A popular women’s yoga wear outfitter with products in major department stores opens a series of brick-and-mortar retail shops in various cities. An apparel company enters a long-term contract with a trendy national fashion brand, agreeing to sell their products under that brand’s label. An upscale menswear firm decides to grow its online market.
All three cases are examples of strategic choices that supplier firms make, and they’re at the heart of a research study on the apparel industry and supplier performance by Ella Mae Matsumura of the Wisconsin School of Business and Jason Schloetzer of Georgetown University.
Drawing on work from John K. Shank (1989) regarding the “scale, scope, and complexity” of these strategic choices, or “structural decisions,” Matsumura and Schloetzer examine how a supplier’s structural decisions and executional skills affect its customer concentration, and in turn, performance. Executional skills are the “day-to-day operations” of a firm, Matsumura says, such as workforce efficiency or building in improvement and feedback processes. Suppliers with a concentrated customer base—with “customer” referring to the retailer in this instance—might receive the bulk of their revenue from a handful of retailers they supply products to, rather than one that is spread across many different customers.
There’s already an established link based on prior studies in the field, Matsumura says, between customer concentration and supplier performance, both positive and negative. While a concentrated customer base can increase efficiencies and save on operating costs, it can also be the equivalent of putting all of your eggs in one basket.
In 2017, for example, many media outlets reported on how Walmart pressured suppliers to trim their wholesale costs in order to keep the company’s pricing system competitive. A supplier with a concentrated base that includes one or more large companies like Walmart can be negatively affected by that customer’s actions, as well as market fluctuations. Knowing in advance the link between a concentrated customer base and supplier performance, Matsumura and Schloetzer wanted to take it a step further and examine whether it was the structural decisions component of a concentrated base or its executional skills component that ultimately had the greatest impact on supplier performance.
Matsumura says the apparel industry was selected as the basis for the study partly because of its inherent competitive environment. With a handful of firms tending to dominate the market, apparel suppliers must be responsive—able to make structural decisions—to changes in retailer and consumer demand, and they need to continuously hone their executional skills to survive. Another characteristic that lends itself to the study setting is that the percentage of supplier revenue varies widely across the number of “major customers,” defined by the Financial Accounting Standards Board as relationships where 10 percent or more of an enterprise’s revenue comes from a sole customer.
Using suppliers’ required disclosures of major customers and data from the Compustat Fundamental Annual table, a database that lists annual company income and other metrics, Matsumura and Schloetzer looked at 55 U.S. apparel suppliers for the period 1998-2014. They defined six structural decisions apparel suppliers were making based on the 491 firm-year observations they reviewed across the 55 companies.
Results: Executional skills tied to supplier performance
Matsumura and Schloetzer’s study finds that while strategic decisions influence customer concentration, they were shown to have little effect on supplier performance. Suppliers’ financial and operational executional skills, on the other hand, were the drivers behind supplier performance—an important consideration for a more in-depth understanding of the relationship between performance and concentrated customer base.
Matsumura says future research might uncover specifically why these executional skills create performance benefits, as well as build on the current study by examining whether the gains are due to activities within the firm or by outside approaches that engender customer loyalty.
Read the paper “The Structural and Executional Components of Customer Concentration: Implications for Supplier Performance” forthcoming in Journal of Management Accounting Research.
Ella Mae Matsumura is the senior associate dean for academic programs at the Wisconsin School of Business, and the Robert and Monica Beyer Professor in Accounting.