“Love thy neighbor, but don’t pull down your hedge”: The influence of interdependence with major customers on supplier productivity

Abstract

This research examines how mutual and relative dependence on major customers impact supplier productivity. We investigate two research questions: (1) Does the extent of mutual dependence between a supplier and its major customer base exhibit a non-linear impact on supplier productivity? (2) How does the combined influence of the supplier’s relative dependence and mutual dependence on major customers affect supplier productivity? Using major customer relationship data from Compustat segment files, we construct a longitudinal dataset in the manufacturing industry for the period 1998–2017. We estimate supplier productivity accounting for selection bias and employ the fixed effect regression approach to examine the effects of mutual dependence and relative dependence on supplier productivity. Moreover, we address potential endogeneity in the model with the control function approach. Our results indicate an inverted curvilinear relationship between a supplier’s mutual dependence on its major customers and its productivity: While increased mutual dependence initially enhances productivity, the marginal returns diminish. Interestingly, the curvilinear effect becomes more prominent when the supplier’s relative dependence increases. Our study’s findings offer three best-practice strategies including (1) spread and anchor risk, (2) reduce relative dependence, and (3) deepen customer understanding, all of which help suppliers manage the interdependence in major customer relationships.