A new study has unveiled a link between the cost decisions of suppliers and their key customers, shedding light on the complex dynamics of supply chain management. 

"By uncovering the role of customer cost decisions in shaping supplier behaviour, we have provided invaluable insights for businesses seeking to navigate the challenges of information asymmetry and uncertainty in supply chain management."

Nishant Agarwal

Published in Management Accounting Research, the analysis offers insight into how suppliers adapt their own cost strategies based on the actions of their major clients, potentially revolutionising the way businesses navigate the complexities of modern supply chains.

Lead author Nishant Agarwal, a lecturer in accounting at The University of Western Australia Business School, said the research drew on a comprehensive US-based dataset of customer-supplier pairs, and revealed an interesting correlation.

“We found that when key customer firms exhibited increased cost stickiness – the phenomenon where costs tend to rise more readily in response to increases in activity or demand compared to how they decrease when activity or demand declines – in previous periods, their suppliers mirrored this behaviour, showing a significant uptick in cost stickiness in subsequent periods,” Mr Agarwal said.

“The finding suggested a nuanced interplay between customer and supplier cost decisions, with suppliers closely monitoring and aligning their strategies with those of their key clients.”

Image: Lecturer in Accounting at the UWA Business School, Nishant Agarwal.

Mr Agarwal said the study identified specific conditions where that relationship was most pronounced. 

“In supply chains characterised by high information frictions, where not a lot of information is available leading to uncertainties, suppliers are particularly attuned to the cost decisions of customers,” he said.

“Additionally, when customer firms projected positive future demand outlooks and their managers had limited opportunities for empire-building activities, the influence of customer cost decisions on supplier strategies became even more pronounced.

“By uncovering the role of customer cost decisions in shaping supplier behaviour, we have provided invaluable insights for businesses seeking to navigate the challenges of information asymmetry and uncertainty in supply chain management.”

Mr Agarwal said the findings not only contributed to the expanding literature on cost behaviour and supply chains, but also offered practical insights for industry practitioners. 

“Our research suggested that an increase in the cost stickiness of customer firms could serve as a powerful signalling mechanism for suppliers, enabling them to anticipate and prepare for potential shifts in future demand,” he said.

“By understanding the intricate relationship between customer and supplier cost decisions, businesses can better position themselves to thrive in an ever-evolving marketplace.”