What is Open Book Costing?
The theory behind Open Book Costing (OBC) is simple: retailers and suppliers work in collaboration to understand their costs and look at ways to reduce them through intiatives such as joint logistical planning or group purchasing, with savings equitably shared.
An open book agreement effectively allows both partners to see a breakdown of all the finances and costs involved in any given area. Some of the benefits are detailed below:
- Provides transparency to the overall cost negotiation, enabling retailers to compare the supply chain cost structures of competing suppliers.
- Establishes the stability and supply capacity of suppliers – this is particularly important in fresh categories such as produce where demand and quality can fluctuate rapidly.
- Enables retailers to offer the supplier alternative sources of raw materials, goods and services which would bring down the overall product cost.
There are benefits for both suppliers and retailers in managing their own supplier base using OBC.
Who is operating Open Book Costing?
OBC has been practiced for a number of years in many industries including the automotive, utility, civil engineering and construction sectors.
The construction industry in the early 1990’s was a prime example of an industry that was plagued with client dissatisfaction, adversarial relationships between client, contractor and subcontractor, non-existent profit margins and a claims culture. A joint industry / government inquiry centred on introducing partnering as best practice and implementing OBC.
The public and non-profit sectors are leading the way in partnering with many housing associations and local authorities introducing it as best practice. Housing associations are committed to delivering OBC on contracts by 2005.
In the grocery industry Asda, Sainsbury’s and Waitrose are currently operating OBC.
Asda has been operating OBC since the late 1990’s. It states that in many instances the reason for suggesting OBC to a supplier is to ensure that where Asda is giving the majority of its business to one supplier, assurances were needed to confirm the supplier could cope with the increased demand.
Benefits of Open Book Costing in the Grocery Industry
Suppliers who are considering entering into OBC with retailers should do so with a view to growing their business and taking advantage of some the savings that OBC can bring. These may be savings in supply chain costs such as transport or distribution, but there may also be opportunities for cost rationalisation in other areas such as utilities or insurance.
In addition to the financial benefits offered by OBC there is evidence that suppliers who are willing to embrace change there are further benefits including:
- A closer working relationship and higher levels of collaboration with retailers.
- Greater efficiencies in production.
- Improved long term security of contract to supply
