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Supply Chain Management: An International Journal

Supply chain integration and performance: US versus East Asian companies


Suhaiza Zailani Premkumar Rajagopal

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Suhaiza Zailani Premkumar Rajagopal, (2005),"Supply chain integration and performance: US versus East Asian companies",
Supply Chain Management: An International Journal, Vol. 10 Iss 5 pp. 379 - 393
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Baofeng Huo, (2012),"The impact of supply chain integration on company performance: an organizational
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Supply chain integration and performance:


US versus East Asian companies
Suhaiza Zailani and Premkumar Rajagopal

Downloaded by New York University At 09:14 28 April 2015 (PT)

School of Management, Universiti Sains Malaysia, Penang, Malaysia


Abstract
Purpose Though there is a wide acceptance of the strategic importance of integrating operations with suppliers and customers in the supply chain,
many questions remain unanswered about how best to characterize supply chain strategies. Is it more important to link with suppliers, customers, or
both? Similarly, little is known about the connections between supplier and customer integration and improved operations performance. This article
seeks to investigate supplier and customer integration strategies by comparing US and East Asian companies. It is of paramount interest to find out how
these strategies actually differ and affect performance of the companies.
Design/methodology/approach This was carried out in three phases. In the first phase, a number of operations-management related journals were
skimmed to select about 30 research articles related to supply chain concepts and practices. In the second phase, investigation efforts narrowed down
to supply chain management research conducted in East Asia and the USA. In the third phase, comparisons were made between East Asian and US
companies indicators of supply chain integration and performance.
Findings The need to react to market changes and the critical role of the supply chain in meeting this need, and the potential benefits of integrating
the supply chain, can no longer be ignored. This potential, however, will be realized only if the interrelationships among different parts of the supply
chain are recognized, and proper alignment is ensured between the design and execution of the companys competitive strategy.
Practical implications The implications for article findings on future research and practice in the new millennium are considered.
Originality/value The aim is to recommend these findings to companies which are still at the infancy stage when it comes to supply chain
management and integration with customers and suppliers.
Keywords Integration, Performance management, United States of America
Paper type Research paper

strategic and cooperative buyer-supplier relationships.


Organizations began to involve strategic suppliers in
resource management decisions (Morgan and Monczka,
1996). Instead of relying on tools such as acceptance
sampling to establish the quality of incoming materials and
component parts, manufacturers purchased from a more
limited number of qualified or certified suppliers (Inman and
Hubler, 1992). Many producers embraced the concept of
supply base management, hoping to reduce costs by cutting
inventory and improving efficiency throughout the supply
chain (Watts and Hahn, 1993, Krause, 1997) at the lowest
delivered total cost. The objective of SCM is to improve the
entire process rather than focusing on local optimization of
particular business units (Heikkila, 2002).
Information is increasingly available through modern
means of technology, i.e. customer relationship management
(CRM) e-business, and supply chain management (SCM)
solutions, which increases the possibility of serving customers
individually with customized bundles of goods and services.
However, overly focused customization would ruin efficiency.
On the other hand, too rigid an approach to SCM would risk
customer satisfaction. Therefore, there need to be a balance
between good customer satisfaction and supply chain
efficiency. In order for operations managers to begin their
improvement efforts, it is crucial to start by gaining an
understanding on the situation and need in distinct customer
segments. Next is to develop manageable number of
alternative modular service offerings to be adapted to
individual customer situations and needs. The final step is
to take the relationship characteristics into consideration and
develop a joint improvement agenda together with the
customer to develop optimum operative efficiency within

Introduction
The challenges associated with getting a product or service to
the right place at the right time intensified as competition in
the 1990s did. In todays manufacturing environment, one of
the key challenges is to be both efficient and contribute to
high effectiveness. If the 1980s were about vertically aligning
operations with business strategy (Hayes and Wheelwright,
1984), the 1990s have been about horizontally aligning
operations across processes (Ghoshal and Bartlett, 1997). In
this globalized era, most industries will not be able to survive
by simply optimizing internal structures and infrastructures
based upon business strategy. The most successful
manufacturers seem to be those that have carefully linked
their internal processes to external suppliers and customers in
unique supply chains. The trends can be seen as below, where
todays dynamic era, e-business and supply chain are
integrated and play a vital role towards an organizations
competitive advantage and sustenance. Manufacturing
organizations orientation towards customer satisfaction has
brought the realization of potential benefits and importance of
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Supply Chain Management: An International Journal


10/5 (2005) 379 393
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[DOI 10.1108/13598540510624205]

379

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Supply chain integration and performance

Supply Chain Management: An International Journal

Suhaiza Zailani and Premkumar Rajagopal

Volume 10 Number 5 2005 379 393

the constraints set by the objectives important for the


customer; and if the joint improvement agenda is
implemented in good co-operation, high customer
satisfaction will follow (Heikkila, 2002).

for some manufacturers in achieving the improvements


necessary to remain competitive. For practitioners, the
strategic importance of integration is similarly reflected in the
Supply Chain Councils popular supply chain operations
reference (SCOR) model that assumes all businesses include
sourcing, making, and delivering processes strategically
linking suppliers and customers to manufacturers (see www.
supply-chain.org).
Many of the theoretical arguments for closely integrating
operations between manufacturers and suppliers and
customers come from the process reengineering literature
(Hammer and Champy, 1993; Hammer, 1996; Fliedner and
Vokurka, 1997). Typically the goal is to create and coordinate
manufacturing processes seamlessly across the supply chain in
a manner that most competitors cannot very easily match
(Anderson and Katz, 1998). As Birou et al. (1998) pointed
out:

Definition of SCM and DCM


There are evidence that suggested different supply chain
integration strategies that manufacturers followed. Around
the world these different supply chain strategies can be
empirically classified into at least five valid types, defined by
the direction (towards suppliers and/or customers) and degree
of integration. These types can be defined, in terms of the
direction and degree of their similar supply chain activities, by
their quite different arcs of integration (Frohlich and
Westbrook, 2001).
A supply chain is a network that includes vendors of raw
materials, plants that transform those materials into useful
products, and distribution centers to get those products to
customers. Known also as the value chain, it is the sequence,
which involves producing and delivering of a product or
service. The simultaneous integration of customer
requirements, internal processes and upstream supplier
performance is commonly referred to as supply chain
management (Tan et al., 1999). An example of a supply
management roadmap can be seen as below. The roadmap
shows the processes involve when selecting the suppliers,
focusing on results right up to supply chain digitization.
Demand chain management (DCM) on the other hand is
the management of sales and distribution portion of the value
chain, which is the other part of the chain. While SCM
focuses on the supply component, DCM looks at the demand
component. SCM is a network of members formed by
autonomous entities and their systems by collaborating and
collective efforts to solve a common problem. While
companies pay attention towards the supply component, the
demand component is increasingly playing a vital role as more
and more companies realize the potential benefits when
owning an efficient chain management system. DCM is
equally important, as it is crucial for business because it
contributes towards the satisfaction of the customer. The
supply chain is also frequently referred to as the logistic
network in the literature; supply chain management
emphasizes the overall and long-time benefit of all parties
on the chain through cooperation and information sharing
(Yu et al., 2001).

The opportunity to use process integration across functional boundaries is


now considered a key to competitive success.

Davis (1993), and Dyer and Ouchi (1993) similarly echoed


the importance of integrating suppliers and customers into
supply chains for developing new products and processes.
Problem statement
As mentioned, the balanced between good customer
satisfaction and supply chain management is crucial for
companies to gain competitive advantage. Business
environments contribute to shape organizations as it
emphasizes marketplace and strive to design the chain to
satisfy this need. This article looks at the diversities of two
industrialized areas, USA and East Asia, on their
organizations SCM practices and how they juggle to
achieve good performance. The objective of this article is to
increase understanding of factors contributing to wellperforming demand chains (supply chain integration) and
how these factors can affect the performance of the
companies. The aim was through case article research to
find how these factors differ between US and East Asian
companies.

Literature review
Supply chain management and demand chain
management
The concept of supply chain partnership extends the
perspective of operations from a single business unit to the
whole supply chain where relationships are formed between
two independent members in supply channels through
increased levels of information sharing to achieve goals and
benefits in terms of reductions in total costs and inventories.
It is a set of practices aimed at managing and coordinating the
supply chain from raw material suppliers to the final usercustomer to gain win-win situation.
A number of researchers suggest that better performance
can be achieved by consolidating customer and supplier bases,
removing unnecessary steps in the chain, speeding up
information and material flows, and creating long-term
partnerships with major customers and suppliers to leverage
the capabilities of several companies in the chain. Previous
management theory in the area of SCM can be broadly
divided into two main categories. The first category studies
primarily the chain structure (e.g. Handfield and Nichols,

The strategic importance of supply chain integration


Over the past decade there has been a growing consensus
concerning the strategic importance of integrating suppliers,
manufacturers, and customers (Reck and Long, 1988;
Leenders and Blenkhorn, 1988; Bowersox et al., 1989;
Freeman and Cavinato, 1990; Syson, 1989; McGinnis and
Kohn, 1993; Morris and Calantone, 1991; Cammish and
Keough, 1991; Eloranta and Hameri, 1991; Burt and Doyle,
1994; Clinton and Closs, 1997; Lummus et al., 2001; Van
Hoek et al., 2001; Lowson, 2003; Power et al., 2001; Barratt
and Oliveira, 2001; Barratt, 2004). As Carothers and Adams
(1991), Langley and Holcomb (1992), and Shapiro (2001)
convincingly argued, the once narrow subject of logistics has
become a comprehensive topic that now spans the entire value
system from suppliers to customers. Reinforcing this point,
Ragatz et al. (1997) noted that the effective integration of
suppliers into product value/supply chains will be a key factor
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Supply chain integration and performance

Supply Chain Management: An International Journal

Suhaiza Zailani and Premkumar Rajagopal

Volume 10 Number 5 2005 379 393

1998; Kanji and Wong, 1999; Gattorna, 1998; Lee, 1993; Lee
et al., 1992; Towill, 1997; William, 2002). The second group
is primarily about industrial networks and the relationships
between organizations in the chain (e.g. Lee, 2000, 2002;
Lambert et al., 1998; Harland et al., 1999; Mohr and
Spekman, 1994; Monczka et al., 1998). Some scholars
suggest using the term demand chain management instead
of SCM (Vollmann, 1996; Simchi-Levi, 1998). This puts
emphasis on the needs of the marketplace and designing the
chain to satisfy these needs, instead of starting with the
supplier/manufacturer and working forward. In this research,
the emphasis on the customer needs is adopted as the starting
point for supply/demand chain management.

inventory control and delivery plans of individual members in


the supply chain. Information-feedback systems owe their
behavior to three characteristics-structure, delays and
amplification. The structure of a system tells how the parts
are related to one another. Delays exist in the availability of
information, in making decisions based on the information,
and in taking action on the decisions. Amplification usually
exists throughout systems and it is observed when an action is
more forceful than might seem to be implied by the
information inputs to the system.
Most important in the environment for innovative products
is reading market signals correctly and being able to react
quickly during the products short life cycle. The crucial flow
of information occurs from the marketplace to the chain. The
critical decisions about capacity and inventory are not about
minimizing costs but where in the chain to position inventory
and available production capacity in order to hedge against
uncertain demand. Suppliers should be chosen for their speed
and flexibility, not for their low cost (Fisher, 1997). The first
step in designing a responsive supply chain is to accept that
uncertainty is inherent in innovative products. Uncertainty
can be avoided by cutting lead-times and increasing the
supply chains flexibility so that it can produce to order or at
least assemble the product at a time closer to when demand
materializes and can be accurately forecast.

Supply/demand chain structure


Time-based management and the relationship between speed
of operations and efficiency has been one of the key issues in
operations management literature during the 1980s and
1990s (e.g. Stalk et al., 1992; Womack and Flowers, 1999).
Stalk et al. (1992) describes how time has become one of the
most important sources of competitive advantage in
manufacturing industries. He describes the background for
Japans secret weapon (Womack and Flowers, 1999) or
lean thinking (Womack and Jones, 1994) by illustrating
how the competitive advantage of Japanese manufacturing
industry evolved from low labor costs-through scale-based
strategy, focused factory and flexible manufacturing-to timebased competitive advantage. Stalk describes companies as
systems and says that competitive advantage can be achieved
by breaking the debilitating loop strangling traditional
manufacturing planning. This means that traditional
manufacturing requires long lead-times to resolve conflicts
between various jobs or activities that require the same
resources. The long lead-times require sales forecasts to guide
planning. Long lead-times make the accuracy of sales
forecasts decline. Forecasting errors increase inventories and
the need for safety stocks at all levels. Errors in forecasts mean
more unscheduled jobs in the production line, increasing the
lead-times for the scheduled jobs. The planning loop expands,
drives up costs, increases delays, and creates system
inefficiencies.
Holmstrom (1989) has empirically studied the efficiency
potential of speed in operations. His main results are
empirical indications of a strong positive correlation
between speed and efficiency in manufacturing and that a
focus on speed of operations helps expose and remove selfinduced sources of uncertainty. He claims that the main
contributor to uncertainty in slow operations is distorted
communication in the activity system. Based on his findings
of a speed threshold he suggests that inventory
commitment needs to be reduced to a point where demand
distortion is diminished and a synchronization of production
with demand is possible in order to improve performance by
speeding up operations. One of the main system issues in
supply chains is industrial dynamics and management of the
bullwhip (or Forrester or whiplash or whipsaw) effect. This
refers to the phenomenon where orders to the supplier tend to
have larger variance than sales to the buying organization (i.e.
demand distortion), and the distortion propagates upstream
in an amplified form (i.e. variance amplification). This
phenomenon is related to the information flows among the
members in the supply chain. Information flows in terms of
orders have a direct impact on the production scheduling,

Supply chain integration tactics


At the tactical level, the literature suggests that there are two
interrelated forms of integration that manufacturers regularly
employ. The first type of integration involves coordinating and
integrating the forward physical flow of deliveries between
suppliers, manufacturers, and customers (Saunders, 1997).
Many of these proponents of supply chain integration fall
under the banner of just-in-time (Chapman and Carter, 1990;
Landry et al., 1997; Grout, 1998; Narasimhan and Jayaram,
1998). Others have pointed out the importance of delivery
integration in terms of implementing product postponement
and mass customization in the supply chain (Lee, 2002) or for
exploiting third-party logistics (Marvick and White, 1998).
Recent SCM and relationship marketing research has
attempted to increase understanding of the conditions for
win-win partnerships, i.e. customer-supplier relationships in
which close long-term co-operation simultaneously increases
the value produced by the demand chain and decreases the
overall cost of the chain. Several researchers have come to the
conclusion that companies need to divide their customersupplier relationships into classes along the continuum from
arms-length relationships to true partnerships (Lambert
et al., 1998). While true strategic partnerships create new
value, they are costly to develop, nurture and maintain. Also,
they are risky given the specialized investments they require.
The number of real partnerships a company can build and
maintain is limited. Therefore, partnership type of
relationships cannot be expected to be built with a large
number of customers or suppliers, and focusing the resources
on building the right relationships requires careful planning
and decision-making.
Commitment refers to the willingness of buyers and
suppliers to exert effort on behalf of the relationship.
Commitment to a relationship is most frequently
demonstrated by committing resources to the relationship,
which may occur in the form of an organizations time,
money, facilities, etc. These types of resources are often
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Supply chain integration and performance

Supply Chain Management: An International Journal

Suhaiza Zailani and Premkumar Rajagopal

Volume 10 Number 5 2005 379 393

referred to as asset-specific resources, in that they are


directed specifically towards the other party (Dyer et al.,
1999). Several other studies have also found a relationship
between resource commitment and the joint action or
continuity between parties within inter-organizational
relationships (Handfield and Bechtel, 2001). These results
suggest that successful partnerships result when both buyers
and suppliers demonstrate a willingness to commit a variety of
assets to a set of future transactions.
Two aspects of communication behavior that address the
extent to which the information exchanged is effective in a
partnership include information sharing, and the level of
information quality and participation (Monczka et al., 1971).
Both of these aspects of information sharing (quantity and
quality) are required to successfully develop supplier
partnerships. Information sharing refers to the extent to
which critical and proprietary information is communicated
to ones supply chain partner (Mohr and Spekman, 1994).
Suppliers and customers can form joint development teams to
improve various aspects in the supply chain or suppliers can
suggest changes that may lead to quality or cost improvements
(Clark and Wheelwright, 1993). Information quality includes
such aspects as the accuracy, timeliness, adequacy, and
credibility of information exchanged. Information
participation refers to the extent to which partners engage
jointly in planning and goal setting (Mohr and Spekman,
1994). These information attributes are closely related and
critical in enabling members of a partnership to co-ordinate
their activities. The earlier mentioned works suggest that
successful supplier alliances are associated with high levels of
information sharing and information quality and
participation.
Interdependence exists when one actor does not entirely
control all of the conditions necessary for achievement of an
action or a desired outcome. Resource dependence has been
explored in empirical studies, which investigate the
relationship between dependence and control in buyersupplier relationships (Handfield and Nichols, 1999). For
instance, dealers are less opportunistic when they depend on a
primary supplier, whereas suppliers with control over dealers
decisions exhibit greater opportunism (Provan and Skinner,
1989). Resource dependence can also influence supplier justin-time (JIT) delivery performance (Handfield and Nichols,
1999). The above literature suggests that successful
partnerships are expected to be characterized by higher
levels of interdependence.
Trust encompasses two essential elements (Kumar et al.,
2001):
(1) Trust in the partners reliability, that is the belief that the
partner stands by its word, fulfills promised role
obligations, and is sincere.
(2) Trust in the partners benevolence, that is the belief that
the partner is interested in the firms welfare and will not
take unexpected actions that will negatively affect the
firm.

The arc of integration


If this need to develop shared operational activities is
accepted, then the strategic issue becomes one of direction
and degree in which direction (towards customers and/or
towards suppliers) and to what extent (degree of integration)
should such shared activity be developed? Taking this pair of
decisions as the key dimensions for representing a strategic
position we can illustrate them graphically as an arc, with the
direction of the segment showing whether the firm is supplier
or customer leaning, and the degree of arc indicating the
extent of the integration. This has more visual immediacy
than a plot on a line graph for this type of investigation.
Hence, in this article we characterize the strategic position of
each respondent with respect to supply chain development as
that firms arc of integration.
Some manufacturers decide to engage in relatively little
integration with suppliers or customers and thus have a
relatively narrow arc of integration. Other manufacturers
extensively integrate their organizations with upstream
suppliers and downstream customers by pursuing a strategy
with a broad arc of integration. Growing evidence suggests
that the higher the level of integration with suppliers and
customers in the supply chain the greater the potential
benefits (Lummus et al., 2001; Anderson and Katz, 1998).
Tan et al. (1998) noted that when companies integrate and
act as a single entity, performance is enhanced throughout the
chain. Others have pointed out that the inherent hazards of
not fully integrating with upstream suppliers and downstream
customers (Lee et al., 1993; Hammel and Kopczak, 1993).
Fisher(1997) highlighted the critical role of balancing supply
and demand across the supply chain. Handfield and Nichols
(1999) argued that now manufacturers must not only manage
their own organizations but also be involved in the
management of the network of upstream and downstream
firms. Dyer and Ouchi (1993) similarly pointed out that those
firms who have traditionally been structured as independent
businesses will increasingly have to configure operations on a
shared basis. By extension, manufacturers with the broadest
arcs of supply chain integration should have the highest levels
of performance improvements.

Methodology
To address the research questions and investigate the
difference in characteristics of relationship across the supply
chain integration and performance between East Asian and
US companies, the research team did an extensive literature
review on multiple aspects of supply chain and performance
indicators of East Asian and US companies. This article was
carried out in three phases. In the first phase, a number of
operations management related journals were flipped to select
about thirty research articles related to supply chain concepts
and practices. This was to identify major independent
variables that attributed to success of supply chain
management. In the second phase, investigation efforts
narrowed down to supply chain management research
conducted in East Asia and the US. With that, the team
was able to sieve out the current research variables. In the
third phase, comparisons were made between East Asian and
US companies indicators of supply chain integration and
performance.

Trust, therefore, exists when a firm believes its partner is


reliable and benevolent. Conflict is behavior that impedes,
blocks, or frustrates another firms goal pursuit (Kumar et al.,
2001). Perceived conflict is the magnitude of present conflict
acknowledged and perceived by the firm.
382

Supply chain integration and performance

Supply Chain Management: An International Journal

Suhaiza Zailani and Premkumar Rajagopal

Volume 10 Number 5 2005 379 393

wave of internet and e-commerce provides a new opportunity


to create a smart integrated supply chain.
.
Information exchange with suppliers. How much information
is shared affects the company-supplier bond. Narasimhan
and Kim (2002) lists market information exchange
between company and suppliers as an indirect
determinant of performance (Narasimhan and Kim,
2002).
.
Level of organic linkage with customers through information
network. Organic linkage refers to the bond between the
company and customer(s). Formation of an informal
information network helps in company-customer
information sharing, which directly strengthens the bond
between them (Narasimhan and Kim, 2002).

Hypotheses
H1.

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H2.

H3.

H4.

A higher level of information sharing improves


performance of supply chain. (a) Increasing
communication between company and suppliers
encourages information sharing including market
information between the two parties, thus improving
performance of the supply chain. (b) A higher level of
organic linkage between company and customers
through an established information network improves
company-customer relationship, thus improving
performance of supply chain.
Overall improvement in internal integration across the
supply chain directly improves performance of supply
chain. (a) Establishing system-wide system integration
among internal functions improves productivity
growth, quality, delivery and flexibility of the supply
chain. (b) Establishing system-wide system integration
among internal functions indirectly improves
company-customer relationship.
Increased external integration with suppliers improves
performance of supply chain. (a) Improving companys
integration with suppliers improves performance of
supply chain in terms of productivity growth, quality,
delivery and flexibility. (b) Establishing strategic
partnership or alliances with suppliers improves
relationship between company and suppliers, and as
a result improves performance of the supply chain.
Increased external integration with suppliers improves
performance of supply chain. (a) Improving external
integration with customers improves performance,
especially company-customer relationship. (b)
Ensuring regular follow-ups with customers for the
purpose of feedback increases customer satisfaction
that directly improves quality, delivery and companycustomer relationship of the supply chain.

Internal integration
.
System-wide system integration among internal functions.
Narasimhan and Kim (2002) view a system-wide
integrated network as an essential determinant of supply
chain performance. Traditional managers are concerned
about the functions of their own departments
(Premkumar, 2002). Each function is bureaucratic in
nature, but this concept is not advisable a successful
supply chain. Cross-functional behavior is relevant. So,
internal functions should be integrated (Narasimhan and
Kim, 2002).
External integration with suppliers
.
Companys integration with suppliers. This refers to
company working closely with suppliers and viewing the
latter as an important component of supply chain
(Narasimhan and Kim, 2002). In this article, this
variable also encompasses the degree of involvement and
influence suppliers have in the companys decision. It also
measures how closely suppliers work with company to seal
a deal (Narasimhan and Kim, 2002).
.
Level of strategic partnership with suppliers. Partnership has
been used to refer to closer, longer-term relationships with
suppliers (as cited in Premkumar, 2002). The level of
strategic partnership or alliances refers to the degree of
partnership the company formally ad informally forms
with suppliers (Narasimhan and Kim, 2002).

Definition of supply chain integration and performance


dimensions
Independent variables: supply chain integration
Recent years have seen growth in the importance of
integration suppliers, manufacturers and customers
(Leenders and Johnson, 2000). Effective integration of
suppliers into supply chains serves as a key factor for some
companies to gain competitive advantage (Bowersox and
Closs, 1996). Supply chain integration refers to a formation of
network encompassing elements of supply chain, which are
the suppliers, customers and the company. Narasimhan and
Kim (2002) listed more than 20 independent variables that
affect the performance of supply chain integration. In this
research, some of these variables had been re-categorized and
has been narrowed down to four major categories:

External integration with customers


.
Companys integration with customers. This refers to
company working closely with customers and viewing
the latter as an important component of supply chain
(Narasimhan and Kim, 2002). In this article, this variable
also encompasses the degree of involvement and influence
customers have in the companys decision. It also
measures how closely customers work with company to
seal a deal (Narasimhan and Kim, 2002).
.
Follow-up with customers for feedback. This refers to the
degree of correspondence between company and
customers, whereby customers respond to the company
regarding the output delivered or to be delivered to
customers (Narasimhan and Kim, 2002). It also refers to
the degree of follow-ups the company does with its
customers feedback.

Information sharing
Information sharing refers to exchange of information among
company, customers and suppliers. Lee (2002) stated that
information should be interoperable, which means that one
system can talk to another. Information links between internal
primary data repositories and business applications and those
of partners allow faster demand forecasting and planning
(Premkumar, 2002). Premkumar adds that the technological

Dependent variables
Performance of manufacturing companies can be evaluated
by a number of key competitive priorities (Krajewski and
Ritzman, 2002). Three major categories are:
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Supply chain integration and performance

Supply Chain Management: An International Journal

Suhaiza Zailani and Premkumar Rajagopal

Volume 10 Number 5 2005 379 393

(1) Quality.
(2) Delivery.
(3) Flexibility.

Customer relationship
Based on the work of Ballou (2004), elevating customer
relationship would mean advancing through levels of
customer service to customer satisfaction, to customer
success (the three Ss). One more dimension added is
customer feedback. Supply chain is part of total product
offering that must assure value for final customers.

Besides that, Lummus et al. (2001) has concluded that


customer closeness also plays an important role in
performance of supply chain. However, in the proposed
supply chain integration model, customer closeness is adapted
as customer relationship. Extensive research also led to
productivity growth noted as an indicator of supply chain
success.

Flexibility
Chopra and Meindl (2004) defines the following flexibility
dimensions as follows:
.
Customer service flexibility. The ability to accommodate
special customer service requests.
.
Order flexibility. The ability to modify order size, volume or
composition during logistics operation.
.
Location flexibility. The ability to service customers from
alternative warehouse locations.
.
Delivery time flexibility. The ability to accommodate
delivery times for specific customers.

Productivity growth
Productivity is a measure of the effective use of resources,
usually expressed as the ratio of output (goods and services)
to input (labor, materials, energy, and other resources) used
to produce them (Stevenson, 2002; Chopra and Meindl,
2004). It is usually expressed as:

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Productivity

Output
Input

Results

Productivity growth is the increase in productivity from one


period to the next relative to the productivity in the preceding
period (Stevenson, 2002):

The following tables (Tables I and II) will show clearly how
US and East Asian companies differ in supply chain
integration tactics and how these affect the different
performance measures of the companies. Furthermore,
Tables III and IV will summarize which of them support the
hypotheses. As shown in Tables I-V, some important findings
can be derived in better understanding the relationship
between supply chain management and performance:
.
Supply chain integration: information sharing, internal
integration, external integration with suppliers, external
integration with customers plays a significant role in the
overall success of a business. It was able to significantly
beat revenue and profitability projection in terms of
market share growth, sales growth and creation of
competitive advantage.
.
Most of the companies extensively integrate their
organization with upstream suppliers and downstream
customers by pursuing a strategy with a broad arc of
integration. Growing evidence suggest that the higher the
level of integration with suppliers and customers in the
supply chain the greater the potential benefits. Noted that
companies with the greatest arcs of supplier and customer
integration have the largest rates of performance
improvement.

Productivity growth
Current period productivity 2 previous period productivity
Previous period productivity
Quality
Harland (1996a, b) states three factors as determinants in
choosing suppliers in order to improve quality performance:
(1) Ability to meet quality standards.
(2) Ability to deliver products on time.
(3) Performance history.
Quality has always been one of the most important
performance criteria in purchasing (Chapman and Carter,
1990; Freeman and Cavinato, 1990; Willis, 1998; Burt et al.,
2003; Ballou, 2004; Vollmann et al., 2005; Heizer and
Render, 2005).
Delivery
Coyle et al. (2003) states three delivery dimensions:
(1) Delivery speed.
(2) Production lead-time.
(3) Delivery reliability.

Implication
This article leads to two important findings. First, evidence
suggested that there were different supply chain integration
strategies that manufacturers followed. Around the world
these different supply chain strategies can be empirically
classified into at least five valid types, defined by the direction
(towards suppliers and/or customers) and degree of
integration. These five groups (inward-, periphery-,
supplier-, customer-, and outward-facing) have both
intuitive appeal and statistical validity in a reasonably large
international database. They can be defined, in terms of the
direction and degree of their similar supply chain activities, by
their quite different arcs of integration. This classification
could be of potential value to future researchers and is capable
of further refinement (e.g. the periphery-facing group the
largest in our article might yield further sub-classifications).
Second, the greatest degree (or broadest arc) of supply chain

In this supply chain integration model, the first two


dimensions are combined as delivery speed:
(1) Delivery speed. How fast orders are processed and goods
are delivered to customers. Coyle et al. (2003) defines
the same dimension as the ability to reduce the time
between order receipt and customer delivery to as close
to zero as possible. This dimension also integrates
production lead-time, which refers to the time between
ordering a good, or service and receiving it (Handfield
and Nichols, 1999). This will give customers realistic
estimates of how long it will take to fill their orders.
(2) Delivery reliability. Delivering desired quality as
promised. Chopra and Meindl (2004) states delivery
dependability as the ability to meet quoted delivery dates
and quantities on consistent basis.
384

Integration and control


Integration with suppliers
Integration with customers

Dimension

Productivity/growth

Information sharing
Benchmarking
with suppliers
Supplier selection
with customers
Supplier participation
Customer relation
Japanese electronics
Information sharing internal integration Sharing product technology
industry (Fujitsu, Mitsubishi, External integration with suppliers
with suppliers; sourcing
NEC, NTT, Sumitomo, Toyota) External integration with customers
strategies; long-term
relationship
Japanese and Korean
Information sharing
Supplier integration level
All has positive impact on:
manufacturing companies
External integration with customers
internally, with customer, with sales growth; market
Internal integration
supplier
share; and profitability
External integration with suppliers
External integration with customers
Korea semiconductor
Information sharing
Information sharing
Mutually profitable
industry
Internal integration
Lasting cooperation
outsourcing partnership
External integration with suppliers
Risk sharing
Consistent
External integration with customers
Efficient communication
Creation of competitive
Continuous improvement
advantage
Samsung product: home
Manufacturing capability
Information sharing
appliances
Internal integration
Assets specificity
External integration with suppliers
Cooperative behavior
External integration with customers
Capabilities requirement of
buyer to supplier
Criticality of parts
Requirement capabilities
congruence

Taiwan 500 companies

Information sharing
Internal integration
External integration
External integration
Information sharing
Internal integration
External integration
External integration

Toyota, Japan
with suppliers
with customers

Independent variables

East Asian company

Table I Previous empirical studies on supply chain management integration and performance of East Asian companies

Performance
quality

Improve quality
as customer
defines
requirements

Quality

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Improve

Improve

Elimination of
problems and
concerns
Communication
improvement

Improve
customer
Feedback and
satisfaction

Customer
Delivery relationship

Improve inventory
level to support
demand efficiently

Improve

Flexibility

Supply chain integration and performance


Supply Chain Management: An International Journal

Suhaiza Zailani and Premkumar Rajagopal


Volume 10 Number 5 2005 379 393

385

Independent
variables

386

Noramco, USA

External
integration with
suppliers
External
integration with
customers

Information
sharing
Internal
integration
External
integration with
suppliers
External
integration with
customers
1995 American Society for Quality Information
Automotive Division membership sharing
Internal
integration
External
integration with
suppliers
External
integration with
customers
Nokia, USA
Information
sharing
Reliable
information flow

American manufacturing
companies in South-eastern USA

East Asian company

Information sharing
Reliable information
flow
Good co-operation
Good relationship and
understanding
Production scheduling
processes
Forecasting processes
Organizational issues
Supplier relationship
Customer relationship

Involvement
Quality-focus
Long-term relationship
Reduced supplier-base

Supplier human asset


Trust
Investments
Buyer-dependence

Dimension

Outputs increased by 33
percent
Profitability increased to
200 percent

All improve demand chain


efficiency

Longer lead time


Both improve customer
responsiveness

Productivity/growth

All improve
quality

Quality

Table II Previous empirical studies on supply chain management integration and performance of US companies

Improved from 90
days to two days

All improve
quality

Less reliable
delivery
performance

Delivery

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All improve customer


satisfaction

Customer
relationship
Flexibility

(continued)

Supply chain integration and performance


Supply Chain Management: An International Journal

Suhaiza Zailani and Premkumar Rajagopal


Volume 10 Number 5 2005 379 393

387

USA product: consumer product

ISIC Division 38: manufacture of


fabricated metal products,
machinery and equipment (703
companies from 23 countries)

USA Service Logistic

Hewlett Packard product:


consumer electronic

East Asian company

Table II

Information
sharing
Internal
integration
External
integration with
suppliers
External
integration with
customers

Information
sharing
Internal
integration
External
integration with
suppliers
External
integration with
customers
Information
sharing
Internal
integration
External
integration with
suppliers
External
integration with
customers
Information
sharing
Internal
integration

Independent
variables
Productivity/growth

Sharing production plans


Access to planning
systems
Knowledge of inventory
mix/levels
Packaging customization
Common logistical
equipment/containers
Common use of thirdparty logistics
Alignment of corporate
strategy with SC
practices

Formal and informal


communication
Organization culture

Quality

Profitable growth
Increase market share
Increase the revenue
Responsiveness

Improved the
quality
innovative

All have positive impact on All improve


profitability and productivity quality

Integrated partnership
improves demand chain
efficiency

Technological innovation Market share (from 27


percent to 60 percent)

Dimension

Lower the
delivery costs

Improved delivery

Delivery

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All improve customer


satisfaction and
service

Customer
relationship

Reduce time to market

Integrated partnership
improves flexibility in
schedule

Flexible supply chain time


reduced by 90 percent
Cash to cash cycle: 45 days

Flexibility
Supply chain integration and performance
Supply Chain Management: An International Journal

Suhaiza Zailani and Premkumar Rajagopal


Volume 10 Number 5 2005 379 393

Supply chain integration and performance

Supply Chain Management: An International Journal

Suhaiza Zailani and Premkumar Rajagopal

Volume 10 Number 5 2005 379 393

Table III Characteristics of relationship across the supply chain integration and performance in East Asian companies
H1

No.

Companies

1
2
3
4
5
6

Toyota, Japan
Taiwan 500
Fujitsu, Mitsubishi, NEC, NTT, Sumitomo, Toyota
Japan & Korean Manufacturing Co.
Korea Semiconductor Industry
Samsung product: home appliances

H2

H3

H4

Support

Support

Support

Support
Support
Support
Support

Support

Support

Support
Support
Support
Support

H3

H4

Support
Support
Support
Support

Support

Support
Support
Support

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Table IV Characteristics of relationship across the supply chain integration and performance of US companies
H1

No.

Companies

1
2
3
4
5
6
7

American manufacturing companies in South-eastern USA


1995 American Society for Quality Automotive Division membership
Nokia, USA
Noramco, USA
Hewlett Packard product: consumer electronic
USA Service Logistic
ISIC Division 38: manufacture of fabricated metal products, machinery and
equipment (703 companies from 23 countries)
USA product: consumer product

H2

Support

Support

Support
Support
Support
Support

Support

Support

Support

Table V Characteristics of relationship across the supply chain integration and performance in US companies
No. Independent variables

East Asian co.

US co.

Remarks

Information sharing

Internal integration

Information sharing
Reliable information flow
Formal and informal communication
Access to planning systems
Sharing production plans
Production-scheduling processes
Forecasting processes
Organizational issues
Technological innovation
Organization culture
Knowledge of inventory mix/levels
Alignment of corporate strategy with SC
practices; common logistical
Packaging customization equipment/containers

US companies tend to use various means in


ensuring information sharing process is
smooth. Besides, there is a lot of sharing until
to the extent of production plans and systems

Information sharing
Benchmarking
Sharing product
technology with
suppliers
Integration and
control
Supplier integration
level-internally
Manufacturing
Capability

External integration with


suppliers

Supplier selection
Supplier participation
Sourcing strategies
Long-term relationship
Supplier integration
level-supplier
Assets specificity
Cooperative behavior
Capabilities
requirement of buyer
to supplier

Supplier human asset investments


Common use of third-party logistics
Long-term relationship
Trust
Involvement
Quality-focus
Reduced supplier-base
Supplier relationship
Good co-operation

integration was strongly associated with higher levels of


performance. Although this has been an assumption behind
much of the supply chain literature, this is the first time (to
the best of our knowledge) that it has been demonstrated
empirically with a large international group of companies.

The East Asian firms emphasize on internal


control primarily to reduce costs, as a
substitute for past labor cost advantages. As
for the US firms, the emphasis is on
operational integration of physical process
flows between a company and its suppliers
and customers. Similarly, they place greater
emphasis on supply chain operational
planning for problem recovery using
organizational culture as the leverage means
Both East Asian and US companies show that
long-term partnership with suppliers and
customers are key to achieving competitive
advantages in the long run. Cooperative
relationship (win-win) are what it takes to
move forward in sharing the same alignment
of focus

These findings have some important implications for theory


and managerial practice. In terms of theory, it may no longer
be enough to consider only the vertical alignment of a
manufacturing function with business strategy. Future
research should also consider the horizontal degree of
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Volume 10 Number 5 2005 379 393

upstream and downstream integration as part of operations


strategy. This article raises the interesting prospect that
manufacturing strategy needs to be aligned across the supply
chain not just inside organizations. The need to realize and
recognize the interrelationships among different parts of the
supply chain is critical in order to gauge the competitive
advantage. Proper alignment is therefore ensured between the
design and execution of companys strategy in an attempt
through linking SCI strategy to the corporate diversification
strategy. Internal integration and external integration with
suppliers and customers should be prerequisite to pursue
sustainable performance growth. Generally, the larger and
more complex the system, the more challenging it becomes to
measure it effectively. It is important to achieve a high level of
efficiency, a high level of customer service and the ability to
respond effectively to a changing environment. Performance
measurement selection is a critical step in the design and
evaluation of ay supply chain integration. It has been
identified that the necessary components are namely the
cost, customer responsiveness, resource, output and
flexibility.
Buyer-seller relationships may develop at two levels: at an
industry level reflected in the legal contracts, and at a
cognitive level that reflects the buyers true assessment of the
supplier. These two dimensions vary in terms of influence on
the development of the inter-organizational relationships.
Trust is the central feature of buyer-seller. The development
of contractual understanding at the very early stage of
interrelationship may facilitate the positive personalities in the
evolution of buyer-seller relationship.

yet to be developed. This includes the external integration


with customers as well.
In todays competitive environment, it is no longer the case
of whether organizations should implement SCI but rather, to
consider what constitutes critical success factors in
implementing the SCL. Several critical factors have been
identified to be important, namely the process, committed
buyer, the flyer and promotional aids, supplier collaboration
and enablement, and more importantly the hosted
application. The organizations willingness to change some
of the existing business processes and policies to achieve more
effective workflow is a key critical factor. Committed buyers
are needed because by enforcing the supplies to use the
system will ensure active trading in the community. Similarly,
if the initial upload of catalogue or flyers is not done properly,
the users will have great difficulty in gaining the awareness.
On the other hand, suppliers enablement is a time
consuming, resource heavy task as it involves things
convincing the suppliers to come on board, training them
and uploading their catalogue.
A hosted application would be ideal for companies that do
not want to invest in high upfront cost, staff to manage the
system and to worry about the hardware and software
obsolescence. This is an affordable alternative solution with
faster setup as compared to the traditional mode of acquiring
licenses. A successful SCI strategy will enable to bring the
organization to a higher level of growth and market share.
Supply chain integration and the new millennium
The history of operations management in the twentieth
century can in some ways be seen as leading to the current
emphasis on supply chain integration as the way to compete,
since that history has been largely been concerned with everincreasing spans of control. From Taylors pioneering work of
1911 to the IMVPs lean production article in the 1980s the
era of Taylor to Toyota (Voss, 1995) has seen the unit of
investigation expand from the task of an individual to the
activities of a network of firms. Scientific management was
concerned primarily with direct labor productivity and thus
the article of work methods. It also looked beyond the firm to
its suppliers and customers. For example, controlling product
quality requires manufacturers to work with suppliers, just as
controlling demand patterns requires them to work with their
customers. In this millennium, enhanced competitiveness not
only in control but also in issues such as product design will
require that manufacturers increasingly open out their arcs of
integration and collaborate within a network of organizations.
New technology is already facilitating such developments.
The internet allows any member of a supply chain to connect
to any other organization. In other words, the widest possible
arc of integration has rapidly changed from a theoretical
concept into an operational reality. Manufacturers can now
link to customers using e-commerce on the sell-side of the
internet in what is popularly termed the Dell direct model.
The more information that manufacturers have concerning
end consumers requirements the simpler supply and demand
decisions become (Poirer, 1999) and the lower the risks of
stock-outs or obsolete inventory (Fisher, 1997). Conversely,
on the buy-side of the internet extensive electronic supply
base management is increasingly feasible. For many years now
cost and delivery information has been shared between
manufacturers and a few major suppliers using electronic data
interchange (EDI). But these EDI systems, unlike the

Recommendation
The role of supply chain management has been well
documented. However, there has been an advantage and.
SCM has yet to be fully implemented in local companies.
However, the idea of supply chain has been accepted
positively by some of the local companies even though there
are pitfalls being recorded by researches in the
implementation of SCM. The introduction of just-in-time
(JIT) production at Proton cars, Malaysia has shown the need
for an extension of supply chain management from an internal
approach to an external approach. JIT is a disciplined
approach to improving overall productivity and eliminating
waste. It provides for the cost-effective production and
delivery of only the necessary quantity of parts at the right
quality, at the right time and place, while using a minimum
amount of facilities, equipment, materials and human
resources. JIT is dependent on the balance between the
suppliers flexibility and the users flexibility. The
disadvantages are seen as the cost involved, the openness
required by the development process and the need to manage
change. The role of SCM is seen as a virtue to reduce the
number of suppliers so as to reduce variability and improve
product quality. The main advantages are found to be better
quality, reduce costs and the ability to produce products,
which are highly desirable in the marketplace. Partnering and
forming alliances benefits the vertical integration without even
taking over companies. It is therefore important to emphasis
on long-term strategy associated with developing the supplier
base. As it is now, the local companies (i.e. Proton) have only
been developing the supplier-manufacturer relationship and
the linkage with customers through information network has
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Supply Chain Management: An International Journal

Suhaiza Zailani and Premkumar Rajagopal

Volume 10 Number 5 2005 379 393

internet, are generally incompatible with each other and


expensive to develop and install. Internet technology, with its
world-wide interconnectivity and ease of access, is far less
costly and permits many more suppliers, even quite small
ones, to be integrated electronically into a supply chain (Coyle
et al., 2003).
One consequence for supply chain integration of this
cheaper, easier internet communication may be to extend the
types of information exchanged. Not only the delivery
schedules and billing data of an EDI system, but also new
product ideas, online product support material, training aids,
and technical knowledge can be transferred. Thus, the nature
of collaboration may increase in range and intensity, and a
broad arc of integration will be defined in terms of more or
different variables. A second consequence of internet use for
supply chain integration, related to the closeness of the
relationship between firms, is harder to predict. By making
collaboration easier and cheaper, the new technology means
companies can integrate aspects of their operations more
swiftly and collaborate more closely than before. But, the
open architecture of the internet means that many more
potential suppliers can bid for business, and new
collaborations, beyond the circle of favored partners, are
easily formed. EDI ties companies together with a proprietary
link representing substantial investment, but the internet
makes such communications available to everyone. Supply
requirements can even be posted on an electronic bulletin
board or supplier network and rival bids easily compared,
permitting new rivals to compete in the electronic
marketplace. Thus, vendor switching may be as likely as
partnership, for the internet enables both approaches.
But assuming that the ultimate are of integration is a webenabled supply chain, then the challenge is to get there first.
In many ways, the new millennium is shaping up as a race
between the outward-facing companies and their less
integrated rivals. It probably took the outward-facing
companies in our sample many years to achieve their high
degrees of integration, and today they still have the advantage.
New internet technologies, however, such as e-procurement
software and advanced supply chain planning systems can
greatly simplify implementation, so that manufacturers with
traditionally narrow arcs of integration now have an
opportunity to quickly catch up.

It is to be hoped that other researchers will be attracted to


such issues. There is growing evidence linking supply chain
integration to performance improvement, such as we have
presented here, will encourage more operation management
academics to investigate an area which now so much concerns
practitioners themselves. Finally, what might increased
research activity into supply chain management mean for
the field of operations management in the new millennium?
Such a development could have at least two potential
consequences. First, the unit of investigation will
increasingly not be the firm but the network of collaborating
companies (Fisher, 1997). This will surely present an extra
layer of difficulty to whichever research method is employed.
In the case of empirical studies, it means that the next
generation of research will likely involve data collection from
more than one unit along the supply chain to provide the
multiple perspectives that bring us closer to scientific validity.
Second, if supply chain management continues to be, as this
and other studies suggest, a key source of competitive
excellence, then the prospect is for operations management
practice (and article) to be seen as an even more crucial and
decisive business discipline than perhaps was the case in the
past. Many of us in the field would happily accept the first of
these suggested consequences in return for the second. That
is, we will take on the burden of an increasingly complex
research task, encouraged by the prospect of our subject
playing an even more central role in business during the
twenty-first century.

Conclusion
The need to react to market changes and the critical role of
supply chain in meeting this need, and the potential benefits
of integrating the supply chain can no longer be ignored. This
potential, however, will be realized only if the
interrelationships among different parts of the supply chain
are recognized, and proper alignment is ensured between the
design and execution of the companys competitive strategy. It
is hoped that these findings on the impact supply chain
integration has on performance of a company, will help our
local companies gear up to invest more resources and time in
this area. It is crucial that the local companies start to be an
agile and learning organization so that they continuously
reinvent themselves by integrating its key strategies with the
suppliers and customers. In the twenty-first century with the
acceleration of globalization, it is even more critical that local
companies start to take note and position themselves of which
the consequences could prove to be fatal.

Future research
This section makes three suggestions for further research, and
concludes with a general observation on the significance of the
increasing importance of supply chain research for the field of
operations management:
.
This article draws on data from electronics manufacturers
and related logistic companies. There may be particular
characteristics to these supply chains that do not apply to
other sectors. Sector specific studies of arcs of integration
and their relation to performance improvement will
potentially yield different insights.
.
Since this article primarily focused on manufacturing,
future research might also include data from purchasing
and marketing representatives to better gauge the degree
of supplier and customer integration.
.
The role of the internet and supply chain integration
seems potentially profound. How can the new media best
be deployed to broaden arcs of integration more swiftly
and at less cost than hitherto?

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