Should-Cost Analysis as an Alternative to Open Book Accounti

Abstract

A key question that decision makers from start-ups to SMEs and corporates face is “to outsource, or not to outsource?”. In today’s business world which is fast-paced, the pressure on companies to provide products and services is higher than ever. To respond to this pressure but holding costs down, all types of companies need to outsource their non-core processes and more concentrate on their key core competencies. Nevertheless, the gained advantages of outsourcing can be beyond only cutting costs. Hence, it is critical to understand the different benefits for both company and its partners. Sharing information and supply chain collaboration have become the main elements of their success. Suppliers’ pricing decisions historically may have been in mystery and the details of a price are confidential. It is logical for a buyer to want to probe the main cost drivers. A recommended approach is to persuade the supplier to open its books. Some believe open book accounting (OBA) as a solution to that and it can deliver, but not guarantees, considerable results or cost savings. The objective of this study is to find an alternative to OBA when the business partners are not ready or willing to open their books. The study shows OBA may not succeed even in mature and rather partnership-oriented relationships. Therefore, should-cost analysis supports the purchaser to achieve its aims to control the profits and costs made within upstream of supply chain. The study shows such alternative to OBA enables the purchaser to enhance the supply network’s efficiency by bringing the cost transparency into the customer-supplier relationships. This study illustrates should-cost analysis is an effective tool in determining fair and reasonable pricing and today it has to be embedded in procurement processes. Should-cost analysis determines what a product should cost on the basis of labor, materials, overhead, and profit margin.