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magnitude of inventory write-downs. Suppliers, for instance, can reduce demand
uncertainty through Vendor-Managed Inventory (VMI), Just-In-Time (JIT) manufacturing,
and Collaborative Planning, Forecasting, and Replenishment (CPFR) with their limited
number of major customers. Lower uncertainty of future demand enables manager to
make corresponding adjustment on the manufacturing cost. Therefore, costs are likely to
be less sticky because managers are more certain about the resource needed in the future
and react more sensitively to the change in sales volume in both directions.
Which of the two views of customer-supplier relationship prevails in affecting cost
stickiness is an empirical question. By using a sample of U.S. manufacturing firms over
year 1976 through 2015, the empirical results provide the evidences that the stickiness of
costs is mitigated when suppliers have a concentrated customer base. Specifically,
following Patatoukas (2012), we construct a measure of customer concentration (CC) to
capture the extent to which a supplier’s customer based is concentrated and investigate the
association between customer concentration and cost stickiness. We test on three
categories of costs- selling, general, and administrative costs, cost of goods sold, and total
operating costs, respectively. The results show that for suppliers with more concentrated
customer bases, SG&A, COGS, and operating costs are less sticky. Specifically, SG&A
(COGS) costs increase on average 0.671(1.043) % when sales increase 1%, while SG&A
(COGS) costs decrease 0.527(0.979) % when sales decrease by 1%, which exhibits
stickiness of SG&A (COGS) costs. However, when customer concentration is considered,
SG&A (COGS) costs increase 0.200 (0.861) % when sales increase 1%, while SG&A
costs decrease 0.444(1.147) % when sales decrease by 1%. Operating costs also reflect the
similar cost pattern. The results suggest that information sharing and collaboration along
customer-supplier chain help suppliers to adjust their costs and resources more precisely,
thus reducing the degree of cost stickiness.
This study contributes to the literature in several aspects. First, we identify customer-
supplier relationship as a determinant of cost stickiness and show that customer
concentration is negatively associated with cost stickiness.
2
Our study provides insight
into how supplier-customer relationship affects supplier’s decision on cost structure.
Second, our study contributes to the literature on customer-supplier relationship. Pandit,
2 While Chang et al. (2017) find that customer concentration level is negatively associated with cost
elasticity, they do not investigate whether costs are sticky when suppliers have concentrated customer
base.