The Impact of Supply Chain Integration on Financial Performance of the Firm in the Pakistan Manufacturing Industry
Research Paper (postgraduate) 2018 26 Pages
THE IMPACT OF SUPPLY CHAIN INTEGRATION ON THE FINANCIAL PERFORMANCE OF THE FIRM IN THE PAKISTAN MANUFACTURING INDUSTRY
Saiyed Muhammad Fauzan Ali
Iqra University, Karachi Pakistan
Abstract: The SCI is found to be a tactical process that is contributory in producing positional benefits for an organization connected to the improved performance of the firm. Nevertheless, there are only a few researches that have addressed the gap in research pertaining to the connection between the buyer and the supplier and the effect of this relationship on the firm’s financial performance. This study examines the effect of SCI on the firm’s financial performance in the manufacturing sector of Pakistan. Moreover, it also investigates the contribution of Trust, Dependence, Commitment and Reputation in the establishment of an effective SCI.
Methods: Data was gathered from 199 respondents, and PLS Analysis has been conducted to find out the impact between the variables.
Findings: The Results revealed that there is a significant and positive impact of SCI on the financial performance of a firm in the manufacturing sector of Pakistan.
Keywords: Supply Chain Integration, Trust, Dependence, Commitment, Reputation, Financial Performance.
Supply Chain Management is organized and tactical management of the functions of an organization, and the flow of information, goods, money, and material in a specific organization, and athwart the firms in the Supply Chain network (Naslund and Williamson, 2010). It is an integration of the fundamental processes of a company starting from the upstream all the way to the downstream. Subsequently, the integration of the Supply Chain is found to deliver value to a firm’s stakeholders and the customers (Shi and Yu, 2013). In addition, it has been argued that SCI is a significant contributor to the enhancement of the company’s performance and creating value in the business (Krause et al., 2007). Yuen and Thai, (2016) argued that the integration of Supply Chain is focused on increasing competitive advantage and improving the quality of the performance of operations. Likewise, Cao and Zhang, (2011) argued that there is a substantial and constructive association among Supply Chain Integration practices and the performance of the financial practices of a firm. However, Supply Chain Integration is a process that focuses on potential returns on the company’s investment. For this reason, companies set different priorities based on the company’s strategic needs, and the desired potential return on investment (Ellinger, Natarajarathinam, Adams, Gray, Hofman, and O’Marah, 2011).
McCarthy-Byrne and Mentzer, (2011) argued that Supply Chain Integration (SCI) involves various economic actions pertaining to internal integration and external integration. A firm integrates internally through information sharing, and systematic alignment of internal processes, whereas, external integration involves enhancing inter-organizational ties among Supply Chain Partners. In relation to the External integration strategy, Ireland and Webb, (2007) claimed that dependence; trust, commitment, and reputation have a significant contribution in the formation of the ties between a supplier and the buyer, which influence supply chain integration (SCI) in numerous ways. Over the past many decades, the concept of Supply Chain Management has transmuted from the customary focus on procuring and logistics to the creation of value and increasing operational excellence, thereby enhancing a firm’s performance. Hence, the new concept has made Supply Chain Integration the center focus of Supply Chain Management (Tse, Zhang, Akhtar, and MacBryde, 2016). Therefore, the thesis will focus on external integration between firms that operate in Pakistan’s manufacturing industry and empirically examine the effect of Supply Chain Integration on the company’s financial performance. Furthermore, to understand the effect of Supply Chain Integration on a company’s financial performance, it is critical to explore how Integration between inter-organizations are established. Hence, it is imperative to comprehend the contribution of the significant elements that govern the establishment of Supply Chain Integration. For this reason, the study will investigate the contribution of trust, commitment, dependence, and reputation in the formation of supply chain integration.
As competition between firms intensify in the 21st Century, and markets have become global, firms have started to face challenges pertaining to product development and generating value under the supply chain network. Hence, to cope up with this rising issue, firms have started to focus on strategies to enhance the process of product development so that value can be delivered to the customers and stakeholders, which will result in the intensified performance of the firm. Therefore, organizations tend to formulate a strategic partnership with their suppliers (Morali and Searcy, 2013). There are arguments that the integration of Supply Chain plays a critical role in enhancing the longstanding performance of the business by the creation of value within the supply chain network (Naslund and Williamson, 2010; Tse, et al., 2016). A study published in the year 2011 claimed that the integration of Supply Chain comprises of economic actions which include information sharing and social relationship between partners (McCarthy-Byrne and Mentzer, 2011). In relation to the concept, Trust and Dependency go hand in hand in this kind of relationship and influence the supply chain integration in a variety of ways (Krause et al., 2007). In addition, Froddel, (2011) reported that supplier commitment is a significant role player in the buyer and supplier relationship because buying organizations would often seek the commitment of the supplier to the relationship when engaging with the problems of a supplier.
Similarly, reputation is critical to a buyer and supplier relationship in a way that manufacturers are likely to monitor the supplier’s behavior when developing trust. Moreover, reputation is a significant key factor that reflects within the supplier’s behavior and business practice (Ryu, Min, and Zushi, 2008). Hence, understanding the joint and independent influence of these factors on supply chain integration is critical for practitioners in formulating a strategy to effectively establish and manage their social ties.
Although, general support in the literature can be found about Supply Chain Integration, which has a substantial and positive impact on the firm’s performance. However, the majority of the studies did not examine the firm’s performance with the viewpoint of addressing the gap in research relating to the relationship between the buyer and the supplier, and its effect on the organization’s performance (Flynn et al., 2010; Fabbe-Costes and Jahre, 2007). Moreover, Studies do not concurrently investigate the contribution of Dependence, Trust, Reputation and Commitment in the establishment of an effective Supply Chain Integration (SCI). As a matter of fact, a number of studies have simultaneously examined the contribution of Trust and Commitment in Supply Chain Integration (Laaksonen et al., 2008; Zhang and Huo, 2013). Therefore, with the intent to fill this gap in research, the study empirically investigates the effect of Supply Chain Integration on the financial performance of the firm. Moreover, to further explore Supply Chain Integration (SCI) in the relation of its formation and strength, it is critical to empirically investigate whether Trust and Dependance play a significant role in the development of an operative Supply Chain Integration, and whether Corporate Reputation and Commitment have a significant and constructive role in the determination of the strength of integration between the Supply Chain Partners (Ireland and Webb, 2007).
The research study was aimed to examine whether trust and dependence have a contribution to the formation of Supply Chain Integration. Moreover, the study also aims to find the role of commitment and reputation in the determination of the level of strength of an inter-organizational relationship. Similarly, the study will empirically study the impact of Supply Chain Integration on the firm’s financial performance, and fill in the Research gap relating to the Effects of SCI on the performance of a firm through the findings of the research.
The Research has aimed at finding an answer to the following two questions:
What is the effect of supply chain integration on the financial performance of the organizations in Pakistan’s Manufacturing Industry?
To what extent do trust, dependence, commitment and reputation affect the buyer and supplier relationship in a Supply Chain Integration framework?
This study will be a significant endeavor in helping supply chain practitioners to develop a strategy, which will enhance the buyer and supplier relationship, with a strong focus on the critical factors that influence Integration, so that the organization’s financial performance can be improved. Moreover, the study aims to provide a milestone for future researchers.
There are a few limitations to this Study, for instance, data was collected from manufacturers only. Future research can collect data from Supply Chain members across a diverse range of Industries. Furthermore, the research was conducted in Pakistan, hence, it cannot be said that whether the relationship between the variables and the level of Integration between the SC partners will be the same as of other countries bearing in mind cross-cultural differences across the different nations of the world.
The remaining part of this dissertation has been organized in a sequential format. Initially, an assessment of the literature is carried out in relation to trust, commitment, reputation, dependence, and SCI, and hypothesis are derived through the collected works. Next in line is the explanation of the adopted methodology and finally, the findings of the analysis are discussed.
In order to enhance the firm’s financial performance and seek a competitive advantage, businesses have been focused on forming a strategy that rationalizes all of the undertakings incorporated in the internal and external processes, making them quick to respond to the customer needs and reducing operational cost. By improving the value of all the undertakings that are incorporated in the process will ultimately improve the firm’s competitive position. A Supply Chain Network comprises of organizations from upstream which is also known as the supplier end of the process to downstream, which is known as the consumer’s end in the process. Integrating the Supply chain process from upstream to the downstream can improve the value of the end outcome, which is either the product or the service. Therefore, to improve the company’s performance through a supply chain strategy, firms engage in integrating cross-functional activities (Beheshti, Oghazi, Mostaghel, & Hultman, 2014).
Firm-supplier relationship underlines the importance of the theory surrounding the social exchange between the supply chain partners, and this social exchange theory helps in explaining the interactive model. From the viewpoint of the related literature, the social exchange theory describes the social structure in the form of a process which is based on mutually agreed exchanges among the partners or social players with the hope that their activities will positively affect the corresponding outcome. Human relations are established through an idiosyncratic cost-gain analysis and by comparing the existing substitutions. The concept of the social exchange theory plays a substantial part in maintaining the stability and commitment within the social system through establishing a mutual and long-term association between the parties, and that both parties should have coexisting rights and obligations (Kingshott & Pecotich, 2007).
Social exchange theory offers a universal analytic approach to a huge selection of social processes that are critical to the inquiry at different levels. Most importantly, it emphasizes the significant role of exchange processes in establishing the foundation of the social structure. It gives a notion of the social interactions between parties and how these interactions can result in the exchange of resources and value-added services, which may lead to performance-based outcomes (DeLamater & Ward, 2013). Understanding these interactions and how they emerge, and alter the networks in which they are rooted is one of the major contributions of this theoretical framework.
Ambrose, Marshall, & Lynch (2010) argue that social exchange theory is highly useful when studying the relationship between the supplier and the buyer. The social exchange theory is often used to comprehend the context and dynamics of a successful relationship. Social exchange theory is based on the concept that people interact with each other with an expectation of getting a reward. There is a significant role of reciprocity in the theory as the actions of a party will result in an equal action or behavior of the other party. Commitment and Trust are found to be the fundamental theme of a social exchange theory because commitment and trust reassure the success of the ties among the parties.
Sweeney & Webb, (2007) draw on social exchange theory and argue that the relationship between parties is often based on the benefits that are expected as an outcome of the association. If the parties feel that the association is emotionally rewarding then the individuals will have a high desire for a strong affiliation. However, Lovblad, Hyder & Lonnstedt, (2012) argue that a desire for affiliation cannot be considered the only relevant motive of the parties towards a social relationship, because different people have different intentions for their feelings towards a relationship. The precise sum and substance of the advantage derived through the association between a supplier and a buyer can significantly differ.
Zhang & Huo, (2013) draw on supply chain integration to explain the firm-supplier social relationship. Supply Chain Integration comprises of economic actions which include aligning the system, sharing of information, and inter-organizational social ties between exchange partners such as supplier and buyer. Supply Chain Integration can help managers to effectively form and manage the social relationship between the buyer firm and supplier firm.
Carr, Kaynak, Hartley, & Ross, (2008) reported the significance of dependence on suppliers to the organization of the buyer and studied the connection to the training of the supplier and their participation in the process of the development of the product in relation to the performance of the supplier. The data had been collected from a random sample of 231 firms and the technique utilized in the study was structure equation modeling. A subset of the sample comprising of a total of 166 organizations in the manufacturing industry was taken into account to test the hypothesis within the conceptual model. Findings revealed that dependence on supplier has a significant contribution in increasing supplier participation in the process of product development.
Dabhilkar, Bengtsson & Lakemond, (2016) discussed the relative power and dependence perspective to understand the way sustainable supply management (SSM) stratagems are taken by the manufacturing firms differ from one another within the Kraljic Matrix in relation to their capability of purchase. Data on the buyer and supplier relationship was collected from 338 manufacturing firms across Europe and North America and the technique that was utilized to test the hypothesis was regression analysis. The study revealed three circumstances in which power and dependence can be used to find out the effectiveness of purchase capabilities of a firm. Sustainability program was found to impact supplier compliance, the trade-off between high social compliance and low cost was found to be a significant and strategic alignment of sustainability initiatives between firm and supplier can lead to improved financial performance.
Hoejmose, Grosvold, & Millington, (2013) reported the significance of joint dependence in the establishment of a supply chain management which is socially responsible. The sample of the study consisted of a thousand largest firms in the UK in terms of turnover and thousand largest firms in terms of operations. The organizations were sent an invitation letter to participate in the study which was directed towards the director of the department of procurement. The final sample comprised of 339 respondents from a total number of 177 firms based in the UK. The hypothesis was tested using a set of regression models. The findings of their research revealed that joint dependency had a constructive effect on the socially responsible supply chain management. Furthermore, it was revealed that relationships that are jointly dependent had a significantly constructive effect on the implementation of a socially responsible supply chain management.
Terpend & Krause, (2015) studied the contribution of enticements on the performance of the supplier under the condition of the buyer and supplier dependence. Data was gathered from 230 respondents from the US industrial firms, and the hypothesis was tested using a Hierarchical Regression Analysis. Findings revealed that competitive incentives had a substantial role in enhancing productivity when the ties among the supplier and the buyer can be characterized by an adequate level of mutual dependence.
Doney, Barry, & Albratt, (2007) conducted a study to examine the factors that surround trust within the relationship among a buyer and a supplier. Trust was reported to have a positive relationship with commitment. Furthermore, the study found out that trust played a substantially positive part in the development of commitment between the supply chain partners and enhances business opportunities. Since commitment is related to the emotional content and in recognition of the traditional values of the relationship between two parties, these sentiments are tied to the partners for reasons beyond monetary gains. Therefore, both parties have the willingness to continue a long-term relationship, which enhances supplier integration.
Jiang, Henneberg, & Naude, (2012) studied the impact of trust and dependence on business relationships. Data was collected from 636 respondents and the hypothesis was tested using structural equation modeling. Satisfaction, Communication, Commitment, and Long-term orientation were also considered as significant determinants of the quality of association. The study reported that trust and dependence both have a significant role in the quality of the ties among the partners. Both trust and dependence have a significant and positive relationship and both are considered to be relational antecedents, on understanding relationship quality.
Jones, et al. (2010) examined the contribution of trust in a modern supply chain relationship. Furthermore, different facets of trust in the supply chain network were examined. The study employed an exploratory, multi-method research framework and data was collected from 189 respondents. Findings revealed that organizations identify trust as a critical factor in the strategies that are competitively designed. Buyers recognize the supply chain trust as an important contributor to enhancing competitive performance. However, it was discovered that suppliers place a high level of trust in the buying firms while buyer’s do not place a significant level of trust in their suppliers. It was argued that managers fail to comprehend the interconnectedness of supply chain trust and companies fail to unlock the true potential of supply chain collaboration.
Laeequddin, Sardana, Sahay, Waheed, & Sahay, (2009) identified the process of developing trust in a supply chain partnership. Data were collected from 102 senior managers from the packaged food industry in UAE. The hypothesis was tested using multiple regression analysis. Findings revealed that a relationship based on risk worthy characteristics establishes a significant level of trust among the members of the supply chain partnership.
Stuart, Verville, & Taskin, (2012) reported the relationship between trust with supplier and supply chain performance. A questionnaire approach was employed and data was collected through an email survey from manufacturing and service industries. The procurement managers of 852 organizations in the USA were chosen to fill out the questionnaire. A total of 172 responses were gathered for the study and the hypothesis was tested using the structural equation modeling. The study reported a significant relationship between the level of trust and the supplier’s competency in a relationship between the supplier and the buyer. However, the relationship amongst the interpersonal communication between the buyer and supplier and the level of trust was found to be statistically insignificant. Moreover, trust was found to be a significant contributor to customer relationship, financial performance, and market growth.
Yeung, Selen, Zhang, & Huo, (2009) reported the effect of trust on SCI. Data was collected from five cities in China and a questionnaire survey approach was adopted. The validity of the constructs was tested using the reliability testing technique, and the hypothesis was tested using the confirmatory Factor analysis. The results of the study revealed that trust enhances the supplier integration (SI). In the case of a lower level of trust, the level of internal integration is reduced and the buyers become vulnerable to high switching costs and potential supplier opportunistic behavior.
Chae, Choi, & Hur, (2017) reported the effect of the buyer’s power over the supplier’s relationship commitment. Data was collected from five countries, namely China, Hong Kong, Taiwan, South Korea, and the US, and 1,229 responses were gathered. The Multiple Regression techniques were employed to test the Hypothesis, and the results revealed that the buyer’s non-mediated power and the power of reward had a significant positive impact on the supplier’s relationship commitment, however, the coercive power was found to have a significant negative effect on the relationship commitment.
Ferro, pain, Svensson, & Payan, (2016) reported the mediating contribution of commitment and trust in a relationship between the buyer and the supplier. Data were collected from 600 small and medium-sized enterprises (SME) and the analysis was performed based on 259 responses. Structural equation modeling was utilized to perform the analysis. The study found that commitment plays a significant role in the relationship between the manufacturer and the supplier.
Li, Li, & Feng, (2015) examined the connection between Commitment and Supplier Trust. Data was gathered from 214 Chinese manufacturing organizations, and the hypothesis was tested using structural equation modeling technique. The results showed that the transaction related investments mediate the relationship between commitment and trust, and similarly, the cost of switching also moderates the relationship between commitment and trust.
Sharma, Young, & Wilkinson, (2015) examined the role of commitment in providing value to the relationship between a buyer and a supplier. Data was gathered from 160 respondents, and then the causal path analysis and the regression techniques were employed to test the hypothesis. The study found out that commitment played a substantial part in the relationship development among the buyer and the supplier.
Zhao, Huo, Flynn, & Yeung, (2008) studied the impact of Power and relationship commitment to Supply Chain Integration. The data was gathered from a total number of 617 firms operating in China, a questionnaire-based survey method was espoused in the study and responses was measured using Likert Scale. Exploratory Factor Analysis was utilized to conduct the analysis. Furthermore, the reliability test was also utilized to test the legitimacy of the constructs. Findings revealed that a normative relationship commitment between supply chain partners enhances supply chain integration.
Manello & Galabrese, (2018) examined the role of reputation in the supplier selection. Data was gathered from 53,100 direct supply contracts, and logistic regression analysis was implemented to examine the hypothesis. Findings revealed that reputation had a significant contribution in the selection of the supplier.
Michaelis, Woisetschlager, Backhaus, & Ahlert, (2008) reported the effect of Corporate Reputation on initial trust across two service industries. Data was collected from 184 individuals and analysis of covariance is utilized to conduct the analysis. Furthermore, the reliability test has also been utilized to examine the reliability of the constructs. Findings revealed that corporate reputation and level of risk has a significant impact on initial trust. Moreover, it is reported that corporate reputation is a suitable instrument in developing initial trust between two parties, whether there is any risk associated with the firm or not.
Ryu, Min, & Zushi, (2008) studied the role of trust in the relationship between the uncertainty of the environment and the manufacturer’s propensity for having a vertical control over the supplier. Data was collected from manufacturing firms, 2399 (textile), 3679 (electronic), 3469 (metal), and 3499 (steel). Structural equation modeling was utilized to conduct the analysis. In the study, it was reported that Supplier’s corporate reputation based on a trustworthy behavior decreases the manufacturing firm’s negotiating costs and enhances a cooperative approach to conflict resolution.
Supply Chain Integration
Danese & Romano, (2011) reported the moderating role of an integrated supplier in the relationship between performance efficiency and customer integration. Data were collected from 200 manufacturing plants and hierarchical regression analysis was employed to examine the hypothesis. Findings revealed that an integrated supplier has a positive moderating effect on the relationship between efficiency and customer integration. It was found that efficiency cannot be achieved merely by enhancing customer integration. Supplier integration was found to be a critical contributor to the achievement of efficient performance. In Fact, it was revealed that the effect of customer integration on a firm’s efficiency increases with an increase in the intensity of integration among the buyer and the supplier.
Gimenez, Vart, & Donk, (2012) reported that an integrated supply chain has a significant positive impact on the firm’s performance. However, it is argued that SCI is operative only in the buyer and supplier relationship context. Data was gathered from 23 manufacturing firms in the Netherlands. ANOVA and factor analysis was utilized to conduct the analysis. Findings revealed that Supply Chain Integration enhances the cost performance of the firm when the complexity of the Supply is high. However, if the complexity of the supply is low, SCI is found to have no impact on the firm’s performance. This implies that higher inter-connectedness and interdependencies across the supply chain network will result in enhanced firm’s performance.
Koh, Demirbag, Bayraktar, Tatoglu, & Zaim, (2007) identified the relationship between the practices of Supply chain management and the organization’s operational performance. Data was gathered from a sample of 203 manufacturing SMEs working in the manufacturing industry in Turkey. The exploratory factor analysis technique was utilized to conduct the analysis. Furthermore, the framework of the study was tested utilizing a partial least square method, the technique is a variance-based structural equation modeling approach. Supply Chain practices were grouped into two categories: Outsourcing and Multi-supplier (OMS) and Supplier Collaboration and Lean practices (SCLP). Findings revealed that both variables SCLP and OMS have a significant and positive effect on operational performance. Interestingly, both SCLP and OMS have a non-significant effect on Supply Chain Management related operational performance. Likewise, as the direct relationship between the two performance constructs was discovered to be significant, both variables of SCM practices have an indirect and significant beneficial outcome on ORG through OPER.
So & Sun, (2010) studied the supplier integration strategy in relation to lean manufacturing adoption. A survey method was utilized in the research. Questionnaires were forwarded to the participating organizations through email, fax and website interview across different countries. Data was collected from 558 manufacturing organizations across 17 countries and the technique employed for the analysis was multiple regressions. Findings revealed that an integrated supplier had a significant and constructive impact on lean manufacturing practices. It was concluded that the implementation of a supplier integration strategy positively influences lean manufacturing adaptation in small and medium-sized organizations.
Yeung, Selen, Zhang, & Huo, (2009) reported the relationship between Trust and integrated supply chain. Data was collected from five cities in China and a questionnaire survey approach was adopted. The reliability test was directed to test the content legitimacy of the constructs used in the study and confirmatory factor analysis (CFA) was employed in the analysis. The results of the study revealed that trust enhances supplier integration. When trust is low, it decreases internal integration and the buyers become vulnerable to high switching costs and potential supplier opportunistic behavior.
Fullerton & Wempe, (2009) examined the effects of non-financial manufacturing performance on the association between lean manufacturing and financial performance. Data were collected from 121 executives from manufacturing organizations in the USA. Structural Equation Modeling technique was employed to test the hypothesis. The study reported a significant and constructive effect of non-financial manufacturing performance on the relationship between a firm’s profitability and lean manufacturing practices.
Huo, Wang, & Zhao, (2014) examined the effects of Supply Chain Integration on the company’s cost leadership and differentiation. Data was gathered from 604 firms based in China, and Hierarchical Linear regression was utilized to test the Hypothesis. Findings revealed that process and Internal Integration had a substantial and positive impact on the financial performance of the firm.
Zhao, Feng, & Wang, (2015) examined the impact of an integrated supplier on the financial performance of an organization. Data was collected from 195 Chinese organizations, and hierarchical regression analysis was adopted to test the hypothesis. Results revealed that there is a reversed and U-Shaped Association among the supplier integration and the firm’s financial performance.
Zolait et al., (2010) studied the association among the integrated supply chain and firm’s performance in the manufacturing industry. Data was gathered from 98 manufacturing Malaysian firms. Multivariate analysis was utilized to conduct the study. The study revealed that an integrated supply chain had a substantial and positive impact on the firm’s performance, particularly the improvement in operations and growth in revenue. It was reported that a higher level of supply chain integration will result in a higher level of firm performance.