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The Effect of Supply Chain Management Practices, Customer Orientation and Operational Capability on SMEs in Malaysia By Nor Azrin

Md Latip Introduction Recent factors such as globalisation, maturing markets and rapid technological change have foster more intensified and swift change of competition in the marketplace (Santoro and Chakrabarti, 2002). In consequence of increased competition in both domestic and international market, firms can no longer effectively compete in isolation of the suppliers and other entities in the supply chain (Lummus et al., 1999). As organizations seek to develop partnerships and more effective information links with trading partners, internal process become integrated and span the traditional boundaries of firms. (Thakkar et al., 2008) Supply Chain Management (SCM) has been recognized as a strategy that could lead companies to gain competitive advantage, other than to achieve greater business performance. The SCM concept is theorised from the formation of a value chain network consisting of individual functional entities committed to providing resources and information to achieve the objectives of efficient management of suppliers as well as the flow of parts (Lau and Lee, 2000; Koh et al., 2007). The SCM seeks to enhance competitive performance by closely integrating the internal functions within a company and effectively linking them with the external operations of suppliers, customers, and other channel members. The benefit of such supply chain integration can be attained through efficient linkage among various supply chain activities, and the linkage should be subject to the effective construction and utilization of various supply chain practices for an integrated supply chain. SCM practices implemented to achieve superior supply chain performance require internal cross-functional integration within a firm and external integration with suppliers or customers to be successful (Narasimhan, 1997; Kim, 2006). Mason (2003) suggests that supply chain performance can be the key to financial success. Effective communication and collaboration among supply chain participants can be the key to making sure that retailers, manufacturers and suppliers get their orders when they need them and without error. This philosophy is consistent with a customer orientation making sure that customer needs are met, and at a profit. Mason (2003) suggests that effective SCM involves reaching out to supply chain participants at both ends - back to suppliers and forward to customers - to 1

increase customer service (a marketing orientation) and to reduce costs, thereby improving financial performance (Green Jr et al., 2006). Operational capability can be viewed as the pattern of decisions related to sourcing products, capacity planning, conversion and distribution of finished products, demand management, communication, and delivery. Since these are key business processes involved in producing a company's product or service, it is important to link them to the overall business capability. In other words, a firm must develop strategic capabilities for managing the supply chain based on overall corporate capabilities, and based on these high level capabilities, a set of detailed operating capabilities can be developed for each process within the supply chain (Lummus et al. 1998; Kim 2006). This study seeks to disclose the influence of the above-mentioned construct; customer orientation and operational capability on firms performance and to investigate the effect of SCM practices as a strategic lever in mediating on such relationship. This is helpful in developing a framework for linking SCM practices to its market demand and operational capability, and in identifying how such linkages can be connected to the improvement of SMEs performance.

Background of the Study Malaysian SMEs are a vital component of the countrys economic development. According to SMIDEC (2006), SMEs accounts for 99.2 per cent of total business establishments and the SME sector contributed around 32 per cent of real gross domestic product (GDP) 19 per cent of national total exports and 56.4 per cent of national total workforce. SMEs account for 96.5 per cent of all companies in the manufacturing sector. The majority is engaged in the food and beverages sub-sector (32.5 per cent), followed by chemicals and chemical products (15.6 per cent), rubber and plastic products (10.3 per cent) and fabricated metal products (6.6 per cent). These industries accounted for 79.0 per cent of total SME output, 29.8 per cent of total manufacturing output, 26.0 per cent of total value added and 31.3 per cent of total manufacturing employment. Concurrently, value added products from SMEs are expected to be worth RM 120 billion from 83 billion in 2007 in the manufacturing sector by 2020 (SMIDEC, 2006). The majority of manufacturing companies are

located in the central parts of Malaysia and around the countrys major industrial regions. According to Saleh and Ndubisi (2006), the Malaysian Governments commitment to, and concern for, the development of SMEs has been clearly evident since the early 1970s. The New Economic Policy was introduced in 1971, which aimed to improve peoples welfare and restructure ethnic economic imbalances. The governments commitment to the development of SMEs can also be seen in the second Industrial Master Plan (IMP2), which ended in 2005, which is followed by the Third Industrial Mater Plan (IMP3) 20062020, to coincide with the countrys vision for 2020 (MITI, 2005). The Malaysian Government has implemented various policies and strategies under these plans. The IMPs were formulated to enhance the growth of the manufacturing sector across the entire value chain and cluster-based industrial developments. Hence, this plan provides an integrated approach to the development of industrial areas and opportunities for growth of SMEs (MITI, 2005). To sum up, based on the statistics on SMEs scenario in Malaysia, one may conclude that this sector is undoubtly a back bone industry to the national economy. With more than half job opportunities are from this sector, SME is indeed playing an important role in developing Malaysia for its both economic and socioeconomic growth.

Problem Statement In today's international business dynamic, supply chain management has become a critical strategic initiative in a global competitive environment. Many researchers argue that supply chain management creates competitive values through the active involvement of supply chain entities and their supportive systems for enterprise interaction. Sustainable business successes are no longer measured by a single entity's performance outcomes but through the competitive advantage of the collaborative supply chain network (Spekman et al., 1994; Jeong and Hong 2007). According to Razak (2005), SMEs need to adopt best business practices such as SCM to remain competitive in the market. SMEs need to be competitive in terms of price, quality, delivery and efficient services. Furthermore, it also must respond to the real time market demand and changes. Since the customer is the ultimate judge of supply chain performance, effective and timely responses to ever changing customer

tastes and preferences have become essential components for successful business performance (Jeong and Hong, 2007). The strategic role of SCM requires consideration of the potential implications of efficient linkage between firms customer orientation and operational capability to develop coherent and integrated strategies. Since firms operational capability involve key business processes that produce a companys product or service, it is important to link them to the overall business capability. Accordingly, a better understanding of the relationship between customer orientation and operational capability on firms performance is needed. Although in general, SCM decisions should be strategic and compatible with the market demand and business capability, previous literature has not shown the effect of supply chain management practices on mediating the relationship between customer orientation and operational capability on firms performance especially in the SMEs sector. A possible explanation is that, it may be due to the failure of empirical studies to identify the role of strategic lever that customer orientation and operational capability can use to enhance the chance of firm success. It means that there might be a mediating variable that have to be considered to better explain the relationship between customer orientation and operational capability on firms performance, and thus the relationship might be impacted by such mediating variable. Hence, this research paper plan to disclose the shape of the relationships between the customer orientation and operational capability for firms performance and to investigate the effect of SCM practices as a strategic lever on such relationship.

Significance of the Study In view the fact that the success of small and medium businesses has a direct impact on the national economy, this study seeks to add to the body of knowledge by providing new data and empirical insights into the relationship between supply chain management practices and the business performance of the SMEs in Malaysia. In addition, this study could also provide towards better understanding on the relationship between customer orientation and the operational capability of firms that could generate an impact on performance improvement of SMEs in Malaysia. This information will be useful to the top management of SMEs since it can glean

important knowledge about how effective SCM, customer orientation and operational capability impacts business performance.

Objectives of the Study The purpose of this research is to disclose the relationships between the abovemention construct; customer orientation and operational capability and how the duo influence SMEs performance. The study also focuses on examining the effect of SCM practices as a strategic lever, mediating the two construct on contributing to firms performance. In summary the objectives of this study are as follows: to identify the relationship of customer orientation and operational capability on the performance of Malaysias SMEs. to investigate the effect of SCM practices in mediating such relationship on contributing towards firms performance.

Hypothesis of the Study The hypotheses of the study are as follows: i. ii. iii. Customer orientation positively affects performance of the SMEs Operational capability positively affects performance of the SMEs SCM practices mediate the impact of customer orientation on performance of the SMEs. iv. SCM practices mediate the impact of operational capability on performance of the SMEs.

Literature review Adopting supply chain management (SCM) requires companies to take a long-term view and have an extensive focus, on all the channels that are employed in the total transformation process from the beginning to the end-user to create a productive and reliable supply chain network system. Organizations have to re-think how business is done at every level within and outside the organization. By evaluating and mapping a

specific supply chain, a company is able to find and reduce system redundancies while improving reliability and flexibility of a system (Tummala et al., 2006). A supply chain includes all the value chain processes from suppliers to end customers. It is essential that each supply chain member adds value from the viewpoint of the end customer in the supply chain. Customer orientation in supply chain is defined as the degree to which a supply chain focuses on customers and recognizes their desires, placing first priority on meeting their needs with superior products or services through collaboration with other supply chain partners (Jeong & Hong, 2007). This definition is similar to those by Rindfleisch and Moorman (2003), which defined customer orientation as the set of behaviors and beliefs that place a priority on customer interests and continuously create superior customer value. Supply chain entities should be committed to customer orientation for satisfying and exceeding multiple customer requirements. Jeong and Hong (2007) identify three aspects of customer orientation in supply chains (customer-closeness, customerflexible, and customer-accessible) as follows: Customer-closeness. This aspect of customer orientation is organizational and individual commitment to stay in touch with customers and to continue perceiving their changing needs over time (Bowen et al., 1989) Customer-flexible. Flexible is related to the range of performance requirements in manufacturing, supply chain, and strategy areas (Aranda, 2003; Barad and Even, 2003). Customers rapidly change their tastes and preferences in dynamic social environments. Customer-flexible firms are fully aware of the needs for building internal design, manufacturing and service capabilities in view of constantly changing customer expectations. Customerflexible therefore refers to the extent of awareness and the intent of firms that are willing to respond to changing customer expectations (Kerwin, 2003). Customer-accessible. Customer-accessible refers to the extent to which a supply chain is ready to allow customers to access information that is critical in fulfilling their multiple requirements. Location and distribution networks have been regarded as strategic decisions in targeting customers. Customer orientation is not just about the impeccable execution of internal operational details or friendly customer service. Rather, in dynamic environments, firms extend the concept of market and service scope by making information

available according to customer needs. Although end customers may not have direct access to third tier suppliers, customer-accessible supply chains may have information infrastructures that include even the third tier suppliers, as needed. Therefore, customer accessibility requires an operational strategy for developing effective operational and service delivery systems for customer contact and for customer support. Waiting time for access to information may be a source of irritation to customers and have a negative impact on the evaluation of services. On the contrary, fast and easy accessibility to information has a positive effect on customer trust in accessing products and/or services (Jeong & Hong, 2007).

Methodology and sample Two types of data will be referred in this research or study which is primary and secondary data. Primary data will be available through structured questionnaire distributed to the respondents or target population. Meanwhile secondary data will be obtain through the books, journals, e-journals, websites and other related reading materials that might come from printed or electronic medium or media. Sampling method is basically by using structured questionnaire which will be conducted through convenience sampling to ensure the respondents are covered easily without been biased to others. The target population will be the small and medium enterprises in Malaysia registered under Small and Medium Industries Development Corporation (SMIDEC). The study will focus on SMEs that fall under manufacturing, manufacturing related services and agro-based industries category. Sampling size will be determined by the use of sample size selection chart developed by Isaac and Michael (1981). The total population will be matched to the chart to find out the proposed sampling size. This study will use two types of statistics namely descriptive and inferential statistics. Descriptive statistics are covered by mean, percentage, and standard deviation while the inferential statistics will use four methods of analyzing which are

t-test, analysis of variance (ANOVA), correlation and structural equation model (SEM).

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