Purpose – Researchers have long sought to understand how risks in supply chains (SCs) affect firm performance. Yet, they have not fully subjected claims of how SC risks affect firm financial performance to theoretical and empirical scrutiny. The purpose of this paper is to investigate the links between SC risks and firm financial performance.
Design/methodology/approach – The author analyzes how SC risks affect firm financial performance from the perspective of marginal financial performance (MFP) using survey and financial statement data. The author employs structural equation modeling to examine the hypotheses using 106 Taiwanese listed companies across 20 industries.
Findings – The findings regarding the importance of industry-specific risk, organizational risk, internal business process risk, and demand risk are consistent with prior studies. The author finds that demand risk has an MFP of −0.20, the highest negative effect among the risk variables. The findings also show that industry-specific risk possesses an MFP of −0.16, the second-highest negative effect, despite having no direct effect on financial performance.
Research limitations/implications – This paper examines how SC risks affect MFP via combining survey and financial statement data. It does not assume the reported MFP estimates apply to all businesses in other countries. However, future research could triangulate our findings.
Originality/value – This study combines survey and financial data to analyze how SC risks affect firm financial performance. Specifically, it provides a methodology for estimating quantitative cause-effect relationships between SC risk and firm financial performance, an important topic that receives less research interest in the field of supply chain management.
In modern business environments characterized by ever-increasing competition and globalization, managers use innovative technologies and strategies to achieve and sustain competitive advantages (Chan and Qi, 2003). Because supply chains (SCs) consist of all activities associated with the flow and transformation of goods from the raw material stage to the end user (Handfield and Nichols, 1999), effective supply chain risk management (SCRM) via coordination and collaboration among SC partners is key to ensuring profitability and continuity (Brindley, 2004; Tang, 2006). Not surprisingly, a considerable amount of literature has accumulated on the subject (e.g. Kleindorfer and Saad, 2005; Ritchie and Brindley, 2007; Rotaru et al., 2014; Zsidisin, 2003; Zsidisin and Ellram, 2003).
One recent finding, for example, is that two organization-level factors, perceived operational similarity and market leadership, significantly influence the risk manager’s likelihood of learning what might trigger other firms’ operational losses (Hora and Klassen, 2013). Another finding is that improved internal integration of core business processes within a company enhances demand visibility and thus decreases demand risk (Kache and Seuring, 2014).
Extensive studies in the SCM field develop SCRM models through examining and identifying the determinants of risk performance in SCs. However, few studies investigate how changes in SC risks affect firm financial performance. This study therefore develops a corporate SCR financial model based on the MFP perspective using the combined method of a survey and financial reports. Analysis of the SCR financial model reveals that demand risk produces the largest negative impact (MFP ¼ −0.20) on corporate financial performance, and industry-specific risk generates the second largest negative impact (MFP ¼ −0.16) on corporate financial performance, although itself without direct effect.
By adding to the benefits of existing SCRM models (e.g. Bavarsad et al., 2014; Cao and Zhang, 2011; Ghadge et al., 2013; Ritchie and Brindley, 2007; Tracey et al., 2005; Zhao et al., 2013), this study contributes a methodology for estimating the effects of SCRs on financial performance. Thus, this study addresses part of the fundamental improvement of SCRM performance models. Nonetheless, more research is needed to further clarify the nonsignificant impacts of organizational risk and supply risk on demand risk and corporate financial performance, respectively, although several possible explanations are provided.