Academic journal article Management Accounting Quarterly

Interorganizational Cost Management in Supply Chains: Practices and Payoffs

Academic journal article Management Accounting Quarterly

Interorganizational Cost Management in Supply Chains: Practices and Payoffs

Article excerpt

It is generally accepted that one of management's primary roles is to optimize profits by controlling costs effectively. This includes costs associated with operating the day-to- day business, such as those related to labor, materials, and administrative functions, as well as more strategic costs, such as those for research and development (R&D) and capital investments in property and equipment.

Traditionally, companies have focused on costs that they can control from within, which is known as internal cost man- agement (ICM). But with the advent of technology capable of measuring and tracking costs along a supply chain, there is an emerging trend to manage costs associated with supply chain partners, too. As an example, a manager at a French multina- tional company explained that his former job description was to "manage" or "supervise" his suppliers. In his current role, however, he is expected to "collaborate with" suppliers. He further explained that one of his company's primary goals was to work with suppliers to reduce costs. This collaborative ap- proach is known as interorganizational cost management (IOCM), which is quite different from the more traditional model where a more powerful partner benefits at the expense of a weaker one.

How IOCM Works

Here is an example of how IOCM can benefit both parties in a business transaction. A chocolate company initially supplies chocolate to a customer by following these six steps: (1) Supplier produces liquid chocolate; (2) sup- plier solidifies chocolate into chocolate bars; (3) supplier wraps the bars and packages them on pallets; (4) sup- plier ships the pallets; (5) customer unwraps the pack- aging; (6) customer melts the bars back to liquid form. It was only after the supplier and customer began work- ing together that they realized both companies' costs could be reduced substantially by shipping the choco- late in liquid form.

This example leads to several specific questions re- garding interorganizational cost management: In what types of IOCM activities do companies engage? What practices can firms in supply chains employ to facilitate the development of IOCM activities? What are the pay- offs, if any, to companies that engage heavily in IOCM? To answer these questions, we surveyed a representa- tive set of organizations engaged in supply chain activi- ties. We also identified several factors that people be- lieved would help organizations implement IOCM as well as its perceived benefits.

In this article, we present a summary of our survey results to assist management accountants in determin- ing their organization's potential for engaging in IOCM. The academic version of our article can be found in the April 2012 issue of Accounting, Organizations and Society. Titled "Effect of Internal Cost Management, Information Systems Integration, and Absorptive Capacity on Inter-Organizational Cost Management in Supply Chains," that article contains the theory, refer- ences, technical analysis, and detailed results pertaining to factors that can be combined to enable IOCM.

The Survey

With the support of IMA (Institute of Management Accountants), we collected the data for this study at three IMA-sponsored events: a national meeting, a Lean accounting conference, and a regional IMA con- ference. IMA members in supply chain organizations were encouraged to complete the survey; 76 responded. We targeted accountants with knowledge of internal cost management (ICM) activities, supply chain activi- ties, information systems, and their organization's rela- tionships with supply chain partners. More than half the respondents are in a controller or similar type of ac- counting position, and about one-quarter hold finance positions such as CFO or project financial director. A variety of organizational types are represented; most were from manufacturing, followed by distributors, re- tailers, and wholesalers.

Before we could evaluate the extent to which interor- ganizational cost management activities were being adopted, however, we believed it was important to first describe these practices in the context of common ICM activities because many IOCM practices are just an in- terorganizational application of many internal proce- dures. …

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