Academic journal article Journal of Supply Chain Management

The Effects of Major Customer Networks on Supplier Profitability

Academic journal article Journal of Supply Chain Management

The Effects of Major Customer Networks on Supplier Profitability

Article excerpt

INTRODUCTION

Supply chain management (SCM) practices such as strategic partnerships, supply base optimization, longer-term contracts, and cooperative relationships have been extensively adopted over the past decades by many U.S. firms (Anderson & Jap, 2005; Choi & Krause, 2006; Economist, 2006; Ogden, 2006). As a result, firms have reduced their total number of exchange partners while increasing the volume of trade with a select few (Choi & Krause, 2006; Economist, 2006; Monczka & Trent, 1998). To secure the status of preferred partnerships, supplying firms have strengthened ties with major customers, thereby increasing customer concentrations (CCs) across industries (Irvine, Park & Yildizhan, 2016; Lanier, Wempe & Zacharia, 2010; Patatoukas, 2012).

Organizational scholars have provided two different perspectives about the economic behavior of concentrated relationships with major customers. On the one hand, economists, focusing on the self-interested nature of economic actors, describe the relationship dynamics in the notion of power and competition, whereby a small number of large buyers can extract favorable terms and conditions from dependent suppliers (Galbraith & Stiles, 1983; Kelly & Gosman, 2000; Porter, 1974). On the other hand, sociologists predict the cooperative behavior between exchange partners through the principle of embeddedness, wherein opportunism can be curbed by trust and commitment shared among members of the networks in which they are embedded (Granovetter, 1985; Uzzi, 1996, 1997).

Consequently, studies investigating the economic outcomes of these relationships with major customers have yielded diverging results. Some researchers report that suppliers having concentrated exchanges with a few major customers have lower profits due to the bargaining power of major customers (Balakrishnan, Linsmeier & Venkatachalam, 1996; Kelly & Gosman, 2000; Lanier et al., 2010). In contrast, other researchers considered CC as an important aspect of a supplier's network structure that positively influences the supplier's firm performance (Irvine et al., 2016; Patatoukas, 2012; Uzzi, 1996, 1997).

This controversy in the literature motivates my investigation into a firm's customer network. Specifically, I address the following research questions: What are the characteristics of a firm's major customer network? How is a supplier's profitability influenced by those network characteristics? How do the principles of power and/or embeddedness affect concentrated relationships with major customers?

To answer these research questions, I employed the network data of major customers based on the Statements of Financial Accounting Standards (SFAS) No. 131's major customer disclosure, which mandates that firms identify all individual customers accounting for more than 10 percent of their total sales. I then identified three dimensions of the major customer networks of U.S. public firms--CC, mutual dependence (MD), and customer interconnection (CI)--and investigated how they affect suppliers' return on assets (ROA) and return on sales (ROS) in year t + 1.

Using 717 suppliers and their networks of major customers, I found that CC negatively affects the supplier's [ROA.sub.t+1]. This result is in line with the organizational economists' view that CC increases the bargaining power of customers (Galbraith & Stiles, 1983; Porter, 1974). On the other hand, mutual dependence between a supplier and its major customers increases both [ROA.sub.t+1] and [ROS.sub.t+1], while mitigating the negative effects of CC on the supplier's profitability. From the perspective of embeddedness, these findings suggest that the reciprocated dependence between suppliers and major customers lowers the risk of opportunism of major customers and thus helps suppliers to facilitate value creation and capturing. Lastly, I found, surprisingly, that Cl has a negative impact on the supplier's [ROA. …

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