developing cost management in customer–supplier relationships: three case studies

Journal of Purchasing & Supply Management 10 (2004) 65–77

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doi:10.1016/j.pu

Developing cost management in customer–supplier relationships:three case studies

Harri I. Kulmala*

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

Received 9 July 2002; received in revised form 6 January 2004; accepted 23 February 2004

Abstract

This study describes cost management development projects in three customer–supplier relationships and analyzes these projects

from the perspective of relationships. Differences in suppliers’ objectives, actions taken, and results gained in the projects were found

in the explorative study, although the customer’s objective was the same in all cases. The use of cost information depended on the

balance of power between firms, on the trust between personnel, and on the volume of the firms’ mutual business.

r 2004 Elsevier Ltd. All rights reserved.

Keywords: Cost accounting; Cost management; Customer–supplier relationship; Network; Purchasing

1 In this study cost accounting refers to principles, calculation rules,

1. Introduction

Purchasing literature of the last decade emphasizesanalyzing customer–supplier relationships (CSRs) be-cause of their significant role in the success of individualfirms (Mohr and Spekman, 1994; Lambert and Cooper,2000). Interorganizational practices have become im-portant in the manufacturing industry, partly due to thecost pressure caused by decreasing price levels andpartly due to firms’ concentration on their corecompetencies. ‘‘[O]rganizational buying is dramatically

shifting from the transaction oriented to the relational

oriented philosophy, and will shift from a buying process

to a supplier relationship process’’ (Sheth and Sharma,1997, p. 91). Because of this shift, much of the pastresearch on buying behavior will become obsolete(Sheth and Sharma, 1997, p. 92). One of the trends inpurchasing research has been the classification of CSRsin order to illustrate the structure of the supply base(Krapfel et al., 1991; Olsen and Ellram, 1997; Kapoorand Gupta, 1997; Matikainen, 1998; Handfield et al.,2000). Efficient management of the supply base hasbecome a challenge (Trent and Monczka, 1998, pp. 6–7),in part because the supply base is turning into a tierednetwork in which the number of direct CSRs per firm

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ess: [email protected] (H.I. Kulmala).

e front matter r 2004 Elsevier Ltd. All rights reserved.

rsup.2004.02.003

decreases (Hines, 1996; Gumbleton, 1999; Kulmalaet al., 2002). From the network perspective arises alsocritical aspects on the applicability of CSR classifica-tions (Dubois and Pedersen, 2002).

Outsourcing and supply chain development are oftenmotivated by cost, which is one reason why firms havepaid attention to efficient management of CSRs(Virolainen, 1998; Matikainen, 1998). Some studies ofcost information1 and its use in CSRs exist (Munday,1992a,b; Anderson et al., 1994; Carr and Ng, 1995;Ellram, 1996; Christopher, 1998; Cooper and Slag-mulder, 1997 and 1999b; Seal et al., 1999; Dekker, 2000;Cokins, 2001; Mouritsen et al., 2001; Tomkins, 2001;Kulmala, 2002). Some of the studies describe andanalyze interorganizational cost management (IOCM)practices (see e.g. Cooper & Slagmulder, 1999b;Mouritsen et al., 2001; Kulmala et al., 2002), but lackthe analysis of empirical cost management developmentfrom the point of view of CSRs.

The state of affairs highlights the need for knowledge:‘‘How does the nature of a CSR influence interorganiza-

tional cost management development?’’ The objectives ofthis study are to describe cost management development

and information systems that are used to produce cost information.

Cost management refers to utilizing cost information in controlling

and coordinating the occurrence of cost.

ARTICLE IN PRESSH.I. Kulmala / Journal of Purchasing & Supply Management 10 (2004) 65–7766

projects in three CSRs (the projects increase empiricalknowledge of cost management development carried outacross the boundaries of a single firm), and to analyze

these three projects from the CSR perspective (empiricalevidence is provided on differences between the CSRs inwhich the cost management development projects wereconducted). The research method is the case study.Three cost management development projects (CMDPs)in a firm network are analyzed from the CSR pointof view.

2. Theoretical background

2.1. Classifying CSRs

The scientific research of consumer buying behaviorbegan in the 1960s and was soon expanded to includealso industrial purchasing (Baily, 1963; Sheth, 1973;Sheth and Sharma, 1997). Competitive strategy andorganizational relationships have been of special interestin business literature since the 1980s (Porter, 1980;H(akansson, 1982). Hence, the power of buyers andsuppliers is a well-known phenomenon. In purchasing,the balance of power is also addressed by portfoliothinking (Henderson, 1970; Fiocca, 1982; Kraljic, 1983;Campbell, 1985; Turnbull, 1990; Olsen and Ellram,1997; Krapfel et al., 1991; Kapoor and Gupta, 1997;Matikainen, 1998; Bensaou, 1999; Handfield et al., 2000;Donaldson and O’Toole, 2000; Nellore and Taylor,2000; Dubois and Pedersen, 2002). The old wisdom ofnot putting all one’s eggs in the same basket is known asthe portfolio theory, which dates back to financialinvestment analysis in the 1950s (Markowitz, 1952).

The well-known portfolio of Kraljic (1983) has beenalmost like a platform for later discussion. Thedimensions for classifications are typically not definedin exact figures, except the classification of Kapoor andGupta (1997). An explanation could be the industry-specificity: industries have a different structure andtherefore it is impossible to give numeric and genericrecommendations. A firm using any of the modelsshould decide whether a certain volume is high or low,how important a certain purchase is, etc. A product or asupplier may get the same label, ‘‘strategic’’ for example,regardless of which portfolio is used, even if thedefinitions for the labels are different. It would beessential to define the situations and rules for the use ofportfolios when they are applied as management tools.

A major difference exists in the classifications: theyare based either on products (Henderson, 1970; Kraljic,1983; Olsen and Ellram, 1997, p. 105; Kapoor andGupta, 1997; Handfield et al., 2000) or CSR character-istics (Campbell, 1985, 1988; Krapfel et al., 1991; Olsenand Ellram, 1997, p. 107; Matikainen, 1998; Bensaou,1999; Donaldson and O’Toole, 2000). Dubois and

Pedersen (2002) state that product perspective is toonarrow for analyzing CSRs. They also mention thatanalyzing CSRs separately from the network of suchrelationships is misleading. Latest development inpurchasing has taken place through the application ofportfolio-like classification tools in CSR management.Major problems in this development are that themeasurement of the dimensions in portfolios is notuniversal but rather particular, the purposes for usingportfolios are different, and no single portfolio candescribe the many sides of a CSR in network context.

2.2. Cost management in CSRs

According to Munday (1992a) and McIvor (2000)cost management and cost accounting could have astrong effect on CSRs in supporting the development ofrelationships. As Kakabadse and Kakabadse (2000, p.673) understand purchasing: ‘‘whatever the reason for

strategic sourcing, a prime purpose still remains, reduction

of costs’’. In literature, costs have been analyzed fromthe perspectives of cost analysis techniques (Ellram,1996; Axelsson et al., 2002), cost reductions (Munday,1992b; Carr and Ng, 1995; Cooper and Slagmulder,1997 and 1999b), and interorganizational cost informa-tion use (Munday, 1992a; Berry et al., 1997; Cooper andSlagmulder, 1998; Spina and Zotteri, 2000; Dekker andvan Goor, 2000; Cokins, 2001; Mouritsen et al., 2001).The car industry has been a pioneer in applying moderncost management techniques interorganizationally, andthe cost savings gained have been outstanding (Tanaka,1993; Carr and Ng, 1995; Dyer, 1996; Cooper andSlagmulder, 1999a).

The importance of interorganizational cost manage-ment development is underlined by several recent studies(Cooper and Slagmulder, 1999b; Spina and Zotteri,2000, p. 1174; Handfield et al., 2000, p. 42; Cokins, 2001,p. 25; Tomkins, 2001, p. 163). However, ‘‘literature

offers little empirical evidence on the role of management

accounting in such relationships and theory development is

still at an early stage’’ (Dekker and van Goor, 2000, pp.44–45). Furthermore, the network approach to CSRs isalmost forgotten in cost management (Hopwood, 1996;Kulmala et al., 2002).

One of the requirements for any CSR development isthat information between the firms is shared (Munday,1992a; Stuart et al., 1998; Tomkins, 2001). From themanagement point of view, information on activitiesand cost structures is important when analyzing anddeveloping a firm’s operations. Interorganizationalinformation sharing should therefore include somethingabout activities and costs. Cost management in whichfirms reveal part or all of their cost accounting system orcost information to business partners is called open-book accounting (Seal et al., 1999; Mouritsen et al.,2001; Kulmala, 2002). Shared cost information could be

ARTICLE IN PRESSH.I. Kulmala / Journal of Purchasing & Supply Management 10 (2004) 65–77 67

used by the customer to carry out value analysis andvalue engineering2 in the whole supply chain in order toreveal the cost-reduction potential of suppliers’ opera-tions and to exploit target costing across the boundariesof companies (Munday, 1992a; Cooper and Slagmulder,1999a,b).

Cost information from suppliers has already beendemanded by some customers (Munday, 1992b; Mour-itsen et al., 2001; Kulmala et al., 2002). A primaryobstacle for information sharing is that suppliers inmanufacturing networks do not meet the quantitativeand qualitative standards of shared cost information thecustomers expect (Kulmala et al., 2002). Particularreasons for using cost information in decision-makingsituations seem to exist in customer firms if theinformation was provided by suppliers (Kulmala et al.,2002): Purchasing would compare the cost levels andcost-reduction potential of suppliers, and product designwould estimate manufacturing costs already at thedesign phase.

2.3. Open-book accounting and trust

The lack of information transparency may weakentrust. Lack of trust has been noted to be a destructivecharacteristic for a customer–supplier relationship(Sheppard and Sherman, 1998; Brennan and Turnbull,1999; Donaldson and O’Toole, 2000; Carter, 2000;Lazar, 2000). Furthermore, increased trust in a supplychain decreases the total cost due to reduced risks(Matikainen, 1998; Ouchi, 1979). A common demand ofcustomers, one-way information sharing (Stuart et al.,1998, p. 84), may be experienced as unethical bysuppliers, which can be extremely harmful becausesuppliers that are dissatisfied with a customer’s unethicalbehavior will either leave the relationship or be un-willing to provide further services (Carter, 2000, pp.204–205). A connection between the adaptations ofsuppliers and the relationship’s balance of power exists,but little evidence is found of customer adaptations(Brennan and Turnbull, 1999, p. 489). This means thatbefore suppliers leave the relationship, they try to adaptto the demands of customers. A suggested solution foravoiding the pitfalls due to imbalance of power is theimplementation of win–win principles (Frey and Schlos-ser, 1993; Dyer, 1996; Lazar, 2000; Spina and Zotteri,2000).

There are two kinds of contradictory results in open-book accounting studies. On one hand, many studiessuggest that open-book accounting demands trustbetween the parties (Munday, 1992a; Berry et al.,1997; Tomkins, 2001; Mouritsen et al., 2001; Axelssonet al., 2002). Giving cost information which is,

2For value analyses (VA) and value engineering (VE) see e.g.

Cooper and Slagmulder (1997).

traditionally, kept as one of the most secret areas of afirm, to other firms demands also long-term orientationbecause in short-term relationships no active manage-ment of joint cost accumulation between firms takesplace. On the other hand, there are studies that supportthe interpretation that open-book accounting andtransparency build trust (Seal et al., 1999). In practice,trust has been seen both as a requirement for and as aconsequence of open-book accounting (Kulmala, 2002),but the issue needs more critical and empirical analysis.

2.4. Summary

The users and reasons for the use of cost informationshould be defined before building accounting systemsbecause registration and reporting should be in theforms most likely to be useful for these users. DifferentCSRs have a different focus as regards the interorgani-zational use of cost information. Furthermore, in somerelationships it may not be necessary to consider costinformation at all. Table 1 illustrates the focus for costinformation use in different CSRs, as the presentpurchasing literature sees it, from the customer’s pointof view.

Three notes can be made on the table. First, most ofthe techniques and approaches are designed to serve thestrategic CSR category. This may have something to dowith environment in which a strategic supplier cannot bereplaced but has to be involved in development instead.Second, all the categories seem to be cost reductionoriented. This may be a consequence of purchasing-initiated studies. Third, some of the techniques havebeen mentioned suitable for many categories. Thisindicates, that the purchasing typologies are notprimarily cost management oriented and that costmanagement development in CSRs is not yet widelystudied.

3. Research design

‘‘To understand business relationships, greater atten-

tion must be directed to the business network context

within which dyadic business relationships take place’’

(Anderson et al., 1994, p. 12). A network is a stepfurther from the dyadic relationships because of thebigger number of firms involved and the influence ofCSRs on each other (Dubois and Pedersen, 2002). Anetwork is a group of firms having a common interestand operating together (H(akansson and Snehota, 1989;Anderson et al., 1994; Harland et al., 2001). Thenetwork approach is important also for not to simplifycomplex inter-firm dynamics to a two-variable portfolio(Dubois and Pedersen, 2002, p. 40). Furthermore, costmanagement in network relationships has been consid-ered from the state of the art point of view (Kulmala

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Table 1

Focus of cost information use in different purchasing categories

Categorya Focus of cost information use

Strategic/‘‘Partnership’’ Poor performance cost minimization (Olsen and Ellram, 1997)

Early involvement of suppliers in purchases (Dyer, 1996; Olsen and Ellram, 1997)

Joint development of products with suppliers (Dyer, 1996; Olsen and Ellram, 1997)

Both parties agree on cost reduction targets (Handfield et al., 2000)

Target pricing to identify cost-saving opportunities (Handfield et al., 2000)

Work closely with suppliers and strive for cost reductions (Kapoor and Gupta, 1997)

Open book accounting (Ellram, 1996)

Non-critical/‘‘Continuous churn’’/D Administrative cost reduction (Olsen and Ellram, 1997)

Identify the cost of consolidation of purchases (Olsen and Ellram, 1997)

Frequent competitive biddings (Kapoor and Gupta, 1997; Ellram, 1996)

Make mainly annual contracts with low transaction cost (Matikainen, 1998)

Bottleneck Low cost of purchasing operations (Olsen and Ellram, 1997)

Concurrent engineering and value analysis with suppliers (Olsen and Ellram, 1997)

Leverage Unit cost reduction of material (Olsen and Ellram, 1997)

Value analysis in order to lower product cost (Ellram, 1996)

aAdopted from Olsen and Ellram (1997), Handfield et al. (2000), Kapoor and Gupta (1997), and Matikainen (1998).

H.I. Kulmala / Journal of Purchasing & Supply Management 10 (2004) 65–7768

et al., 2002), but not from the development pointof view.

This study is based on three IOCM developmentprojects that were carried out in three CSRs of amanufacturing network during the years 1999–2001.The case firms in which the CMDPs were carried outwere suppliers for the same main contractor. Thesuppliers’ CMDPs were initiated by the main contrac-tor. The reason for this was that the main contractormet intense competition in price in the late 1990s, whichled to cost-reduction needs. However, the projects werenot dependent on each other for any other reasons. Thenetwork’s main contractor is a global equipmentprovider. The main contractor has 163 direct suppliers(year 2000) and divides them into four classes: A(Partnership, 3 suppliers), B (Strategically important,30), C (Ordinary suppliers, 50), and D (Bulk suppliers,80). The annual sales of the main contractor in 2000were ca. 160 Mh.

In this study, six purchasing portfolios are used astools in order to describe the case CSRs and in order tosteer the analysis. These portfolios are illustrated inAppendix A (Figs. 2–7). The selection of these and notany other portfolios was based on their representativenature. By using these six portfolios, most of thefeatures in purchasing portfolios ever constructed aretaken into account. In addition, by using manyportfolios, a possible interpretation difficulty of oneportfolio does not ruin the analysis.

In the development of theory it is not necessary to findstatistical evidence on single issues but rather the aim isto understand and to conceptualize a phenomenon (Yin,1994). In case studies, the number of cases can be limitedin such a way that an extra case does not increaseevidence or our knowledge. Cases which are expected to

differ from each other should be examined in order tofind out as much as possible about the phenomenonstudied (Gummesson, 1991; Yin, 1994). The number ofcases, three, is a clear limitation for the generalizabilityof the results. However, the study is explorative innature. The generalization of the cases is made byfollowing the contextual generalization rhetoric (Lukkaand Kasanen, 1995).

CMDPs created a solid basis for analyzing theconnection between CSR and the goals, actions, andresults of these projects. The nature of CSRs was studiedin three ways:

* By interviewing the top managers of each of thecase suppliers and the purchasing manager of themain contractor in summer 2001. The focus in theseinterviews was on the one hand on the CSR betweenthe supplier and the main contractor, and on theother hand on the CMDP. The interviews were basedon a structured questionnaire consisting of 42 closedquestions and eight open questions. The closedquestions were derived from the six frameworks inorder to classify the case relationships. The closedquestions were either short statements that inter-viewees could assess from 1 (very little or high) to 5(very much or low), or questions for exact values ofcertain measures, for example sales volume oralternative suppliers’ names. One open questionrelated to how case firms characterized their relation-ship to the main contractor/to case suppliers. Sevenopen questions considered CMDPs, motives, re-sults, problems, the effect of the counterpart onresults, and the reasons for the results. The ques-tionnaire was sent to the interviewees two weeksbefore interviews.


* By gathering business facts and key figures during theCMDPs either from official business information(financial statement information, press releases, etc.)or from documented project material (see e.g.publications introduced in connection with the casedescriptions) during 1999–2001. The author acted asa participative observer in the follow-up of all theprojects.

* By meeting the representatives of all the case firms atleast twice a year at the network developmentmeetings during 1998–2001. The meetings lasted6–8 h each, and were aimed at defining the overalldevelopment efforts the network firms were going totake during the next 6 months.

Due to the methods used, the results depend stronglyon interviewees’ experiences and opinions. It is possiblethat interviewees do not reveal their deep feelings andnegative opinions about other parties to the interviewerfor fear of harming the business if the counterpart hearsthe feelings.

4. Case studies

The three case studies are described from fiveperspectives: why development was begun, what actionswere taken to improve the quality of suppliers’ costinformation, which kind of nature each of the CSRshad, how the openness of cost information wasperceived in each CSR, and what were the observedchanges and results in the CSRs during the study.Table 2 summarizes the cases. Furthermore, therelationships are classified into the six frameworks ofFigs. 2–7 (Appendix) according to the relationshipdescription (see Section 4.3). This classification is madein order to support the analysis and in order to identifythe differences.

4.1. Background of the development cases

The supplier in case 1 delivers the biggest proportionof the main contractor’s purchases. Due to the pricepressure, the main contractor set general-level costreduction targets (3–15%) for the products of thissupplier in 1998. To meet the cost reduction targets, thecurrent cost structure of the products should be knownaccurately. The supplier wanted to improve its account-ing system. Product cost information was required forexample to analyze the profitability of customer-specificproduct mixes.

The specific goal of the main contractor for theCMDP of case 2 was ‘‘to reduce total cost by producing

more accurate cost information about the supplier’s

operations, and by improving information transfer be-

tween the parties’’. The supplier was expected to take

part in the main contractor’s product developmentprocess more actively than in the close history and tomake its logistics operations more efficient. In therelationship, there was a major controversy: the maincontractor wanted small batch sizes in the spirit of just-in-time philosophy, but the supplier wanted to increasethe delivery batch size to reduce activity cost. Incomponent supply, the activities needed to sell acomponent do not depend on the component’s purchas-ing price. Forgetting this fact had led to biased prices,because the supplier’s accounting system calculated theselling prices and gross margins by factors derived fromthe purchasing prices of components. In addition,the cost and operations registration system was tooaggregated. The supplier could not identify, which costsare related to which customers or products. Hence, thecost and profitability awareness of the supplier wasweak.

This CMDP in case 3 had a hard start. The maincontractor wanted ‘‘to reduce the total purchasing cost of

a product group’’. On the other hand, the maincontractor needed ‘‘accurate cost information from the

supplier in order to compare it with the competitors’’. Thiswas a situation very likely to lead to the supplier’sunwillingness to cooperate. ‘‘Cost information is per-

fectly handled in this firm and we have no need to develop

in this area’’, said the facility manager of the supplier inspring 2000. The main contractor later offered morevolume to the supplier in the form of a new productgroup if the supplier’s price in the new group was morethan 20% lower compared with the price of the currentsupplier. Only after the possibility of centralizing themain contractor’s network purchases had been ex-plained, did the supplier become interested in CMDP.

4.2. Actions taken for the development of suppliers’ cost

accounting

The IOCM development in case 1 began in spring1999 by implementing a new ABC system at thesupplier’s and by integrating it to an existing ERPsystem (Lahikainen et al., 2000). A major advance in thecase of the new system was the ease in the assignment ofindirect labor and overhead cost. To support pricenegotiations, the supplier asked the main contractor toaccept the accounting principles of the new system—which it did. The consequence of this act is thatnowadays the parties do not waste time in squabblingfor example over how the material consumption iscalculated, how to make depreciations, or what theinterest rate used is.

The CMDP of case 2 began in fall 1999 withdeveloping a simplified ABC model. Activities (nomaterial cost) of one business area were included inthe model. The usefulness of the simplified model isbased on connecting the four-category purchasing

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Table 2

Summary of the cases

Addressed issue Case 1 Case 2 Case 3

Background of cases What does the supplier sell to the main

contractor?

Subassemblies and an end product Components and design of technical

solutions

Components, bulk material, and the

delivery of these to main contractor’s

facility

Supplier’s annual sales 17 Mh 40 Mh 33 Mh

Percentage of sales to the main

contractor

30% 7% 9%

Development goal of the main

contractor

Increase end product’s competitiveness by: (1) knowing the suppliers’ cost, (2) actively reducing the cost

Actions in accounting Nature of new cost analysis Covers all the products Classification tool One–time calculation

Supplier’s product cost known Yes 10 pilot products in one business area One product group without

management’s cost

Supplier’s customer profitability

known

Yes Three sample products One product group

Main contractor’s development input

as experienced by the supplier

(low/moderate/high)

High High Moderate

Nature of CSRs Age of the CSR 10 years 20 years 4 years

Supplier category in the frameworks See Appendix A See Appendix A See Appendix A

Main contractor’s classificationa A—Partnership B—Strategically important B—Strategically important

Main contractor’s willingness to

replace the supplier (scale: 1-5)

1—Very little 2—Little 2—Little

Openness Openness of cost information Supplier’s cost information given to

main contractor

No Supplier’s cost information given to the

network

Observed changes

and results of the

projects

Win–win solutions Balancing the suppliers’ profitability of

the products sold to the main

contractor

No Reduced sales price to network

customers—more sales to the supplier

The statement of the supplier’s

representative

‘‘We got reliable and useful cost

accounting and reporting system that

helps in product mix decisions’’

‘‘We are interested in serving the main

contractor and in reducing costs, but

we keep the cost data in house.’’

‘‘The ‘‘network deal’’ would not be

possible without the cost analysis. We

had to prove that we are the lowest–

cost alternative.’’

The statement of the purchasing

manager of the main contractor

‘‘Increased understanding about the

cost structure and pricing principles of

the supplier and tools developed for the

cost reduction work were the major

results of the project.’’

‘‘Technology issues give this supplier

very much power. We have to buy

certain components from them even if

they do not open their cost structure’’

‘‘We expected cost reductions and

wanted to support the supplier by

centralizing the purchases of the

network.’’

Development results for main

contractor

Accurate cost structure of purchased

products known

Better supplier’s cost awareness, more

economical batch sizes.

20% lower purchasing prices for a new

product group

aClasses: A (Partnership), B (Strategically important), C (Ordinary), D (Bulk).

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portfolio used by the firm3 with the activity cost of eachitem (Lyly-Yrj.an.ainen et al., 2000). Ten pilot productswere classified according to their activity structure. Thismodel made it possible to identify product-specificactivity cost with sufficient accuracy. The classificationtool was valuable for the sales and management of thesupplier, because it showed the product cost andtransaction profitability for different sales batches(Sepp.anen et al., 2002). The supplier’s personnel wasprovided with educational material that highlights thesignificance of cost issues for the profitability ofdifferent kinds of sales transactions. The educationalmaterial and the batch size analysis changed the way ofoperating with the main contractor: there is an activetrend to avoid small batch sizes nowadays. A surprisingchange also emerged during the CMDP: in the sales ofsimple components, the supplier started to favor atypical order–delivery process (instead of earlier projectsales) in order to remove continual price discussionsfrom individual transactions. Logistics cost becamemore transparent and foreseeable when it was assignedto deliveries according to their batch size.

The cost analysis in case 3 was begun at the supplier’sin fall 2000 to identify the cost and profitability ofservicing the main contractor (Varis, 2001). The projectcovered cost factors that were linked to the service ofthis main contractor concerning a product groupdiscussed. According to activity-based calculations, thesupplier was capable of reducing the price by 20%without endangering its customer profitability by justchanging some of its operations. Although the currentsupplier of the new product group gave the maincontractor the same price as this supplier, the maincontractor transferred its total purchasing volume ofthis product group to this supplier. The members of themain contractor’s supply network discussed a ‘‘networkdeal’’ according to which the main contractor’s networkcould centralize purchases of a product group tothis supplier. Illustrating the networked structure ofmain contractor’s supply base, the supplier of case 1was a customer of this supplier as well. The serviceconcept could be reproduced with only little customer-specific customization and cost, but the volume wouldmultiply.

4.3. Nature of the CSRs

In the supplier classification of the main contractor,supplier of case 1 was one of the three class ‘‘A’’suppliers. The main contractor has organized resourcesof its own to develop the supplier’s operations. Twoengineers have used 10–30% of their working time todevelop only this supplier’s products and processes. The

3The portfolio was tailored, not adopted from the models presented

in Appendix A.

supplier has invested a significant proportion of itsresources for the main contractor. In spring 2001 thesupplier hired one product designer to design only thismain contractor’s products. The supplier has madecustomer-specific investments, for example manufactur-ing lines. One of the lines is only for the maincontractor’s products. Hence, this relationship fallsin the strategic category (see Figs. 2, 6, and 7 inAppendix A) because of the high-volume purchasesand the strong influence of one party on the otherparty’s success. Supplier’s specific investments aresometimes problematic. This supplier would invest forany customer willing to buy more than 5% ofproduction. All the current customers are served bydeveloping and manufacturing certain customer-specificproducts. Bensaou’s (1999) framework has a weaknesshere. The supplier’s specific investments are high, butthey could be interpreted as technology- or product–specific: the investments would be made for anycustomer because of the supplier’s willingness to be asystem supplier.

The strength of the case 1 relationship seems to behigh. Furthermore, the supplier has been one of the bestsuppliers in responding to the demands and challengesset by the main contractor. The main contractor’s risk inthe case of alternative suppliers is high: in the favoredgeographical area it is not possible to find other firmsable to deliver all the products and services that thissupplier provides. If the supplier were replaced, thepurchases should be divided into smaller subunits whichwould be contrary to the main contractor’s strategy toform system suppliers and a multi-tier supply network.The portfolio of Fig. 4 is not clear in this case. The basisfor the relationship seems to be the supplier’s ability tocontinuously improve. The cost of replacing thissupplier would be very high. Although the ‘‘Partner-ship’’ box is the obvious description of this relationship,the main contractor buys also certain minor productsthat could be manufactured by many suppliers. The‘‘Free-market Competition—Back Leveraging’’ boxwould be the product-based choice for these minorproducts. On the other hand, if the main contractorbegan to buy minor products against the supplier’s willfrom other firms, the purchased volume would decreaseand the trust in the relationship would suffer. This mighthave an effect also on the more important products andon the operations overall. Hence, the product-basedapproach (see e.g. Kraljic, 1983; Kapoor and Gupta,1997) seems to be insufficient: the CSR descriptionshould be made concerning the total exchange in therelationship.

In case 2, the main contractor’s purchasing managersaid: ‘‘The technology of the components bought from this

supplier is significant to us. This supplier has been the

technology leader so far.’’ Some of the products,especially supplier-designed subassemblies, demand a


specific knowledge and are high-volume components tosuch a degree that the supplier falls into the strategiccategory (see Figs. 2 and 7 in Appendix A). Thetechnology risk for the customer is very high in thesepurchases. On the other hand, the supplier sells, evenmore than the supplier in case 1, very simple items thatcould as such fall in the non-critical category. In themain contractor’s supplier classification, this supplierwas classified in class ‘‘B’’. The supplier was likely toreach A-level in the near future if it showed moreopenness.

Due to its technological position in the market,supplier 2 was highly attractive for the main contractor.Hence, in the framework of Fig. 3, the relationshipbelongs to box ‘‘2’’ (Appendix A). The ‘‘Free-marketCompetition—Back Leveraging’’ (Fig. 4) box seems todescribe this relationship: the main contractor mentionsfour alternative suppliers that could substitute for thecurrent supplier, but the replacement would be verycostly. The supplier admitted that at least somecomponents could be purchased from other suppliers.Both parties mentioned that they have invested a lot ofresources, especially work time, in the relationship ofcase 2. One engineer from the main contractor has takenpart in cooperation with this supplier. The supplier hasallocated three sales engineers to serve this maincontractor, which is more resources than allocated toany other customer. The role of the main contractor inCMDP was ‘‘bringing in the development project and

researchers’’, as the managing director of the suppliermentioned. The main contractor also increased the timeallocated for discussion and development with thissupplier. Furthermore, the supplier felt that the CMDPcarried out with the main contractor had improved thesupplier’s image and increased its power in the maincontractor’s network. The specific investments in thisrelationship are not as high as in case 1. The resourcetime investment by both parties is less than half of thatin case 1 but more than in both parties’ relationships onaverage. Concerning the limit between ‘‘high’’ and‘‘low’’ buyer’s or supplier’s specific investments inFig. 6, it is not clear.

The supplier of case 3 was classified as a B-supplier inthe main contractor’s supplier categories. The mainreason for this was the supplier’s negotiation culture: themain contractor felt its trading-style was not coopera-tive. The only purchasing situation in this relationshiphappens when the annual price negotiations take place.The main contractor’s orders and technical specifica-tions are communicated to the supplier as often and assoon as possible. The risk and opportunity in thisrelationship depend on the supplier’s ability to maintaindelivery accuracy. If the delivery service to themain contractor’s facility fails, main contractor’sproduction suffers. The supplier’s facility is locatednearest to the main contractor of all competitors. The

main contractor could buy from other suppliers—fouralternative suppliers were named—but replacingcost would be more than one year’s cost savingsand the ramp-up time of the service would be somemonths. It seems that this relationship will last at leastas long as the supplier offers the lowest total cost. At thebeginning of the study the relationship seemed to fallsomewhere between boxes ‘‘1’’ and ‘‘4’’ in the frame-work of Fig. 3 (see Appendix A). Major changeoccurred during the CMDP: the supplier’s attitudetoward customer’s demand changed positive and thesupplier’s sales related to the main contractor grew to15% of total sales due to the network deal. So, therelationship moved toward boxes ‘‘2’’ and ‘‘5’’ (seeAppendix A).

In the CSR of case 3, the interpretation of theframework of Fig. 5 (see Appendix A) was ‘‘A’’ in 1999but will be ‘‘B’’ in 2002 if the new sales volume to thenetwork is added to this main contractor’s account.Because of the uncertainty of this new volume, thechange in CSR description is not self-evident (see dashedline in Appendix A). The supplier has invested in therelationship almost alone. Thus, the relationship fallsinto the class ‘‘Captive Supplier’’ in the framework ofFig. 6. The main contractor’s investments have beenmostly time and managerial advice, while the supplierhas built a new facility and changed the layout of aproduct line. The new facility investment was madeprimarily in order to improve the service of this maincontractor.

The analysis of CSRs revealed features that explain toa high degree the reasons for the CMDP results. In case1, the supplier’s cost information became open, andmodern cost accounting techniques were used. The mostimportant driver for the results were the supplier’scontinuous improvement capability and the parties’commitment to long-term cooperation. In case 2, thesupplier hid its improved cost information from themain contractor. Recent history revealed thatthe supplier was disappointed with the behavior of themain contractor. Hence, trust in the CSR was notsufficient for the supplier to share cost information.Furthermore, the supplier had much power in technol-ogy issues and the main contractor accounted only for7% of the annual sales. In case 3, the openness of thesupplier’s cost information was expanded to the wholenetwork. The main reason for this was the increase ofsales promised to the primarily short-term and trade-oriented facility manager.

4.4. Openness of cost information

The firms in case 1 took part in win–win negotiationsin order to discuss the supplier’s profitability objectivesfor each product in spring 2000. In these negotiationsthe parties agreed on the profitability measures and


target values for the supplier’s customer profitability inthis relationship. Since the win–win negotiations, open-book accounting has been utilized one-way: the maincontractor is provided with all the cost informationconcerning its products manufactured by this supplier.The profitability differences between different productswere not balanced in the win–win negotiations, but inspring 2001 the firms agreed to change the supplier’spricing to follow the costs: the price of the mostprofitable products was marked down and the price ofthe unprofitable products was marked up. The motiva-tion for this balancing was, according to the productionmanager of the supplier: ‘‘All the exchange in this

relationship should be equally profitable’’. Furthermore,the supplier has promised to take part in the maincontractor’s target costing project in 2002, being a pilotsupplier who will be closely involved. In the network,the win–win procedure of this relationship representspioneering.

Openness of cost information was not achieved incase 2. In contrast, since the beginning of the project itwas clear to the supplier that it was not willing to revealall cost information to this or any customer. Anindividual factor may explain this to a very high degree.In this case, the lack of openness in cost informationsharing can be explained by the lack of trust: even if therelationship had lasted long, the supplier felt that acouple of very negative incidents had happened in the20-year relationship. The supplier felt that the maincontractor had conducted unfair operations. Therefore,trust was on a weaker basis than in case 1, at least thesupplier’s trust on the main contractor, and the strengthof the relationship was not high. This led to minimumcost information transfer from the supplier to the maincontractor. However, no volume increase or any otherdirect incentive for openness was promised for thissupplier, which left the effect of incentives unchecked inthis case.

An unusual open-book meeting was arranged in fall2000. The supplier of case 3 presented its actual serviceprocess and all related activity-based cost information tofive of the network’s members. These members stood fora new purchasing volume potential. Open-book proce-dure as in case 1 was carried out not only in a dyadicCSR but also in a multilateral network context. Theparticipants of the meeting thought that such aprocedure will become general (Sepp.anen et al., 2002,p. 67). The supplier got new customers in spring 2002. Ittook almost a year before the participants had replacedtheir old suppliers.

Comparing the cases with cost management literature,the multilateral openness attained in case 3 is uncom-mon. Most of the cases reported relate to dyadicpractices (Cooper and Slagmulder, 1999b; Mouritsenet al., 2001). In addition, the supplier of case 1 was oneof the customers of the supplier in case 3, and

responsible for part of the volume increase for thissupplier. Hence, it is reasonable to believe that thenetwork approach to CSRs (H(akansson and Snehota,1989; Anderson et al., 1994; Dubois and Pedersen, 2002)is appropriate also for cost management, instead of theuse of a single purchasing portfolio.

The one-way openness in cases 1 and 3 illustrates theproblem of the imbalance of power: cost informationshared only one-way may whittle away the confidence atthe supplier’s and lead to conditional openness. Condi-tional openness may not be the most suitable approachin strategic partnerships. Open-book accounting wasachieved in two out of three CSRs studied. The effectof the main contractor’s attitude and power wassignificant, because the main contractor did notshow any openness regarding its own cost information.These cases lengthen the list of many studies on one-wayopen-book practices (Dyer, 1996; Seal et al., 1999;Cooper and Slagmulder, 1999b; Mouritsen et al.,2001), which strengthens the argument of Stuart et al.(1998, p. 84) according to which ‘‘y the tiered supplier

partnership model clearly focuses on benefiting the

buyer.’’

4.5. Observed changes during the study and the results of

the CMDPs

The relationship in case 1 did not change very muchduring the years 1999–2001. The supplier’s processeswere analyzed by the researchers building the ABCsystem and by the main contractor’s engineers. Thesupplier gained ‘‘better understanding of the main

contractor’s demands in product design and more

cooperation at different levels of the organization.’’ Thesupplier also felt that ‘‘the main contractor organized the

funding of the researchers to create the new cost

accounting system’’ and in this way helped the supplierto advance.

The supplier of case 3 mentioned that ‘‘the main

contractor had a leading role in coordinating a project

that increases our sales.’’ The open-book culture incost information was also brought in by the maincontractor. The biggest change in the CSR duringthe CMDP was in the parties’ awareness of eachother’s business. For example, the supplier had notrealized the network’s possibility to centralize purchasesbefore the main contractor presented the idea. However,the timetable for the network’s purchases was adisappointment for the supplier, because some of thenetwork firms ordered no items from the supplier in thefirst year.

The attitude of the supplier in case 3 toward open-book accounting changed completely during theCMDP. This was mainly due to the change in theattitude of the supplier’s facility manager. The managerappreciated cost analysis only if it directly helped to


create more sales or to decrease cost. The manager waspragmatic to such a degree that when more sales werelikely to occur, s/he did not waste time in sharing thecost information with any potential buyer. ‘‘I would not

share cost information with other customers if no

measurable benefit were likely to occur’’, the managermentioned. Decreased unit cost, strict benchmarking,and no customer-managed operations were the mea-surable results of this CMDP. Material cost is ahighly important criterion for the main contractorwhen selecting supplier for the components incase 3. Compared with theory, this is typicalin leverage-category relationships (see Figs 2 and 7 inAppendix A).

This study brings in evidence of benefit also for thesuppliers in the spirit of Ellram’s (1995) functionalitystatement. In the cases 1 and 3 there were win–winsituations. Case 1 emphasizes the importance of inter-organizational process assessment and win–win solu-tions in the category of strategic relationships. Processassessment in case 1 followed the idea of joint processassessment (Ellram, 1996) in strategic partnerships. Incase 3, the nature of process assessment was on the maincontractor’s side mainly benchmarking. The win–winsolution was based only on increasing volume, com-pared with the product mix profitability analysis incase 1. On the other hand, strategic supplier 2 was notinvolved in any open-book procedure. Case 2 seems tobe a normal development project on accountinginformation, interorganizationality did not substantiallyappear in cost information use. Balance of power andtrust did not prevail in case 2. This and the lack ofsufficiently attractive and direct win–win situationexplains to a high degree the supplier’s unwillingnesstoward openness.

5. Discussion

Because the nature of CSR seems to have an in-fluence for IOCM development, the goal setting forinterorganizational CMDPs should be made withcareful analysis of what kind of cost information islikely to be produced by participating firms, andwhat kind of use the cost information will be putto in the relationship. The selection of the customer’spoint of view for the cost reduction was supported bythe case evidence according to which IOCM seems to beat the customer’s responsibility: the customer carriesmostly the burden of cost accumulation in the supplychain.

Major differences were found between the CMDPs:suppliers’ objectives, actions taken in case CSRs, andthe results of the projects were different, although themain contractor’s initial objective was the same in allcases. Cost information transfer and utilization de-

pended on the balance of power between firms, on thetrust between personnel, and on the volume of firms’mutual business. Although this could have been seenbeforehand, because all the issues mentioned have beendescribed to influence the nature of CSRs (Porter, 1980;Mohr and Spekman, 1994; Virolainen, 1998), the newfinding is that a customer can proceed with the selectedobjectives if appropriate approach and incentives areapplied with different suppliers. This study indicatesthat suppliers that have good experiences of a customer(adequate trust), are likely to reach win–win situation(significant mutual business volume), or do not haveexclusive position as a supplier (not a supplier domi-nated CSR) are ready to openness. This would beimportant for any firm trying to decrease the total costin the supply network.

From cost management development point of view, itis not enough to position a CSR in existing purchasingportfolios, but rather the analysis should be diversifiedconcerning also the details of the relationship and theintentions of the firms. Even versatile use of currentclassifications may be inadequate because of thenetworked structure of the supply base. It seems, thatCSR classifications do not fully support cost manage-ment perspective, because the CSR portfolio analysesused were too aggregated as such when explaining thedifferences in IOCM development. Hence, there isevident need for a new framework. Fig. 1 illustrates aninitial suggestion that is made on the basis of this study.In this new framework, the three dimensions are selectedto be the features that explained cost informationtransfer and utilization in case CSRs.

The framework is directed to help customer-sidedecision-makers in analyzing whether open-book ac-counting is likely to work (colored box) or not.However, the new framework is not statistically testedand this suggestion is not an effort to claim that thedevelopment of cost management will not occur if aCSR does not include all the features of the colored box.On the contrary, also in case 2, which did not includeany of the three features in Fig. 1, some developmenttook place, but from main contractor’s point of view itwas not too much.

At least five issues limit the generalization of theresults of this study: first, the relationships studiedbelong to the same network. The effect of the maincontractor on objectives and results might be severe.Second, the features of the theoretical frameworks werenot put in priority order. Relationships might becompletely different if this priority order were estab-lished and communicated to the interviewees. Third, thestudy was carried out in the manufacturing industry.Cost pressure in today’s manufacturing makes itimportant for almost all firms to develop cost aware-ness. Fourth, a specific accounting situation maydemand a certain focus in the use of cost information

ARTICLE IN PRESS

Strategic importance of the purchase

Dif

ficu

lty

ofm

anag

ing

the

purc

hase

sit

uati

on Bottleneck Strategic:

1 & 2

Non-critical Leverage: 3

Fig. 2. Portfolio of purchases (Olsen and Ellram, 1997, p. 105).

Customer dominant

Supplier dominant

Non-adequate Adequate

High

Low

Trust

Vol

ume

of m

utua

lbu

sine

ss

Balance of Power

Fig. 1. A framework for analyzing the development potential of interorganizational cost management in different CSRs. (The colored box indicates

highest potential for open-book accounting.)

H.I. Kulmala / Journal of Purchasing & Supply Management 10 (2004) 65–77 75

regardless of a CSR’s nature. Fifth, in line with Duboisand Pedersen (2002), this study represents a critical andalso limitedly studied approach of not recommendingthe use of purchasing portfolios for all purchasing-related connections, such as IOCM, for example.

The research method, case studies with participatoryfollow-up and structured interviews, may producebiased results. The impact of the researcher cannot befiltered out. However, as the study was explorative, thisweakness is possible to accept. In further studies, alsothe reliability and generalizability of the results shouldbe more accurately taken into account. Consideringfurther research, more cases and more diversifiedselection of CSRs should be analyzed in order to createan initial typology for cost management in CSRs.Furthermore, the network approach to CSRs offers awide field for cost management research.

Fig. 3. Analysis of supplier relationships. (Italic numbers refer to box

numbers. Olsen and Ellram, 1997, p. 107).

Acknowledgements

This paper has benefited from the comments byprofessor Erkki Uusi-Rauva, professor Mika Hannula,senior researcher Jari Paranko, and researcher MarkoSepp.anen from Tampere University of Technology andtwo anonymous reviewers of the Journal of Purchasingand Supply Management.

Free-marketCompetition – TargetNegotiation

Free-marketCompetition – Continuous Churn

Partnership Free-market Competition– Back Leveraging

Low HighNumber of alternatives

Fea

sibi

lity

or

Eas

e of

Ch

ange

Low

Hig

h

Fig. 4. Alternative situations in supplier management (Kapoor and

Gupta, 1997).

Appendix A

The positioning of the case relationships in purchas-ing portfolio frameworks. The framework of Kapoorand Gupta (1997, Fig. 4) was left out of the case analysisbecause of interpretation difficulties.

Key: 1—case 1 CSR, 2—case 2 CSR, 3—case 3 CSR(Figs. 2–7).

ARTICLE IN PRESS

CaptiveBuyer

StrategicPartnership:

1 & 2

MarketExchange

Captive

Supplier: 3

Low HighSupplier’s Specific Investments

Buy

er’s

Spe

cifi

c In

vest

men

ts

L

ow

H

igh

Fig. 6. Relationship types (Bensaou, 1999).

Low-Volume High-Volume Purchases Purchases

Op

port

unit

y /

Ris

k

Low

H

igh Bottleneck Crit. Strategic:

1 & 2

Non-critical Leverage: 3

Fig. 7. Commodity portfolio matrix (Handfield et al., 2000).

A 2 & 3 B 1

D C

Share of deliveries in proportionto turnover

Val

ue o

f de

liver

ies

Fig. 5. Four types of relationships (Matikainen, 1998).

H.I. Kulmala / Journal of Purchasing & Supply Management 10 (2004) 65–7776

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