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Journal of Systems and InformationTechnologyVol. 12 No. 3, 2010pp. 210-221# Emerald Group Publishing Limited1328-7265DOI 10.1108/13287261011070830

Supply chain integration: anempirical study on manufacturing

industry in MalaysiaAli Hussein Zolait and Abdul Razak Ibrahim

University Malaya, Kuala Lumpur, Malaysia

V.G.R. ChandranUniversiti Technologi Mara, Selangor, Malaysia, and

Veera Pandiyan Kaliani SundramUniversity Malaya, Kuala Lumpur, Malaysia

Abstract

Purpose – The purpose of this paper is to attempt to identify the relationship between supply chainprocess integration and firm performance.Design/methodology/approach – The dimension classification and measurement instrument ofthe framework adapted from the previous research focus on firm performance impacts of digitallyenabled supply chain integration (SCI) capabilities. The study employed the quantitative methodwhere convenience sampling and self-administered survey questionnaires were sent to 98 conferenceparticipants in Malaysia. The research framework was pre-tested using multivariate analysis.Findings – The findings reveal that all three dimensions of supply chain process integration werestatistically significant to firm performance. Furthermore, information flow integration shows agreater influence than physical and financial flow integration.Research limitations/implications – This study focused on the manufacturing sector withrespondents who were participants of a conference.Practical implications – The results offer insights to supply chain management practitioners andpolicy makers on the importance of SCI and information technology (IT) infrastructure to improvethe competitiveness of manufacturing industry in terms of operational excellence, revenue growthand customer relationship.Originality/value – This study adds to the body of knowledge by providing new data and empiricalinsight on the relationship between SCI and firm performance specifically for the manufacturingindustry in Malaysia. In addition, the findings may invite opportunities for comparative studiesmainly 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

1. IntroductionSupply chain management (SCM) has captured the interest of many practitionersand scholars in recent years (Bechtel and Jayaram, 1997; Burgess et al., 2006). Thispopularity 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 asdemand 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 thekey role of supply chain integration (SCI) in the SCM phenomenon, limited scholarlyinvestigation has been undertaken to present a theoretical viewpoint, supported byempirical evidence (Sahin and Powell, 2002) on how to enable SCI capability to yieldperformance gains for firms.

The current issue and full text archive of this journal is available atwww.emeraldinsight.com/1328-7265.htm

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2. Purpose of studyAlthough there is a wide range of literature on SCI, the area needs further researchdue to the lack of empirical evidence on the linkages between supply chain processintegration and firm performance. To address the research gap we investigate ‘‘howinformation flow, financial flow and physical flow affects the capabilities ofmanufacturing firms in a developing country such as Malaysia.’’ This study attemptsto empirically examine the link. Additionally, this empirical exercise also is intended tocontribute to deepening the understanding of the conceptual framework established inprevious studies (Rai et al., 2006; Appendix). This study has suggested the directpositive link between supply chain process integration and firm performance. Inaddition, this current study highlights that supply chain process integration is therestructuring 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 reviewThe literature defines SCI as the degree of integration of core processes acrossorganizational boundaries through improved communication, partnerships, alliancesand cooperation (Power, 2005). It also includes the application of new technologies toimprove information flows (Donk et al., 2008; Kim and Narasimhan, 2002), financialflow (Mabert and Venkataramanan, 1998) and coordinate the flow of physical goods(Childhouse and Towill, 2003; Donk et al., 2008) between supply chain partners. Theconcept of SCI has propelled continuous development in manufacturing (Cousins andMenguc, 2006; Donk et al., 2008). Firms are venturing on to integration activities, linkingof suppliers, manufacturers and customers in order to obtain significant improvementsin terms of cost efficiency and lead time (Exon-Taylor, 1996; Power, 2005).

In relation to the types of performance measures, some authors measureperformance of the entire supply chain (Lee et al., 2007; Li et al., 2009) or only deal withmeasuring 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 asmeasurement indicators (Frohlich and Westbrook, 2001; Kim, 2006) and others aremore inclined towards utilizing pure financial criteria as measurement indicators(Narasimhan and Kim, 2002; Rosenzweig et al., 2003; Vickery et al., 2003). As aconsequence, there is no consensus regarding how performance is to be measured(Fabbe-Costes and Jahre, 2007). Further, to date, there have been few research studieson 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 (Gimenezand Ventura, 2005). These are the relation between internal SCI and performance,between external SCI and performance or both types of SCI with regards toperformance. Many research articles have clearly argued and have provided evidenceconcerning the positive impact of SCI on performance either through explicit (Frohlichand Westbrook, 2001; Rosenzweig et al., 2003) or implicit (Kim, 2006; Narasimhan andKim, 2002) consideration. The next section describes how different types of SCI namelyinformation, physical and financial flow relate to performance.

4. Research framework and hypothesesAttempts to frame the analytical investigation require a strong theoreticalconsideration and supportive review of literature to support the relationship betweenthe variables under consideration. The research framework of this study is extensivelybased on previous research (Rai et al., 2006), primarily on the dimension classification

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and measurement instrument. The underpinning theory of this research frameworkwas based on the RBV of the firm (Barney, 1991). The resource-based theory of thefirm emphasizes the management of internal resources to establish hard to imitateadvantages (Barratt and Oke, 2007; Fawcett et al., 2007). In this respect, the supply chainorganization needs to focus on the organizational skills and processes enhancement indelivering distinctive products and services. As such this enables the firms in the supplychain to develop competitive advantage and possess core competencies.

This section provides the theoretical arguments for the conceptual frameworkestablished in this study. We relied mainly on the resource-based theory to link SCI andfirm performance. The resource-based theory of the firm explicates the role firms’ internalresources impact on performance. The resource-based theory focuses on the uniquebundle of resource that a firm possesses (Barney and Ouchi, 1986; Barney, 1991; Conner,1991) which varies among firms (Penrose, 1959) (Wernerfelt, 1984, 1995). Because thenature of resources possessed by firms is heterogeneous, the differences in performancecan be attributed to the different resources owned by the firms. The frequently notedfirm resources are the intangibles. This includes the knowledge, experience and skillsof employees, technological resources, capabilities that include management andorganizational capability (Praest, 1998). Indeed, due to the changing nature of theenvironment, scholars (Teece et al., 1997) turned their attention to the role of the dynamiccapabilities or resources. Prahalad and Hamel (1990), among others, emphasize a firm’sbasic 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) tolook 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 capabilitieshave become the explanatory factors in explaining performance.

Overall, the resources owned by firms that include the tangibles and intangibles areseen as the source of performance gains. Among the resources, the SCM capability offirms 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 RBVmay provide a better understanding on the issues of SCI and performance.

Based on the study’s objectives and approaches, the following conceptual model canbe drawn (Figure 1). As for Figure 1, schematically represents the research model. The

Figure 1.Research framework

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firm performance was dependent on the variables of supply chain process integrationsuch as information flow integration, physical flow integration and financial flowintegration. Whereas, the dependent variable, firm performance was operationalizedby operational excellence, customer relationships and revenue growth.

This study examines the relationship between a firm performance and supply chainprocess integration which includes flow integration, physical flow integration andfinancial flow integration. From the above model, the following hypotheses will be tested:

H1. The financial flow integration has a positive relationship with firmperformances.

According to Rai et al. (2006), financial flow integration is defined as the extent towhich exchange of financial resources between a focal firm and its supply chainpartners is driven by workflow events. This includes all activities required tofacilitate the flow of funds across the supply chain, including invoicingcustomers, paying suppliers and internal transfers (Johnson and Mena, 2008).This implies that effective flow of funds across the supply chain improvescash 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 makepossible shareholders satisfaction and the supply chain working improvement.As such, effective and efficient management of financial flow integration isessential to improve the supply chain performance (Wong et al., 2009).

H2. The physical flow integration has a positive relationship with firmperformances.

Rai et al. (2006) defines physical flow integration as the extent to which a focalfirm uses global optimization with its supply chain partners to manage the flowof materials and finished goods from the point of origin (ultimate supplier), tothe point of destination (ultimate customer). This implies that suppliers can beintegrated with the internal processes of their customers in an effort to improvequality and reduce costs (Koufteros, 2005). Physical flow integration improvesthe productivity of manufactures (focal firm) through reduction in productioncost, effective just-in-time inventory management and improved suppliermanagement (Levy et al., 1995). In the long run this enables firms to gain orderwinning capabilities and better customer services (Quesada et al., 2008). Assuch physical flow integration makes a significant contribution to the firmsperformance (Ganeshan et al., 2001; Zailani and Rajagopal, 2005) and finally tothe total supply chain members (Zelbst et al., 2009).

H3. The information flow integration has a positive relationship with firmperformances.

Information flow integration is defined as the extent to which information isshared between a focal firm and its supply chain partners (Rai et al., 2006).According to (Lee et al., 2007), information sharing within business units, acrosssupply chain partners such as suppliers and other strategic alliances is essentialto perform three major linkages: supplier linkage, internal linkage and customerlinkage. In particular, this integration through effective and efficient informationflow 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 andperformance. As such increasing the level of integration and information sharing(Sezen, 2008; Trkman et al., 2007) among the members of a supply chain hasbecome a necessity for improving the effectiveness of the supply chain.

5. Methodology – survey instrument developmentA survey instrument was designed based on the two main constructs: SCI and firmperformance. The measurement and scale for each construct is obtained from previousliterature (Rai et al., 2006) (Appendix). Respondents are asked to indicate the performanceof their firm in terms operational excellence, customer relationship and revenue growth ascompared to their competitors. As such a semantic comparison scale was used, indicating‘‘much better than average,’’ ‘‘better than average,’’ ‘‘same as competitors-average,’’ ‘‘slightlyless than average’’ or ‘‘much less than average.’’ Whereas items associated to SCI constructused a seven-item Likert-type scale. Respondents were asked to state their agreement witha given statement on a scale that ranged from ‘‘strongly agree’’ to ‘‘strongly disagree’’ withits midpoint anchored as ‘‘neither agree nor disagree.’’

6. Data collection of sampleThe unit of analysis employed in this study is organization or firm, which primarilyrefers to the focal firm of the supply chain. Therefore, multiple responses from eachfirm are not allowed in this study. The sampling frame of supply chain and logisticsmanagers was compiled from the list of attendees of the annual conference of theChartered Institute of Logistics and Transport, Malaysia. Target respondents for thesurvey were the senior or middle managers with direct responsibility for SCM orlogistics function in the organization, as these individuals were knowledgeable enoughto effectively respond to all of the scale items. Questionnaires were distributed to all the98 participants of the conference. Later, 48 questionnaires were found not valid due tothe fact of multiple responses from some firms, some respondents that did not belongto manufacturing industries were removed and incomplete questionnaires wereeliminated. As a result, total valid and usable questionnaires were only from 50manufacturing firms’ respondents (adjusted sample size). The research framework waspre-tested using respondents from manufacturing organizations and to avoid responsebiases responses from the pilot test were not included in the final multivariate analysis.

7. Measurement of variablesBased on the main purpose of study, there are two main variables, SCI and firmperformance. The collective evidence from past literatures suggested that the constructsdemonstrate good measurement properties. Table I summarizes the variables andmeasurement items and the number of indicators associated with each sub-construct.

Table I.Measurement ofvariable

Variable Dimensions Items

Supply chain integration Financial flow integration 2Physical flow integration 4Information flow integration 5

Firm performance Operations excellence 3Customer relationship 2Revenue growth 2

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8. Data analysis and findingsDemographic data showed in Table II depict that the majority of the firms’ respondentsare from industrial electrical and electronics producers as they represent 53 percent of firmtypes. Geographically, the majority of the firms’ respondents are from northern andsouthern 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 operationalexperience.

Table III shows descriptive statistics for each dimension. The result indicates thatinformation 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 andevident 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, thedegree of SCI on the firms’ performance was largely positive. The standard deviation wasquite high, indicating the dispersion in a widely spread distribution. This means that theeffect of SCI on firms’ performance is an approximation to a normal distribution. Thisalso indicates that responding firms had high levels of performance. As such the abovefindings concurred and corresponded well with previous studies (Gunasekaran and Ngai,2004; Kim and Narasimhan, 2002; Sezen, 2008) which implicate the profound importanceof information flow integration in determining the firm’s performance in various businesssectors, primarily in the manufacturing industry. Consequently (Du, 2007; Fabbe-Costesand Jahre, 2007; Sezen, 2008; Stonebraker and Liao, 2006), this is due to the process ofglobal campaigning that connects technology and speed, supply chain processintegration is the new model for enterprises to practice. Under this new model, theenterprises should think deeply about how the global marketplace integrates production,purchasing, logistics supporting, product designing and marketing well enough torespond to the customer’s immediate demands. This would create the biggest synergy,

Table II.Description of therespondent firms

Business description (%) Number of employees (%)

Electrical 26.3 Fewer than 50 –Electronic 26.3 50-100 13.2Wood 13.2 101-250 18.4Chemical 21.0 251-500 39.5Food 13.2 501 or greater 28.9

Annual sales Operating experienceLess than 1 million – Less 1 year –1-5 million 18.4 1-5 years 5.35-10 million 23.7 6-10 years 13.210-50 million 34.2 10-15 years 39.550-100 million 15.8 15-20 years 34.2More than 100 million 7.9 More than 20 years 7.8

Table III.Descriptive statistic

analysis

Dimension Mean Standard deviation

Financial flow integration 3.69 0.60Physical flow integration 3.73 0.61Information flow integration 3.92 0.56Firm performance 3.76 0.59

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achieving better performance by lowering operating costs, inventory pressure and risk.For this reason, many firms have established strong relationships with their supply chainmembers in the global marketplaces to archive better integration.

Research hypotheses were tested using a multiple regression analysis. It is a usefultechnique that can be used to analyze the relationship between a single dependent(criterion) variable and several independent variables (predictor or explanatory) at onetime. In this analysis, a set of independent variables is weighted to form the regressionvariate (regression equation or model) and that may be used to explain its relativecontribution toward one dependent variable (Hair et al., 1995). This analysis wasundertaken 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 associationwith firms’ performance. This hypothesis states that firms exposed to high levels of supplychain process integration will experience high levels of firm performance. The F-statisticsproduced (F ¼ 32.29) which was significance at 1 percent level (Sig. F ¼ 0.000), thusconfirming 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 41.9percent of firm performance. Thus, H1 was partially supported.

The results also indicated that there were three dimensions of SCI; namely, financialflow, physical flow and information flow which are positively associated with firmperformance. It can be argued that these three dimensions of SCI focus on: financialflow integration (p < 0.05), physical flow integration (i < 0.05) and information flowintegration (p < 0.01), and are all directly involved in the improvements of firmperformance. Moreover, the findings also indicate that the most important SCIpractices that explain the variance in firm performance was information flow and wassignificant at the 1 percent level (p < 0.01).

The result suggested that supply chain process integration yields sustained gainsin firm performance, particularly operational excellence and revenue growth. Thesefindings have significant implications for the management of supply chain processintegration, as it needs to be focused and leveraged to create performance gains byusing lower-order technology capabilities to enable higher-order process integrationcapabilities in firm performance. The greater degree of SCI is strongly associated withhigher levels of performance, which has been a prevalent assumption behind much ofthe supply chain literature (Briscoe and Dainty, 2005; Childhouse and Towill, 2003;Neuman and Samuels, 1996; Quesada et al., 2008; Samaranayake, 2005; Stonebrakerand Liao, 2006). However, most previous studies have focused on using informationtechnology to improve the effectiveness of SCM (Gunasekaran and Ngai, 2004; Kim andNarasimhan, 2002; Sezen, 2008).

Table IV.Multiple regressionanalysis

Variables Beta t-value Sig. coefficient Result

Constant 2.390 0.02Financial flow integration 0.161 2.372 0.02 AcceptPhysical flow integration 0.164 1.984 0.04 AcceptInformation flow integration 0.339 5.145 0.00 Accept

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

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9. ConclusionThese findings have some important implications for theory and managerial practice. Interms of theory, organizations should consider more options for vertical integration,either backward or forward integration as part of their business operational strategyalong the supply chain. This study highlighted the achievement of supply chain strategythrough upstream and downstream integration as part of the manufacturing strategy. Inaddition, several significant contributions in terms of managerial implications are alsopurported. First, managers in manufacturing firms whom are not to totally involved inthe initiative of supply chain process integration should start aggressively managingsupply chain process integration. Second, manufacturers who are already following thisapproach but at a slow pace of execution should move rapidly to enhance informationflow integration followed by physical flow and financial flow integration across supplychain. Eventually, this improvement in firm performance will give the overallmanufacturing industry in Malaysia a leading edge of competitiveness and indirectlywill provide more attraction in relation to foreign direct investment.

In Malaysia, governments should aggressively facilitate developments ofinformation, communication and technology (ICT). More promising ICT policy shouldbe developed to facilitate the information technology infrastructures adoption bymanufacturing firms. This is essential to enhance the usage of the Internet and web-based applications to facilitate the collaboration and integration across the parents ofthe supply chain. Hence, manufacturers as the focal firm in the supply chain can havean 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 specificcharacteristics of supply chains which do not apply to other sectors. Sector-specific studiesof supply chain process integration and their relation to firm performance improvementwill potentially yield different insights. Since this study primarily focused onmanufacturing, future research might also include data for the purpose of comparativestudy 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 smallsample size of respondents who were participants of a conference, and this might leadto response bias. Moreover, to increase the scientific validity of the research, a sampleof respondents should be taken along supply chain members of one particular productline, rather the just a focal firm in a supply chain. This reflects more holisticmethodological approaches in identifying the true relationship between the supplychain process integration and firm performance.

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Appendix

Corresponding authorAli Hussein Zolait can be contacted at: alizolait@gmail.com

Construct Definition Items

Financial flowintegration

The degree to which financial flowsbetween a focal firm and its supplychain partners is driven by workflowevents

Account receivables processes areautomatically triggered when we ship toour customersAccount payable processes areautomatically triggered when we receivesupplies from our suppliers

Physical flowintegration

The degree to which a focal firmuses global optimization with itssupply chain partners to manage thestocking and flow of materials andfinished goods

Inventory holdings are minimized acrossthe supply chainSupply chain-wide inventory is jointlymanaged with suppliers and logisticspartners (e.g. UPS, FedEx)Suppliers and logistics partners deliverproducts and materials just in timeDistribution networks are configuredto minimize total supply chain-wideinventory costs

Information flowintegration

The extent of operational, tacticaland strategic information sharingthat occurs between a focal firm andits supply chain partners

Production and delivery schedules areshared across the supply chainPerformance metrics are shared acrossthe supply chainSupply chain members collaborate inarriving at demand forecastsOur downstream partners (e.g.distributors, wholesalers, retailers) sharetheir actual sales data with usInventory data are visible at all stepsacross the supply chain

Operationsexcellence

The degree to which a focal firm isbetter than its competitors in itsresponsiveness and generation ofproductivity improvements.

Product delivery cycle timeTimeliness of after sales serviceProductivity improvements (e.g., assets,operating costs, labor costs)

Customerrelationship

The degree to which the focal firm’srelationship with customers andinformation about their preferences isbetter than its competitors

Strong and continuous bond withcustomersPrecise knowledge of customer buyingpatterns

Revenue growth The degree to which the focal firm’sincrease in revenue from current andnew products and markets is morethan its competitors

Increasing sales of existing productsFinding new revenue streams (e.g. newproducts, new markets)

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

Construct measurements

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