Financial benefits and risks of dependency in triadic supply chain relationships

Abstract

The economic consequences of interdependent relationships with suppliers and customers have long been of interest to supply chain managers and academics alike. Whereas previous studies have focused on the benefits or risks of embedded relationships that accrue to buying firms, this study simultaneously investigates the effects of a supplier's and a customer's embeddedness, arising from resource dependency, on a focal firm's financial performance in triadic supply chain relationships. Using 1,144 unique focal firm-years for U.S. firms from Compustat, we find that a supplier's and a customer's dependency both increase the focal firm's performance in terms of return on assets (ROA) and return on sales (ROS) by increasing asset turnover (ATO). As levels of supplier and customer dependency on the focal firm increase, however, the economic benefits of customer dependency diminish beyond a certain point, while those of supplier dependency continue to increase above that threshold. Thus, our findings show the paradoxically differing risks of the supplier's versus the customer's dependency, while establishing the unequivocal economic benefits of supplier and customer relations for focal firms in the middle of concentrated triadic relationships.

Greater Reliance on Major Customers and Auditor Going‐Concern Opinions

“…Major customers with strong bargaining power can also extract significant price concessions, which can significantly diminish gross margins for suppliers (Schumacher ; Snyder ). Their strong bargaining position can also result in major customers securing extended payment periods and larger trade credit, which can further heighten cash flow risks for the supplier firm (Gosman and Kohlbeck ; Kim and Henderson ). Consistent with this line of reasoning, Kim () and Gosman and Kohlbeck () report that sales to major customers are associated with lower supplier gross margins and profitability.…”

“…These ties enhance communication and coordination, resulting in suppliers developing expectations and systems that are compatible with their major customers (Ak and Patatoukas 2016;Yli-Renko et al 2001). These benefits can improve the performance of suppliers (Kim and Henderson 2015;Lanier et al 2010) and make it easier for distressed suppliers to retain major customers, in comparison to retaining a large number of smaller customers that collectively produce the same amount of sales (Irvine et al 2016). Major customers may also have incentives to cooperate with distressed suppliers to minimize disruptions to their own production (Swinney and Netessine 2009).…”

“…Kim and Henderson () show that major customer dependency brings benefits to the supplier but after a certain point, the benefits from major customer dependency diminishes. Consistent with this view, when we regress annual sales growth on our largest major customer reliance proxy, a measure capturing relationship length and the interaction of our largest major customer and relationship length variables, we find a negative and significant ( p < 0.01) coefficient on the interaction term.…”

Customer and Supplier Portfolios: Can Credit Risks be Managed Through Supply Chain Relationships?

“…A more concentrated base of customers and suppliers appears to lead to embeddedness, which improves performance (Lanier et al. ; Kim and Henderson ). Part of the performance improvement appears to stem from increased efficiencies, particularly in inventory deployment (Ak and Patatoukas ).…”

“…A smaller set of trading partners may also lead to reduced supply chain complexity and, in turn, reduce disruptions and risks (Choi and Krause 2006;Bode and Wagner 2015;Brandon-Jones et al 2015). A more concentrated base of customers and suppliers appears to lead to embeddedness, which improves performance (Lanier et al 2010;Kim and Henderson 2015). Part of the performance improvement appears to stem from increased efficiencies, particularly in inventory deployment (Ak and Patatoukas 2016).…”