Journal of Systems and Information Technology

Journal of Systems and Information Technology Emerald Article: Supply chain integration: an empirical study on manufacturing industry in Malaysia Ali Hussein Zolait, Abdul Razak Ibrahim, V.G.R. Chandran, Veera Pandiyan Kaliani Sundram

Article information: To cite this document: Ali Hussein Zolait, Abdul Razak Ibrahim, V.G.R. Chandran, Veera Pandiyan Kaliani Sundram, (2010),"Supply chain integration: an empirical study on manufacturing industry in Malaysia", Journal of Systems and Information Technology, Vol. 12 Iss: 3 pp. 210 - 221 Permanent link to this document: http://dx.doi.org/10.1108/13287261011070830 Downloaded on: 25-03-2012 References: This document contains references to 59 other documents To copy this document: [email protected] This document has been downloaded 875 times.

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Supply chain integration: an empirical study on manufacturing industry in Malaysia

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Ali Hussein Zolait and Abdul Razak Ibrahim University Malaya, Kuala Lumpur, Malaysia

V.G.R. Chandran Universiti Technologi Mara, Selangor, Malaysia, and

Veera Pandiyan Kaliani Sundram University Malaya, Kuala Lumpur, Malaysia Abstract Purpose – The purpose of this paper is to attempt to identify the relationship between supply chain process integration and firm performance. Design/methodology/approach – The dimension classification and measurement instrument of the framework adapted from the previous research focus on firm performance impacts of digitally enabled supply chain integration (SCI) capabilities. The study employed the quantitative method where convenience sampling and self-administered survey questionnaires were sent to 98 conference participants in Malaysia. The research framework was pre-tested using multivariate analysis. Findings – The findings reveal that all three dimensions of supply chain process integration were statistically significant to firm performance. Furthermore, information flow integration shows a greater influence than physical and financial flow integration. Research limitations/implications – This study focused on the manufacturing sector with respondents who were participants of a conference. Practical implications – The results offer insights to supply chain management practitioners and policy makers on the importance of SCI and information technology (IT) infrastructure to improve the competitiveness of manufacturing industry in terms of operational excellence, revenue growth and customer relationship. Originality/value – This study adds to the body of knowledge by providing new data and empirical insight on the relationship between SCI and firm performance specifically for the manufacturing industry in Malaysia. In addition, the findings may invite opportunities for comparative studies mainly with other industries as well as other developing and developed economies. Keywords Supply chain management, Manufacturing industries, Technology led strategy, Malaysia Paper type Research paper

Journal of Systems and Information Technology Vol. 12 No. 3, 2010 pp. 210-221 # Emerald Group Publishing Limited 1328-7265 DOI 10.1108/13287261011070830

1. Introduction Supply chain management (SCM) has captured the interest of many practitioners and scholars in recent years (Bechtel and Jayaram, 1997; Burgess et al., 2006). This popularity has been due to the fact that SCM is a vital element for operational success (Croom et al., 2000). SCM is an integration of various business processes such as demand planning and forecasting, procurement, manufacturing and assembly, distribution, management of resources and customer-focused process management (Lummus and Vokurka, 1999; Mentzer et al., 2001; New, 1997). However, in spite of the key role of supply chain integration (SCI) in the SCM phenomenon, limited scholarly investigation has been undertaken to present a theoretical viewpoint, supported by empirical evidence (Sahin and Powell, 2002) on how to enable SCI capability to yield performance gains for firms.

2. Purpose of study Although there is a wide range of literature on SCI, the area needs further research due to the lack of empirical evidence on the linkages between supply chain process integration and firm performance. To address the research gap we investigate ‘‘how information flow, financial flow and physical flow affects the capabilities of manufacturing firms in a developing country such as Malaysia.’’ This study attempts to empirically examine the link. Additionally, this empirical exercise also is intended to contribute to deepening the understanding of the conceptual framework established in previous studies (Rai et al., 2006; Appendix). This study has suggested the direct positive link between supply chain process integration and firm performance. In addition, this current study highlights that supply chain process integration is the restructuring activities that target the realigning of resources within and across firms, with the resource-based view (RBV) (Barney, 1991) as an underpinning theory. 3. Literature review The literature defines SCI as the degree of integration of core processes across organizational boundaries through improved communication, partnerships, alliances and cooperation (Power, 2005). It also includes the application of new technologies to improve information flows (Donk et al., 2008; Kim and Narasimhan, 2002), financial flow (Mabert and Venkataramanan, 1998) and coordinate the flow of physical goods (Childhouse and Towill, 2003; Donk et al., 2008) between supply chain partners. The concept of SCI has propelled continuous development in manufacturing (Cousins and Menguc, 2006; Donk et al., 2008). Firms are venturing on to integration activities, linking of suppliers, manufacturers and customers in order to obtain significant improvements in terms of cost efficiency and lead time (Exon-Taylor, 1996; Power, 2005). In relation to the types of performance measures, some authors measure performance of the entire supply chain (Lee et al., 2007; Li et al., 2009) or only deal with measuring the individual firm’s performance (Rai et al., 2006; Tracey and Tan, 2001). Some authors prefer using a mix of logistics or supply chain operational criteria as measurement indicators (Frohlich and Westbrook, 2001; Kim, 2006) and others are more inclined towards utilizing pure financial criteria as measurement indicators (Narasimhan and Kim, 2002; Rosenzweig et al., 2003; Vickery et al., 2003). As a consequence, there is no consensus regarding how performance is to be measured (Fabbe-Costes and Jahre, 2007). Further, to date, there have been few research studies on performance of others in the supply chain in addition to the focal firm. Performance studies in relation to SCI can be classified into three groups (Gimenez and Ventura, 2005). These are the relation between internal SCI and performance, between external SCI and performance or both types of SCI with regards to performance. Many research articles have clearly argued and have provided evidence concerning the positive impact of SCI on performance either through explicit (Frohlich and Westbrook, 2001; Rosenzweig et al., 2003) or implicit (Kim, 2006; Narasimhan and Kim, 2002) consideration. The next section describes how different types of SCI namely information, physical and financial flow relate to performance. 4. Research framework and hypotheses Attempts to frame the analytical investigation require a strong theoretical consideration and supportive review of literature to support the relationship between the variables under consideration. The research framework of this study is extensively based on previous research (Rai et al., 2006), primarily on the dimension classification

Supply chain integration

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Figure 1. Research framework

and measurement instrument. The underpinning theory of this research framework was based on the RBV of the firm (Barney, 1991). The resource-based theory of the firm emphasizes the management of internal resources to establish hard to imitate advantages (Barratt and Oke, 2007; Fawcett et al., 2007). In this respect, the supply chain organization needs to focus on the organizational skills and processes enhancement in delivering distinctive products and services. As such this enables the firms in the supply chain to develop competitive advantage and possess core competencies. This section provides the theoretical arguments for the conceptual framework established in this study. We relied mainly on the resource-based theory to link SCI and firm performance. The resource-based theory of the firm explicates the role firms’ internal resources impact on performance. The resource-based theory focuses on the unique bundle of resource that a firm possesses (Barney and Ouchi, 1986; Barney, 1991; Conner, 1991) which varies among firms (Penrose, 1959) (Wernerfelt, 1984, 1995). Because the nature of resources possessed by firms is heterogeneous, the differences in performance can be attributed to the different resources owned by the firms. The frequently noted firm resources are the intangibles. This includes the knowledge, experience and skills of employees, technological resources, capabilities that include management and organizational capability (Praest, 1998). Indeed, due to the changing nature of the environment, scholars (Teece et al., 1997) turned their attention to the role of the dynamic capabilities or resources. Prahalad and Hamel (1990), among others, emphasize a firm’s basic competence, which includes coordination of different types of production knowledge, and the competence of integrating multiple technological flows. This has lead scholars (Barney and Ouchi, 1986; Barney, 1991; Conner, 1991; Penrose, 1959; Teece et al., 1997) to look for the uniqueness that an organization has that contributes to performance. Hence, issues like environment (market competition), internal factors, firm strategy, structure, system and people, competence and capabilities and assets size and financial capabilities have become the explanatory factors in explaining performance. Overall, the resources owned by firms that include the tangibles and intangibles are seen as the source of performance gains. Among the resources, the SCM capability of firms is vital (Maheshwari et al., 2006; Sanchez-Rodrıguez et al., 2005; Sari, 2008; Trkman et al., 2007). Hence, integrating the different views of scholars within the RBV may provide a better understanding on the issues of SCI and performance. Based on the study’s objectives and approaches, the following conceptual model can be drawn (Figure 1). As for Figure 1, schematically represents the research model. The

firm performance was dependent on the variables of supply chain process integration such as information flow integration, physical flow integration and financial flow integration. Whereas, the dependent variable, firm performance was operationalized by operational excellence, customer relationships and revenue growth. This study examines the relationship between a firm performance and supply chain process integration which includes flow integration, physical flow integration and financial flow integration. From the above model, the following hypotheses will be tested: H1.

The financial flow integration has a positive relationship with firm performances. According to Rai et al. (2006), financial flow integration is defined as the extent to which exchange of financial resources between a focal firm and its supply chain partners is driven by workflow events. This includes all activities required to facilitate the flow of funds across the supply chain, including invoicing customers, paying suppliers and internal transfers (Johnson and Mena, 2008). This implies that effective flow of funds across the supply chain improves cash conversion cycle or cash-to-cash cycle through reduced days-in-inventory, shortened days-in-receivables and prolonged days-in-payables (Tsai, 2008). Eventually, the financial flow optimization (Comellia et al., 2008) will make possible shareholders satisfaction and the supply chain working improvement. As such, effective and efficient management of financial flow integration is essential to improve the supply chain performance (Wong et al., 2009).

H2.

The physical flow integration has a positive relationship with firm performances. Rai et al. (2006) defines physical flow integration as the extent to which a focal firm uses global optimization with its supply chain partners to manage the flow of materials and finished goods from the point of origin (ultimate supplier), to the point of destination (ultimate customer). This implies that suppliers can be integrated with the internal processes of their customers in an effort to improve quality and reduce costs (Koufteros, 2005). Physical flow integration improves the productivity of manufactures (focal firm) through reduction in production cost, effective just-in-time inventory management and improved supplier management (Levy et al., 1995). In the long run this enables firms to gain order winning capabilities and better customer services (Quesada et al., 2008). As such physical flow integration makes a significant contribution to the firms performance (Ganeshan et al., 2001; Zailani and Rajagopal, 2005) and finally to the total supply chain members (Zelbst et al., 2009).

H3.

The information flow integration has a positive relationship with firm performances. Information flow integration is defined as the extent to which information is shared between a focal firm and its supply chain partners (Rai et al., 2006). According to (Lee et al., 2007), information sharing within business units, across supply chain partners such as suppliers and other strategic alliances is essential to perform three major linkages: supplier linkage, internal linkage and customer linkage. In particular, this integration through effective and efficient information flow will eventually lead the firm and total supply chain to better performance (Narasimhan and Kim, 2002; Palsson and Johansson, 2009). Past studies (Du, 2007; Gunasekaran and Ngai, 2004; Kim and Narasimhan, 2002) reported


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positive relationships between the level of information flow integration and performance. As such increasing the level of integration and information sharing (Sezen, 2008; Trkman et al., 2007) among the members of a supply chain has become a necessity for improving the effectiveness of the supply chain. 5. Methodology – survey instrument development A survey instrument was designed based on the two main constructs: SCI and firm performance. The measurement and scale for each construct is obtained from previous literature (Rai et al., 2006) (Appendix). Respondents are asked to indicate the performance of their firm in terms operational excellence, customer relationship and revenue growth as compared to their competitors. As such a semantic comparison scale was used, indicating ‘‘much better than average,’’ ‘‘better than average,’’ ‘‘same as competitors-average,’’ ‘‘slightly less than average’’ or ‘‘much less than average.’’ Whereas items associated to SCI construct used a seven-item Likert-type scale. Respondents were asked to state their agreement with a given statement on a scale that ranged from ‘‘strongly agree’’ to ‘‘strongly disagree’’ with its midpoint anchored as ‘‘neither agree nor disagree.’’ 6. Data collection of sample The unit of analysis employed in this study is organization or firm, which primarily refers to the focal firm of the supply chain. Therefore, multiple responses from each firm are not allowed in this study. The sampling frame of supply chain and logistics managers was compiled from the list of attendees of the annual conference of the Chartered Institute of Logistics and Transport, Malaysia. Target respondents for the survey were the senior or middle managers with direct responsibility for SCM or logistics function in the organization, as these individuals were knowledgeable enough to effectively respond to all of the scale items. Questionnaires were distributed to all the 98 participants of the conference. Later, 48 questionnaires were found not valid due to the fact of multiple responses from some firms, some respondents that did not belong to manufacturing industries were removed and incomplete questionnaires were eliminated. As a result, total valid and usable questionnaires were only from 50 manufacturing firms’ respondents (adjusted sample size). The research framework was pre-tested using respondents from manufacturing organizations and to avoid response biases responses from the pilot test were not included in the final multivariate analysis. 7. Measurement of variables Based on the main purpose of study, there are two main variables, SCI and firm performance. The collective evidence from past literatures suggested that the constructs demonstrate good measurement properties. Table I summarizes the variables and measurement items and the number of indicators associated with each sub-construct.

Table I. Measurement of variable

Variable

Dimensions


Financial flow integration Physical flow integration Information flow integration Operations excellence Customer relationship Revenue growth

Firm performance

Items 2 4 5 3 2 2

8. Data analysis and findings Demographic data showed in Table II depict that the majority of the firms’ respondents are from industrial electrical and electronics producers as they represent 53 percent of firm types. Geographically, the majority of the firms’ respondents are from northern and southern region of Malaysia. The typical number of employees is between 101 and 500. Almost all the selected firms for this study are between five and 20 years of operational experience. Table III shows descriptive statistics for each dimension. The result indicates that information flow integration is important (with the highest mean score, i.e. M ¼ 3.92, SD ¼ 0.56) and is the most dominant factor to influence the firm performance and evident to a considerable extent, followed by physical flow integration (M ¼ 3.73, SD ¼ 0.61) and financial flow integration (M ¼ 3.69, SD ¼ 0.60). Furthermore, the degree of SCI on the firms’ performance was largely positive. The standard deviation was quite high, indicating the dispersion in a widely spread distribution. This means that the effect of SCI on firms’ performance is an approximation to a normal distribution. This also indicates that responding firms had high levels of performance. As such the above findings concurred and corresponded well with previous studies (Gunasekaran and Ngai, 2004; Kim and Narasimhan, 2002; Sezen, 2008) which implicate the profound importance of information flow integration in determining the firm’s performance in various business sectors, primarily in the manufacturing industry. Consequently (Du, 2007; Fabbe-Costes and Jahre, 2007; Sezen, 2008; Stonebraker and Liao, 2006), this is due to the process of global campaigning that connects technology and speed, supply chain process integration is the new model for enterprises to practice. Under this new model, the enterprises should think deeply about how the global marketplace integrates production, purchasing, logistics supporting, product designing and marketing well enough to respond to the customer’s immediate demands. This would create the biggest synergy, Business description

(%)

Number of employees

(%)

Electrical Electronic Wood Chemical Food Annual sales Less than 1 million 1-5 million 5-10 million 10-50 million 50-100 million More than 100 million

26.3 26.3 13.2 21.0 13.2

Fewer than 50 50-100 101-250 251-500 501 or greater Operating experience Less 1 year 1-5 years 6-10 years 10-15 years 15-20 years More than 20 years

– 13.2 18.4 39.5 28.9

Dimension Financial flow integration Physical flow integration Information flow integration Firm performance

– 18.4 23.7 34.2 15.8 7.9

– 5.3 13.2 39.5 34.2 7.8

Mean

Standard deviation

3.69 3.73 3.92 3.76

0.60 0.61 0.56 0.59


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Table II. Description of the respondent firms

Table III. Descriptive statistic analysis

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Table IV. Multiple regression analysis

achieving better performance by lowering operating costs, inventory pressure and risk. For this reason, many firms have established strong relationships with their supply chain members in the global marketplaces to archive better integration. Research hypotheses were tested using a multiple regression analysis. It is a useful technique that can be used to analyze the relationship between a single dependent (criterion) variable and several independent variables (predictor or explanatory) at one time. In this analysis, a set of independent variables is weighted to form the regression variate (regression equation or model) and that may be used to explain its relative contribution toward one dependent variable (Hair et al., 1995). This analysis was undertaken to better understand the relationship between SCI and firms’ performance. The summary of the result analysis is depicted in Table III. As noted in Table IV, H1 measures supply chain process integration and its association with firms’ performance. This hypothesis states that firms exposed to high levels of supply chain process integration will experience high levels of firm performance. The F-statistics produced (F ¼ 32.29) which was significance at 1 percent level (Sig. F ¼ 0.000), thus confirming the fitness for the model. The coefficient of determination R2 was 41.9 percent. This expresses that supply chain process integration can significantly account for 41.9 percent of firm performance. Thus, H1 was partially supported. The results also indicated that there were three dimensions of SCI; namely, financial flow, physical flow and information flow which are positively associated with firm performance. It can be argued that these three dimensions of SCI focus on: financial flow integration (p < 0.05), physical flow integration (i < 0.05) and information flow integration (p < 0.01), and are all directly involved in the improvements of firm performance. Moreover, the findings also indicate that the most important SCI practices that explain the variance in firm performance was information flow and was significant at the 1 percent level (p < 0.01). The result suggested that supply chain process integration yields sustained gains in firm performance, particularly operational excellence and revenue growth. These findings have significant implications for the management of supply chain process integration, as it needs to be focused and leveraged to create performance gains by using lower-order technology capabilities to enable higher-order process integration capabilities in firm performance. The greater degree of SCI is strongly associated with higher levels of performance, which has been a prevalent assumption behind much of the supply chain literature (Briscoe and Dainty, 2005; Childhouse and Towill, 2003; Neuman and Samuels, 1996; Quesada et al., 2008; Samaranayake, 2005; Stonebraker and Liao, 2006). However, most previous studies have focused on using information technology to improve the effectiveness of SCM (Gunasekaran and Ngai, 2004; Kim and Narasimhan, 2002; Sezen, 2008). Variables

Beta

t-value

Sig. coefficient

Result

Constant Financial flow integration Physical flow integration Information flow integration

0.161 0.164 0.339

2.390 2.372 1.984 5.145

0.02 0.02 0.04 0.00

Accept Accept Accept

Notes: Overall model F ¼ 32.29; R2 ¼ 0.419; adjusted R2 ¼ 0.406

9. Conclusion These findings have some important implications for theory and managerial practice. In terms of theory, organizations should consider more options for vertical integration, either backward or forward integration as part of their business operational strategy along the supply chain. This study highlighted the achievement of supply chain strategy through upstream and downstream integration as part of the manufacturing strategy. In addition, several significant contributions in terms of managerial implications are also purported. First, managers in manufacturing firms whom are not to totally involved in the initiative of supply chain process integration should start aggressively managing supply chain process integration. Second, manufacturers who are already following this approach but at a slow pace of execution should move rapidly to enhance information flow integration followed by physical flow and financial flow integration across supply chain. Eventually, this improvement in firm performance will give the overall manufacturing industry in Malaysia a leading edge of competitiveness and indirectly will provide more attraction in relation to foreign direct investment. In Malaysia, governments should aggressively facilitate developments of information, communication and technology (ICT). More promising ICT policy should be developed to facilitate the information technology infrastructures adoption by manufacturing firms. This is essential to enhance the usage of the Internet and webbased applications to facilitate the collaboration and integration across the parents of the supply chain. Hence, manufacturers as the focal firm in the supply chain can have an effective on efficient flow of information, physical flow and financial flow. This study draws on data from the manufacturing industry, mainly electrical, electronic, wood, and chemical and food. Therefore these specific industries have specific characteristics of supply chains which do not apply to other sectors. Sector-specific studies of supply chain process integration and their relation to firm performance improvement will potentially yield different insights. Since this study primarily focused on manufacturing, future research might also include data for the purpose of comparative study mainly with other industries as well as other developing and developed economies. Finally, this study had a narrow focus on the manufacturing industry with a small sample size of respondents who were participants of a conference, and this might lead to response bias. Moreover, to increase the scientific validity of the research, a sample of respondents should be taken along supply chain members of one particular product line, rather the just a focal firm in a supply chain. This reflects more holistic methodological approaches in identifying the true relationship between the supply chain process integration and firm performance. References Barney, J.B. (1991), ‘‘Firm resources and sustained competitive advantage’’, Journal of Management, Vol. 17 No. 1, pp. 99-120. Barney, J.B. and Ouchi, W. (1986), Organizational Economics: Towards a New Paradigm for Studying and Understanding Organizations, Jossey-Bass Publishers, San Francisco, CA. Barratt, M. and Oke, A. (2007), ‘‘Antecedents of supply chain visibility in retail supply chains: a resource-based theory perspective’’, Journal of Operations Management, Vol. 25, pp. 1217-33. Bechtel, C. and Jayaram, J. (1997), ‘‘Supply chain management: a strategic perspective’’, The International Journal of Logistics Management, Vol. 8 No. 1, pp. 15-34. Briscoe, G. and Dainty, A. (2005), ‘‘Construction supply chain integration: an elusive goal?’’, Supply Chain Management: An International Journal, Vol. 10 Nos. 3/4, pp. 319-26.


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Appendix Construct

Definition

Items

Financial flow integration

The degree to which financial flows between a focal firm and its supply chain partners is driven by workflow events

Account receivables processes are automatically triggered when we ship to our customers Account payable processes are automatically triggered when we receive supplies from our suppliers Inventory holdings are minimized across the supply chain Supply chain-wide inventory is jointly managed with suppliers and logistics partners (e.g. UPS, FedEx) Suppliers and logistics partners deliver products and materials just in time Distribution networks are configured to minimize total supply chain-wide inventory costs Production and delivery schedules are shared across the supply chain Performance metrics are shared across the supply chain Supply chain members collaborate in arriving at demand forecasts Our downstream partners (e.g. distributors, wholesalers, retailers) share their actual sales data with us Inventory data are visible at all steps across the supply chain Product delivery cycle time Timeliness of after sales service Productivity improvements (e.g., assets, operating costs, labor costs) Strong and continuous bond with customers Precise knowledge of customer buying patterns Increasing sales of existing products Finding new revenue streams (e.g. new products, new markets)

Physical flow integration

The degree to which a focal firm uses global optimization with its supply chain partners to manage the stocking and flow of materials and finished goods

Information flow The extent of operational, tactical integration and strategic information sharing that occurs between a focal firm and its supply chain partners

Operations excellence Customer relationship Revenue growth

The degree to which a focal firm is better than its competitors in its responsiveness and generation of productivity improvements. The degree to which the focal firm’s relationship with customers and information about their preferences is better than its competitors The degree to which the focal firm’s increase in revenue from current and new products and markets is more than its competitors

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Table AI. Source: Rai et al. (2006)

Corresponding author Ali Hussein Zolait can be contacted at: [email protected]

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Construct measurements