October 30, 2018

Customer centricity benefits buyer firms while suppliers assume more risk, break even

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Andrew crecelius streamAndrew Crecelius, Ph.D.More and more companies are structuring their organizations based on customer segments instead of product categories to better meet the needs of these specific customers. But this customer-centric approach is often a double-edged sword for those companies’ suppliers, who may reap some benefits but also assume more risk.

In an article published in the Journal of the Academy of Marketing Science, researchers from the University of Alabama at Birmingham Collat School of Business and colleagues from four other institutions detailed a first-of-its-kind look into the impact of a customer-centric approach on upstream suppliers.

As an example of customer centricity, Andrew Crecelius, Ph.D., assistant professor in the UAB Department of Marketing, Industrial Distribution, & Economics, cited a computer manufacturer that, instead of having server, laptop and desktop divisions, now has educational, home consumer and enterprise divisions within its organizational structure.

Creceilus’ group conducted two studies, one that focused on one supplier with many customers and a second that focused on a broad set of suppliers to many publicly traded firms. What they found was that, while customer centricity may be a benefit to buyer firms, it is usually only a break-even proposition for suppliers.

“The thing that surprised us most is that the suppliers are not seeing the benefits their customers are seeing from these customer-centric structures,” Crecelius said. “We found that while the average supplier benefits from having more customer-centric buyer firms in terms of sales, there is no significant effect on profits. They are not being harmed, but they are not seeing a profit benefit, either.”

Crecelius believes this is happening, in great part, because the same information about customer needs that companies are collecting to redefine their own organizations is also being used to wring value-added services from suppliers that greatly benefit the buyer’s bottom line but not the suppliers’. These often include additional customer service, expedited or drop shipping, vendor-managed inventory and support for promotional activities.

“This market intelligence allows buyers to be more informed when they are negotiating with suppliers, and they can be more demanding. By being more demanding they get more concessions from their suppliers. When their customers are customer-centric, it increases a supplier’s sales, but it also increases their costs.”

“This market intelligence allows buyers to be more informed when they are negotiating with suppliers, and they can be more demanding,” Crecelius said. “By being more demanding they get more concessions from their suppliers. When their customers are customer-centric, it increases a supplier’s sales, but it also increases their costs.”

In the article, the group cites figures from 2015 which indicated that the number of firms in the United States adopting a customer-centric structure had risen by nearly 50 percent in the preceding decade. The message to suppliers, Crecelius said, is that they must recognize and understand customer-centric relationships and use that knowledge more effectively.

“It is becoming more and more prevalent so for suppliers to get this upstream lift as we call it, they need to do the right things,” Crecelius said. “They need to know their customers are self-interested when they reorganize in this way, what it means for them as the supplier, and if they benefit, too. If a supplier focuses on developing stronger relationships with customer-centric buyers, they should be able to profit from them.”

JAMS is a premier journal in the field of marketing and marketing research and provides a vital link between scholarly research and practice by publishing research-based articles in the substantive domain of marketing. It is recognized on the Financial Times 50, the prestigious list of 50 journals the publication uses to rank business schools globally.

Working with Crecelius on the project were Justin M. Lawrence, Ph.D., assistant professor at Michigan State University; Ju-Yeon Lee, Ph.D., assistant professor at Iowa State University; Son K. Lam, Ph.D., associate professor at the University of Georgia; and Lisa K. Scheer, Ph.D., professor at the University of Missouri.