturing industry. The case studyconsists of eight companies that have de"ned them-selves as a network.

2. Networking

2.1. Dexnition

Networking can be de"ned in many ways.According to Ollus et al. [6,7] networking iscompetition by short throughput time, informationmanagement and capacity and competence #exibil-ity. Another de"nition is given by Raatikainen [8].According to them networking is operationbetween partners who commit themselves to eachother's long term future. Fig. 1 describes network-ing as it is to be understood in this context. Thenetwork has a certain structure that consists ofcustomers' and their direct and indirect suppliers'who possibly have supply relations to each other.Partnership is a widely used typical term for a cer-tain development stage of companies' cooperation(see e.g. [9,10]). The di!erence between partnershipand network relationship is the context of com-panies' cooperation. Network relationship is a sup-ply relation between companies taking part ina network and having one or more common objec-tives.

2.2. Competition and the buyer}supplier relationship

Porter [11] identi"ed four major methods tobecome a leading supplier in any business. These

34 H.I. Kulmala et al. / Int. J. Production Economics 79 (2002) 33}43

include partnership with the most demanding cus-tomers, partnership with customers with the mostcomplex products or services, doing business in themost regulated and competitive industry andchoosing the most developed suppliers.

Matujainen [12, p. 19] introduces a model fore$cient governance of the interorganizational busi-ness relationship. The model shows that a companyhas an opportunity to choose between creatingsustainable partnership and con"dence or continu-ous controlling of the suppliers. Bensaou's [13] anal-ysis gives support to the classi"cation of suppliersalso mentioned by Matikainen. According to thise!ective supply chain management requires choos-ing a type of relationship appropriate to productand market conditions and adapting managementpractices to that relationship. BothMatikainen andBensaou use the Porterian perspective on customerand supplier power over each other (Porter [14]).Original model is the "ve-force model in which twoforces are customer's and supplier's power overeach other. Matikainen handles the forces by theproduction or sales volumes and Bensaou by theinvestments made for the relationship. Supplierclassi"cation can be seen as an agent promoting thenetworklike reorganization of the supply chain.

Lear-Olimpi [15] refers to a study of 200warehousing companies of which 95% are going tobuild new partnerships. These companies areintended to share more information with the part-ners. The conclusion of these studies is more intensee!ect on the partner's way of doing business. Thisworks both from the customer to supplier and viceversa. The basis for modeling the business environ-ment in these contexts is the contractual side ofa company.

2.3. Industry structure change

The major trend in recent years has been thecentralization of the industry. The creation of bigcorporations has been worldwide and the com-panies created are global both in their operationsand in their customers (see e.g. [16}20]). Forexample the Finnish based companies Valmet andRauma have merged. European car manufacturers,medicine and food industries have concentratedinto bigger companies. Even such a decentralized

industry as paper manufacturing has seen fusionslike the one between the Swedish Stora and theFinnish Enso. Big corporations concentrating ontheir core business outsource a lot of functions (seee.g. [10,15,21]). Parker [19] states that one of themajor trends changing logistics business is consoli-dation of the industry.

The centralization of purchased volume can bestudied through a number of suppliers and volumepurchased from them [21, pp. 84}89]. For example,Sandvik Tamrock, a Swedish-Finnish mining andconstruction equipment supplier, had more than600 direct suppliers in 1996 and today they haveonly 160 [22]. Finnish electronics manufacturershave reduced their number of direct suppliers bymore than 22% from 1990 to 1994. The amount ofpartner suppliers has risen at the same time from8% to 14% of the whole supplier base [23, pp.31}35]. IBM uses 50 suppliers for 85% of its pro-duction requirements; Sun Microsystems uses 40suppliers for 90% of its production material needs[24]. Diet Coke derives 80% of its sales from 13%of its customers. Taster's Choice reports 87% of itssales come from 4% of its customers [25]. Thusthere is in progress a huge transition from subcon-tracting to system suppliers and fewer "rst linesuppliers (see e.g. [9,10]).

The Finnish Ministry of Trade and Industry [26]studied the structure of supply chains and the rea-sons why certain companies end up as system sup-pliers' while others continue as subcontractors ina networking environment. The study consisted of33 Finnish metal and electronics industry SME's.The system suppliers were de"ned as "rst-tier sup-pliers (see Fig. 1: Supplier). They were more de-veloped and they were responsible for larger volumethan the subcontractors. Of the system suppliers' netsales 80% were over 10MFIM while 56% of sub-contractors' net sales were under 10MFIM.Willing-ness to commitment with customer side, good"nancial situation, ability to take risks and develop-ment capabilities were named as the most importantreasons for a company becoming a system supplier.

2.4. Networking in practice

Examples of successful Finnish networks areAhlstroK m, Nokia, Puustelli and Nordberg. The

H.I. Kulmala et al. / Int. J. Production Economics 79 (2002) 33}43 35

�Paintwork ingredient.�Cost savings were reported in U.S. dollars ($4).

AhlstroK m network consists of paper machinerysuppliers and was created in 1991. Since then thepersonnel employed has risen from 100 to 300 andthe turnover of network partners has risen from 60to 150MFIM. Only one company has experienceda bankruptcy [6]. An U.S. automaker has given anadhesives� supplier a signi"cant role in productdevelopment and gained cost savings up to25FIM� per vehicle [27].

Networking is more typical in high growth andfast changing industries than in slow growth andstatic industries. However, the focus of networkingseems to depend on the growth of the industry. Inhigh growth businesses, for example the telecom-munications or software industry, networks con-centrate on product. In slow growth industries, forexample pulp and paper or metal processing, theyconcentrate on process [7, pp. 116].

According to the study by Karjalainen [28]outsourcing extensively a!ects the creation ofnetworks. The authors studied 57 Finnish metaland electronics industry SME's. Factors relating tocosts were the second most important reasons foroutsourcing production (45% of companies asked)while the strategic choices were the most importantreasons (65%). Cost accounting gives a dual answerto outsourcing. Of the companies 33% stated thatcosts were an important reason for not outsourcingproduction. Lack of trust was mentioned as thethird most important reason for not outsourcing(20%). The price level of suppliers was the thirdmost typical problem in outsourcing (20%).

2.5. Networking as an answer to challenges

Literature covering the areas of networkingrefers to clear change in supply chain structure:Customers are organizing the suppliers into di!er-ent levels (see e.g. [9,26,28]). However, networkingincludes four main characteristics when comparedto traditional competition:

� profound commitment to partners and diversi"-ed communication on all levels of the organiza-tion,

� transfer of competencies to decentralized, #exibleand independent units,

� end product and customer approach for com-ponent and system suppliers,

� speed of change and operations increases.

The trends introduced in previous sections leadtowards networking. Supply chain management iseasier through close relations to suppliers. Innova-tion power transferred to suppliers cannot be utiliz-ed without reliable relationships. End product costreduction demands customer in#uence in the sup-plier product and process development. Consolida-tion of industries leads to multiple buying volumes,which also will be concentrated on some competentsuppliers. These reasons will make intense net-working #ourish in the near future.

3. Cost management

3.1. The important role of cost management

Dealing with today's competition is challengeenough, even when we have all the right in-formation. However, if we respond to the wronginformation, we could be losing a battle [29]. Costaccounting o!ers very important knowledge formanagement both at strategic and operationallevel. In a world of nonsustainable competitive ad-vantage costs have to be managed both aggressive-ly and intelligently. A "rm that fails to reduce costsas rapidly as its competitors will "nd its pro"tmargins squeezed and its existence threatened. Thecompetitive environment demands the develop-ment of sophisticated cost management practices tokeep costs down.

The poor state of management accounting isa well-known fact. Johnson and Kaplan made thestate of a!airs known as early as in 1987 with theirRelevance Lost book. &Today's managementaccounting information, driven by the proceduresand cycle of the organization's "nancial reportingsystem, is too late, too aggregated, and too dis-torted to be relevant for managers' planning andcontrol decisions. The management accounting sys-tem also fails to provide accurate product costs'[30].


E!ective and appropriate modern costaccounting systems and information should [31]:

� Provide a multi-dimensional focus on a multipli-city of cost objects such as customers, products,services, functions, processes and activities.

� Focus less on cost tracking and reporting andmore on cost planning and control.

� Support every key business decision, includingsourcing, pricing, investment justi"cation,e$ciency and productivity measures, productelimination and new product introduction.

3.2. The many faces of cost

Accountants usually de"ne cost as a resourcesacri"ced or foregone to achieve a speci"c objec-tive. The basic problems are closely connected tothe nature of cost accounting: the problemsencountered emanate from four fundamentalproblems.The problems are: of scope, measure-ment, valuation and assigning.

The problem of scope entails ascertaining whichvariables should be taken into consideration. Themeasurement problem entails a search for suitablevariables to measure. The essence of the problem isthat what cost accounting needs is monetary units,but the object of scrutiny consists of physical units.Valuation problem means searching for an appro-priate way to evaluate resources used. For examplethe following options are useful: original cost, mar-ket value, replacement value and opportunity cost.The division of total cost into parts implies a prob-lem of assignment. Costs should be assigned to costobjects (product, customer, time period, etc.). Anychoice among assignment methods of costs isa choice among di!erent ways to divide the wholeinto parts. Using the cause and e!ect criterion,managers identify the variable that causes cost ob-jects to incur costs. Most often the principle ofcausality is used in cost accounting. Direct chargeand causal tracing should be used wherever pos-sible. Allocation is the last resort. Allocation is theindirect assignment of cost. Allocation is a &dirtyword' in cost systems } something to be avoided ifpossible. It implies arbitrariness of measurement

and a limit to the meaning of the resulting informa-tion [29].

There are several good solutions to every prob-lem. It is not possible to say that one solution isbetter than another. The solution is somehowa subjective notion. The presence of four basicproblems and several options to solve them are themain reasons for the following:

� In a multiproduct environment it is not possibleto achieve "nal certainty of accuracy of results.

� If two persons counted the costs in the same "rmwithout knowing anything about each other,they would not get the same results. The di!er-ence between results could be great.

The accounting situation has great in#uence onoptions chosen. If the decision situation is wellknown it will automatically limit the number ofoptions. Networking environment will presenta certain kind of accounting situation. The follow-ing sections include an analysis of what kind ofchallenges a network economy creates.

3.3. Cost accounting and supply chain management

Supply chain developments demand the intro-duction of new management accounting techniquesalongside traditional reporting systems. Supplychain developments require the contribution ofideas from management accounting and manage-ment accountants, both internal to the "rms and ininter"rm relationships. The poor state of manage-ment accounting from the supply chain perspectiveis well known: Total cost models are generally notcurrently available either within individual com-panies or across company boundaries, costinformation across supply chains is currently lim-ited and target costing processes are not wellunderstood [32].

For the majority management accounting prac-tice has limited its scope to the boundaries of the"rm. This limitation makes it di$cult for the "rmto take advantage of any cost-reduction synergiesthat exist across the supply chain. Such synergiescan only be achieved by coordinating the cost-reduction activities of multiple "rms. The objectiveof interorganizational cost management programs


is to "nd lower-cost solutions than would be pos-sible if the "rm and its buyers and suppliers attem-pted to reduce costs independently. Coordinatingthe cost-reduction programs at the "rms can helpreduce costs in two ways: Firstly, it can help toidentify ways to make the interface between the"rms more e$cient. Secondly, it can help the "rmand its buyers and suppliers to "nd additional waysto reduce the manufacturing cost of products. Thiscoordination requires the "rms in the supply chainto extend their cost management programs beyondtheir organizational boundaries [33].

There are only few examples available ofaccounting techniques being used in partnershipsituations. Most of the inter"rm relationships areonly taking place in terms of dyadic or two-partyrelationships. Little evidence of management acrossthe supply system of businesses as a whole has beenfound.

Cullen [34] provided examples of accountingtechniques being used in partnership situations.The key features were: dyadic nature of the partner-ship, implementation of open books for bothsupplier and purchaser, target costing, commonand shared cost reduction activities, commondevelopment activities, maintenance in each "rmof familiar cost accounting and managementaccounting procedures, and proactive managerialroles of the management accountants. Managementaccountants worked in multifunctional teams andthey were developing their broader managerial andpersonal skills, commercial capability, as well astheir "nancial knowledge. Much of this work wasbeing done through ad hoc projects alongside thenormal accounting systems, which remained un-changed. Only slight impact on the routine struc-tures of "nancial planning, budgeting and reportingwas found. This re#ected the fact that there werefew organizational changes. Costs were still beingreported in a traditional mode.

The study of Karjalainen [28] also includescustomers' contribution to suppliers' cost reducinge!orts. forty percent of suppliers had contractsdemanding decreasing price level. Twenty-sevenpercent of suppliers did cost reduction work to-gether with their customers. In price negotiationsthirty-four percent of suppliers were credited be-cause of capital investments made to improve cus-

tomers' products and 24% were granted long-termproduction volume if they made the investmentsneeded to improve customers' products. Five casecompanies' outsourcing short-term history wasanalyzed deeply. Three companies used costaccounting to help the decision and two stated theoutsourcing decision as a strategic choice notnecessary to be backed up by cost analysis. Twocompanies ended up to open cost accounting withtheir customers'.

In the partnership relation "rms are legally inde-pendent entities. Firm policy has no power beyondorganizational boundaries. As companies focus ontheir core activities and outsource the rest, theirsuccess increasingly depends on their ability to con-trol what happens in the value chain outside theirown boundaries. The scope of cost accounting inthat sense is wider in partnership.

Cost accounting practices are seldom exactlysimilar in di!erent companies. In the costaccounting area there are no formal rules and regu-lations as in the "nancial accounting area. Mainlyto assist internal decision-makers, accountantsdevelop customized reports designed on the basisof the speci"c information needs. Di!erent methodscreate a need to somehow compile informationbefore it is in useful form. Di!erences betweenaccounting practices easily create ine!ective practi-ces. If numbers are di$cult to understand peoplewill spend lot of time in arguing about secondarythings like the proper way of de"ning the hourlycost for a machine center. If so, a lot of valuabletime for creating something new and improvingperformance will be lost. Creating widely acceptedaccounting practices between partners is one of thechallenges partnership sets for cost accounting.

As already mentioned, "rms are concentratingmore business on fewer suppliers. This automati-cally means further expansion into new functions,and into new product lines for the suppliers. Firmsare even buying "nal products from suppliers. Insome cases this means that the supplier has thetotal responsibility for the product except market-ing. This kind of development creates new activitiesin the "rm. May be components for new productshould be ordered from abroad, for example. Ifsuch activities are new for the "rm it has to learn tocost these activities too.


3.4. Customer proxtability

Fewer customers and suppliers press for know-ledge of customer pro"tability. The problem is thataccountants are not very good at measuring cus-tomer pro"tability. According to a survey of morethan 400 chief "nancial o$cers, 57% said the in-ability to measure product and customer pro"tabil-ity is the biggest constraint on their businesses [35].Large customers tend to be either the most pro"t-able or the least pro"table of the entire customerbase. It would be unusual for a large customer to bein the middle of the total pro"tability rankings[36].

Recent research has shown that, once the fullcost of supporting customers is taken into account,the majority of customers (usually around 70%) arenot pro"table at all. In fact the studies carried outby Cooper and Kaplan at the Harvard BusinessSchool have led them to the so-called 20}225 rule,which states that in some companies 20% of cus-tomers account for 225% of pro"ts, which of coursemeans that the other 80% &lose' 125% of pro"ts.Others have suggested a 25}50}75 rule whereby25% of customer segments produce 50% of salesand 75% of pro"ts. The problem is that ac-countants have no idea which customers make upthe 20}25% and which make up the 75}80%. Normust we examine customer pro"tability over theshort term only. The important measure is thelifetime pro"tability of a customer. Research hasshown that customer pro"ts rise with the length ofthe trading relationship. Satis"ed customers spendmore, attract other customers, are easier and lesscostly to deal with, and become less sensitive toprice [37].

3.5. Customer specixc costs

The di!erence between product costs andcustomer-driven costs is the resource-consumingactivities that trigger them. Customer driving costsderive from speci"c customers and their buyingcharacteristics. A number of cost factors are easilyidenti"able with speci"c customers and are directlytraceable to the respective customers. The mostrational system of tracing other customer costs tocustomers is likely to be based on activity-based

costing (ABC) principles. By focusing on activitiesand the di!erent activity requirements placed onthe organization by di!erent customers, ABC pro-vides insight into the activity cost structure of cus-tomer-driven costs.

Costs are attached to di!erent types of cost ob-jects at di!erent levels. The number of levels of costattachment varies from one company to the next.For customer-driven activity costs, there are usu-ally "ve levels: order level, customer level, channellevel, market level, and enterprise level.

Customer speci"c costs can be calculated withfollowing ABC procedure:

� specify levels of cost attachment,� specify activities needed by cost objects,� specify resources needed,� calculate the total cost of resource,� determine the cost driver for each resource,� add together activity costs for each activity,� determine the cost driver for each activity,� determine the unit cost of each activity,� determine the bill of activities for each cost

object.

Calculating the total cost of resource includes allfour problems of cost accounting. All the othersteps have something to do with the assigningproblem: the total is divided into parts throughdi!erent methods.

3.6. The win}win relationship

If customer and supplier are going to share pro"tthere is a necessity for open book accounting. Theneed to share information must be two way. Thereis also a need for the customer to open his books tothe supplier. Cullen et al. [34] reported pro"t shar-ing arrangements in partnership situations: If theproject is completed at a cost less than the originalbudget, then the pro"t is shared between the partieson an agreed basis.

Buxton [38] also reported similar arrangements:If the cost for a project is below the agreed estimate,both parties share the resulting pro"t according toa formula. If the costs are above the agreed esti-mate, they share the loss. For open-book costing towork, however, there needs to be trust between the


Fig. 2. Current supplying relations in the network studied.

parties and this need for trust is important in un-derstanding the whole philosophy of supply chainmanagement [39].

One typical feature of partnership is that some ofthe improvement e!orts are made together. Costinformation of high quality is very useful in identi-fying improvement opportunities. Good descrip-tions and understanding of activities and processescreates a solid base for improvement. Facts insteadof intuition create a good base for de"ning oppor-tunities for improvement. Improvement e!ortsmade together are one of the main reasons forsharing cost information between partners.Di!erent kinds of pro"t share agreements betweenpartners also increase the need for reliable costinformation. Pro"t sharing agreements and com-mon improvement e!orts together also create a de-mand for cost information. Before pro"t can beshared it must determined. One of the simplestde"nitions for pro"t is total income minus costs.Determination of incomes and costs may be simple,but it may also be terribly complicated. In the mostdi$cult situation all of the four basic problemsconcerning both incomes and costs are present.

Concentrating more business on fewer suppliersmay also mean higher production volumes fora supplier. Typically the customer is interested ingetting some price discounts based on high order-ing volume. In a win}win relationship the suppliershould be able to calculate how much cost savingshigher volume will create. If the supplier has identi-"ed a clear understanding of behavior of unit levelcosts, he or she will be able to answer the question.

4. A case study

4.1. Network description

The network studied consists of an equipmentsupplier (customer) and seven of its suppliers. Twoof the suppliers are service companies providingcomponents, technical support and design service.Five companies are manufacturers, two of themmiddle sized and three small ones. If the annual netsales exceeds 100 MFIM, the company is categor-ized as middle sized. Fig. 2 shows the current sup-ply relations of the network.

Cost management challenges in the case networkwere analyzed as follows: Analyzing and describingthe present cost accounting practices of suppliersgives a realistic view of opportunities. To identifytargets for the partnership the needs of customerswere analyzed. The gap between the present situ-ation and the targets creates a challenge that will bepartly described as follows.

The present state of the network's cost ac-counting was surveyed by two questionnaires. The"rst was directed at seven persons in supplier sidetop management and the second was directed atseven persons responsible for purchasing in thecustomer side organization. The questionnaires in-cluded both open and closed questions. All thequalitative data were gathered by open questionsand quantitative data by closed questions. All thescales of closed questions were from one to "ve.

The following results are based on the answersgiven in the questionnaires and interviews. Thethree new challenges found for cost managementhave arisen from the case study's open questions,thereby con"rming the notions to which theauthors were quided by the literature.

4.2. Cost management practices

Top management and accounting professionalswere interviewed for the supplier's survey. Generalattitudes towards cost accounting were measuredregarding importance and level of satisfaction. Allthose interviewed felt that cost accounting is very


Fig. 3. Customer and supplier satisfaction with cost informa-tion.

important.Most of themwere satis"ed with currentpractices. More detailed results of satisfaction arepresented in Fig. 3. Cost information is dividedthere into seven variables.

Typically cost information is needed in the pric-ing and o!ering process. Costs should be presentedwith the information on items, products, costcenters, projects and customers.

The people interviewed were interested in know-ing manufacturing related costs such as materialsand salaries of employees. Only two "rms used joborder numbers to identify di!erent jobs. The use ofjob order numbers makes it possible to identify,direct materials and salaries used to manufacturethe product. Only one "rm is recording the actualmaterial consumption of the job.

Overhead allocation did not seem to be interest-ing for the "rms. Typically, the sales price of theorder should be high enough to cover the job'svariable and "xed costs and to generate a pro"t.Only one company used an overhead multiplier fordirect work hours. Another company had an over-head multiplier for indirect material costs.

Questions concerning costs per hour per em-ployee were also asked. The aim of this questionwas to measure the level of cost consciousness ofthe "rm. The question was formulated as follows:How much is the cost per hour per employee andwhat will it cover. The variation of answers wasquite large. It was easy to see that the "rms do notsee the relevance of this kind of question. It wasalso easy to see that some people cannot see thedi!erence between cost accounting and pricing.

The understanding of fringe bene"ts, social securityand unemployment payments was also verylimited.

4.3. Cost management objectives of the customer

Seven persons responsible for purchasing in thecustomer organization were interviewed. The pri-mary goal of this project is to increase competenceand decrease costs. Secondary goals are to increaseopenness, business-oriented thinking and co-opera-tion.

When selecting suppliers most of the attention ispaid to the following characteristics in descendingorder of importance: delivery accuracy, high qual-ity, low costs and short delivery time. However,costs are placed only third.

Cost information transfer happens only occa-sionally between the customer and supplier. Thesharing of cost data is therefore insu$cient com-pared to the networking the literature demands.Product development and purchasing were namedas the most important customers for cost informa-tion. Cost information would be used in trying toin#uence and decrease the cost level and to increasethe cost awareness of these groups.

Opening the books was believed to increasecompetitiveness of the "rm, to help in identifyingdevelopment objectives, to create a logic base fordecision, to create high level business understand-ing and to increase production volume and trustbetween partners.

The increase of competitiveness was believed tooriginate from the following three factors:

� reliable cost information helps to concentrate onfundamentals, mainly on product and processdevelopment,

� knowing the present state well enough gives op-portunities to evaluate the consequences of ac-tions taken,

� the win}win principle can be implemented cor-rectly only by having reliable cost information.

In summary we can say that the state of costaccounting and cost management in the networkstudied is poor. The customer is at the develop-ment stage in his ideas on utilizing shared cost


information. The utilization requires at least thenext fact: suppliers know their costs and are willingto share the information with the customer.

No supplier is able to deliver cost informationthat would be at a satisfactory level for the cus-tomer. To reach the goals set by the customer side itis necessary to develop the cost management prac-tices of suppliers. If the "rm has no information oncosts available for internal use, it is totally impos-sible to share it with anybody. There is nothing toshare. The willingness to share cost informationwith others represents a complete new way ofthinking in the metal product industry. Accordingto the preliminary questionnaire only two out ofseven suppliers were willing to share cost informa-tion with the customer. The suppliers' interest insharing cost information could be increased if thecustomer could specify more exactly what informa-tion is wanted.

5. Conclusions

The main reason for networking is to "nd newcompetitive advantage. Networking includes fol-lowing four main characteristics: profound com-mitment to partners, decentralized andindependent units, end product and customer ap-proach for system suppliers and increasing speed ofchange. Big corporations are concentrating on theircore business and outsourcing the rest. Their suc-cess increasingly depends on their ability to controlhappenings outside their own boundaries. Thescope of cost management in that sense is widerthan earlier.

The poor state of management accounting evenin a traditional environment is well known. A newaccounting environment demands the introductionof new cost management techniques. Traditionalcost management practice has limited its scope tothe boundaries of the "rm. There is only littleinformation available on accounting techniquesused in the partnership situation. Only a few organ-izational changes have taken place and costs arestill reported in a traditional mode.

Firms are concentrating more on doing businesswith fewer suppliers. Larger customers tend to beeither the most or the least pro"table. Concentra-

tion creates pressure to know customer pro"tabil-ity. In a win}win relationship a supplier should alsobe able to calculate the in#uence of volume increaseon pro"t. Partnership also often means a biggerresponsibility for the supplier. Instead of separatecomponents they are delivering complete productsand systems. This easily means totally new func-tions for them. This also implies the need to costthese activities.

In a win}win relationship there is a necessity foropen book accounting. Openness is needed if cus-tomer and supplier are to share pro"t. Costinformation is very useful in identifying improve-ment opportunities and prioritizing them. It is alsovitally important when determining pro"t. Firmsare legally independent entities in partnership. Cre-ating mutually accepted accounting practices is oneof the challenges partnership poses for cost man-agement.

The case network consists of one customer andseven suppliers. Increasing competitiveness anddecreasing costs is the primary goal of this network.Increasing openness, business-oriented thinkingand cooperation are secondary goals. Low costlevel of supplier is not said to be the most impor-tant criterion in selecting partner.

Suppliers feel that cost accounting is very impor-tant but the state of cost accounting is very poor.The suppliers do not seem to see this poor state.Only two "rms are really able to control directcosts. Typically the sales price is assumed to coveroverheads and pro"t. Ignorance of employee's costsper hour proved negligent attitudes towards costaccounting in some "rms.

Cost information transfer in the network takesplace only occasionally. Open book management isa totally new way of thinking and only two sup-pliers have been able to accept this principle at themoment. Willingness to share information is notenough, the ability to produce the needed informa-tion is also necessary. A great deal of developmentwork with suppliers' cost accounting systems isneeded.

The challenge is huge. A lot of work should bedone before there can be open book managementcircumstances in two-party relationships. Thechallenge is even greater in inter"rm relationshipsinvolving several "rms.


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The role of cost management in network relationships