ABSTRACT Purpose This study aims to investigate the underlying psychological mechanism and the boundary conditions of the effects supplier customization (SC) on its performance in supply chain management (SCM). Methodology/approach Based upon the contract theory, the study explores how SC influences its performance by revealing mediating role of customer entitlement (CE), and examines the boundary conditions of contractual governance (CG). The dyadic questionnaire survey data of 111 supplier and customer firms in China were used to validate a moderated mediation model. Findings It is found that SC enhances its performance through the increased CE. Furthermore, the above consequential link is moderated by both contractual completeness (CCP) rather than contractual enforcement (CEF). Specifically, CCP negatively moderates the indirect effect of SC on SP through CE. However, CEF negatively moderates the direct effect of SC on CE. Research implications This research are really limitations, including its focus on single industry; single-country system; its cross-sectional design; and the oversight of the possible impact of relational governance (RG) on the link between buyers and sellers. Practical implications Executives should always attach importance to the development of psychological contract (PC), and managers should identify the underlying psychological mechanisms of a customization strategy in B2B and use contractual design and execution with caution. Originality/value/contribution The study extends the literature of the psychological mechanism and more granular characterization of CG, and provides insights for managers to recognize reasonable governance tactics in the context of SCM.