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

• DOI: http://doi.org/10.1111/jbl.12179
• Author: Thomas J. Goldsby,Matthew A. Schwieterman,Keely L. Croxton
• Published date: 01 June 2018
• Date: 01 June 2018

Customer and Supplier Portfolios: Can Credit Risks be Managed

Through Supply Chain Relationships?

Matthew A. Schwieterman

1

, Thomas J. Goldsby

2

, and Keely L. Croxton

2

1

Michigan State University

2

The Ohio State University

While supply chain risk has been the subject of an ever-increasing amount of research attention, the importance of credit risk has been less

studied, at least by supply chain researchers. Yet, there may be risks inherent within a firm’s portfolios of supply chain relationships that

are manifested in the credit risk of a firm. Moreover, portfolio characteristics may serve as a signal to the external market regarding these risks.

While customer and supplier portfolio characteristics may impact the firm’s exposure to risks, the specific issue of how portfolio characteristics

relate to credit risk has rarely been examined by supply chain scholars. This research bridges extant works in supply chain management and

finance to relate supply chain characteristics to a critical reputational outcome, namely credit ratings. In this research, we utilize a sample of

firms that recently underwent an initial public offering to empirically examine the theoretical predictions of Resource Dependence Theory

regarding the relationships between different supply chain portfolio characteristics and credit risk.

Keywords: risk; supply chain portfolios; supply chain relationships; initial public offering; Resource Dependence Theory

INTRODUCTION

Firms are involved in multiple relationships at any point in time

and these relationships can be conceptualized as portfolios (Parise

and Casher 2003; Hoffmann 2005, 2007; Lavie 2006, 2007; Ozcan

and Eisenhardt 2009). While firms engage with customers and sup-

pliers in order to access resources, relationships also feature risks

for the focal firm. Supply chain risk has been the subject of an

increasing amount of research attention as business executives try

to understand how to manage risk and minimize the impact of sup-

ply chain disruptions (Hendricks and Singhal 2003; Blackhurst

et al. 2005; Zsidisin et al. 2005; Tang 2006). Previous research

has suggested that the manner in which a company structures and

manages relationships with customers and suppliers can affect the

risks they face and their ability to minimize the negative financial

outcomes of disruptions (Pettit et al. 2013).

Supply chain relationships can also influence risk outcomes

beyond the typical measures of financial performance (e.g.,

return on assets, return on sales, and earnings before interest,

taxes, depreciation, and amortization margin) used in previous

research on supply chain risk. For example, the finance literature

has shown that firms with concentrated customer bases are likely

to hold excess cash as a buffer against the loss of the relation-

ships (Itzkowitz 2013). Firms with a high degree of dependence

upon key trading partners receive less favorable loan terms from

banks (Campello and Gao 2017). A prominent customer may

decrease the liquidity of suppliers through longer payment terms

(Murfin and Njoroge 2015). Finally, the performance announce-

ments of key trading partners affect the terms extended by len-

ders (Kim et al. 2015).

This research builds off of extant works in supply chain man-

agement (SCM) and finance to examine the relationships

between supply chain portfolio characteristics and external per-

ceptions of credit risk. Based on Resource Dependence Theory

(RDT) (Pfeffer and Salancik 2003), portfolios of relationships

may serve as a signal to the external market regarding these

risks, and therefore we believe they may impact a firm’s credit

rating. In addition to serving as a measure of credit risk, a firm’s

credit rating is significant because it can affect a firm’s cost of

capital, as well as influence investors in their decisions. To the

best of our knowledge, no supply chain research has examined

how characteristics of a firm’s portfolios may be manifested in

the credit risk of that firm.

While not present in the literature, the links between credit

risk and supply chain portfolios are present in the popular busi-

ness press and consulting literature. For instance, in 2016 Fitch

affirmed Deutsche Post’s BBB+credit rating, partly due to its

strong portfolio of contract relationships that offered confidence

in future cash flows (DPDHL 2016). Moreover, suppliers’credit

risks, and associated credit failure, have been described as a

“weak link”in supply chains that customers should consider

when making decisions regarding their supply base (Bryn and

Denton 2013).

To extend theory within the portfolio context, we synthesize

literature from SCM and finance to focus on concentration and

balanced portfolio dependence. Concentration has been utilized

in both the SCM and finance literatures as an independent vari-

able, and gives us insight into the way a firm allocates business

to key customers and suppliers. Balanced portfolio dependence,

defined as the average degree of balance in dependence across

the top ncustomers and suppliers, respectively, helps us explore

whether the benefits of balanced relationships extend to credit

risk evaluations. We believe that these characteristics provide a

strong baseline for this research because they have been shown

to impact financial performance in the literature (Gulati and

Sytch 2007) and enable us to synthesize the disparate literatures

in management, SCM, and finance. Moreover, these two con-

structs are parts of relatively recent extensions (Gulati and Sytch

2007) of RDT (Pfeffer and Salancik 2003), enabling us to lever-

age rich theory and relate RDT to a new outcome.

Corresponding author:

Matthew A. Schwieterman, Department of Supply Chain Manage-

ment, Michigan State University, 632 Bogue Street, East Lansing,

MI 48824, USA; E-mail: matthew@msu.edu

Journal of Business Logistics, 2018, 39(2): 123–137 doi: 10.1111/jbl.12179

© Council of Supply Chain Management Professionals