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Such system can reduce demand uncertainty and thus, reduce inventory uncertainty. A
limited number of major customers also facilitate suppliers to adopt just-in-time (JIT)
manufacturing system. Under JIT system, suppliers can produce products in small batches,
therefore inventory level is reduced (Balakrishnan, Linsmeier, and Venkatachalam, 1996).
The key point of JIT is coordination with customers, but the coordination cost is high.
Suppliers with few major customers may enjoy lower coordination cost in ordering,
scheduling, production, and delivery. Overall, the view of operations management
suggests a positive association between customer concentration and efficiency.
Consistent with this perspective, Patatoukas (2012) finds that suppliers with more
concentrated customer bases spend less on SG&A expenses per dollar of sales and hold
lower level of inventories. These suppliers also enjoy higher turnover rate of current and
non-current assets and shorter cash conversion cycles. Ak and Patatoukas (2016) show
that manufacturers with more concentrate customer bases have lower inventory holding
and shorter inventory holding period. Kalwani and Narayandas (1995) indicate that
suppliers who maintain long-term relationship with few customers do not come with a loss
in the rate of sales growth overtime. They argue that although the customers may have
higher bargain power, these suppliers can still achieve the same level of growth and better
profitability by improving inventory utilization and reducing SG&A costs.
Irvine, Park, and Yildizhan (2016) show a dynamic life-cycle of supplier-customer
relationship. They find a negative association between customer-based concentration and
profitability in the early stage of the supplier-customer relationship. However, as the
relationship matures, the association between customer-based concentration and
profitability becomes positive. They explain that in the early stage of the relationship,
suppliers make greater customer-specific SG&A investment in order to earn higher profit
in the future. These customer-specific investment increases fixed SG&A expense and
therefore, higher operating leverage. As the relationship matures, suppliers with higher
level of customer concentration enjoy higher operating profit and lower operating risk.
2.3 Literature Review on Information Transfer across Supply Chain
2.3.1 Auditor Perspective
Information transfer along supply chain has some effect on auditors. Krishnan, Lee,
Patatoukas, and Wang (2018) find negative relation between customer-base concentration
and audit fees. They argue that major customer relationships may enable suppliers to
reduce their operating complexity; lower operating complexity for more dependent