Manufacturers succeed by concentrating customers
The fewer the customers, the better for manu-facturers says research by Assoc. Prof. Panos Patatoukas. Doing business with a limited number of major customers allows manufacturers to hold fewer inventories for a shorter time. These inventories comprise a significant part of a firm’s assets—as much as 25 percent for the average manufacturer—and can be costly and risky to hold as inventories can become obsolete.
“The matching between suppliers and customers is a bit like dating,” says Patatoukas. “When a supplier firm in the manufacturing sector develops a focused, long-term relationship with a major customer, both parties tend to benefit by choosing each other.”
Patatoukas co-authored the study, which was published in Production and Operations Management, with B. Korcan Ak, a Berkeley Haas PhD candidate.
To examine the link between customer-base concentration and inventory efficiencies, Patatoukas and Ak analyzed more than 15,000 annual reports of U.S. manufacturers over a 30-year period obtained from filings with the U.S. Securities and Exchange Commission.
Suppliers with fewer customers also enjoy better collaboration with their major customers, the study finds. In essence, their co-dependency fosters more information sharing that facilitates better demand forecasting and more efficient production planning.
“The study 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 along the supply chain,” says Patatoukas. —PT