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among suppliers and customers and the relative resources and product dependence among
them.
2.2.1 Potential Cost of Customer Concentration
Suppliers with concentrate-based customers face serious dependence asymmetry
because larger customers have a greater impact on supplier’s profits and cash flow and
larger customers are more likely to attract other suppliers to do business with them.
Serious dependence asymmetry provides customers with strong buyer power, which may
impose potential costs on suppliers. Specifically, firstly, strong buyer power of customer
may increase suppliers operating risk. For example, Scherer (1970) argues that suppliers
may fear instant and heavy losses if the customer changes its supplier. The fear provides
customer strong bargain power over price and credit terms. Gosman and Kohlbeck (2009)
find that as sales to major customer increases, the gross margins and return on asset of
supplier decrease, consistent with the argument that the increasing buyer power allows
buyers to dictate prices from suppliers and to have fewer inventories and extended
payment periods. Secondly, strong bargain power may induce managers to engage in
earning management. Raman and Shahrur (2008) documents that firms engage in earning
management in order to show positive and stable earning potential and to induce their
suppliers/customers to invest more in relationship-specific investment. They also find that
the duration of customer-supplier relationship is shorter when firms engage in earning
management. Thirdly, strong bargain power may induce managers to engage in tax
avoidance. Huang, Lobo, Wang, and Xie, (2016) document a positive association between
customer concentration and corporate tax avoidance. Huang et al. (2016) argue that for
firms with a concentrated corporate customer bases, they have higher cash flow risk
because loss of major customer could lead to a considerable drop in cash flows. They also
have incentive to manage earnings to enhance the perception of their customer. Since tax
avoidance can increase both cash flow and accounting earnings, firms with a concentrated
corporate customer bases are more willing to engage in tax avoidance.
2.2.2 Benefits of Customer Concentration
The view of operations management provides another story, suggesting that limited
number of major customers facilitates information sharing and production coordination
along the supply chain. Furthermore, implementation of some supply-chain practice can
reduce demand uncertainty, suppliers’ cost, and increase efficiency (Ak and Patatoukas,
2016); e.g., under collaborative planning, forecasting, and replenishment (CPFR), supplier
will set up an information system with major customer to exchange demand forecasts.