Avoiding Over-Reliance on a Single Large Customer: The Impact of Technical Capability, Product Development and Alternative Key Customers

Abstract

ABSTRACT This study examines three investments that component suppliers can make to circumvent their large customers' ability to achieve significant power advantages. A large scale survey of component suppliers was conducted approximately 12 to 24 months after Original Equipment Manufacturers (OEMs) began flexing their increased purchasing power to demand price reductions and costly design services. The results show that suppliers' technical capability, suppliers' efforts to develop segment-focused products, and supplier investments to build relationships with alternative key customers lessened their large customers'power advantage. The urgency of balancing relationships with large OEMs is illustrated with the finding that customers'power advantage has a strong negative influence on the suppliers'forecast ofc their own performance. In contrast, no relationship between forecasted performance and the level of interdependence between large OEMs and their suppliers was found. The rapid increase of customer power across a broad range of industries has placed many companies in situations similar to the component suppliers investigated in this study. Thus, the outcomes of these suppliers'investments should be of interest to a large audience of managers. The theory used to frame and examine this important managerial situation provides a vantage point that complements the work done by other researchers.