Customer Concentration and Cost Structure

RePEc: Research Papers in Economics, 2013

Using a recently expanded data set on supplier-customer links, we examine how customer concentration a¤ects …rm pro…tability. We …nd that the relation between customer concentration and …rm pro…tability is more complex than recent literature suggests. We con…rm that customer concentration promotes operating e¢ciencies for pro…table …rms. However, we …nd a di¤erent result for younger, less pro…table …rms where customer concentration impairs …rm pro…tability and can increase distress risk. We explain these di¤erences by introducing a relationship life-cycle hypothesis wherein the relation between customer-base concentration and pro…tability is time-varying; being signi…cantly negative in the early years of the relationship, and turning positive as the relationship matures. The key driver of this dynamic is the customer-speci…c investments the relationship entails. These investments result in larger …xed costs and greater operating leverage early in the relationship, but can signi…cantly bene…t the …rm as the relationship matures.

Marketing Letters, 2009

The competitive nature of today's business-to-business markets requires companies to continually look for ways to reduce costs; one of the easiest of which is to demand price reductions from suppliers. In this research, price reduction demands and the corresponding concessions given by 238 suppliers to the six major North American Automotive original equipment manufacturers during 2001-2007 are analyzed utilizing a simultaneous equation model. The three stage least squares estimates indicate that suppliers are willing to give higher price concessions when buyers align specific interfacing characteristics and processes with their suppliers so that the suppliers perceive greater opportunities for future business and profit. These results provide, for the first time, an understanding of the dynamic nature of the impact of buyer-supplier relational components on supplier price concessions.

Journal of Business Research, 2017

This study provides an empirical investigation of the impact of customer-supplier relationships on firm innovation in an interorganizational framework encompassing transaction cost economics, resource dependence theory, and the theory of incomplete contracts. Using a sample of U.S. firms for the period from 1980 to 2005, this study explores how customer concentration and customer bargaining power affect a supplier's process innovation and product innovation measured with R & D-to-assets ratio and patents (also citations), respectively. The findings imply that a concentrated customer base, which reflects a strong customer-supplier relationship as well as high switching costs, motivates suppliers to invest more in R & D and become more innovative. However, the evidence also suggests that strong customer bargaining power creates holdup problems and forces suppliers to invest less in R & D and innovation. The results are robust to sophisticated econometric techniques that control for endogeneity and suggest heterogeneous effects of business partnerships on firm innovation.

International Journal of Global Business and Competitiveness, 2021

This research investigates how competition intensity and differences in cost structures affect decisions made by competing suppliers and the role that behavioral factors play as influences. We use controlled laboratory experiments to study the scenario of suppliers competing for a share of demand being outsourced by a single buyer. The buyer seeks to maximize the service level provided by suppliers by allocating based on different performance measures which create varying levels of competition intensity. The experimental treatments include those performance measures as well as differences in supplier cost structures. Our experimental results show that in the majority of cases suppliers' decisions do not confirm theoretical predictions from the Nash equilibrium, and we find patterns in those deviations. To explain them, we first evaluate behavioral factors found in the literature including bounded rationality, learning, and other-regarding behavior. We then introduce a new behavioral factor, rival-chasing. Rival-chasing builds on other-regarding behavior by considering competitors' actions in addition to their outcomes. We find that rival-chasing can explain patterns in suppliers' behavior that cannot be explained by other behavioral factors.

Journal of International Business Studies, 2002

Most studies on Japanese supplier-automaker relationships have focused on the nature of the dyadic inter-firm relationship and the performance of the assembler. We examine the relationship between a Japanese supplier's "customer scope strategy" (i.e. number of customers) and the supplier's performance. By analyzing data on 125 suppliers, we found that a supplier with broad automotive customer scope tends to be more profitable and is better off with less exclusive ties. This relationship held even after controlling for supplier size, product type, and the underlying competitiveness/efficiency of each supplier. We argue that a broad customer scope strategy Ieads to superior pedormance primarily due to learning opportunities. This finding highlights a key liability of vertical integration since integration of inputs often limits the ability of in-house divisions to access new customers. However, there is a limit to the advantages of a broad customer base, since sales to "unrelated customers" (e.g., non-automotive) did not have a significant impact on performance. In short, there appear to be diminishing returns to customer scope as suppliers add "dissimilar" customers with requirements fi.u-ther from their core knowledge domain. Thus, these findings offer empirical support for the knowledge based view of the firm which suggests that the efficient boundaries of firms are driven by knowledge domains/considerations. Our findings also suggest that studies that focus only on the advantages of long-term cooperative relationships may be misleading if interpreted to mean that an exclusive supplier-assembler relationship is the optimal solution for the supplier.

SSRN Electronic Journal, 2018

We examine two competing predictions regarding the impact of major customer firms' risk taking on that of their supplier firms. The bargaining power theory holds that major customers are aware of the imbalance of bargaining power between them and their suppliers and thus may exploit it by engaging in more risk taking. Anticipating this behavior, suppliers have incentives to follow the same policy (i.e. engage in more risk taking) to avoid a greater power imbalance. On the contrary, the precautionary motive argument implies that suppliers that rely heavily on their major customers should reduce their risk when these customers engage in excessive risk taking and subsequently experience adverse cash flow shocks and financial distress. We find robust evidence in support of the first prediction, that is, that suppliers' risk taking is positively influenced by that of their major customers. This impact becomes more pronounced when the two parties have more comparable bargaining power and when the suppliers have greater risk-taking capacities. Overall, our study shows that major customers' risk-taking behaviors can help predict those of their suppliers.

SSRN Electronic Journal, 2013

Using a recently expanded data set on supplier-customer links, we examine how customer concentration a¤ects …rm pro…tability. We …nd that the relation between customer concentration and …rm pro…tability is more complex than recent literature suggests. We con…rm that customer concentration promotes operating e¢ciencies for pro…table …rms. However, we …nd a di¤erent result for younger, less pro…table …rms where customer concentration impairs …rm pro…tability and signi…cantly increases distress risk. Thus, the relation between customer-base concentration and pro…tability is non-linear; it is signi…cantly negative in the early years of a …rm's public life, turning positive as the relationship matures. The reason for this dynamic relation is that …rms who serve a few major customers make customer-speci…c investments that result in larger …xed costs and greater operating leverage. These relatively high …xed costs mean that customer concentration is risky for young …rms, but can signi…cantly bene…t the …rm if the relationship survives.

International Journal of Operations & Production Management, 2019

Purpose – To build a more comprehensive understanding of factors affecting the success of service contracting, the purpose of this paper is to investigate the influences of service complexity, contract structure and contracting process on the buyer-perceived supplier performance in business-to-business (B2B) services. Design/methodology/approach – A research model is developed based on transaction cost economics and the research on service contracting. The model is tested by the survey data collected. Professional focus groups on LinkedIn are used to generate the list of potential respondents. The sample consists of 177 purchasing professionals from 25 countries. Findings – The results indicate that three major contract dimensions and follow-up management practices positively influence buyer-perceived supplier performance. Furthermore, service complexity amplifies the effects of incentives designed in the contract and the buyer’s follow-up contract management on perceived supplier performance. Research limitations/implications – The sample consists of respondents from 25 countries and provides good geographic coverage. However, the results should be generalized with caution because not all countries were represented equally. Practical implications – The study suggests a framework and guidelines for purchasing managers to improve the design and management of service contracts to secure good performance from their supplier. Originality/value – This paper contributes to understanding the performance-enhancing aspects of designing and monitoring service contracts in B2B contexts. It also adds to the knowledge of the role of service complexity in successful B2B service purchasing. Keywords Service contract, B2B services, Perceived supplier performance, Service complexity, Service purchasing, Transaction cost economics (TCE)

Journal of Operations Management, 2010

2014

This thesis was written as a part of the Master of Science in Economics and Business Administration at NHH. Please note that neither the institution nor the examiners are responsible − through the approval of this thesis − for the theories and methods used, or results and conclusions drawn in this work.