If one of your biggest customers asked you to open up your books so they could have a look at your cost structure, how would you respond? Well, this is exactly the dilemma now facing many own label suppliers - particularly those dealing with Sainsbury, which is at the forefront of efforts by food retailers to implement just such a strategy.
The theory underpinning open book costing sounds reasonable enough: retailers work in partnership with suppliers to understand their costs and to identify ways these can be reduced for mutual benefit, such as through combined purchasing or making better use of spare capacity.
And while Sainsbury with its PICO initiative  previously known as CONI  is clearly taking a lead here, there is nothing new per se about the concept of open book costing as other retailers have run similar schemes for years without any problems  with McDonald's being a prime example.
But Sainsbury's efforts to implement PICO with its own label supply base has made people very nervous  if only because many fear other retailers will increasingly adopt such practices in the future for suppliers of branded and non-branded products alike. And the moves by the multiples to implement factory gate pricing offer a taste of what could be in store in the future.
"It will become more of an issue, particularly around the area of supply chain, where arguably there is a logic to open costs," says the sales director at one supplier of branded groceries. "The logic is that unless everybody is aware of the costs in the chain, how can you know if efficiencies are being generated? However, it all tends to be a one way street at the moment."
And therein lies the rub. While some suppliers say they can see possible benefits of a more open trading relationship, none believe retailers in general are able to adopt the long term approach needed if they are to deliver on their side of any deal.
"Open book costing can be beneficial to both parties on the understanding that costs can go up and down, and that the relationship needs to be viewed as long term and built on trust," says one commercial director.
But he adds: "Demands on buying teams mean short term decisions can be taken to retrieve margin shortfalls. And the increased scope of online auctions means there is a potential for a mismatch. In addition, the widespread changes in buying personnel mean developing a long term commitment can sometimes be difficult to achieve in practice."
Such lack of trust among suppliers means there is, understandably, plenty of resistance to initiatives such as open book costing.
But the reality for suppliers caught up in the Sainsbury scheme is that they have to decide which of three strategies to adopt, says one senior executive. "You can either say no' and mean it. Or you can say yes' and mean no'. Or you can say yes' and mean yes'. We have opted for the latter."
Of those suppliers contacted by The Grocer for the reader poll we published last week, about half who had been approached by a retailer on this issue said they had agreed to co-operate  albeit only up to a point in most cases.
Such passive resistance is due to the fact suppliers, almost to a man, believe retailers only want to use open book costing as a way of beating down prices.
"So far, most of the retailers who have wanted to discuss this have used it to understand their suppliers' production economics for the purpose of taking a greater share of the margins for themselves," says one managing director, "I believe retailers could get greater advantage by developing true partnerships where both sides work together to take costs out of the system. That requires trust which is built up over time in an environment where the total margin is equitably shared. I haven't seen any retailer do that."
The suspicion that open book costing is really about "value capture" means there's mistrust all round, according to another.
"Once again this will lead to an inward focus on demand and rebuttal, with a great deal of wasted energy, rather than letting people focus on growing consumer sales," he adds.
"A far bigger problem than supposedly high product costs is the retailers' inability to turn 99% service levels into depots into 99% availability on shelf. Surely we should work together to sort that one out instead?"
Objections to open book costing run much deeper than dissatisfaction at retailer efforts to capture more savings from their supply base. For some there is also a philosophical issue at play. In short: do retailers have the right to decide the cost base, margins, investment decisions and, ultimately, the profitability of their suppliers?
One managing director says: "If retailers are happy with the price they pay and the profit they make from us, surely that is enough? I don't object to retailers making the margins they do  in many cases they make more money out of my products than I do! Don't forget: I am also under pressure to create shareholder value. How can I with open book costing?"
But for another supplier such questions are academic. "With consolidation in retailing and manufacturing there will inevitably be greater open-ness'  forced or otherwise  between the two," he says. "The challenge for manufacturers is to ensure they have such a compelling offer that retailers don't need to see the books. And if they do, manufacturers  whether branded or own label  need to be in a strong enough position to resist the inevitable claim they are making excessive profit."
{{ANALYSIS }}
The theory underpinning open book costing sounds reasonable enough: retailers work in partnership with suppliers to understand their costs and to identify ways these can be reduced for mutual benefit, such as through combined purchasing or making better use of spare capacity.
And while Sainsbury with its PICO initiative  previously known as CONI  is clearly taking a lead here, there is nothing new per se about the concept of open book costing as other retailers have run similar schemes for years without any problems  with McDonald's being a prime example.
But Sainsbury's efforts to implement PICO with its own label supply base has made people very nervous  if only because many fear other retailers will increasingly adopt such practices in the future for suppliers of branded and non-branded products alike. And the moves by the multiples to implement factory gate pricing offer a taste of what could be in store in the future.
"It will become more of an issue, particularly around the area of supply chain, where arguably there is a logic to open costs," says the sales director at one supplier of branded groceries. "The logic is that unless everybody is aware of the costs in the chain, how can you know if efficiencies are being generated? However, it all tends to be a one way street at the moment."
And therein lies the rub. While some suppliers say they can see possible benefits of a more open trading relationship, none believe retailers in general are able to adopt the long term approach needed if they are to deliver on their side of any deal.
"Open book costing can be beneficial to both parties on the understanding that costs can go up and down, and that the relationship needs to be viewed as long term and built on trust," says one commercial director.
But he adds: "Demands on buying teams mean short term decisions can be taken to retrieve margin shortfalls. And the increased scope of online auctions means there is a potential for a mismatch. In addition, the widespread changes in buying personnel mean developing a long term commitment can sometimes be difficult to achieve in practice."
Such lack of trust among suppliers means there is, understandably, plenty of resistance to initiatives such as open book costing.
But the reality for suppliers caught up in the Sainsbury scheme is that they have to decide which of three strategies to adopt, says one senior executive. "You can either say no' and mean it. Or you can say yes' and mean no'. Or you can say yes' and mean yes'. We have opted for the latter."
Of those suppliers contacted by The Grocer for the reader poll we published last week, about half who had been approached by a retailer on this issue said they had agreed to co-operate  albeit only up to a point in most cases.
Such passive resistance is due to the fact suppliers, almost to a man, believe retailers only want to use open book costing as a way of beating down prices.
"So far, most of the retailers who have wanted to discuss this have used it to understand their suppliers' production economics for the purpose of taking a greater share of the margins for themselves," says one managing director, "I believe retailers could get greater advantage by developing true partnerships where both sides work together to take costs out of the system. That requires trust which is built up over time in an environment where the total margin is equitably shared. I haven't seen any retailer do that."
The suspicion that open book costing is really about "value capture" means there's mistrust all round, according to another.
"Once again this will lead to an inward focus on demand and rebuttal, with a great deal of wasted energy, rather than letting people focus on growing consumer sales," he adds.
"A far bigger problem than supposedly high product costs is the retailers' inability to turn 99% service levels into depots into 99% availability on shelf. Surely we should work together to sort that one out instead?"
Objections to open book costing run much deeper than dissatisfaction at retailer efforts to capture more savings from their supply base. For some there is also a philosophical issue at play. In short: do retailers have the right to decide the cost base, margins, investment decisions and, ultimately, the profitability of their suppliers?
One managing director says: "If retailers are happy with the price they pay and the profit they make from us, surely that is enough? I don't object to retailers making the margins they do  in many cases they make more money out of my products than I do! Don't forget: I am also under pressure to create shareholder value. How can I with open book costing?"
But for another supplier such questions are academic. "With consolidation in retailing and manufacturing there will inevitably be greater open-ness'  forced or otherwise  between the two," he says. "The challenge for manufacturers is to ensure they have such a compelling offer that retailers don't need to see the books. And if they do, manufacturers  whether branded or own label  need to be in a strong enough position to resist the inevitable claim they are making excessive profit."
{{ANALYSIS }}
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