Conventional wisdom says that relying on just a few major customers is not a savvy business strategy because those 800-pound gorillas can leverage their size to wring concessions out of their suppliers. But that’s not necessarily true, a new survey shows. It turns out that bigger can be better for your business when it comes to customer size.
In fact, suppliers that have a few major customers enjoy higher performance — demonstrated by bottom-line profitability rates and stock market valuations — compared with firms that have a less concentrated customer base, according to supply chain research by Panos Patatoukas, assistant professor of accounting at the University of California, Berkeley's Haas School of Business. His study was just published in The Accounting Review.
If Walmart buys most of its soap from your company, for example, Patatoukas' research suggests you are probably performing more effectively 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.
Critics of large retailers such as Walmart say the big-box retailers can squeeze their independent suppliers.
"The conventional view is that relationships with high customer-base concentration are an impediment to a supplier firm's performance," said 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."
He found evidence to the contrary. Though suppliers with a more concentrated customer base did report lower gross margins, 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.