Long-Term Manufacturer-Supplier Relationships: Do They Pay off for Supplier Firms?

Abstract

Recently, there has been a growing trend toward long-term relationships between manufacturers and their suppliers. Although much as been written about the benefits of this shift to manufacturers, little is known about the benefits to supplier firms. In this study, we empirically assess the impact of long-term relationships with specific customers on the performance of supplier firms using cross-sectional and longitudinal information available in the Compustat collection of data bases and the Compact Disclosure data base. Our results indicate that maintaining long-term relationships with select customers does not come at the expense of the rate of sales growth. Suppliers in long-term relationships are able to achieve the same level of growth as firms that employ a transactional approach to servicing their customers. These suppliers are able to reduce costs over time through better inventory utilization; however, this reduction in cost seems to be bargained away by their customers through lower prices over time. Finally, the supplier firms in long-term relationships achieve higher profitability by differentially reducing their discretionary expenses such as selling, general, and administrative overhead costs to a greater extent than their counterparts who use a transactional approach to servicing their customers.