Financial Dependence, Lean Inventory Strategy, and Firm Performance

• DOI: http://doi.org/10.1111/jscm.12136
• Date: 01 April 2017
• Published date: 01 April 2017

FINANCIAL DEPENDENCE, LEAN INVENTORY STRATEGY,

AND FIRM PERFORMANCE

*

ISAAC ELKING

University of Houston –Downtown

JOHN-PATRICK PARASKEVAS

Miami University

CURTIS GRIMM AND THOMAS CORSI

University of Maryland

ADAMS STEVEN

University of Massachusetts - Amherst

We conduct an empirical investigation of the impact of focal firm and

supplier financial dependence on focal firm financial performance using

the lens of resource dependence theory. We further investigate the moder-

ating impact of dependence asymmetry on the relationship between lean

inventory strategy and focal firm financial performance. We use an innova-

tive supply chain structure data set provided by Bloomberg, which allows

implementation of unique measures for focal firm and supplier financial

dependence within a supply chain. The results of an analysis of 3,638

buyer–supplier relationships provide support for the hypothesized direct

effects of focal firm financial dependence and supplier financial depen-

dence on firm financial performance. Our results also support our hypoth-

esis regarding the moderating effect of dependence asymmetry on the

relationship between lean inventory strategies on financial performance.

These findings both improve our understanding of the impact of depen-

dence on focal firm performance and shed light on the heretofore unstud-

ied impact of dependence asymmetry’s effect on the efficacy of lean

inventory strategies.

Keywords: power; lean inventory; dependence; resource dependence theory; buyer–

supplier relationships; archival data; econometric analysis

INTRODUCTION

The interface between buyer–supplier power asym-

metry and the effectiveness of lean inventory strategies

is an important issue for supply chain researchers and

managers. Lean inventory strategies have been exten-

sively studied and have been found to benefit firms

through cost reduction, superior operational perfor-

mance, and improved financial performance (Callen,

Fader & Krinsky, 2000). Trust between supply chain

partners is critical to the success of a lean inventory

strategy as firms must rely on each other for a steady

flow of goods or face operational disruptions (Steven-

son, 2007). However, trust and relationship develop-

ment between supply chain partners is hampered by

dependence asymmetry within relationships (Thye,

Lawler & Yoon, 2011). As such, understanding the

impact of power asymmetries on the effectiveness of

lean inventory strategies within buyer–supplier rela-

tionships is of critical importance.

More broadly, the increasing complexity and global

nature of sourcing decisions have led to a growing

*The first two authors are listed alphabetically and contributed

equally to this work.

Volume 53, Number 222

Journal of Supply Chain Management

2017, 53(2), 22–38

©2017 Wiley Periodicals, Inc.

interest in the study of power and dependence in sup-

ply chain relationships. Research suggests these depen-

dencies play a critical role in the success or failure of

outsourcing decisions (Tsai, Lai, Lloyd & Lin, 2012).

Scholars have further made valuable contributions to

our understanding of the role of dependence in sup-

ply chain relationships through conceptual papers

considering the role of power in the supply chain

(Crook & Combs, 2007; Ireland & Webb, 2007).

Empirical research in supply chain management has

also incorporated power and dependence in research

models (Cheng, 2011; Emery & Marques, 2011; Tsai

et al., 2012), relying primarily upon survey methodol-

ogy to test hypotheses (Nyaga, Lynch, Marshall &

Ambrose, 2013; Pulles, Veldman, Schiele & Sierksma,

2014; Terpend & Krause, 2015). However, the role of

financial dependence and its link to firm financial per-

formance in the context of a focal firm and its suppli-

ers remains unstudied, despite its interest and

importance to both scholars and practitioners.

In this article, we contribute to theory by exploring

the impact of focal firm financial dependence and sup-

plier financial dependence on firm performance as well

as the interface between buyer–supplier power symme-

try and lean inventory on firm performance. We iden-

tify focal firm financial dependence and supplier

financial dependence as yet unstudied constructs within

the supply chain dependence literature. We further

study the moderating role of dependence asymmetry

on the relationship between lean inventory strategies

and focal firm financial performance. We are the first to

investigate this moderating role, and this contribution

is particularly salient as just in time (JIT) and lean

inventory practices have become widespread in recent

years. We also contribute empirically and methodologi-

cally to the supply chain power literature by utilizing a

unique data set that enables us quantify the depen-

dence relationships between supply chain partners. The

next section details the article’s contribution to the liter-

ature and then proceeds with theory and hypotheses.

THEORY AND HYPOTHESES

Literature Background

Empirical researchers have provided foundational

insights into the effect of power on firms engaged in

supply chain relationships through the use of survey

data. Maloni and Benton (2000) investigate the

impact of mediated and nonmediated power on rela-

tionship strength, which then impacts firm perfor-

mance. They operationalize six constructs of power

based on the typology developed by French and

Raven (1959) and survey tier 1 suppliers of Chrysler

and Honda to test how the automakers’ use of differ-

ent types of power affects the suppliers’ view of the

strength of the relationship and its perceived impact

on automaker, supplier, and supply chain perfor-

mance. Similarly, Nyaga et al. (2013) survey execu-

tives at a large high-tech buying firm and their

suppliers to study supply chain dyads. They link the

deployment of different aspects of power and rela-

tional factors to the propensity of firms to engage in

collaborative and adaptive behavior, and the subse-

quent impacts on operational performance. Brown,

Lusch and Nicholson (1996) also employ a survey

methodology to consider the use of different types of

power on supply chain relationships, but add to the

literature stream by explicitly investigating the impact

of power asymmetries. They note that a dependent

party operates under the expectation that a powerful

supply chain partner may use their power in a coer-

cive manner, and, as such, the use of power does not

greatly affect the weaker member’s normative commit-

ment to the relationship.

We contribute to the dependence literature by utiliz-

ing yet untested dimensions of power, focal firm finan-

cial dependence and supplier financial dependence. We

also contribute to the dependence literature in terms of

how we operationalize and measure power and how

we operationalize and measure firm performance. As

indicated in Table 1, previous studies have used percep-

tual measures of power based on the taxonomy devel-

oped by French and Raven (1959), who identify

reward, legitimate, expert, referent, and coercive forms

of power. These studies employ survey methodologies

to estimate the levels of mediated and nonmediated

power within supply chain relationships. We utilize a

unique data set that allows us to quantify buyer finan-

cial dependence (the percentage of the focal firm’s cost

of goods sold spent with each supplier) and supplier

financial dependence (the percentage of total revenue

that each supplier within a focal firm’s supply base

receives from the focal firm). Additional detail regard-

ing these measures will be provided in the “Data and

Methodology” section. We further contribute to the

research of power and dependence in supply chains

through our use of buyer firm return on assets (ROA)

as a quantitative financial-dependent variable. Previous

literature has relied upon perceptual measures of sup-

ply chain and operational performance as demon-

strated by the examples given in Table 1.

Resource Dependence Theory and Power

Resource dependence theory provides a particularly

pertinent lens through which to examine the role of

relative power within a supply chain setting. The fun-

damental premise of resource dependence theory as

initially developed by Pfeffer and Salancik (1978) is

that firms must rely on external organizations to

obtain key resources. This dependence grants power

to a firm within an exchange relationship to the

degree that the other parties, such as suppliers and

April 2017

Dependence, Lean Inventory, and Performance

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