Why it's better for suppliers to have fewer customers

Being selective about who one does business with can actually benefit suppliers as well as buyers, as having fewer major customers allows suppliers to keep a tighter control of inventory, according to a study.

Research from the University of California at Berkeley’s Haas School of Business, says inventories can make up as much as 25% of assets for the average manufacturer but can be risky to hold as they can become obsolete. 

“The matching between suppliers and customers is a bit like dating,” said Panos Patatoukas, one of the report’s authors.

“When a supplier firm in the manufacturing sector develops a focused, long-term relationship with a major customer, both parties tend to benefit.”

The study, Customer-Base Concentration and Inventory Efficiencies: Evidence from the Manufacturing Sector, analysed more than 15,000 annual reports of US manufacturers over a 30-year period.

Researchers found suppliers with fewer customers enjoy better collaboration with their major customers. This because their mutual dependency fosters more information sharing, which in turn leads to better demand forecasting and more efficient production planning.

Patatoukas’ previous research also found that a concentrated customer base makes a manufacturer more attractive to investors.

“Investors appear to consider relationships with a limited number of major customers as a plus for firm valuation and are willing to pay a higher premium for [these] manufacturers,” said Patatoukas.

He cited Walmart’s relationships with suppliers.

“You may think of Walmart as this big, evil behemoth that is more likely to squeeze its dependent suppliers,” he said.

“The study, however, illustrates how a dependent supplier doing business with a major customer like Walmart may actually do well in terms of inventory management through enhanced collaboration.”

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