The role of cost management in network relationships

Recent years have seen rising interest in network economy. The first reason is globalization. The world has been shrunk by information technology and open economies. The second reason is that companies have to take care of costs to meet the descending price rate of the market. Competition in the mature lines of business especially requires continuous productivity improvements. This leads to narrow competencies and extensive outsourcing. Cost accounting has been a widely discussed issue during the last years. Traditional cost accounting is changing to cost management. Target costing, value engineering and design-to-cost are becoming more and more common. The aim of the paper is to find out what kind of challenges networking relationships present for cost management. This paper concentrates on two-party relationships only. Cost information management across the supply system of business as a whole is ruled out. The results of 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 own operations. Secondly, a company should share part of the cost information with cooperating firms. Thirdly, part of the information flow should be open to all the companies in the network. Companies rarely know the full costs of each product. This is also the case with the companies analyzed. A lot of development work with suppliers' cost accounting systems is needed. A win-win relationship creates a need for open book accounting. Only two out of seven suppliers are ready for this. There is also a need to create mutually accepted accounting practices. Furthermore, in networking economy the following features of cost management are needed: accurate customer profitability information, accurate information on the influence of volume on profit, " ability to cost new activities. These findings do not present totally new challenges for cost management. However, networking relationships seem to emphasize these features more than traditional relationships. (C) 2002 Elsevier Science B.V. All rights reserved.