Cost Management in Firm Networks

Abstract

This research introduces the present state, development practices, emerging problems, and major challenges in the areas of cost accounting and cost management in networked firms. The research links two separately studied areas, management accounting and networking, in the same context by producing empirical and descriptive evidence on what the state of cost accounting and cost management is in networks and what the guidelines are according to which this state is changing.

The research focuses on Finnish manufacturing industry. The networks analyzed consist of one large main contractor and many small and middle-sized suppliers. The research methods applied are conceptual analysis and case studies carried out with participative observation and action research.

The two major objectives for main contractors in building networks were to increase competitiveness and to reduce costs. In order to meet these objectives, cost information from the network was needed. At the main contractors', purchasing and product design were the internal customers for cost information delivered by suppliers. Reducing costs, increasing cost awareness within organizations, and developing products were the situations in which the internal customers would need cost information. In practice, the main contractors were less satisfied with suppliers' cost information than the suppliers were with their own cost information.

The tracing of direct cost in case networks was conducted poorly. The weak situation in direct costing made the allocation of indirect cost very inaccurate because the allocation was mostly based on direct cost measurement. The reasons for poor costing were limited use of job order numbers and incomplete material consumption follow-up by orders. The most important accounting situations, in which cost information was used and needed at the suppliers' in case networks, were pricing and offer calculation, product mix selection, and production process selection.

In order to improve the present state of cost accounting, some suppliers participated in cost management development projects. During this research, development was based on implementing applications of activity-based costing. The development was incremental, and the ABC systems built were modifications of existing cost accounting systems. The two open-book practices of this research are exceptional compared with earlier literature concerning both the quality of cost information and the scope of openness. The scope of openness in the two cases covered all customer-specific costs, not only variable or direct costs. The win-win solutions of this research occurred through step-by-step processes. No win-win implementations were made on an ad hoc basis or fast; rather they were based on cost analysis and took over one year to realize. This research emphasizes the behavioral side in the open use of cost information. Inter-organizational cost information utilization depended on the balance of power between firms, on the trust between personnel, on the volume of firms' mutual business, and on the state of supplier's cost accounting.

This research indicates three requirements for efficient and effective cost management in networks: cost accounting of member firms should be organized so that it produces relevant, accurate, and usefully presented information, network firms should share at least part (product or customer-specific) or all of their cost information with their customers / suppliers so that consecutive firms in supply chains could cooperate from the same starting point for cost reductions, and network firms should open their cost information multilaterally at least in situations where the benefit for the whole network is expected to meet the benefits of an individual firm. These requirements can be understood also as steps that a network and member firms should take on the road to establishing network accounting and network-wide cost management.

Besides the requirements, this research indicated four emerging challenges for cost management in manufacturing networks: First, long-term approach to a network calls for knowledge whether customers in the network are profitable or not. Second, before taking production responsibility for new network customers, the profitability impact of possible change in production volume should be known. Third, implementing fair win-win improves the likelihood of positive results in cooperation between firms. Finally, identification of the cost-reduction potential of inter-organizational process changes and cooperative operations within a network is more likely if cost information from network members is available than when it is not.

Three major directions for further research are evident as a result of this research. First, in order to avoid the problems of reliability, generalization, and contextuality, a larger number of networks, from the point of view of what the present state and needs are in cost accounting and cost management, should be analyzed. Second, detailed measurement of the results of the cost management development in networks should be carried out. Third, what challenges emerge after the cost accounting in network firms is well-organized and complete openness concerning cost information is reality?