Supplier-Base Concentration and Cost Structure

Abstract

In the past three years, companies across the globe have witnessed significant supply chain disruptions due to the COVID-19 pandemic, which highlights the importance of managing supply risk. Supply risk has increased in the last three decades due to an increasing prevalence of concentrated supplier bases. We predict that firms with high supplier-base concentration will choose a more elastic cost structure in response to the increased supply risk. Using a unique dataset of 4,530 firm-year observations hand-collected from supplier information disclosed by Chinese listed firms, we document a positive association between supplier-base concentration and cost elasticity. Furthermore, results from five cross-sectional tests are consistent with supply risk driving the association between supplier-base concentration and cost elasticity. Our study provides important practical implications to managers. To the extent that supplier-base concentration poses a supply risk, our study suggests that managers can respond by making the cost structure more flexible.

Keywords: Supplier-base concentration; supply risk; cost structure, cost elasticity; interfirm relationship

JEL Classification: M40, M41