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.