Customer-Base Concentration and Inventory Efficiencies: Evidence from the Manufacturing Sector
Production and Operations Management Journal, February 2016
38 Pages Posted: 11 Apr 2014 Last revised: 27 Jun 2016
Date Written: June 9, 2015
What is the link between customer-base concentration and inventory efficiencies in the manufacturing sector? Using hand-collected data from 10-K Filings, we find that manufacturers with more concentrated customer bases hold fewer inventories for less time and are less likely to end up with excess inventories, as indicated by the lower likelihood and magnitude of inventory write-downs and reversals. Using disaggregated inventory disclosures, we find that inventory efficiencies primarily flow through the finished goods inventory account, while raw material efficiencies are offset by higher work-in-process holdings and longer work-in-process cycles. In additional analysis, we document a valuation premium for more concentrated manufacturers after controlling for other firm characteristics, including default risk and cost of capital estimates. We conclude that investors trade off the costs and benefits of relationships with a limited number of major customers and, on balance, consider customer-base concentration as a net positive for firm valuation. Overall, our study adds to interdisciplinary research in accounting and operations management by shedding new light on the relevance of major customer disclosures for fundamental analysis and valuation in the manufacturing sector.
Keywords: Customer-base concentration; inventory efficiencies; inventory write-downs; firm valuation
JEL Classification: M41; L25; G10
Suggested Citation: Suggested Citation