Cost management practices for supply chain management: an ... · Strategic management accounting and cost management practices are concerned with the provision, analysis and use of

296 Int. J. Services and Operations Management, Vol. 4, No. 3, 2008

Copyright © 2008 Inderscience Enterprises Ltd.

Cost management practices for supply chain management: an exploratory analysis

Stephan M. Wagner Kuehne-Center for Logistics Management WHU – Otto Beisheim School of Management Burgplatz 2, 56179 Vallendar, Germany Fax: +49 261 6509–439 E-mail: [email protected]

Abstract: Cost management within a supply chain management domain has lately received a great deal of interest from academics and practitioners; however, the literature is still dominated by conceptual and anecdotal work. The major issue is that it is difficult at best to draw conclusion with any level of confidence concerning the actual degree of usage of various cost management practices. The study reported in this article uses split sample analysis to determine the extent to which firms actually use 18 SCM-related cost management practices. The sample that was developed included 126 medium- and large-sized Swiss firms. The results show that only supplier evaluation and purchasing performance benchmarking are regularly employed by companies and that cost management practices linked to integrated logistics are applied only rarely in corporate practice. In this study, seven of the cost management practices were associated with higher supply chain performance, which suggests that firms should carefully consider their implementation.

Keywords: Supply Chain Management; SCM; purchasing; supplier relationship management; integrated logistics; cost management; survey.

Reference to this paper should be made as follows: Wagner, S.M. (2008) ‘Cost management practices for supply chain management: an exploratory analysis’, Int. J. Services and Operations Management, Vol. 4, No. 3, pp.296–320.

Biographical notes: Professor Stephan M. Wagner holds the Kuehne Foundation Endowed Chair of Logistics Management and is the Director of the Kuehne-Center for Logistics Management at WHU – Otto Beisheim School of Management, Vallendar, Germany. Prior to joining academia, he worked for ten years as Director of Supply Chain Management for a Swiss-based technology group and as Senior Manager for an international top-management consulting firm. He obtained an MBA from the Washington State University and a PhD from the University of St. Gallen. His general research interests lie in the areas of supply chain strategy, purchasing and supply management, interfirm relationships in industrial marketing channels, innovation and risk in supply chains, and management of logistics service firms. Previous works have appeared in the Journal of Business Logistics, Journal of Supply Chain Management, Journal of Purchasing & Supply Management, European Journal of Operational Research, International Journal of Production Research, Journal of Management, Journal of Business Research and other journals.

Cost management practices for supply chain management 297

1 Introduction

Strategic management accounting and cost management practices are concerned with the provision, analysis and use of information in order to assist managers in decision making and managerial control. Cost management is not an end in itself, but a means to support an organisation in achieving its goals, such as boosting profits by aggressively lowering costs (Guilding et al., 2000; Shank and Govindarajan, 1989). With the emergence of Supply Chain Management (SCM), successful firms have started to extend their cost management activities beyond the boundaries of the firm. Cost management plays an important role when it comes to influencing the effectiveness of SCM activities and the behaviour of people engaged in the purchasing, supply and logistics processes (Cooper and Slagmulder, 2004; Ellram, 2002; Kulmala et al., 2002). The net result of adopting cost management practices in this context should be to facilitate the successful implementation of SCM (Axelsson et al., 2002; Bechtel and Jayaram, 1997; Gunasekaran et al., 2001; Mentzer and Konrad, 1991).

Several striking conclusions emerge from the review of the strategic management accounting and cost management-related research conducted in the past decade in the SCM field:

First, a number of cost management practices has been introduced to the SCM literature in recent years, often labelled by acronyms such as SCC (Supply Chain Costing), TCO (Total Cost of Ownership), VCA (Value Chain Analysis), BSC (Balanced Scorecard), SLV (Supplier Lifetime Value), ABC (Activity-based Costing) or SCOR (Supply Chain Operations Reference). Most of them have been borrowed from management accounting and other disciplines and adapted to the specificities of SCM (e.g., the balanced scorecard), while others have been developed from within the field (e.g., the supply chain operations reference model).

Second, conceptual papers and papers presenting anecdotal evidences/case study-based research prevail by far over empirically based research. Kajüter (2002), for example, observed that empirical studies are often limited to single case studies. Currently, management accounting and cost management research in the SCM field is still at the point where management accounting as a discipline was 15 years ago. At that time, Anthony (1989), an expert in the field, wrote that “information about management accounting practices is abysmally poor” and that “almost all information is anecdotal” (p.18). Anthony criticised the assumption underlying many publications that the particular management accounting practice or concept presented is used by ‘most’ or ‘a large number of’ companies, because no large-scale empirical evidence related to the actual incidence of usage was provided.

Today, we can find the misleading assumption pointed out by Anthony in several cost management-related SCM publications. For example, Lere and Saraph (1995, p.30f) express that “many modern supplier management strategies are reinforced with the use of the activity-based costing concept”. This statement is not supported by any empirical evidence. Likewise, Kaczmarek and Stüllenberg (2002, p.275) suggest that the supply chain operations reference-model “is commonly used in practice”. As shown later in this article, this assumption is not supported. In another example related to Supplier Lifetime Value (SLV), Essig and Arnold (2003, p.79) state that the instrument is “… not used as much as it should”. However, without any prior empirical study related to SLV, the actual

298 S.M. Wagner

usage cannot be validly determined. In contrast, the authors of a conceptual article on modern management accounting for purchasing were more cautious when they indicated that “we assume that neither practitioners nor scholars have fully exploited recent developments within the field of management control” (Axelsson et al., 2002, p.53). Implicitly, they also hint to the fact, that the actual application of these practices is unknown and that there is a lack of empirically based research on this subject. Several surveys on conventional management accounting and cost management practices have recently emerged (e.g., Baird et al., 2004; Guilding et al., 2000; Szychta, 2002), yet minimal attention has been directed to determining whether management is actually putting these practices to use in managing the supply chain. It is important for supply chain researchers to assess the extent to which new cost management practices are being applied, as this evaluation will help determine whether research should be directed to improving application of existing approaches as opposed to developing new approaches. In addition, it is important to assess current usage in order to assess whether the newer cost management practices are effective.

Third, the few studies on (selected) cost management practices in SCM demonstrate that firms can in fact benefit from implementing them. For example, in their empirical study, Carr and Smeltzer (1999) found that benchmarking in purchasing is positively related to a company’s strategic purchasing and firm performance. One conclusion of Dekker and van Goor’s (2000) case study of an activity-based costing model to support SCM is that accounting measures are important – though not sufficient – for the success of SCM. In another case, the Balanced Scorecard (BSC) has been discussed extensively since the initial development by Kaplan and Norton in the early 1990s, yet it only recently has been discussed in the supply chain context. There is some research evidence indicating that BSC adopters that explicitly link their measures across all perspectives of the scorecard, and that gather data supporting or refuting these hypothesised relationships outperform BSC adopters that do not explicitly link their measures (Ittner and Larcker, 2003). Here again, it is unclear to which extent the approach is used and the problems that practitioners have with its application. Hence, there is a strong need for empirical work to examine the actual application of key cost management techniques.

To sum it up, there is a growing body of cost management practices for application in SCM and many have the potential to enhance the firms’ supply chain and overall performance. An issue is the lack of empirical evidence on the application and effectiveness of such practices. The aim of this study is to address this shortcoming by analysing the scope and application of various cost management concepts and practices in SCM through a questionnaire survey. The study specifically attempts to address the following questions:

• To which extent do companies apply these various SCM-related cost management practices? Can some practices be considered ‘industry standard’ while others are hardly used at all?

• Is there a difference in usage depending on company characteristics, such as firm size?

• How satisfied are the firms with the applied concepts? Do firms demonstrating a higher performance in SCM (e.g., in terms of material cost or inventory reductions) apply these practices more intensively than low-performing firms?


In addition to pursuing these questions, this article offers a concise overview and review of each cost management practice covered in this study. The remainder of the article is structured as follows: The next section describes the data collection and method and how the sample was divided into subgroups. Section 3 reviews and explains the relevant cost management practices applicable to SCM and presents the results of the analysis. Section 4 aggregates and discusses the findings of the study and provides recommendations for managers and academics.

2 Methodology

2.1 Data collection and sample

The empirical setting for this research are Swiss medium-sized and large firms from various manufacturing and service industries. Switzerland is among the most affluent countries of the world and its business activities can be considered highly developed and representative for other Western economies, such as Germany or the UK. Furthermore, these countries have very similar business cultures (Hofstede and Hofstede, 2005).

The sample consisted of 1000 corporate members of the Swiss national purchasing and supply chain management association (i.e., the Swiss chapter of the International Federation of Purchasing and Materials Management). Following generally accepted recommendations (Dillman, 1978; Jobber, 1990), we contacted the companies’ most highly ranked purchasing or supply chain managers on two occasions. The first contact included a personalised letter, a reply envelope, and a professionally drafted survey booklet. The follow-up contact was a newsletter that included a reminder to participate in the survey. Full anonymity was granted to the respondents. Of the 1000 in the original sample, 126 managers returned complete and usable questionnaires, for an overall response rate of 12.6%. Considering, for example, that response rates in industrial mail surveys are generally lower than in consumer surveys and the targeted top-level executives’ time constraints, the response to our survey was reasonable. Following Armstrong and Overton (1977), the non-response bias was assessed by conducting t-tests between responses from early and late respondents on key variables. The tests did not reveal any significant differences.

Respondents were purchasing, logistics, or SCM executives, holding titles such as Chief Operating Officer, VP of Purchasing, Supply Chain Director, Head of Materials Management, or Supply Chain Manager. Table 1 presents a description of the responding firms. Their annual sales volumes range from US$ 7.5 million to US$ 5.9 billion (mean annual sales of US$ 262 million) and the number of employees from 10 to 50 000 (mean number of employees 1557).

As shown in Table 2, the usage of the cost management practices was examined from four perspectives. For each perspective, the sample was split into two groups (Table 2). The first two perspectives were related to demographics (i.e., industry and firm size), and the second two perspectives were related to the responding firms’ satisfaction with their cost management practices and SC performance.

300 S.M. Wagner

Table 1 Description of respondent firms

Classifications Percentage

Industry

Machinery, plant construction 28.6

Electrical, electronics, optics 17.5

Chemicals, pharmaceuticals 11.1

Food, consumer goods 6.3

Construction 4.0

Automotive 2.4

Basic industries 1.6

Other manufacturing 7.9

Wholesale, retail 4.8

Energy 4.0

Telecommunication 2.4

Public administration 1.6

Software 1.6

Other services 6.3

Annual sales (in US$)

25 million or less 26.2

> 25 million–100 million 34.1

> 100 million–1 billion 23.0

Over 1 billion 4.8

No response 11.9

Number of employees

250 or less 58.7

> 250–500 16.7

> 500–1000 8.7

> 1000–10 000 9.5

Over 10 000 3.2

No response 3.2


Table 2 Grouping of respondents for analysis

Industry

Service firms n = 26

Manufacturing firms n = 100

Firms’ size (annual sales)

Small firms < US$ 47,583,643

n = 55

Large firms > = US$ 47,583,643

n = 56

Satisfaction

Low satisfaction < 2.67

n = 44

High satisfaction > = 2.67

n = 57

SC performance

Low SC performance < 0.5

n = 56

High SC performance > = 0.5

n = 68

2.2 Splitting the sample by industry and firm size

2.2.1 Industry

First, the sample was split according to the type of business the responding firms were in. Based on the respondents’ self-description the majority of firms were categorised as ‘MANUFACTURING firms’ (100 firms) including companies that compete in the machinery, electrical, chemical, construction or automotive industry, for example. The category ‘SERVICE firms’ (26 firms) contains, for example, organisations from trade, energy, telecommunication or public administration. This split was done because manufacturing and service firms tend to behave and perform differently in how they manage their supply chains (Krause and Scannell, 2002).

2.2.2 Firm size

Size is an important structural variable with potential impact on many areas of an organisation. Larger firms more likely formalise goals, measures, and organisational procedures and can invest more resources (financial and human) for building up and applying cost management methods and tools (Baird et al., 2004). We therefore split the

302 S.M. Wagner

sample by the respondent firms’ annual sales, an indicator for size. By splitting the sample around the median of US$ 47,583,643 in annual sales, the firms were categorised as either ‘SMALL firms’ (55 firms) or ‘LARGE firms’ (56 firms).

2.3 Splitting the sample by satisfaction and SC performance

While this study is exploratory in nature and was not intended to establish causal linkages between cost management practices and critical and ultimately important performance outcomes (e.g., firm performance), a goal, nevertheless was to provide a basis for evaluating the relevance of the examined cost management methods in corporate practice. Therefore, we developed two performance measures (i.e., satisfaction and supply chain performance) and split the sample along these measures.

2.3.1 Satisfaction

The fact that the respondents’ satisfaction with phenomena related to channel marketing (Ruekert and Churchill, 1984) or communication (Mohr and Sohi, 1995), for example, has been repeatedly used justifies that it is also an appropriate performance measure in the present study. The aggregate score for ‘satisfaction’ was calculated by averaging the first three performance items in Table 3. They specify the firms’ satisfaction with the cost management practices with respect to their ability to provide relevant information and support them in optimising their supply chains. The survey utilised a five-point Likert format, where 1 = strongly disagree and 5 = strongly agree. The scale demonstrates a high degree of internal consistency (Cronbach’s alpha = 0.87). With a median score of 2.67, the firms were categorised as possessing either ‘LOW satisfaction’ (44 firms) or ‘HIGH satisfaction’ (57 firms) based on a median split of the composite scales.

Table 3 Satisfaction and SC performance variables

Satisfaction (Cronbach’s alpha = 0.87)

Our cost management in SCM

Provides us with all necessary information

Enables us to coordinate our supply chains to the best degree

Supports us in exploiting our suppliers’ potentials

(Scale anchors: 1 = ‘strongly disagree’; 5 = ‘strongly agree’)

SC performance (Cronbach’s alpha = 0.74)

How have the following measures changed in the past three years?

Inventory semifinished and finished goods

Inventory raw materials

Material costs

Missing parts and return shipments

(Scale anchors: –2 = ‘significantly increased’; +2 = ‘significantly reduced’)


2.3.2 SC performance

Similar to the previous measure, the variable ‘SC performance’ equals the mean of the last four performance items in Table 3. The aggregate score for SC performance was developed by summing up and averaging a number of performance items derived from the literature (e.g., Ramdas and Spekman, 2000; Tracey et al., 2004). These items reflect different approaches to measuring SC performance, such as inventory, order fulfilment, and cost. We followed the recommendation to phrase self-reported measures of performance over a three to five-year interval in order to “reduce the chance that performance data from an unusually good or bad year might confound the analysis” (Nayyar, 1992, p.997). The items are based on a Likert-type scale anchored –2 (‘significantly increased’) and +2 (‘significantly reduced’). Cronbach’s alpha for this scale was 0.74, hence, indicating acceptable internal consistency. This variable was then used for splitting the sample. The responding firms were split into two groups around the variable’s median. Firms with scores equal or larger than 0.5 were considered as being successful in improving their SC performance. At least along two of the four SC performance items they must have demonstrated an improvement. Scores below 0.5 indicate that the firms’ supply chain has improved only minor or even deteriorated. Splitting the sample in this fashion resulted in 56 firms with ‘LOW SC performance’ and 68 firms with ‘HIGH SC performance’.

3 Analysis and results

Despite some attempts to provide synopses of cost management practices principally applicable to SCM (Axelsson et al., 2002; Ellram, 1996; Ellram, 2002; Global Logistics Research Team at Michigan State University, 1995, Chapter 6; Stock and Lambert, 2001, Chapter 16; Van Weele, 1984), there is no agreed list or framework outlining what constitutes cost management practices in this field. The reasons are manifold. First, SCM evolved from the purchasing, supply and logistics functions, each with its own perspective and history, for example, regarding the level of integration (internal, dyadic, network). Second, it was only in the 1990s that enterprises started to apply SCM in practice. Therefore, the research stream on the intersection to management accounting began even later, and is still immature. Third, a widely acknowledged aspect of SCM is its cross-functional and interorganisational orientation. On the one hand, this fosters the transfer of cost management techniques from other domains (e.g., management accounting or marketing). On the other hand, this inhibits a clear demarcation from other fields. Therefore, researchers are confronted with a delineation of problems when attempting to itemise the various techniques to be found in corporate practice.

In the absence of an all-embracing list of cost management practices for SCM, this study offers an original distillation of a set of such practices. Although this selection has its roots in the academic literature and is based on the idea that the purpose of cost management in SCM is to provide and analyse relevant information and support supply chain managers in decision making and managerial control to achieve the organisation’s supply chain goals, we do not claim that it is exhaustive. In sum, 18 cost management practices applicable for SCM have been identified. Because of their different philosophical history and their evolution within the broader strategic approach

304 S.M. Wagner

of SCM (Leenders et al., 2006; Tan, 2001), we have grouped them into three categories, i.e., practices related to (1) purchasing, (2) supplier relationship management, and (3) integrated logistics. To measure the use of these cost management practices, we used the same scale previously applied in a study on supplier relation, selection and monitoring practices (Ittner et al., 1999). Respondents were asked to rate their organisations’ incidence of usage of the cost management practices, where 1 = never, 2 = seldom, 3 = occasionally, 4 = usually, and 5 = always. The questions contained the full name as well as a short definition in order to ensure that all respondents had the same conception of each cost management practice.

Each of the 18 practices will now be briefly described in turn, and their incidence of usage analysed. Applying t-tests, the mean differences in usage for the two groups were compared for industry and firm size (see Table 4) as well as the two earlier developed satisfaction and SC performance variables (see Table 5). The rank follows the aggregate incidence of usage, starting with the practices used most intensively by the respondent firms.

3.1 Practices related to purchasing

3.1.1 Purchasing performance benchmarking (price benchmarking) (PU1)

Benchmarking is the process of comparing one’s own products, cost structures, service levels, capabilities, and the like against other firms (Camp, 1989). The most rudimentary form of benchmarking used in corporate practice is the comparison of purchasing performance in terms of purchasing price achieved for a certain product or service. Information about prices other firms are paying for a product or service to a particular supplier can assist the buying firm immediately in its negotiations with suppliers. Price benchmarking is easy to use and it can help firms to bring purchasing prices down quickly (Ellram, 2002, pp.33–34). Therefore it is not surprising that firms on average apply price benchmarking quite extensively (3.58). While there is no industry difference, large firms use this practice significantly more often than small firms (3.13 versus 3.88, p < 0.001). However, price benchmarking does not seem to be associated with higher SC performance.

3.1.2 Target costing (PU2)

Target costing is a cost management concept that is based on a long-term, market-driven rather than a short-term, profit-driven perspective that enables companies to reduce current costs during a product’s planning and design stages by subsequently using various improvement tools such as value engineering or functional analysis. In the end, the attainment of low costs should ensure low and competitive prices that help maintain market share (Cooper and Slagmulder, 1997; Ellram, 2006). While R&D, engineering, manufacturing and purchasing all work together in this process, the purchasing function plays a major role because it is responsible for the external spend – a major portion of many products’ costs. Additionally, purchasing manages the firms’ suppliers and can bring them early into the target-costing process (Ellram, 2000). Manufacturing firms report that they apply this practice more often than service firms (2.08 versus 2.95, p < 0.01) and large firms more often than small firms (2.53 versus 2.96, p < 0.1). Target costing is significantly related to the firms’ satisfaction (2.43 versus 3.16, p < 0.01) and SC performance (2.48 versus 3.04, p < 0.05).


Table 4 Practices and mean differences by industry and firm size L

arge

(M

ean)

3.88

***

2.96

+

2.95

**

2.76

2.84

***

1.70

4.21

3.05

2.54

2.55

1.59

1.52

2.21

*

2.07

**

1.86

*

1.64

+

1.57

*

1.45

+

Spli

t by

firm

s’ s

ize

Smal

l (M

ean)

3.13

2.53

2.22

2.50

2.06

1.51

4.05

2.93

2.44

2.27

1.58

1.39

1.72

1.50

1.48

1.35

1.20

1.17

Man

ufac

turi

ng

(Mea

n)

3.5

9

2.9

5 **

2.5

7

2.6

6+

2.4

1

1.7

5

4.2

0+

3.1

5**

2.5

7

2.5

4

1.5

9

1.5

5

2.0

5

1.8

5

1.7

5

1.5

2

1.4

9

1.3

1

Spli

t by

indu

stry

Serv

ice

(Mea

n)

3.54

2.08

2.65

2.19

2.65

1.58

3.81

2.35

2.50

2.19

1.65

1.50

1.73

1.77

1.54

1.35

1.19

1.23

(S

t. de

v.)

1.14

1.34

1.28

1.25

1.24

1.18

1.08

1.22

1.17

1.14

0.94

0.97

1.27

1.11

0.98

0.88

0.89

0.75

All

firm

s

(M

ean)

3.58

2.77

2.59

2.56

2.46

1.71

4.12

2.98

2.55

2.47

1.60

1.54

1.98

1.83

1.71

1.48

1.43

1.29

Purc

hasi

ng p

erfo

rman

ce (

pric

e) b

ench

mar

king

Tar

get c

osti

ng

Tot

al c

ost o

f ow

ners

hip

Act

ivity

-bas

ed c

ostin

g

Proc

ess

benc

hmar

king

Purc

hasi

ng b

alan

ced

scor

ecar

ds

Supp

lier

eva

luat

ion

Supp

lier

audi

ts

Supp

lier

surv

eys

Ope

n bo

ok

Supp

lier

val

ue-a

dded

/sup

plie

r li

feti

me

valu

e

Supp

lier

bal

ance

d sc

orec

ard

Supp

ly c

hain

met

rics

Supp

ly c

hain

ben

chm

arki

ng

Val

ue c

hain

ana

lysi

s/su

pply

cha

in c

ostin

g

Supp

ly c

hain

map

Supp

ly c

hain

bal

ance

d sc

orec

ard

Supp

ly c

hain

ope

ratio

ns r

efer

ence

mod

el

Pra

ctic

es r

elat

ed to

Purc

hasi

ng

PU

1

PU

2

PU

3

PU

4

PU

5

PU

6

Supp

lier

rel

atio

nshi

p m

anag

emen

t

SR

1

SR

2

SR

3

SR

4

SR

5

SR

6

Inte

grat

ed lo

gist

ics

IL

1

IL

2

IL

3

IL

4

IL

5

IL

6

Not

es:

1

= n

ever

, 2 =

sel

dom

, 3 =

occ

asio

nall

y, 4

= u

sual

ly, 5

= a

lway

s.

St

atis

tica

lly

sign

ific

ant d

iffe

renc

e be

twee

n th

e gr

oup

mea

ns: *

**p

< 0

.001

; **p

< 0

.01;

*p

< 0

.05;

+p

< 0

.10.

306 S.M. Wagner

Table 5 Mean differences by satisfaction and SC performance H

igh

(Mea

n)

3.69

3.0

4*

2.7

9+

2.8

2*

2.56

1.87

4.2

9*

3.10

2.70

2.6

6*

1.67

1.55

2.1

8*

1.94

1.8

3*

1.56

1.54

1.33

Spli

t by

SC p

erfo

rman

ce

Low

(M

ean)

3.43

2.48

2.34

2.25

2.33

1.53

3.89

2.82

2.38

2.25

1.53

1.51

1.71

1.69

1.49

1.40

1.31

1.25

Hig

h (M

ean)

3.8

9+

3.1

6**

3.0

0**

3.0

4***

2.9

1**

2.0

4**

4.5

1***

3.3

4**

3.0

9***

2.8

6***

1.8

6*

1.8

6***

2.6

3***

2.3

0**

2.2

1***

1.8

2***

1.8

1***

1.4

3+

Spli

t by

sati

sfac

tion

Low

(M

ean)

3.49

2.43

2.30

2.16

2.25

1.39

3.77

2.66

1.98

2.09

1.39

1.14

1.61

1.59

1.34

1.18

1.09

1.16

Purc

hasi

ng p

erfo

rman

ce (

pric

e) b

ench

mar

king

Tar

get c

osti

ng

Tot

al c

ost o

f ow

ners

hip

Act

ivity

-bas

ed c

ostin

g

Proc

ess

benc

hmar

king

Purc

hasi

ng b

alan

ced

scor

ecar

ds

Supp

lier

eval

uati

on

Supp

lier

audi

ts

Supp

lier

surv

eys

Ope

n bo

ok

Supp

lier

val

ue-a

dded

/sup

plie

r li

feti

me

valu

e

Supp

lier

bal

ance

d sc

orec

ard

Supp

ly c

hain

met

rics

Supp

ly c

hain

ben

chm

arki

ng

Val

ue c

hain

ana

lysi

s/su

pply

cha

in c

ostin

g

Supp

ly c

hain

map

Supp

ly c

hain

bal

ance

d sc

orec

ard

Supp

ly c

hain

ope

ratio

ns r

efer

ence

mod

el

Pra

ctic

es r

elat

ed to

Purc

hasi

ng

PU

1

PU

2

PU

3

PU

4

PU

5

PU

6

Supp

lier

rel

atio

nshi

p m

anag

emen

t

SR

1

SR

2

SR

3

SR

4

SR

5

SR

6

Inte

grat

ed lo

gist

ics

IL

1

IL

2

IL

3

IL

4

IL

5

IL

6

Not

es:

1

= n

ever

, 2 =

sel

dom

, 3 =

occ

asio

nall

y, 4

= u

sual

ly, 5

= a

lway

s.

St

atis

tica

lly

sign

ific

ant d

iffe

renc

e be

twee

n th

e gr

oup

mea

ns: *

**p

< 0

.001

; **p

< 0

.01;

*p

< 0

.05;

+p

< 0

.10.


3.1.3 Total cost of ownership (PU3)

The Total Cost of Ownership (TCO) methodology is a type of calculation designed to help the buying firm assess direct and indirect costs as well as benefits of a product (or service) to be purchased over its entire life cycle. A TCO analysis ideally offers a final statement reflecting not only the initial purchasing price but all aspects in the further use and maintenance of the product (Degraeve et al., 2005; Ellram, 1994; Wouters et al., 2005). In their exploratory study, Ferrin and Plank (2002) found out that TCO models are based on a number of universal as well as unique cost drivers. These may include, for example, defects, maintenance, inventory holding or training personnel that use the product. In line with Ferrin and Plank (2002) who point out that ‘leading-edge companies’ in fact apply the TCO approach, this research also shows that large firms implement this practice more intensively than small firms (2.22 versus 2.95, p < 0.01). In addition, the present study also finds out that the use of this practice is significantly related to satisfaction (2.30 versus 3.00, p < 0.01) and SC performance (2.34 versus 2.79, p < 0.1).

3.1.4 Activity-based costing (PU4)

Activity-based Costing (ABC) is a cost management practice that assigns costs to products based on the resources they consume by identifying the cost pools, or activity centres in an organisation and assigning costs to products and services (cost drivers) based on the number of events or transactions involved in the process of providing a product or service (Cooper and Kaplan, 1988; Maher et al., 2005). This practice can support the buying firm in its cost and pricing determination when selecting suppliers. Furthermore, it can be used to identify and leverage cost drivers at the supplier’s organisation in order to reduce costs at the supplier’s side (Lere and Saraph, 1995). In our sample, manufacturing firms apply ABC more intensively than service firms (2.19 versus 2.66, p < 0.1). Furthermore, the use of ABC is significantly related to satisfaction (2.16 versus 3.04, p < 0.001) as well as SC performance (2.25 versus 2.82, p < 0.05).

3.1.5 Process benchmarking (PU5)

In contrast to purchasing performance benchmarking (PU1), process benchmarking can be understood as an approach by which a firm seeks to identify best practice processes that produce superior results in other firms (Ellram, 2002, pp.33–34; Singh et al., 2006). If these processes are replicated, the firm will be able to enhance its own performance (Camp, 1995; Fawcett and Cooper, 2001; Vorhies and Morgan, 2005). This form of benchmarking emerged when the focus shifted away from merely analysing the product or service, the strategy pursued, or the performance achieved by the ‘best practice firm(s)’ to the processes and capabilities necessary to produce superior performance (Lapide, 2005; Ralstron et al., 2001). Benchmarking purchasing processes comprises a search, gap assessment and improvement stage and requires continuous higher-order learning capabilities. Our study shows that larger firms utilise this practice much more intensively than smaller firms (2.06 versus 2.84, p < 0.001). Process benchmarking creates more transparency, therefore, frequent users of this practice are more satisfied than less frequent users (2.25 versus 2.91, p < 0.01). Contrary to other studies that

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revealed positive relationships between benchmarking of purchasing and marketing capabilities and performance (Carr and Smeltzer, 1999; Vorhies and Morgan, 2005), there was no difference when the sample was split by SC performance.

3.1.6 Purchasing balanced scorecards (PU6)

The Balanced Scorecard (BSC) concept is very well documented in the literature. By measuring performance from several (financial and non-financial perspectives), it offers an alternative to organisations that have historically overemphasised short-term financial performance. Performance measures and strategic initiatives should cascade across business units or departments and down through the levels of an organisation (Davis and Albright, 2004; Kaplan and Norton, 1996; Kaplan and Norton, 2000). Kaplan and Norton (2000, pp.191ff.) hinted to the application of the concept within functional units, such as shared services or support units. Purchasing, supplier relationship management (see SR6) and integrated logistics (see IL 5) would constitute such functional units. As Axelsson et al. (2002, p.57) state, it “is thus possible to take advantage of this technique in a number of ways especially when it comes to purchasing and supply management”. However, despite several conceptual approaches, practical examples and large-scale empirical investigations in this area are still rare, and the case studies put forward stem mainly from larger firms and are embedded in professionally managed purchasing organisations (Wagner and Kaufmann, 2004). Despite the method’s popularity in managing business units, the present study shows that BSCs are hardly used at all within the purchasing function. The only significant association that exists is with satisfaction, with ‘LOW satisfaction’ firms scoring at 1.39 on average and ‘HIGH satisfaction’ firms at 2.04 (p < 0.01).

3.2 Practices related to supplier relationship management

3.2.1 Supplier evaluation (SR1)

Evaluating the performance of suppliers prior to a supplier selection decision and subsequent to the delivery of products is central to the purchasing process. Therefore, evaluating the performance of suppliers has received a great deal of research interest in the past (Ittner et al., 1999). In particular, researchers have paid attention to supplier selection criteria and methods for supporting the evaluation process. Choi and Hartley (1996), for example, cluster the supplier selection criteria used in corporate practice into the following: finances, consistency, relationship, flexibility, technological capability, service, reliability and price. The decision methods vary in terms of sophistication and range from simple scoring models and expert systems to cluster analysis, data envelop analysis, principal component analysis or analytic hierarchy processing (Araz and Ozkarahan, 2007; De Boer et al., 2001; Petroni and Braglia, 2000). Several interesting insights can be gained from the present study. First, there is only little difference in the application of supplier evaluation practices between service and manufacturing firms (3.81 versus 4.20, p < 0.1). Second, small firms conduct supplier evaluation to the same degree as large firms, hence, there is no statistically significant difference in usage. Finally, supplier evaluation is significantly related to satisfaction (3.77 versus 4.51, p < 0.001) as well as SC performance (3.89 versus 4.29, p < 0.05).


3.2.2 Supplier audits (SR2)

A supplier audit is tasked to review potential and existing suppliers in order to determine if they are in compliance with the buying firm’s current supplier standards and that the supplier’s quality system operates effectively. As this task requires the supplier’s participation, it is a cooperative effort by nature. A supplier audit is – in contrast to supplier evaluations – conducted on the supplier’s premises by a team from the buying firm that may consist of members from purchasing, engineering, manufacturing and quality management. It is recommended that supplier audits follow several predefined pre-audit, audit and post-audit steps (Johnson, 2006; Leenders et al., 2006). The incidence of usage is much higher at manufacturing firms as compared to service firms (2.35 versus 3.15, p < 0.01). While audits seem to increase satisfaction (2.66 versus 3.34, p < 0.01), there is no difference in terms of SC performance.

3.2.3 Supplier surveys (SR3)

In analogy to customer (satisfaction) surveys (Hayes, 1998) is a supplier (satisfaction) survey a management practice to measure and improve the quality of buyer–supplier relationships. Such a survey determines how the supplier views the buying firm in everyday operations, communication and business behaviour and provides input for the buying firm’s planning and cost management processes (La Londe and Raddatz, 2002; Maunu, 2003). The supplier’s remarks uncover the ‘weak spots’ (Van Weele and Rozemeijer, 1998, p.353) of the buying firm’s organisation and expects the buying firm to improve. Therefore, the buying firm needs to be prepared to respond to the suppliers’ suggestions. The only significant mean difference the current survey reveals is the difference with respect to satisfaction. More satisfied firms use this practice more frequently (1.98 versus 3.09, p < 0.001). Supplier surveys bring the weak spots ‘on the table’ and create transparency.

3.2.4 Open book (SR4)

The sharing of cost information, also called ‘open book accounting’ (Munday 1992b, p.35), requires that the supplier opens its books to the buying firm in order to help identify the structure of direct and indirect charges (e.g., direct material, direct labour, overhead) and related data underlying contract prices of components and materials (e.g., process costs, packaging costs, waste) (Munday, 1992a). Open book accounting can be differentiated with respect to (1) the base data, (2) the direction of information flow and (3) the degree of disclosure (Hoffjan and Kruse, 2006). It has been emphasised that suppliers should not be forced by a potentially more powerful buyer to open their books, but to jointly manage transparency at the buyer–supplier interface and exchange sensitive information and knowledge bidirectionally (Lamming et al., 2005). However, in practice a one-way exchange of cost-information seems to prevail (Hoffjan and Kruse, 2006). While this approach is particularly applicable to suppliers of leverage and strategic components and materials, it is applied differently. When suppliers of leverage materials are concerned, the costs are simply analysed for their adequacy, whereas in the case of strategic suppliers, the supplier and the buying firm attempt to reduce costs in high-cost areas collaboratively (Ellram, 1996). As such, open book accounting has been proposed as a key practice for the functioning of supplier partnerships and a practice for reducing costs in buyer–supplier relationships (Kajüter and Kulmala, 2005; Munday, 1992a). In

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the sample of this research, the use of open book differs neither significantly by industry nor by firm size. However, given the valuable information and transparency a supplier’s accounting data disclosure provides to the buying firm, it is not surprising that there is a relationship between the use of this practice and satisfaction. The usage was 2.09 for firms where satisfaction was low and 2.86 where satisfaction was high (p < 0.001). Furthermore, high-performing firms implement this practice more intensively than low-performing firms (2.25 versus 2.66, p < 0.05).

3.2.5 Supplier value-added/supplier lifetime value (SR5)

Measuring Supplier Value-Added (SVA), i.e., the “relative value attributed to a supplier for providing competitive advantage” (Carroll, 1996, p.16), or Supplier Lifetime Value (SLV), i.e., the “future potential of a supplier” (Essig and Arnold, 2003, p.76) is quite new to the SCM profession. Following the shareholder value and customer lifetime value concepts (Christopher et al., 2002; Venkatesan and Kumar, 2004), the idea is to base supplier selection, retention, switching or partnering decisions not on a single period, but to manage supplier relationships for value rather than for purchase price (Siguaw and Simpson, 2004). But unlike in the customer lifetime value framework, the future contribution margins of a supplier are much more difficult to predict. Therefore, it is not surprising, that this surely innovative cost management practice is applied extremely rare. The average was 1.60, with no mean difference with respect to industry, firm size or SC performance. The few firms that apply a SVA or SLV model seem to be more satisfied with their cost management practices for SCM (1.39 versus 1.86, p < 0.05).

3.2.6 Supplier balanced scorecard (SR6)

A supplier BSC extends the concept of developing and implementing strategies within the firm boundaries (e.g., for an individual business unit) to (strategic) supplier relationships and assigns performance metrics accordingly (Cravens et al., 1999; Kaufmann, 2004). As such, it represents a simplified version of a supply chain BSC (IL5) that will be described in the subsequent section. Except from an association with satisfaction (1.14 versus 1.86, p < 0.001), the split sample analyses do not reveal any statistically significant differences, neither with respect to industry, firm size nor SC performance.

3.3 Practices related to integrated logistics

3.3.1 Supply chain metrics (IL1)

Supply chain metrics, also called logistics performance metrics or ratios, play an important role in assessing the performance of supply chains. They allow companies to gauge how well they are currently doing on key performance indicators and help to identify improvement opportunities (Gardner et al., 2005). Much has been written in recent years in the academic and practitioner press about the characteristics of various metrics and their selection and suitability for specific purposes (Dreyer, 2000; Griffis et al., 2004; Gunasekaran et al., 2001; Gunasekaran et al., 2004; Kleijnen and Smits, 2003; Otto and Kotzab, 2003), but with limited empirical support on their incidence of usage. Only one large-scale survey provides an overview of performance measurement


(Global Logistics Research Team at Michigan State University, 1995). This survey indicates that world-class firms have improved their overall performance measurement capability over a five-year period and that the tracking methods became more accurate. But what about the ‘average’ firm? This current study reveals that larger firms use supply chain metrics more often than smaller firms (1.72 versus 2.21, p < 0.05). More importantly, the use of supply chain ratios is significantly related to higher satisfaction (1.61 versus 2.63, p < 0.001) as well as SC performance (1.71 versus 2.18, p < 0.05).

3.3.2 Supply chain benchmarking (IL2)

Although building on the same methodological foundation (Camp, 1995; Fawcett and Cooper, 2001; Lapide, 2005), supply chain benchmarking is an extension of the process benchmarking approach (PU5) presented earlier. Its scope extends beyond the focal firm and includes supply chain spanning business processes from original suppliers through end users (Croxton et al., 2001; Singh et al., 2006). Large firms apply this tool significantly more often than small firms (1.50 versus 2.07, p < 0.01) and firms more satisfied with their cost management practices apply this practice more often than less satisfied firms (1.59 versus 2.30, p < 0.01). There is no statistically significant difference in usage in terms of SC performance.

3.3.3 Value chain analysis/supply chain costing (IL3)

These very similar concepts that build on the value chain concept developed by Porter (1985) and the activity-based costing principles (Cooper and Kaplan, 1988) are methods to analyse, coordinate and optimise activities across firms in a supply chain (Slagmulder, 2002). The goal is to either reduce supply chain costs or enhance differentiation for competitive advantage (Shank and Govindarajan, 1992). Shortcomings of traditional cost management practices are overcome. Value chain analysis and supply chain costing take into account the activities and costs on the customer and supplier side, and recognise the independencies of these activities and costs. As such, by analysing the effects of both buyer costs and supplier costs, value chain analysis and supply chain costing go beyond the TCO concept, which only analyses the effects of purchasing a component or materials on the buyer’s costs (Dekker, 2003; La Londe and Pohlen, 1996; Slagmulder, 2002). Larger firms apply these practices more intensively than small firms (1.48 versus 1.86, p < 0.05). Also, firms that are more satisfied with their cost management practices and demonstrate a higher performance, apply value chain analysis/supply chain costing practices more frequently (1.34 versus 2.21, p < 0.001, respectively 1.49 versus 1.83, p < 0.05).

3.3.4 Supply chain map (IL4)

Real-world supply chains are frequently complex and involve a large number of actors and activities. Supply chain maps (also called pipeline maps or network maps) are a means of understanding and communicating the nature of supply chains (Gardner and Cooper, 2003; Harland, 1996; Scott and Westbrook, 1991). Mapping a supply chain may include the actors involved (e.g., suppliers, retailers), the value-adding activities respectively processes (e.g., manufacturing, assembly, inbound and outbound logistics), the non-value adding activities (e.g., waiting time, storing), and also the time spent in

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each activity. Well-constructed supply chain maps help to establish clarity about what could be potential key issues and areas for improvement (Gardner and Cooper, 2003; Scott and Westbrook, 1991). The current study shows that large firms use supply chain maps more frequently than small firms (1.35 versus 1.64, p < 0.1). Furthermore, the use of this practice is associated with higher satisfaction (1.18 versus 1.82, p < 0.001), however, not with better SC performance.

3.3.5 Supply chain balanced scorecard (IL5)

While the supplier BSC (SR6) applies the BSC concept to a buyer–supplier dyad, the supply chain BSC attempts to go one step further, even if the limited empirical (case study based) research under the label ‘supply chain BSC’ reduces the unit of analysis to the buyer–supplier dyad. As such, Zimmermann (2002) describes the steps an international chemical firm and its customer, a distributor of chemical products went through in the course of the development and implementation of a BSC. There are some initial conceptual advances that establish linkages between the supply chain framework and the BSC and introduce several examples of performance measures for each of the ‘classical’ BSC perspectives (i.e., financials, customers, business processes, and innovation/learning) that might be used in a supply chain BSC (Brewer and Speh, 2000; Brewer and Speh, 2001). However, these authors hint to the hitherto limited practical use of the BSC in SCM by stating that “a supply chain-wide implementation of the balanced scorecard, although theoretically desirable, seems rather unlikely in practice” (Zimmermann, 2002, p.413). Likewise, Brewer and Speh (2000, p.85) state that “there is little evidence that firms have incorporated the balanced scorecard approach into their SCM practices”. Therefore, it is not surprising that BSCs are hardly used at all in SCM despite their theoretical potential. Large firms apply this practice more intensively than small firms (1.57 versus 1.20, p < 0.05) and a more frequent use is associated with higher satisfaction (1.09 versus 1.81, p < 0.001). Contrary to the theoretical claim, the data did not reveal any relationship with SC performance.

3.3.6 SCOR (IL6)

The Supply Chain Operations Reference (SCOR) model was designed by the Supply Chain Council as a cross-industry process reference model to address, improve, and communicate the collaboration within and between parties involved in supply chains. The SCOR-model can be used to describe the basic processes (plan, source, make, deliver and return) on various levels. As a standard diagnostic tool, the SCOR-model contains not only the processes but also SC performance attributes and metrics to measure process performance. Metrics are applied to various levels and processes and include, for example, perfect order fulfilment, order fulfilment cycle time, or cash-to-cash cycle (Davies, 2004; Röder and Tibken, 2006; Supply Chain Council, 2005). As such, the SCOR-model can be a powerful practice for firms collaborating in supply chains by making their collaboration more transparent and helping them to identify areas for improvement and to track improvement measures. However, firms almost do not use this practice, and larger firms somewhat more intensively than small firms (1.17 versus 1.45, p < 0.1). While there is a significant relationship between the application of the SCOR-model and satisfaction (1.16 versus 1.43, p < 0.1), the use of this practice is unrelated to SC performance.


4 Discussion and implications

Consultants and academicians offer a large variety of conceptual considerations for cost management practices and their adaptation for the SCM area. But not much has been known about their actual application in corporate practice. For the first time, this empirical study surveys and analyses a total of 18 SCM-related practices. This study reveals several fundamental particulars and several useful implications for SCM managers can be drawn from the findings.

4.1 Incidence of usage

In summary, the incidence of usage of the various cost management practices in a SCM context is lower than expected. First, firms use only two practices (i.e., supplier evaluation and purchasing performance benchmarking) on a regular basis. All other cost management practices are applied only occasionally, most of them even seldom or hardly at all. Having a look at the practices that are hardly used seems to indicate that some are overly theoretical and that they have not yet been ‘translated’ to the practitioner world (e.g., supplier lifetime value). Others are too generic and do not take the various industry and supply chain characteristics into account. As such, supply chain managers often indicate that the ‘standard’ supply chain operations reference model does not fulfil their company specific requirements. Many larger organisations have developed their own supply chain reference models. For some of the less-used cost management practices, the open sharing of information is critical (e.g., open book, supply chain balanced scorecard, supplier balanced scorecards). However, firms are still hesitant when it comes to sharing (confidential) information with other partners in the supply chain.

Second, the six purchasing and supplier relationship management-related practices are used more often than the practices related to integrated logistics. The definition of measures and data collection within the focal firm and on the buyer–supplier dyad seems quite doable and hence, the practices related to purchasing and supplier relationship management we studied are used more frequently. On the contrary, cost management from an integrated logistics perspective requires that the practices are developed and data are collected from more than two independent firms in a supply chain. And in corporate practice, this is a difficult and challenging task. Supply chains are configured and reconfigured regularly, that is, the partners change at least every once in a while. Why should firms bother with defining measures and collecting data along the supply chain and from other companies in the supply chain, knowing that the configuration will change, and as a consequence, the data might become obsolete? Furthermore, the problem with information sharing as indicated earlier is even more severe when a large number of firms in the supply chain are involved. Therefore, it is not surprising that companies prefer the practices that they can implement within their firm boundaries or on the buyer–supplier interface over integrated logistics-related practices.

Third, in no instance is the average degree of usage higher for service firms. Instead, several cost management practices, that is target costing, activity-based costing, supplier evaluation and supplier audits, are used more frequently by the manufacturing firms than the service firms in the sample. This is consistent with our hypothesis and related research (Krause and Scannell, 2002). One possible reason is that service firms lag behind in the adoption of the SCM concept and therefore also in the adoption of related cost management practices.

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Fourth, larger firms seem to be more inclined or advanced in implementing a number of the practices analysed. This is particularly the case for four of the six purchasing-related practices and all six practices related to integrated logistics. This is consistent with our hypothesis and research that shows that larger firms are more likely to formalise organisational procedures. On the other hand, there is no statistically significant difference for small and large firms in using the six supplier relationship management-related practices. Here it also depends on the size of the partner in the dyad. If the supplier is a small enterprise, it is less likely that the focal firm is able to develop and implement cost management practices spanning both firms.

4.2 Satisfaction and SC performance

In summary, the positive associations with the satisfaction construct outweigh the positive associations with (the ultimately more important) SC performance construct. First, all 18 practices are significantly related to the firms’ satisfaction with the cost management practices they use in the SCM area. That is, they provide them with all relevant information and help them in coordinating their supply chains and exploiting their suppliers’ potential. Put differently, if they apply these practices more frequently, than they are more content.

Second, the analysis of the most important statistical association, namely, SC performance, shows that 11 out of 18 practices are not related to SC performance. In each category, the least used practices are not related to SC performance. Hence, one might conclude that firms have already recognised that; and this is the reason for their hesitant use. Interestingly, for neither of the three balanced scorecard nor the three benchmarking practices does the data show any relationship with SC performance. On a first glance, this seems in contradiction to the research indicated earlier. However, Carr and Smeltzer (1999) did not relate benchmarking to SC performance and Ittner and Larcker (2003) studied the balanced scorecard not even in a supply chain context. On the other hand, this study identified seven out of the 18 practices that are applied more intensively by firms demonstrating a higher SC performance. Firms should consider implementing them.

From the hitherto discussion, some universal recommendations for managers as well as academics can be derived. In light of reduced staff resources and limited funds available to firms and supply chain managers, firms are advised to be very selective in terms of which SCM-related cost management practices to implement. The first decision criterion should be to select practices that support the firm in improving SC performance. Second, practices related to supplier relationship management and integrated logistics require the commitment and dedication of resources from other firms. Only if these are ensured for a longer period of time, should such practices be developed and implemented.

What can be gleaned from this research for academics? First, they have been very productive in conceptualising a large number of cost management practices for SCM. However, instead of coming up with ever new and more sophisticated concepts, they should spend more time and effort in detailing these practices to meet the requirements of practitioners and in translating these practices into their language. Furthermore, there seems to be an enormous potential for teaching the concepts to the corporate world.


Substantial progress in understanding cost management practices in the SCM field has been made through this current research and the research questions put forward in the first section have been answered. However, it is important to note that our findings are preliminary, reflecting patterns seeming to emerge, and that our interpretations are tentative. Therefore, future research efforts should aim to better understand why the use of several of the cost management practices is limited. Second, more elaborate models that link the cost management practices to SC performance and firm performance should be developed and tested empirically. In essence, academics should demonstrate the value of the practices for the firm. Third, academics should conceptualise and tailor the cost management practices in a way that they fit the supply chain situation.

5 Conclusion

Although advances in theory and practice have contributed to the development of a large bucket of cost management practices for effective SCM, this important building block is far from mature. Firms continue to struggle with the selection and successful implementation. They need to understand which cost management practices can support them in influencing systems and human behaviour in a SCM context. This present study examined 18 SCM-related cost management practices empirically, revealed their actual incidence of usage, and analysed whether industry and firm size play a part in the use of these cost management practices. Most importantly, associations between the frequency of usage and the firms’ satisfaction with their SCM accounting as well as SC performance were analysed. Consequently, this study helps advance theory and knowledge in the area of SCM and management accounting and serves as a valuable reference for corporate SCM practitioners.

Acknowledgements

The author appreciates the valuable comments from participants at the 2005 European CSCMP Conference in Amsterdam, from Executive MBA students at the University of St. Gallen, as well as the Swiss Federal Institute of Technology Zurich, where earlier reports on this research were presented. He particularly thanks Tom Speh for his input and insightful critique on a previous version of the article. Finally, he likes to thank the editor and the reviewers for giving constructive feedback.

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