Less is More: The Unexpected Value for Suppliers That Have Few Major Customers

Walmart may serve millions of customers, but suppliers who are lucky enough to have Walmart as their customer have one more reason to smile—in the spirit of the chain store’s famous “happy face” logo.

According to supply chain research by Panos Patatoukas, assistant professor of accounting, suppliers with few but major customers enjoy higher performance—demonstrated by bottom line profitability rates and stock market valuations—than firms with a less concentrated customer base.

For example, if Walmart buys most its soap from your company, the research suggests you are probably performing more effectively and enjoying better stock valuations because the efficiencies from coordinating and collaborating along the supply chain more than make up for the weaknesses of dealing with large and powerful customers, such as a Walmart.

Patatoukas’ paper, “Customer-Base Concentration: Implications for Firm Performance and Capital Markets,’” is published in The Accounting Review, March 2012.

Supplier firms are firms that supply businesses with necessary products or services for resale, such as a grower who supplies flowers to a florist. Suppliers have a highly concentrated customer base when, for example, a small number of customers account for the largest percentage of net sales.

In the press, critics of large retailers such as Walmart say the big box retailers can squeeze their dependent suppliers. This study concludes otherwise.

“The conventional view is that relationships with high customer-base concentration are an impediment to a supplier firm’s performance,” explains Patatoukas. “This is because major customers are thought to pressure their dependent suppliers to provide concessions such as lowering prices, extending trade credit, and carrying extra inventory.”

But Patatoukas found evidence to the contrary and that customer-base concentration positively affects supplier-firm performance and stock market valuation.

Suppliers with a more concentrated customer base did report lower gross margins; Patatoukas found they also spent less on selling, and in general, administrative expenses per dollar of sales. In addition, they hold less of their assets in inventory, and they experienced higher turnover rates of both current and noncurrent assets and shorter cash conversion cycles.

In summary, his findings suggest that efficiencies from coordination and collaboration along the supply chain dominate weaknesses in dealing with major customers and so customer-base concentration has a net positive impact on supplier firm performance.

See the full paper.

Walmart may serve millions of customers, but suppliers who are lucky enough to have Walmart as their customer have one more reason to smile—in the spirit of the chain store’s famous “happy face” logo. According to supply chain research by Panos Patatoukas, assistant professor of accounting, suppliers with few but major customers enjoy higher performance—demonstrated by bottom line profitability rates and stock market valuations—than firms with a less concentrated customer base.

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