Supply Chain Mgt. Programs and Performances: An Exploratory Study using Non-Parametric Analyses

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1 2-ICIT 9-//07 in RoC Going for Gold ~ 5-S, 6-σ & KM Paper #: 0-07 Page- /9 Supply Chain Mgt. Programs and Performances: An Exploratory Study using Non-Parametric Analyses Dr. Arawati Agus Faculty of Economics and Business, Universiti Kebangsaan Malaysia, 600, Bangi, Selangor Malaysia. araa@pkrisc.cc.ukm.my Dr. Za faran Hassan Management Dept., Faculty of Business Mgt., Universiti Teknologi MARA, 050, Shah Alam, Malaysia zafaran@salam.uitm.edu.my ABSTRACT This paper explores supply chain management (SCM) programs in manufacturing companies in Malaysia. At this preliminary stage, this study examines relationships between supply chain management programs and supply chain performance (supply chain flexibility and supply chain integration) and profitability. Supply Chain management variables, performance improvements and associations are analyzed through non-parametric methods such as Spearman s correlations, Friedman s Rank Test, Mann-Whitney test and Kruskal Wallis test. The findings suggest that SCM programs and implementations have significant correlations with supply chain flexibility, supply chain integration and profitability. In addition, responsiveness flexibility, new product flexibility and distribution flexibility have significant correlations with profitability. Meanwhile, purchasing integration, production integration, logistics integration and inventory integration also have strong correlations with profitability. The result also indicates that high profit-generated companies emphasized more on SCM programs such as customer relations practices, lean system, technology and innovation and quality information exchange. They also have better responsiveness/market flexibility, followed by volume flexibility and launch/new product flexibility compared to low profit-generated companies. This cluster also has higher production integration, purchasing integration, logistics integration and inventory integration. Keywords: Supply Chain Management, Supply chain flexibility, Supply chain integration,, Friedman Test, Mann-Whitney Test and Kruskal Wallis Test..0 Introduction As global competition increases, businesses should be more involved in how their suppliers and customers do business. To compete successfully in today challenging business environment manufacturing companies should be able to effectively integrating the internal functions within a company and effectively linking them with the external operations of suppliers and supply chain members. Supply Chain Management seeks to enhance performance by closely integrating the internal functions within a company and effectively linking them with the external operations of suppliers and chain members. Supply Chain management requires coordination with customers and suppliers, therefore firms must achieve a relatively high degree of integration before implementing SCM. SCM involves integration, coordination and collaboration across organisations and throughout the supply chain. Supply Chain management has the potential to assist the organisation in achieving both cost and a value advantage (Christopher, 998). To gain competitive advantage, organisations have to adopt Supply Chain Management (SCM) approach and consider the supply chain as a whole. Many researchers claim that Supply Chain Management can result in better supply chain performance (Christopher, 998 and Christiansee & Kumar, 2000), but very few empirical studies have been carried to investigate the impact of SCM on supply chain performance and profitability. According to Ganeshan and Harrison (999), a supply chain is a network of facilities and distribution options that performs the functions of procurement of materials, transformation of these materials into intermediate and finished products, and the distribution of these finished products to customers. Supply Chain Management (SCM) is the management of upstream and downstream relationships with suppliers and customers to deliver superior customer value at less cost to the supply chain as a whole (Christopher, 998). SCM involves integration, co-ordination and collaboration across

2 2-ICIT 9-//07 in RoC Going for Gold ~ 5-S, 6-σ & KM Paper #: 0-07 Page- 2 /9 organisations and throughout the supply chain. SCM comprises functions like distribution planning, demand forecasting, purchasing, requirement planning, production planning, warehousing, material handling, inventory, packaging, order processing, and transportation etc. All these functions are considered as building blocks of SCM in today's business environment. This paper explores the possibility of adopting SCM as the basis for enhancing performance in manufacturing companies in Malaysia (producing non food based products with medium to high emphasis in technology). First, this paper proceeds with a brief explanation on the SCM principles and literature review; Second, it discusses the methodology adopted, the objectives of the study and the test conducted to obtain the reliable measures of SCM variables. Third, it determines the correlations between SCM and performances; Fourth, it highlights the results of Spearman s correlation, Friedman test, Mann-Whitney test and Kruskal Wallis test. Finally, the results are then discussed and implications highlighted. 2.0 Construct Measurement: Validity and Reliability As the initial data analysis, seven SCM variables constructs were subjected to validity and reliability tests before a single score can be calculated to represent each construct. Confirmatory factor analysis (CFA) or a measurement model using AMOS was employed for examining construct validity of each scale by assessing how well the individual item measured the scale (Ahire, Golhar and Walter 996). The goodness of fit indices (GDI) of the eight constructs exceeded the 0.90 criterion suggested by Hair et al. (998), hence, establishing the construct validity. The reliability analysis was conducted by calculating the Cronbach s alpha for each construct. Items that did not significantly contribute to the reliability were eliminated for parsimony purpose. The result shows that the Cronbach s alpha measures for the seven constructs exceeds the threshold point of 0.70 suggested by Nunnally (978). Alpha coefficients for SCM scales range between 0.80 and 0.98 after the alpha maximization process were carried out. As a result, items were retained for the seven constructs. In order to obtain consistent and reliable measures of supply chain flexibility, supply chain integration and profitability, a reliability test using SPSS reliability procedure was conducted to determine the item analysis and internal consistency and stability of the measurements (Saraph et al. 998, Flynn et al. 995, Churchill, 979). The reliability analysis was conducted by calculating the Cronbach s alpha for each scale. The result shows that the Cronbach s alpha measure for performances scales also exceed the threshold point of 0.70 suggested by Nunnally (978). The alpha coefficient for Supply Chain scales is 0.9 and the alpha coefficient for Supply Chain Integration scales is Having met the requirement of reliability, the composite measure of each construct can be measured by calculating its mean values (Hair et al. 998)..0 Research Methodology The instrument used in this study was a structured survey questionnaire, which was designed to assess the companies in term of the described dimensions. The instrument developed in this study consists of two major parts. The first part comprises several constructs measuring SCM practices, and the second part comprises three performance measurements. To enable respondents to indicate their answers, seven point interval scales were use for the questionnaire. A total of seven constructs of SCM, which have been widely referred, were extracted. Similarly, the dependent variables namely supply chain flexibility, supply chain integration and profitability also used a seven-point interval scale, representing a range of agreement on statement whether over the past three years these performances are high relative to competitors after implementing SCM practices. A total ample of 0 companies were randomly chosen from manufacturing companies (non-food based manufacturing companies with medium to high technology) in Klang Valley, Malaysia. Companies in Klang Valley were chosen because majority of these companies were situated in Klang Valley (mostly in Kuala Lumpur and Selangor). The reasons for focusing on this sector are twofold. First, manufacturing 2

3 2-ICIT 9-//07 in RoC Going for Gold ~ 5-S, 6-σ & KM Paper #: 0-07 Page- /9 companies have emerged as leading sectors in Malaysia in terms of adopting new manufacturing and SCM programs and these practices are driven primarily by competitive rather than regulatory forces. Second, the industry is heterogeneous in terms of sub-sectors and product/process complexity. As an exploratory study, forty useable responses were received and were analyzed using the SPSS package. The primary purpose of the research was to measure senior quality managers or production manager s perception of SCM variables and to gain insight into the benefits of implementing SCM in the manufacturing industry. The goal is to understand and determine determinants of SCM that can enhanced SCM performances (supply chain flexibility and supply chain integration) and bottom line result (profitability). Face to face interviews with SCM managers or production managers were carried out for checking the information accuracy, validating the outcome of analysis and developing an understanding of practical aspects of SCM principles adoption. With regards to these questions, the main objectives of this paper are: () To empirically explore associations among SCM variables. (2) To empirically investigate relationships between SCM and performance. () To empirically assessing the importance of each SCM indicator on performance..0 Study Findings Discussions on the empirical findings are be based on non-parametric analyses. The non-parametric section includes (a) Spearman correlation analyses between SCM variables and performances, (b) cluster analysis and Friedman test, and (c) Kruskal Wallis and Mann-Whitney tests.. Spearman Correlation analyses between SCM variables and performances Further, through Spearman correlations (Table, Table 2 and Table ) relationships between SCM, supply chain flexibility, supply chain integration and profitability were investigated and described. This result indeed confirms close associations between SCM and supply chain flexibility, supply chain integration and profitability. has significant correlations with responsiveness flexibility (r = 0.567), new product flexibility (r = 0.5), distribution flexibility (r = 0.5), volume flexibility (r = 0.27) and product flexibility (r = 0.58). In addition, profitability also has strong correlations with production integration (r = 0.55), purchasing integration (r = 0.55) and distribution/logistics integration (r = 0.5) and inventory integration (0.75). These findings are consistent with several previous studies that proclaimed better organizational transformations as a result of SCM initiatives (Lee et al., 997; Metters, 997; Narasimhan & Jayaram, 998; Lummus et al., 998; Anderson & Katz, 998). Fundamentally, to improve supply chain flexibility, supply chain integration and profitability, a manufacturing company should implement SCM programs. Table : Spearman s Correlations between Supply Chain Management programs and performances Supply Chain management programs Supply Chain Supply Chain Integration Strategic Supplier Partnership 0.72** 0.6** 0.* 2 Customer Relations Practices 0.20** 0.590* 0.2* Information Sharing 0.566** 0.5* 0.00** Quality Information Exchange 0.60** 0.59** 0.0* 5 Lean System 0.558** 0.59** 0.77** 6 Postponement Concept 0.** 0.90** Technology and Innovation 0.56** 0.598** 0.55** *P 0.05, **P All t-tests are one-tailed Table 2: Spearman s Correlations between Supply Chain and Supply chain flexibility Product 0.76 ** 2 Volume 0.27 ** New Product 0.5 **

4 2-ICIT 9-//07 in RoC Going for Gold ~ 5-S, 6-σ & KM Paper #: 0-07 Page- /9 Distribution 0.5 ** 5 Responsiveness ** *P 0.05, **P All t-tests are one-tailed

5 2-ICIT 9-//07 in RoC Going for Gold ~ 5-S, 6-σ & KM Paper #: 0-07 Page- 5 /9 Table : Spearman s Correlations between Supply Chain Integration and Supply chain Integration Distribution/ logistics integration 0.5 ** 2 Procurement/purchasing integration 0.55 ** Production integration 0.55 ** Inventory integration 0.75 ** *P 0.05, **P All t-tests are one-tailed.2 Cluster Analysis and Friedman s Test To further explore on the segmentation of manufacturing companies in this study, cluster analyses were carried out. Since profitability is a very importance bottom-line outcome, therefore the classification is based on profitability clustering. The result from cluster analysis statistically segmented the manufacturing companies into two clusters based on profitability namely High profit-generated companies and Low profit-generated companies. Tables and 5 highlight further information about the two clusters. The first cluster comprises of large-scaled companies with average employees of more than,200 and average approximated sales turnover between RM million to RM 550 million. Meanwhile, the second cluster comprises of smaller companies with average employees of about 0 and average approximated sales turnover between RM million to RM 25 million. Table : Rankings of Supply Chain Management Programs based on High and Low Profit-Generated Companies using Friedman s Test Supply Chain High profit-generated companies Low profit-generated companies Management programs Friedman s Test Rank Mean Std Dev Friedma n s Test Rank Mean Std Dev Strategic Supplier Partnership Customer Relations Practices Information Sharing Quality Information Exchange Lean System Postponement Concept Technology and Innovation Table 5: Rankings of Supply Chain based on High and Low Profit-Generated Companies using Friedman s Test High profit-generated companies Low profit-generated companies Supply Chain Friedman Rank Mean Std Friedman Rank Mean Std Dev s Test Dev s Test Product Volume New Product Distribution Responsiveness From the result we can infer that the higher level of SCM implementations are more realized in High profit-generated companies than Low profit-generated companies. High profit-generated 5

6 2-ICIT 9-//07 in RoC Going for Gold ~ 5-S, 6-σ & KM Paper #: 0-07 Page- 6 /9 companies gives high priorities to customer relations practices, lean system, technology and innovation followed by quality information exchange, postponement concept, strategic supplier partnership and lastly information sharing. This first cluster performed highly in supply chain flexibility especially responsiveness flexibility, volume flexibility and new product flexibility followed by distribution flexibility and product flexibility. On the other hand, the second cluster ( Low profit-generated companies ) has volume flexibility, product flexibility, distribution flexibility. In addition, Table 6 exhibits the overall rankings of the SCM integration for the two clusters based on the Friedman s rank test and in case of a tie; the variables were ranked according to means and standard deviations. The result highlights the importance of production, purchasing, inventory and logistics integration in SCM implementations in enhancing profitability. The findings also suggest that manufacturing companies in Malaysia give less emphasis on strategic supplier partnership and information sharing compared to their counterparts in developed countries. Table 6: Rankings of Supply Chain Integration based on High and Low Profit-Generated Companies using Friedman s Test High profit-generated companies Low profit-generated companies Supply Chain Friedman Rank Mean Std Friedman Rank Mean Std Integration s Test Dev s Test Dev Distribution/ logistics integration Procurement/purchasin g integration Production integration Inventory Integration Kruskal Wallis and Mann-Whitney Tests Table 7: Kruskal Wallis Test and Summary of Statistics by Types of Industry SCM Group Mean Chi-Square Sig. Rank Value Mean Supply Chain (ns) Management programs Mean Supply Chain Mean Supply Chain Integration (ns) (ns) (*) Notes: =Small scaled industry; 2 =Medium scaled Industry; = Large-scaled Industry **significant at p=0.00, * significant at p=0.05, ns = not significant Kruskal Wallis tests were used to further explore differentiation of SCM, supply chain flexibility, supply chain integration and profitability according to types of industry. In this study, respondents were asked whether they classified their companies into small, medium or large scaled industries. The results presented in Table 7 indicate that large-scaled industry has the highest means for almost all the variables. 6

7 2-ICIT 9-//07 in RoC Going for Gold ~ 5-S, 6-σ & KM Paper #: 0-07 Page- 7 /9 Statistically, however, the result only suggests significant difference in the means of profitability according to the types of industries. To explore further on the effect of ISO accreditation on SCM variables, supply chain flexibility, supply chain integration and profitability, Mann-Whitney tests were conducted. The result presented in Table 8 does not support general assumptions regarding the effect of ISO accreditation on SCM variables and profitability. These results show that: () Companies with ISO accreditation exhibit relatively higher level of performances, (2) However, there are no significant differences between the two groups for supply chain management programs, supply chain flexibility, supply chain integration and profitability. Table 8: Mann-Whitney Test and Summary of Statistics by ISO Accreditation SCM Group Mean Mann Whitney Sig. Value Mean Supply Chain (ns) Management programs Mean Supply Chain Mean Supply Chain 2. Integration (ns) (ns) (ns) 2.2 Notes: =Yes; 2 = No ISO accreditation **significant at p=0.00, * significant at p=0.05, ns = not significant Therefore, we can state that even though all performance measurements and SCM scores are higher for companies with ISO accreditation, the Mann Whitney tests fail to show significant statistical evidences to support the assumption that companies with ISO accreditation have higher means for supply chain management, supply chain flexibility, supply chain integration and profitability. 5.0 Conclusion and Implications In this paper, researchers examine the relationship between supply chain management programs and supply chain performances such as supply chain flexibility and supply chain integration variables as well as profitability in manufacturing companies in Malaysia. The study measures senior quality managers or production manager s perception of SCM variables and level of performances in the industry. In summary, the findings of the empirical study are clear, and suggest several things. Firstly, there is significant impact of SCM on performances of the Malaysian manufacturing companies. The findings suggest that supply chain management programs have significant correlations with supply chain flexibility, supply chain integration and profitability. High profit-generated companies gives high emphasis on customer relations practices, lean system, technology and innovation followed by quality information exchange, postponement concept, strategic supplier partnership and lastly information sharing. In addition, supply chain flexibility and supply chain integration also have strong correlations with profitability. The result also indicates that high profit-generated companies has higher level of responsiveness flexibility, volume flexibility and new product flexibility followed by distribution flexibility and product flexibility. These companies also have high performance in production integration and purchasing integration. The results of this study suggest that superior adoption in SCM does have an impact on performances. The findings show that SCM is positively related to supply chain flexibility, supply chain integration and profitability, which reinforces several empirical studies in the supply chain (Vickery et al. 999, Lee et al., 997, Frohlich & Westbrook, 200 Gunasekaran et al, 200, Kuei et al., 200 and Cox, 999). 7

8 2-ICIT 9-//07 in RoC Going for Gold ~ 5-S, 6-σ & KM Paper #: 0-07 Page- 8 /9 Since this paper is still at the exploratory stage, no generalization is being put forward. However at this stage, the evidence of the importance of SCM programs is clear. Nonetheless, more samples will need be collected to test hypotheses, assumptions and also propositions and ultimately to make generalizations. Therefore, rather than being conclusive, this paper opens new avenue for extended and future research. References Ahire, S.L.,Golhar, D. Y. & Waller, M. A. 996, Development and validation of QM implementation constructs, Decision Sciences., 27(): Anderson, M.G., Katz, P.B., 998. Strategic sourcing. International Journal of Logistics Management. 9 (),. Christiansee, E. & Kumar, K. (2000): ICT-enabled coordination of dynamic supply webs ; International Journal of Physical Distribution and Logistics Management, Vol. 0:/; pp Christopher, M. (998), Logistics and Supply Chain Management: Strategies for reducing cost and improving service, Financial Times. Pitman Publishing. Churchill, Gilbert A. Jr. (979) A Paradigm for Developing Better Measures of Marketing Constructs, Journal of Marketing Research. xvi, pg 6-7. Cox, A. (999). Power, Value and supply Chain Management. International Journal of Supply Chain Management, (), Flynn, B., Sakakibara, S., & Schroeder, R.G., 995. Relationship between JIT and TQM: practices and performance. Academy of Management Journal 8 (5), Frohlich M. T. & Westbrook R., 200. Arcs of integration: an international study of supply chain strategies. Journal of Operations Management 9 (200) Ganeshan, Ram & Harrison, Terry, P., (999) An Introduction to Supply Chain Management online internet, www:http//silmaril.smeal.psu.edu /misc/supply_chain_intro.html. pp. -2, 999. Gunasekaran, A., Patel, A., & Mcgaughey R. E. (200). A Framework for Supply Chain Performance Measurement. International Journal of Production Economics, 87(), -7. Hair, J.F., Anderson, R.E., Tatham, R.L. & Black, W.C. (998) Multivariate data analysis, Englewood Cliffs, NJ: Prentice-Hall. Kuei, C.H., Madu, C.N., & Lin, C. (200). The relationship Between Supply Chain Quality Management Practices and Organizational Performance. International Journal of Quality and reliability Management, 8(8), Lee, H.L., Padmanabhan, V., & Whang, S., 997. Information distortion in a supply: the bullwhip effect. Management Science (), Lummus, R.R., Vokurka, R.J., & Alber, K.L., 998. Strategic supply planning. Production and Inventory Management Journal. 9 (), Metters, R., 997. Quantifying the bullwhip effect in supply chains. Journal of Operations Management. 5, Morris, M.H., Calantone, R.J., 99. Redefining the purchasing function: an entrepreneurial perspective. International Journal of Purchasing and Materials Management. Fall, 2 9. Narasimhan, R., Carter, J.R., 998. Linking business unit and material sourcings. Journal of Business Logistics. 9 (2), Narasimhan, R., Jayaram, J., 998. Causal linkages in supply management: an exploratory study of North American manufacturing firms. Decision Sciences. 29 (), Nunnally, J. (978). Psychometric Theory. New York: Mc Graw Hill Book Co. Saraph, Jayant V., Benson, George P., & Schroeder, Roger G An instrument for measuring the critical factors of quality management. Decision Sciences. Fall. 20: Vickery, S., Dröge, C., & Markland, R. (997), "Dimensions of manufacturing strength in the furniture industry", Journal of Operations Management, Vol. 5 pp

9 2-ICIT 9-//07 in RoC Going for Gold ~ 5-S, 6-σ & KM Paper #: 0-07 Page- 9 /9 Authors Background Dr. Arawati Agus is an Associate Prof. in the National University of Malaysia (UKM). She received a Bachelor degree in Finance from the Southern Illinois University and Master in Management Sciences from St. Louis University. She obtained her Ph. D. in National University of Malaysia (UKM). Area of research are Quality Management, Operation Management, and Management Science. Dr. Za faran Hassan has a Doctorate in Business Administration from the National University of Malaysia and MBA from Saint Louis University, USA. She is an Associate Professor and currently is the Head of the International Business and Human Resource Management Department at the Faculty of Business Administration of Universiti Teknologi MARA, Malaysia. She is a member of the Malaysian Institute of Management, Malaysian Society for Training and Development, Center for Small Business and Regional Research at UOW Australia, the Academy of International Business, the panel of expertise on Hospitality Industry, and the APO expertise on SME. 9