Open Book Costing – What is Open Book Costing?
with compliments from Commerce Edge's training programme on Supplier Management.
Open Book Costing is where the Seller is prepared to reveal to the Buyer exactly what the cost make up of a product is and how he approaches cost allocation.
In order for Open Book Costing to work effectively the Seller must be prepared to be completely open with the Buyer and be prepared to divulge information which under traditional circumstances would be unheard of due to the sensitivity of the data.
What Information would be revealed by Open Book Costing?
Open Book Costing – What is needed for Open Book Costing?
Trust and security
- In short everything! (in reality, as much as possible)
- What overhead is recovered against the product
- What the overhead is comprised of
- How much profit is secured from the product
- What are the materials cost, who does the Supplier buy from
- What are the labour charges, how many man hours does it take to make a product
- What is the Work in Progress at any one time, what materials stock do they carry, how much finished product is kept in stock and what is the cost of this;
- What finance charges are being carried
In order for Open Book Costing to be achieved there must exist a high degree of trust, and inter dependency between the Parties
- Open Book Costing requires the Supplier to provide information which the Customer could use to exploit the Seller; therefore it is essential in moving to Open Book Costing that the Seller believes this will not happen
- But if I can’t exploit it what’s its use?
- The use of Open Book Costing is a demonstration to the Buyer that he is paying a fair price
- Ensure that the Seller is operating efficiently
- Identify inefficiency where costs can be eliminated and thus reduce the price without penalising the Seller
- Identify opportunities where the Buyer could alter behaviour to take out cost from the Supply Chain
Graphic Below indicates a suggested process to be followed for doing openbook costing with a supplier