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effects of long-term supplier-customer relationship are potentially spill over to other
markets. They find that suppliers who have a long-term relationship with customers, these
suppliers’ loan spreads are lower and enjoy looser covenants on bank loans. They argue
that firms that have long-term relationship with major customers are interpreted by banks
as a certification of higher product quality, lower default risk, and higher operation
stability than other firms in the same industry.
3. Hypothesis Development
We expect that customer-based concentration will have impact on the degree of cost
stickiness in two opposite ways. First, suppliers often involve relationship-specific
investments in a supplier-customer relationship (Raman and Shahrur, 2008), and firms
with higher customer concentration make greater relationship-specific investment (Irvine
et al., 2016). Such investments are specific to a particular customer in order to meet
customers’ need, and the value of investments is lower outside the relationship. As
suppliers’ sales decrease, from the view of bargain power, major customers have the
power to pressure their dependent suppliers to keep a high level of product availability and
retain relationship-specific investments when customers expect recovery of demand in the
future. Suppliers are willing to keep their capacity in order to keep this relationship,
leading to cost stickiness. The pressure would be more pronounced when the suppliers
depend on few major customers.
On the other hand, a more concentrated customer base can increase efficiency
through increased information sharing and enhanced production coordination and
inventory managements (Patatoukas, 2012). Increased information sharing provides more
information to suppliers; thus supplier’s managers are less likely to retain resources when
sales decrease since they are more certain about future sales. As Patatoukas (2012) notes,
suppliers with concentrated customer bases have better working capital management
because of better information sharing and production coordination. Better information
sharing along supply chain can help reduce the bullwhip effect since the information
asymmetry is reduced. These suppliers also enjoy lower redesign costs. From the view of
operations management, the relationship with few major customers allows suppliers to
implement some supply-chain practices that can reduce demand uncertainty (Ak and
Patatoukas, 2016). A set of technology-enabled standards such as collaborative planning,
forecasting, and replenishment (CPFR), provide a roadmap for enabling collaborative
demand and supply planning and execution process. This requires both suppliers and