EMPIRICAL INVESTIGATION OF INTEGRATED SUPPLY CHAIN MANAGEMENT PERFORMANCE SOME INSIGHTS

DEAN ELMUTI, PH.D.

School of Business, Lumpkin College of Business and Applied Sciences, Eastern Illinois University, 600 Lincoln Avenue, Charleston, IL 61920

Supply chain management has become a very prominent issue for both large and small companies as they strive for better quality and higher customer satisfaction [3, 18]. According to a recent Deloitte Consulting Survey, 91% of North American manufacturers rank supply chain management as very important or critical to their companies success, yet only 2% of the manufacturers in the same survey rank their supply chains as world class [10, 25]. Supply chain management works to bring the supplier, distributor, and customer into one cohesive process [14, 28]. The manufacturers, suppliers, transporters, warehouses, retailers, and customers are involved in a dynamic but constant flow of information, products, and funds [23]. Supply chain management has become known as the supply network or the supply web because it shows how each unit interacts with the others. The suppliers and distributors that were once adversaries are now becoming partners for the betterment of both corporations [9]. Managing the chain of events in this process is called supply chain management. Effective management must take into account coordinating all the different pieces of this chain as quickly as possible without losing any of the quality or customer satisfaction, while still keeping costs down [5, 22]. The strategic importance of the supply chain is emphasized by the recent observation of John Grossman, vice president of materials management of AlliedSignal: Competition is no longer company to company, but supply chain to supply chain [26]. Success is no longer measured by a single transaction; competition is, in many instances, evaluated as a network of cooperating companies competing with other firms along the entire supply chain [21, 24]. To be successful, companies will not seek to achieve cost reductions or profit improvement at the expense of their supply chain partners, but rather they will seek to make the supply chain as a whole more competitive [15].

LITERATURE REVIEW The significant number of supply chain management programs used across all business sectors is well documented in the literature [6, 13, 25] Some researchers have focused on partner characteristics as an explanation for supply chain management behavior and outcomes [1, 4, 27]. According to that perspective supply chain management projects are undertaken to respond to marketplace demand and intense global competition. Wisner, Choon, and Choon [27], for instance, suggest that the intense global competition of the past decade has led many organizations to create cooperative, mutually beneficial partnerships with suppliers, distributors, retailers, and other firms in the supply chain. The objective of those partnerships has been to offer lowercost, higher-quality products and services with greater design flexibility. Other researchers have focused on supply chain performance measurement [1, 11, 20]. Beamon [1], for instance, identifies three types of performance measures as necessary components in any supply chain performance measurement system: resource measures, output measures, and flexibility measures. Hewitt [11] recommends customer satisfaction, return on trading assets, and flexibility as the measurements for supply chain performance. From a different prospective, Christopher [4] suggests that one key to success is the creation of an agile supply chain on a worldwide scale. Agility implies rapid strategic and operational adaption to large-scale, unpredictable changes in the business environment, focusing on eliminating barriers to quick response. Successful implementation of supply chain management has been credited with helping to cut costs [16], increase technological innovation [12], increase profitability and productivity [9], reduce risk [2], and improve organizational competitiveness [4, 8, 24, 27]. However,

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supply chain management does encounter several obstacles, including an increasing variety of products, decreasing product life cycles, increasingly demanding customers, globalization, and difficulty executing new strategies [3]. According to a recent survey, 95% of Fortune 500 executives surveyed said their companies should be more focused on global supply chain management. However, just 45% have actual programs in place. The latter figure is over optimistic because many of these companies are working on only one piece of the total supply chain [10]. Claims by proponents of an integrated supply chain management system suggested six research questions. Those questions guided this investigation of the impact of the integrated supply chain management program on organizational performance: 1. Does participation in the integrated supply chain management system influence employee productivity? 2. Does the integrated supply chain management system achieve its stated objective of improving the level of supply chain system efficiency? 3. Does the integrated supply chain management system achieve its stated objective of improving quality of products and services? 4. Does the integrated supply chain management system achieve its objectives of increasing return on trading assets? 5. Does participation in the integrated supply chain management system influence the systems flexibility to accommodate volume and schedule fluctuations? 6. Will managers report positive assessments of the contributions of the integrated supply chain management system to overall organizational performance? This article presents a longitudinal and experimental field study that compares changes in productivity, quality of products produced, and performance of participants and nonparticipants in the integrated supply chain management system in an industrial setting. RESEARCH SITES AND PARTICIPANTS This research was conducted in two manufacturing plants of a large, diversified, nonunionized, multidivisional corporation located in an urban area in the northeastern United States. The two plants were located in the same state. Production operations were primarily assembly using a batch process. The company is now engaged in producing, processing, distributing, and marketing its products and services worldwide. Revenues for 1998 were derived from the companys three core businesses, vitamins and fine chemicals, flavors and fragrances, and diagnostics.

Plant A provided an experimental group of individuals who were successful in implementing an integrated supply chain management program in their plant, and plant B in the same company provided a matched comparison group of individuals who did not implement an integrated supply chain management program in their plant and indicated that they did not anticipate any changes in their supply chain activities in the foreseeable future. The experimental plant A had a workforce of 945 employees at the time the study was planned. Comparison plant B had 890 employees at the beginning of the study. The plants produced the same types of products, used the same technologies, and had similar workforces. Participants in the integrated supply chain management program and nonparticipants were comparable in most areas. During the time of this study the company was not doing well financially, primarily because of intense competition from low-wage countries in Asia, low productivity, limited access to new markets, high production costs, and limited customer service and support. To address those problems and because of eagerness to improve performance, new managers were hired in plant A. The new management in that plant was quite actively keeping abreast of new trends in supply chain management techniques and practices. Supply chain management strategy refers generally to the integration of logistics and physical distribution activities by wholesalers, retailers, and manufacturers to effectively integrate purchasing and supply with other functions in the firm. The supply chain management concept attracted the attention of top managers in plant A because many firms are finding that the integration of supply chain activities may be directly related to their organizational effectiveness. A consulting group was invited to train managers and employees at all levels of the organization and to assist in implementing the program. The consulting group made it clear from the beginning that success depended to a large degree on the cooperation and participation of all job holders and support from senior and middle management. Top management agreed to commit resources to improve operations and to develop and train employees. All levels of employees, including senior managers, middle managers, first-line supervisors, sales staff, production workers, and machine operators, were trained by the consulting group for a few weeks before implementation of the integrated supply chain management projects.

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The primary responsibility of the consulting group was to identify the types of company activities that involved supply chain management projects. The major activities or functions were planning, sourcing, manufacturing, delivering, procuring, overall logistics, and using strategic supplier alliances as necessary components. Another responsibility of the consulting group was to select a suitable technology for using the Internet or intranets (corporate networks that use Internet technologies), which would allow employees to access the data, information, and knowledge they need for making decisions quickly. Internet technology, in addition, would allow employees to communicate effectively with each other in different locations, integrate supply chain activities, and maintain customer service channels. MEASURES OF ORGANIZATIONAL PERFORMANCEACTUAL DATA Actual organizational data from the surveyed firm (productivity, quality, flexibility, and other performance indicators) were used to assess the impact of the integrated supply chain management system on organizational performance. Productivity was measured by the ratio of output produced to resources used. Four productivity measures were available from organization records: Efficiency rate. Number of products produced within quality specification divided by industrial engineering output rate. System efficiency level. Personnel requirement, equipment utilization, energy use, and cost are included [1]. Flexibility measures. Systems ability to accommodate volume and schedule functions from supplier, manufacturers, and customers can be measured. Flexibility is vital to the success of the supply chain in an uncertain environment [26]. Overall productivity. Total hours earned (number of actual pieces of product produced divided by number of pieces of product expected to be produced) divided by total hours paid [1, 17]. Additionally, records of quality and customer complaints were collected from an internal quality audit, and the number of defects per finished product per 1,000 units was added and averaged per six months [7]. Furthermore, records of return on trading assets and other performance indicators were collected from sales and financial statements and were reported in percentage of total sales [11]. Data for each of the performance measures were collected for a 36-month period, ranging from 6 months before adoption of the integrated supply chain management program to 30 months after the pro-

gram began. This length of measurement provided adequate time to assess the impact of the integrated supply chain management program on employee productivity, the quality of their products, and the return on trading assets. Average rates were then computed for 6-month intervals and compared before and after the program began. Period 1 covers the 6 months before the program was implemented, period 2 covers the first 6 months the program was operational, period 3 covers months 7 through 12, period 4 months 13 through 18, period 5 months 19 through 24, and period 6 months 25 through 30. Follow-up interviews were then conducted with the plant manager, human resource manager, operations manager, information systems manager, and controller in this manufacturing facility. The purpose of the interviews was to obtain a deeper perspective on the effect of the integrated supply chain management program on productivity, quality, and employee performance as well as to assess the effectiveness of the program relative to its costs and to identify factors associated with the success or failure of the program. Furthermore, the interviews were used to rule out other possible explanations for changes in employee performance in the plant. ANALYSIS OF ORGANIZATIONAL PERFORMANCE IMPACTS Table 1 presents average 6-month rates for the performance measures from 6 months before the adoption of the integrated supply chain management program until 30 months after the program began. Before implementation of the integrated supply chain management program, the average percentages for the various measures were as follows: the production efficiency rate was 44%, system efficiency rate was 56%, overall productivity average rate was 64%, average number of defects per 1,000 units was 222%, system flexibility rate was 50%, net income average rate was 4%, return on investment (ROI) average rate was 2%, market share average rate was 2%, and export growth average rate was 0%. Table 1 also presents the average rates 30 months after the program began. For each measure, the average rate for the two periods was different. As can be seen in the table, a great deal of improvement was shown in each area after the program began. At the same time, there were no significant differences in performance dimensions for the comparison group in plant B, which did not adopt the integrated supply chain management program in its plant. See table 2 for more details.

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TABLE 1: Data From Organizational Records

Before program implementation Performance dimension
Production efficiency rate System efficiency level Overall productivity rate Quality given in number of defects per 1,000 units System flexibility Other Performance Indicators Net income ROI Market share Export growth

After program implementation PRD 2 Avg (%)

67 70 73 164 47 6 2 2 0

PRD 1 Avg (%)

44 56 64 222 50 4 2 2 0

PRD 3 Avg (%)

72 73 79 122 58 8 3 3 1

PRD 4 Avg (%)

76 78 84 96 64 10 4 3 3

PRD 5 Avg (%)

82 84 83 90 68 12 4 3 6

PRD 6 Avg (%)

82 85 85 78 68 14 5 4 8

PRD 26 Avg (%)

76 78 81 110 61 10 3.6 3 8

FINDINGS FROM FOLLOW-UP INTERVIEWS In the follow-up interviews all four managers and the plant controller expressed overwhelming support for the integrated supply chain management program and claimed that the program was making a great contribution to organizational productivity, quality of products produced, and performance. The plant manager indicated that his plant gained 6,000 hours in the production area as a result of reduced absenteeism and active participation by functional teams in the plant. He claimed that the proportion of employee days missed dropped from 12% per year to less than 5%

for the whole plant. The human resource manager, operations manager, and information systems manager considered the program to be a highly successful method of controlling employee turnover, fill rate, on-time deliveries, reliable delivery, customer responsiveness, quality, customer service, and production costs. The human resource manager said that his firm was able to save $180,000 in turnover-related costs in 2.5 years largely because of the integrated supply chain management program. All four managers and the plant controller, who provided independent assessments of the effectiveness of the integrated supply chain management program,

TABLE 2: Data From Organizational Records

After program implementation Plant A PRD 26 Avg (%)
76 78 81 110 61 10 3.6 3 8 73 increase 39 increase 26.5 increase 50 decrease 22 increase 150 80 50 8 increase increase increase increase 45 56 63 218 50 4 2 2 0

Before program implementation Performance dimension

Production efficiency rate System efficiency level Overall productivity rate Quality given in number of defects per 1,000 units System flexibility Other Performance Indicators Net income ROI Market share Export growth

Plant B PRD 26 Avg (%)

2.2 increase 0 increase 1.5 increase 1.8 decrease 0 increase 0 0 0 0 increase increase increase increase

PRD 1 Avg (%)

44 56 64 222 50 4 2 2 0

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expressed confidence that improvements in quality and performance in their plant were made possible by the implementation of the integrated supply chain management program. They also indicated that there were no other major changes in activities, technologies, or incentives in their plant for the past 30 months that could account for the gains. They also said that there were no major shifts or changes related to the competitive environment in their region. Furthermore, key managers in the plant provided additional information on implemented projects concerning the drivers used for improvement. A number of organizational strategies were also identified as key contributors to the success of supply chain management. These included strategies to increase trust, integration of activities, and communication among supply chain members. The major activities or drivers of supply chain performance were inventory, transportation, facilities, and information. Inventory includes raw materials, work in process, and finished goods in the supply chain. Minimum stock in all these categories is important to the improvement of supply chain performance. Transportation involves moving inventory from point to point. That allows firms to maintain a low level of inventory and replenish it only when products are sold. Costbenefit analysis methods were used to make responsive and efficient decisions concerning modes of transportation, amount of goods to be transported, and whether to use in-house or outsourced transportation. The two major facility types are production and storage sites. Facilities are important in supply chain management because they determine the location, capacity, and warehousing methods that allow firms to be responsive and keep costs low. Facilities with little excess capacity are able to respond to demand fluctuations better than large facilities. Information includes data and its analysis associated with inventory, transportation and location of inventory, as well as customer product needs. Several technologies were used to store and analyze information in the supply chain, including electronic data interchange and the Internet. These technologies were used to disseminate information with better visibility and access for all functional areas, enabling better decisions to be made in each stage of the supply chain. SAVINGS Further analysis of the impact of the program on organizational performance was done through the

use of the plants cost-saving data. The plant controller estimated that the total costs of the program 30 months after it began was about $2,580,000. This total consisted of $2 million for equipment and maintenance, including computerInternet online hardware and software components. Other cost items included $160,000 in fees for the consulting group, $180,000 for the original training, and $240,000 to implement several of the recommendations. He also estimated that in the 30-month period, the plant had realized $1.5 million in one-time savings. The plant also realized approximately $1,300,000 per year in continued cost savings from recommendations and resolution of customer complaints. Other advantages of implementing the integrated supply chain management program include management control over production costs, inventory control, reduced number of defective products, and improved performance. SUCCESS FACTORS All four managers and the plant controller were asked to quantify their opinions (on a scale of 1 = very useful to 5 = not useful) concerning the degree of usefulness of 14 possible factors associated with supply chain management strategies. Their responses, translated into means and rankings to make the analysis more meaningful, are presented in table 3. Most respondents found that integrated behavior between manufacturers, suppliers, and customers must exist and must be a focal point for companies if they wish to remain competitive. In fact, integrated behavior is the most useful contributing factor to their integrated supply chain management effort. Sharing information with all levels of the supply chain is critical. Another critical activity in integrated supply chain management is cooperation. Cooperation and collaboration must occur throughout the supply chain, from planning to controlling activities through evaluating the performance of the chain. Supply chain management activities must be accomplished systematically, with clear goals and expectations. Integrating the processes of supply chain activities is essential to the planning, sourcing, producing, delivering, and consuming of specific goods or services [9]. Building and establishing partnerships or alliances that will last is one of the most critical requirements for successful supply chain management. Sharing channel risks and rewards should be a long-term commitment because it is important for focus and teamwork among all members along the supply chain and it results in a competitive advantage [19].

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TABLE 3: Factors Affecting Supply Chain Management Project Success

RANK
1 2 3 4 5 6 7 8 9 10 11 12 13 14

MEAN
4.60 4.20 3.95 3.80 3.75 3.70 3.20 2.88 2.70 2.40 2.30 2.25 2.20 2.15

STD
1.48 1.40 1.32 1.38 1.41 1.22 1.31 1.41 1.32 1.38 1.28 1.34 1.52 1.44 Integrating behavior between manufactures, suppliers, and customers. Sharing information with all levels of the supply chainInternet. Ensuring cooperation throughout the supply chain and collaborating. Having clear objectives and expectations by all parties in the chain. Integrating process of supply chain activities. Establishing partnerships. Mutually sharing channel risks and rewards. Reducing response time across the supply chain. Making products easily adaptable to various markets. Using various quality suppliers (outsourcing). Producing quality goods or services. Accurately forecasting products or services. Fulfilling all orders in a timely and efficient manner. Being flexible in anticipating change in demand and supply.

Reducing response time across supply chain activities, making products easily adaptable to various markets, using quality suppliers from around the world through outsourcing of products and services, producing quality goods or services, using ISO 9000 certifications or company-specific standards, forecasting accurately, fulfilling all orders in a timely and efficient manner, and being flexible in anticipating change in demand and supply were among the factors contributing to successful supply chain management projects [18, 19, 27]. SUMMARY Several significant findings emerged as a result of this study. First, the performance measures clearly indicate a positive impact on employee performance. Participants in the integrated supply chain management program increased the time spent on production, improved their efficiency rate, enhanced overall productivity, improved ROI, and increased market share. Second, the link between these favorable changes and the integrated supply chain program was supported in the follow-up interviews with key plant managers. All of those interviewed indicated that the program made a contribution to organizational productivity, product quality, and overall performance. The bottom line for these managers was that the integrated supply chain management program was effective. The managers indicated that the dollar savings and indirect benefits generated by the program were greater than the costs of administration. The program was generally believed to help enhance customer responsiveness, decrease employee turnover, and contribute to organizational goals of increased performance, reduced costs, and improved product

quality. Indications are that those benefits will continue to accrue for the foreseeable future. Finally, a number of factors were identified as key contributors to supply chain management success. These include strategies to increase the integration of activities, sharing of information through Internet technologies and others, cooperation and collaboration throughout the supply chain channel, and established partnerships with key suppliers. The Internet can provide a real opportunity for demand and capacity data to be visible to all employees and partners in the supply chain. In turn, these strategies should improve quality, delivery, performance, customer service, and overall effectiveness of supply chain management. There are obvious limitations to the self-reported data collected in this study and to the interview responses from key managers in this plant. Interview responses can contain inherent biases among individuals for programs that they may have personally requested or supported. In addition to these limitations, the hiring of a new management team in plant A that was eager to increase efficiency and improve quality most likely helped to improve organizational performance. In this case, it was very hard, if not impossible, to distinguish between effects of the integrated supply chain management program and the hiring of a new management team. CONCLUSION A major conclusion drawn from this study is that introducing an integrated supply chain management program into an organization requires the introduction of multifaceted changes in organizational operations. These changes include closely integrating the internal functions in a company and effectively

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linking them with the external operations of suppliers and channel members. Companies must realize that supply chain integration requires each stage of the supply chain to take into account the impact its actions have on other stages. Integration and coordination results in each stage of the supply chain design, planning, and operation should have a considerable impact on the complete chain. Companies should also realize that it takes commitment and skill to implement an integrated supply chain management program and reap its rewards. The payoffs, however, can be substantial. REFERENCES
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17. Marks, M.I., P.H. Mirvis, E.J. Hackett, and J.F. Grady Jr. Employee Participation in a Quality Circle Program: Impact on Quality of Work Life, Productivity, and Absenteeism. Journal of Applied Psychology 71, no. 2 (1986): 6169. 1 8 . Mentzer, J.T., H.H. Foggin, and S.L. Golicic. Collaboration. Supply Chain Management Review 4, no. 4 (Sept. 2000): 5260. 1 9 . Mentzer, J.T. Supply Chain Management. Thousand Oaks, Calif.: Sage, 2001. 2 0 . Narasimhan R., and J. Jayaram. Causal Linkage in Supply Chain Management: An Exploratory Study of North American Manufacturing Firms. Decision Sciences 29, no. 3 (1998): 579605. 2 1 . Noble, D. Purchasing and Supplier Management as a Future Competitive Edge. Logistic Focus 5, no. 5 (1997): 2327. 2 2 . Shin, H., D.A. Collier, and D.D. Wilson. Supply Management Orientation and Supplier/Buyer Performance. Journal of Operations Management 18, no. 3 (2000): 317333. 2 3 . Simchi-levi, D., P. Kaminsky, and E. Simchi-levi. Designing and Managing the Supply Chain . Boston: Irwin McGrawHill, 2000. 2 4 . Spekman, R., D. Salmond, and J. Kamauff. At Last Procurement Becomes Strategic. Long-Range Planning 27, no. 2 (1994): 7684. 2 5 . Thomas, J. Why Your Supply Chain Doesnt Work. Logistics Management and Distribution Report 38, no. 6 (1999): 4244. 2 6 . Vickery, S., R. Calantone, and C. Droge. Supply Chain Flexibility: An Empirical Study. The Journal of Supply Chain Management 35, no. 3 (1999): 1624. 2 7 . Wisner, D., J. Choon, and T.K. Choon. Supply Chain Management and Its Impact on Purchasing. Journal of Supply Chain Management 36, no. 4 (fall 2000): 3342. 2 8 . Youngdahl, W.E. Global Supply Chain Management . Toronto, Canada: John Wiley & Sons, 2000.

About the Author DEAN ELMUTI, Ph.D., is a Professor of Management and the Management Discipline Coordinator in the School of Business at Eastern Illinois University. Previously, he was employed for several years by multinational corporations in the Middle East and the United States. He has published more than 60 articles in the areas of quality, strategy, and global competitiveness in diverse journals, including the Journal of Applied Business Research, Journal of Business Strategy, Quality Progress, Journal of Small Business Management, and Production and Inventory Management Journal.

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