The Effects of Major Customer Networks on Supplier Profitability

Abstract

Whereas extant research on supply chain networks focuses mainly on the networks of major suppliers, this study fills a gap in the literature by exploring the relational and structural characteristics of networks of major customers and their impact on the financial performance of suppliers. Based on the major customer disclosure of the Statements of Financial Accounting Standards 131, this study identifies three dimensions of the major customer networks of U.S. public firms—customer concentration, mutual dependence and customer interconnection—and investigates how they affect the supplier's return on assets (ROAt+1) and return on sales (ROSt+1). Drawing on 717 suppliers and their major customer networks from the Compustat database, the study shows that customer concentration and interconnection negatively affect the supplier's ROAt+1 and ROSt+1, whereas mutual dependence enhances them and reduces the negative impact of customer concentration on the supplier's profitability. This positive interaction between customer concentration and mutual dependence demonstrates how two governance principles, power and embeddedness, simultaneously affect concentrated relationships with major customers.