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Journal of Operations Management 26 (2008) 557–570

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Supply chain variability, organizational structure, and performance:

The moderating effect of demand unpredictability
Richard Germain a,*, Cindy Claycomb b, Cornelia Dröge c
a
154 College of Business, University of Louisville, Louisville, KY 40292, United States
b
Wichita State University, United States
c
Michigan State University, United States
Received 2 September 2005; received in revised form 1 September 2006; accepted 1 October 2007
Available online 13 October 2007

Abstract
Supply chain process variability is the level of inconsistency, or volatility, in the flow of goods into, through, and out of a firm.
The research investigates the links among organizational structure (formalization and integration), supply chain process variability,
and performance as moderated by environmental uncertainty. We found that in a predictable demand environment, only formal
control affects supply chain process variability, leading to improved financial results; but in an unpredictable demand environment,
only cross-functional integration affects supply chain process variability, leading to improved financial performance. We also
examined whether supply chain process variability is a complete or partial mediator of the relationship between organizational
structure and performance, and found that: (1) in a predictable demand environment, supply chain process variability completely
mediates the relationship between formal control and performance and (2) in an unpredictable demand environment, supply chain
process variability partially mediates the relationship between integration and performance. Supply chain process variability has an
inverse relationship with financial performance, regardless of the demand environment; and organizational structure provides
managers with the mechanisms to mitigate this variability’s detrimental impact on financial performance.
# 2007 Elsevier B.V. All rights reserved.

Keywords: Supply chain; Performance; Demand

1. Introduction et al., 1992; Wacker, 1987). Our focus is broader: supply

Firms are continually searching for causes of
financial performance and one source is process
variability. Research to date has investigated very
specific manufacturing process modifications to diag-
nose, manage, and reduce production process variability
(Antony et al., 1999; Bhatnagar and Chandra, 1994;
Bitran and Sarkar, 1994; Kher and Fredendall, 2004;
Lee and Apley, 2004; Lee and Tang, 1998; Melnyk
* Corresponding author. Tel.: +1 502 852 4680;
fax: +1 502 852 7672.
E-mail address: richard.germain@louisville.edu (R. Germain).
chain process variability encompasses the (in)consis-
tency in flows into and out of the firm, as well as internal
variabilities, such as production lead-times and produc-
tion output rates. We investigate two specific organiza-
tional mechanisms that, depending on environmental
conditions, may manage and reduce supply chain
process variability: these mechanisms are formal
control and integration.
Supply chain process variability, concerned with
material flow (un)evenness inbound, within, and out-
bound, is important for two reasons: (1) variability’s
negative implications for firm performance (due to both
direct and opportunity costs) and (2) variability’s
potential amplification, both within a firm and across

0272-6963/$ – see front matter # 2007 Elsevier B.V. All rights reserved.
doi:10.1016/j.jom.2007.10.002
558 R. Germain et al. / Journal of Operations Management 26 (2008) 557–570
firms. For a particular firm, supply chain process
variability results in costs associated with overtime,
unused capacity, excess or insufficient inventory,
premium freight, changeovers, material handling,
record keeping, irregularities in quality, dissatisfied
customers, disruptions to throughput improvement, and
others. The direct costs of variability have a negative
influence on financial performance, but opportunity
costs may also be significant. Furthermore, variability
within a firm from one source is often amplified because
it impacts other types of variability; for example,
variability in inbound inventory flows may lead to
unplanned downtime (Inman and Gonsalvez, 1997).
Finally, looking at all firms in the supply chain,
variability originating in any one firm can have a major
impact on variability in another firm even if they are
indirectly linked through a channel intermediary. This
amplification is embodied in the ‘‘bullwhip effect,’’
which states that demand variability increases as it
moves up the supply chain from its source (Kahn, 1987;
Lee et al., 1997a,b; Chen et al., 2000).
The research model incorporates supply chain
process variability with traditional contingency theory
variables: demand unpredictability (a dimension of
environmental uncertainty); formal control and integra-
tion (dimensions of organizational structure); and
financial performance. Our first research question is:
Under which demand unpredictability contingencies do
formal control and integration reduce or alleviate
supply chain process variability? When demand is
relatively predictable, the expectation is that formal
control is the organizational mechanism that should
control supply chain process variability and lead to
improved financial results; on the other hand, in
unpredictable demand environments, cross-functional
integration should control supply chain process
variability and lead to improved financial performance.
This means that low versus high demand unpredict-
ability moderates the relationship between organiza-
tional structure and supply chain process variability.
Demand unpredictability has been identified as a key
contingency variable in the design of supply chains
(Fine, 1998, 2000) and in whether an efficiency versus
flexibility strategy should be followed (Fisher, 1997),
but integrating supply chain process variability into
contingency theory has yet to be studied in the extant
literature. Our second research question concerns the
mediating effect of supply chain process variability on
the relationship between organizational structure and
financial performance: Is there a direct effect of formal
control or integration on performance, once their
indirect impact through supply chain process variability
is accounted for? We examine whether the answer to
this question also depends on demand unpredictability.
2. Model overview and construct definitions
2.1. Overview of the model
Fig. 1 presents the research framework. Our focus is
on how four constructs relate to one another under
conditions of low versus high demand unpredictability;
i.e., we propose that demand unpredictability is a
moderator of model relationships and thus there are two
diagrams in the Figure. We begin by defining all
constructs central to our model: formal control and
integration (which are organizational structure con-
structs), supply chain process variability and demand
unpredictability (which is an environmental construct).
2.2. Organizational structure: definitions of formal
control and integration
Formalization refers to the presence of written rules,
procedures, and documents (Miller, 1991). Formal
control refers to devices used to monitor systems on a
written, codified, and rational basis (Khandwalla, 1974;
Workman et al., 1998). Developing and enforcing
performance control and behavioral prescriptions
improves decisions and increases the predictability of
performance (Pierce and Delbecq, 1977). Formal
control ensures there is a clearly specified body of
rules and control mechanisms. All firms utilize control
devices to monitor performance. If formal control is
limited, then informal control (obtained through
socialization processes) must be present if anarchy
and chaos are to be avoided.
Cross-functional integration refers to lateral com-
munication within a firm and signifies the level of
coordination among different work units (Galbraith,
1994; Lawrence and Lorsch, 1967; Ruekert and Walker,
1987). The hierarchical nature of institutions suggests
that the natural communication flow is vertical: upward
toward higher level managers and downward toward
subordinates. Effective lateral communication, prere-
quisite for the integration of functional activities, is one
goal of cross-functional teams and cross-functional
liaison personnel. Enterprise resource systems foster
electronic integration within the firm, a process
underway with the transformation of material require-
ments planning software since the early 1980s. The
level of cross-firm integration escalated during the late
1990s with the development of the Internet and
specialized software platforms, especially those related
 R. Germain et al. / Journal of Operations Management 26 (2008) 557–570
Fig. 1. Theoretical framework.
to collaborative planning, forecasting, and replenish-
ment (CPFR). In this research however, we focus on
integration requiring direct human interaction: cross-
functional teams, committees, and liaison personnel.
2.3. The meaning of supply chain process
variability
Supply chain process variability may be defined as
the level of inconsistency in the flow of goods
throughout the firm. It is concerned with material flow
unevenness. There are three main sources of variability
that plague a firm in a supply chain: (1) upstream
sources such as supplier performance (e.g., inconsistent
or variable delivery performance); (2) internal sources
related to manufacturing such as inconsistent through-
put and output rates, highly variable inventory levels
(the antithesis of JIT), and inconsistent product quality;
(3) downstream sources related to customers, such as
changes in orders and inconsistent deliveries across
time (Davis, 1993; Germain et al., 2001). Supply chain
processes are variable when delivery times, production
lead-times, or throughput rates fluctuate (Schmenner
and Swink, 1998).
Understanding the influence of process variability in
a supply chain system is a goal of inventory control
theory and is manifested in the theory of swift, even
flow (Davis, 1993; Schmenner and Swink, 1998). The
theory holds that a fast and even flow of materials
through a process, regardless of the type of process,
results in a more productive process. Productivity for
559
any process – be it labor productivity, machine
productivity, materials productivity, or total supply
chain productivity – increases with the consistency and
speed by which materials flow through that process, and
productivity decreases with increases in the variability
associated with the flow. Process variability is measured
by the variance ‘‘of the timing or quantities demanded
or of the time spent in various process steps’’
(Schmenner and Swink, 1998, pp. 102–103). The
theory of swift, even flow argues for coordination of a
supply chain: the more integrated the connections
between supply chain exchange parties and the faster,
more even the flow from raw materials to end
customers, the more productive the supply chain.
2.4. Environmental context: demand
unpredictability as moderator
Environmental uncertainty, which firms strive to
reduce (Beckman et al., 2004), refers to the difficulty
firms have in predicting the future because of
incomplete information or changing conditions.
Demand unpredictability is a major contributor to
overall uncertainty (Davis, 1993; Chen et al., 2000).
Demand unpredictability refers to the degree to which a
firm can anticipate or forecast sales and market trends:
demand unpredictability is low when sales forecasts and
market trends are easier to monitor and predict, while in
a highly unpredictable demand environment, sales
forecasts and market trends are more difficult to monitor
and predict (Celly and Frazier, 1996). Demand
560 R. Germain et al. / Journal of Operations Management 26 (2008) 557–570
unpredictability can be characteristic of the general
level of demand for an industry’s products or it can
come from particular customers and not from others.
The impact of demand unpredictability manifests
itself in a variety of ways, negatively influencing a
firm’s product offerings, plans, operations, and strate-
gies. High levels of demand unpredictability often arise
from innovative products. Relative to businesses with
predictable demand, these businesses often experience
less time for deliberation and choice, shorter product
life cycles and lead-times for made-to-order products,
and brief competitive advantages, but also higher
contribution margins, product variety, stock out rates,
customer price-sensitivity, and markdowns for obsolete
inventory (Fine, 1998; Fisher, 1997; Grewal and
Tansuhaj, 2001). Although firms can respond to demand
unpredictability, it is a constant source of uncertainty
for firms when customer preferences are variable
(Beckman et al., 2004). In unpredictable demand
environments, it is difficult for firms to precisely
forecast fluctuations in demand attributable to, for
example, economic variables (e.g., purchase postpone-
ment), marketing mix variables (e.g., price changes), or
market trends.
Supply chain processes need stability and predict-
ability for effective coordination. High levels of
uncertainty in an operating context create a less
controlled situation. Operations are ultimately driven
by market demand patterns, and therefore unpredictable
demand implies less streamlined and highly variable
operational processes. Unpredictable demand patterns
mean that firms have to change production schedules,
switch products and parts, maintain different levels of
inventory, and alter throughput rates and delivery
schedules more frequently and at irregular intervals
(Germain et al., 2001; Jaworski and Kohli, 1993).
3. Theoretical model and hypotheses
3.1. Theoretical context: contingency theory
The fundamental premise of contingency theory is
that the selection of an appropriate organizational
structure to ‘‘fit’’ the environment leads to higher
performance (Van de Ven and Drazin, 1985; Walker and
Ruekert, 1987). Rather than accept a deterministic logic
(e.g., all firms should be formalized) or an ‘‘every-case-
is-different’’ approach, contingency theorists assert that
there is a middle ground where it is possible to analyze
the differences in organizational structures in an orderly
way (Ruekert et al., 1985; Miller, 1997; Birkinshaw
et al., 2002).
One of the principal contingency variables identified
early on by contingency theorists was environmental
uncertainty. Burns and Stalker (1966) and Lawrence
and Lorsch (1967) related environmental uncertainty to
organizational structure and concluded that unpredict-
able environments require more organic structures
while predictable environments require more mechan-
istic structures. Managing uncertainty through various
structural mechanisms has been noted as an essential
issue for organizational design (Thompson, 2003;
Williamson, 1981; Workman et al., 1998). In particular,
formalization (a mechanistic structure element) was
hypothesized to result in better performance in
predictable environments but not necessarily in
unpredictable ones; integration (an organic structure
element) will result in better performance in unpre-
dictable environments. We develop this basic proposal
below in H1 and H2, but note that the two configurations
in Fig. 1 are the result of this contingency focus.
3.2. H1: The predictable demand environment
configuration
Formal control systems work well in a predictable
environment as standards of performance remain
uniform across time. A manufacturing firm that can
correctly forecast demand for a particular time period
can plan or schedule operations at a steady rate during
that period (Thompson, 2003). Deviations from opera-
tional standards can signal process problems in this
case. Such deviations indicate inefficient, poorly
designed, or poorly executed processes. An organiza-
tion that faces a predictable environment would rely
primarily on formal control (i.e., standardized rules) for
adaptation or corrective action in order to eliminate or
reduce supply chain process variability and increase
financial performance (Ruekert et al., 1985; Miller,
1997; Thompson, 2003). For example, Germain et al.
(2001) found that formal performance control relates
inversely to throughput variance (an element of supply
chain process variability) and positively to financial
performance.
In contrast, integration is expected to have little if
any impact on supply chain process variability and
financial performance when demand is predictable.
When demand is predictable, the need for interfunc-
tional coordination is lessened, as links between
functions and the functions themselves are relatively
stable across time. The goal is to design a system for
maximum efficiency in the face of predictability, rather
than adjustments across functions in the face of
unpredictability (Fisher, 1997). In summary, we
 R. Germain et al. / Journal of Operations Management 26 (2008) 557–570
Table 1
Summary of the hypotheses
Independent constructs Dependent constructs
Predictable demand environment
Supply chain process Financial performance
variability
Formal control H1a () H1b (+)
Integration H1c (null) H1d (null)
Supply chain process H3 () and equal to the
variability path in the unpredictable
demand environment
propose a contingency effect: formal control, but not
integration, affects supply chain process variability
when demand is predictable (first part of Fig. 1). H1 a–d
is summarized in Table 1 (along with the other
hypotheses):
H1. When demand is predictable, formal control (a)
inversely associates with supply chain process varia-
bility and (b) positively associates with financial per-
formance; however, there is no association of
integration with (c) supply chain process variability
and (d) financial performance when low demand unpre-
dictability exists.
3.3. H2: The unpredictable demand environment
configuration
When an environment becomes unpredictable, new
complications arise for the firm. Formal control devices
are inadequate because an organization faces environ-
mental contingencies. Contingencies are external
uncertainties ‘‘in which the outcomes of organizational
action are in part determined by the actions of elements
of the environment’’ (Thompson, 2003, p. 159). A firm
must determine when and how to act, and its cues must
be taken primarily from the environment. Formal
control is thus expected not to affect supply chain
process variability or financial performance when
demand is unpredictable.
When an environment is unpredictable, the firm
should pursue cross-functional integration to ‘‘cluster
capacities into self-sufficient units,’’ each equipped
with a full array of resources requisite for an
organization to meet contingencies (Thompson, 2003,
p. 78). Firms faced with uncertain environments
establish homogenous groups of specialists (e.g., in
finance, in human resources, in marketing) for ‘‘house-
keeping’’ purposes, but develop interdepartmental
committees, teams, and task forces for coordination
561
Unpredictable demand environment
Supply chain process Financial performance
variability
H2a (null) H2b (null)
H2c () H2d (+)
H3 () and equal to
the path in the predictable
demand environment
of operations (Thompson, 2003; Ruekert and Walker,
1987; Workman et al., 1998). With cross-functional
integration, units become aware of how processes in one
function affect another. This allows firms to create
unified forecasts (which are more accurate than
individual functions’ forecasts) and to make cost
trade-offs across units. In effect, mutual adjustment is
accomplished by cross-functional integrative devices
(Ruekert and Walker, 1987; Thompson, 2003).
An unpredictable environment creates administra-
tive and operational challenges for a firm not found in
predictable environments where exceptions do not
dominate (Burns and Stalker, 1966; Lawrence and
Lorsch, 1967). Tasks become more complex and non-
routine, causing emphasis to shift from formal control
to exception processing (Miller and Dröge, 1986;
Miller, 1997). To handle contingencies, firms select
particular organizational structures to increase adapt-
ability (Miller, 1987). The traditional argument is that
adaptability to demand unpredictability is found in
more ‘‘organic’’ structures, with less formal control and
greater cross-functional integration (Burns and Stalker,
1966; Miles and Snow, 1978; Miller, 1991). Key
decisions such as where to position inventory to protect
against stock outs when demand is unpredictable are
better made by organic, integrative, outward looking
structures (Fisher, 1997), and breaking down barriers
between departments allows a firm to foresee and
handle process variability (Deming, 1986). This overall
picture is shown in the bottom configuration of Fig. 1
and is summarized in Table 1:
H2. When demand is unpredictable, there are no asso-
ciations of formal control with (a) supply chain process
variability and (b) financial performance; however,
integration is (c) inversely associated with supply chain
process variability and (d) positively associated with
financial performance when high demand unpredict-
ability exists.
562 R. Germain et al. / Journal of Operations Management 26 (2008) 557–570
3.4. H3: The effect of supply chain process
variability on performance
There has long been theorized a relationship between
variability and performance (Bhatnagar and Chandra,
1994). Deming (1986) went so far as to propose that the
key aim of management is to control variability in order
to ultimately lower costs. The general operations
management theory of ‘‘swift, even flow’’ argues that
reduced variance in materials flow and operational
activities contribute to improved performance
(Schmenner and Swink, 1998). The more consistent
the flow of materials, the more productive processes
should be, and this implies improved financial
performance (Germain et al., 2001).
Researchers have connected financial performance
inversely to variability, but any particular research has a
narrowly defined domain of variability. For example,
production schedule instability or variability (Inman
and Gonsalvez, 1997) and manufacturing bottlenecks
(Davis, 1993) are treated as significant sources of
excessive cost. Comparing world class manufacturers to
other manufacturers, researchers found that stable
schedule policies (Harrison, 1996) and process dis-
cipline and control (Oliver et al., 1994) are exhibited by
world-class performers. The logistics literature is
particularly concerned with lead-time variance, which
drives up buffer stocks and associated holding costs
(e.g., Bowersox and Closs, 1996). Late delivery may
lead to expediting costs, a search for substitute sources
of supply, and plant slowdown or shutdown, while early
delivery may lead to de-expediting costs (e.g., storage
costs).
Fluctuations in production schedules or customer
delivery cycles increase inventory levels and associated
holding costs, time spent on set-ups and changeovers, as
well as transportation costs, thus negatively influencing
financial performance. Low process variability and
reliable and stable delivery schedules associate with
high-performing manufacturing plants (Mapes et al.,
2000). Process variance control provides additional
power and economic value to a company’s processes
through increased productivity and lower costs (Bohn,
1994; Deming, 1986). Germain et al. (2001) found a
negative association between throughput variance and
performance. By analogy, all these examples suggest
that supply chain process variability, a broader
variability construct than most researchers have studied,
adversely influences costs or capacity utilization, and
therefore overall productivity. Thus supply chain
process variability inversely relates to financial perfor-
mance.
H3. Supply chain process variability and financial
performance are inversely associated; the strengths of
this relationship (i.e., the betas) are equal across pre-
dictable and unpredictable demand environments.
3.5. Summary
Our contingency theory model as a whole (see Fig. 1
and Table 1) proposes that (1) formal control is the chief
organizational mechanism by which supply chain
process variability can be reduced in predictable
demand environments (while integration plays little
or no role) and (2) integration is the chief organizational
mechanism by which supply chain process variability
can be reduced in unpredictable demand environments
(while formal control plays little or no role). It is also
clear that the direct impact of formal control on
financial performance is proposed only in predictable
demand environments, while the direct impact of
integration on financial performance is proposed only in
unpredictable demand environments. In addition, the
slope of the relationship between supply chain process
variability and financial performance is hypothesized
equal across these different environments.
4. Method
4.1. Sample
The ‘‘executive list’’ of the Institute of Supply
Management’s (ISM) manufacturer’s membership was
obtained. A member having reached the senior most
purchasing title in their firm or division obtains the
‘‘executive’’ distinction. This sampling frame contained
the name and contact information of 1264 managers.
For the purpose of statistical power, a target sample
size of 200 was set. Prior experience with the sampling
processes described below indicated an expected
response rate in the range of 50% from subjects pre-
qualified by telephone. We therefore set a target of
obtaining agreements of participation from about 400
respondents. Individuals were randomly selected from
the sampling frame and contacted by telephone. The
conversation that ensued confirmed employment by a
manufacturer (as a check against frame misclassifica-
tions). Then, a key informant check was undertaken. If
they possessed sufficient knowledge to complete the
survey, they were asked to participate. In 159 cases, one
of the criteria was not met and these managers were
randomly replaced with others from the ISM list. Thus,
in the end, 402 ‘‘executive’’ purchasing managers were
contacted who were employed by a manufacturer, who
 R. Germain et al. / Journal of Operations Management 26 (2008) 557–570 563

possessed sufficient knowledge to complete the survey,
and who agreed to participate. Although initial contact
was by phone, all respondents were promised anon-
ymity and did not have to identify themselves when
returning the survey instrument.
In 78 cases, we were able to acquire the name of a
second qualified person who was willing to complete the
survey. They were identified by the previously qualified
ISM member. Multiple respondents per firm were
obtained to assess inter-rater agreement and to thereby
lessen concern with mono-respondent bias. A total of 480
surveys were sent to 402 firms. Of these, 227 useable
surveys were returned from 210 firms for response rates
of 47% for surveys (or 227/480) and 52% for firms (or
210/402). However, two surveys were later dropped
because they had too many missing values, and thus the
sample size for the subsequent analyses was 208.
Respondent title levels included directors (66%),
managers (16%), and vice-presidents (14%) and their
functional areas included purchasing (72%), materials
management (10%), and manufacturing (5%). The firms
in the sample are large, with average annual sales of
US$ 1.406 billion. They ranged from US$ 1.25 million
in sales to US$ 42 billion, with a standard deviation of
US$ 4.188 billion. The average number of employees
was 4573, ranging from 15 to 122,000, with a standard
deviation of 13,132. The respondents were asked to
answer the questionnaire for their SBU or division
however, not for the entire firm (or for the entire firm if it
was the SBU).
Table 2 provides the 2-digit SIC classification of the
firms in the sample. For the purpose of x2-testing
(described below), industries with fewer than 10 firms
were consolidated into an ‘‘other’’ category. The most
frequent SIC group is 28 (chemicals, n = 34), followed
by SIC 34 (fabricated metal products, n = 21), SIC 30
(rubber, n = 18), SIC 20 (food, n = 17), SIC 35
(industrial machinery, n = 17), and SIC 36 (electronic
and electrical equipment, n = 14).
4.2. Measurement of the moderator: demand
unpredictability
Three items were used to measure demand unpre-
dictability (Celly and Frazier, 1996) for the SBU or
division. On 7-point semantic differential scales,
respondents were asked whether: (1) ‘‘sales are
predictable . . . unpredictable,’’ (2) ‘‘sales forecasts
are likely to be accurate . . . inaccurate,’’ and (3)
‘‘market trends are easy to monitor . . . difficult to
monitor.’’ The mean of these three items was taken and
the sample was then split as close as possible to the
median of the composite score (Calantone et al., 2002).
This led to n = 112 in the predictable demand group
(mean of 3.06 for unpredictability) and n = 96 in the
unpredictable demand group (mean of 4.97 for
unpredictability). The option of dividing the sample
into three and then comparing the ‘‘high’’ versus ‘‘low’’
groups (and discarding the middle) was not imple-
mented. This option, which costs sample size, is usually

Table 2
Industry classification, total and by demand unpredictability group
2-Digit SIC Industry description Demand environment Total Percentage
of total (%)
Predictable Unpredictable
20 Food & kindred products 9 8 17 8
26 Paper and allied products 6 6 12 6
28 Chemicals and allied products 18 16 34 16
30 Rubber and miscellaneous plastics products 12 6 18 9
33 Primary metal industries 7 3 10 5
34 Fabricated metal products except machinery 12 9 21 10
and transportation equipment
35 Industrial and commercial machinery and 3 14 17 8
computer equipment
36 Electronic and electrical equipment/components, 7 7 14 7
except computer equipment
37 Transportation equipment 4 6 10 5
39 Miscellaneous manufacturing industries 7 5 12 6
All other 2-digit SIC groups 26 16 42 20
Missing 1 – 1 –
Total 112 96 208 100
2 2
x -test of independence between 2-digit SIC group and demand unpredictability group: x = 13.420; d.f. = 10; p = .201 (n = 207 due to one firm not
providing their 2-digit SIC group).
564 R. Germain et al. / Journal of Operations Management 26 (2008) 557–570

Table 3
Measurement model and two-group confirmatory factor analysis results
Constructs and measurement items Loading t-Value
Formal control (r = .77; rwg = .77): Rate the extent to which the following control devices used to gather information about the performance of your
firm. 7-point scales, endpoints of ‘‘rarely used’’ and ‘‘often used.’’
x1 A comprehensive management control & information system .652 9.636
x2 Use of cost centers for cost control .747 11.066
x3 Use of profit centers and profit targets .706 10.316
x4 Quality control of operations using sampling & other methods .582 8.159
Integration (r = .81; rwg = .76): In assuring the compatibility among decision in one area (e.g., purchasing) with those in other areas (e.g.,
production), to what extent are the following integrative mechanisms used? 7-point scales with endpoints of ‘‘rarely used’’ and ‘‘often used.’’
x5 Interdepartmental committees that are set up to .810 12.755
allow departments to engage in joint decision-
making on an ongoing basis
x6 Cross-functional teams that are temporary bodies set up .849 13.536
to facilitate inter-departmental
collaboration on a specific project control
x7 Liaison personnel whose specific job it is to coordinate .658 9.829
the efforts of several departments for the purposes
of a specific project
Supply chain process variability (r = .63; rwg = .81): Rate the following on consistency. 7-pt scales, endpoints of ‘‘always the same, very consistent,
low variance’’ and ‘‘rarely the same, very inconsistent, high variance.’’
y1 Amount of time for shipments to arrive from key suppliers .657 8.047
y2 Amount of time for shipments to reach key customers .613 7.545
y3 Production lead-time (fixed production schedule) .436 5.323
y4 Daily production output rate .528 9.829
Financial performance (r = .95; rwg = .93): Rate performance in each of the following areas. 7-point scales with endpoints of ‘‘well below industry
average’’ and ‘‘well above industry average.’’
x5 Average return on investment over the past 3 years .912 16.847
x6 Average profit over the past 3 years .956 18.272
x7 Profit growth over the past 3 years .922 17.175
Notes: Loadings are common metric completely standardized estimates; all t-values significant at p < .01. r = scale composite reliability;
rwg = interrater agreement score. CFA fit statistics: x2 = 242.591; d.f. = 170; p < .01; RMSEA = .065; CFI = .941.

chosen to accentuate differences, thereby making it
more likely that significant differences or models will
be found. In our case, the common median split
supported most of the hypothesized differences (as will
be shown in Section 4), and thus eliminating the
‘‘muddled middle’’ was not necessary.
We examined whether these two groups differ in
significant ways. It is conceivable that these two
demand unpredictability groups are disproportionately
populated by different industries, for example. To assess
this possibility, a x2-test of independence between the
SIC groups and the demand unpredictability groups was
examined. Table 2 presents the 2-digit SIC distribution
by demand unpredictability group. To lessen the
number of cells with expected values below five in
the x2-test, all 2-digit SIC groups with fewer than 10
firms were combined into an ‘‘other’’ category. The x2-
test is not significant (x2 = 13.420, d.f. = 10; p = .201).
Furthermore, independent sample t-tests revealed that
the demand unpredictability groups did not differ with
respect to the number of employees (t = .934; p > .10),
annual sales (t = 1.380; p > .10), or production tech-
nology routineness (t = 1.040; p > .10; Khandwalla,
1974). Production technology routineness was mea-
sured on five items (i.e., custom, small batch, large
batch, mass assembly, and continuous process technol-
ogy) on 7-point scale with endpoints of ‘‘1 = used
rarely’’ and 7 = used almost exclusively.’’ The items
were given weights of 1 through 5 and the sum was
taken. The results suggest that differences in demand
unpredictability groups are not being confounded by
industry type, firm size, or production technology
routineness.
4.3. Measurement of model constructs
Table 3 shows instructions to respondents and the
exact scale items for the remaining constructs. Formal
control (Khandwalla, 1974) and integration (Miller and
Dröge, 1986) were measured using established scales.
 R. Germain et al. / Journal of Operations Management 26 (2008) 557–570
In the case of formal control, respondents rated items
related to use of cost/profit centers, quality methods,
and management information and control systems on 7-
point scales with endpoints of ‘‘rarely used’’ and ‘‘often
used.’’ For integration, respondents rated reliance on
cross-functional teams, liaison personal, and temporary
bodies brought together for specific projects on seven-
point scales with endpoints ‘‘rarely used’’ and ‘‘often
used.’’
For supply chain process variability, respondents
rated consistency in inbound lead-times, outbound
delivery cycles, production lead-times, and daily
production output rates (Germain et al., 2001), thus
covering the domain of ‘‘incoming, within, outgoing.’’
Seven point scales were used with endpoints of ‘‘always
the same, very consistent, low variance’’ and ‘‘rarely the
same, very inconsistent, high variance.’’ Note that the
scale endpoints are very descriptive so that respondents
can understand the variability construct. High ratings on
these scales suggest that the firm unevenly processes
materials and that the flow of goods is relatively
inconsistent.
Financial performance of the SBU was measured
using Miller’s (1991) scale. The three-item perceptual
construct tapped return on investment, profit, and profit
growth on seven-point scales with endpoints of ‘‘well
below industry average’’ and ‘‘well above industry
average.’’ Respondents rated performance over the past
3 years to offset particularly good or bad years due to
unusual circumstances. We did not ask for ‘‘hard’’
performance measures because usually only about a
third of respondents provide them (it is often against
company policy), while an unknown number refuse to
participate at all when they see such questions. These
perceptual performance measures cannot be verified
against secondary data because they pertain to SBUs
and ‘‘hard’’ data for this unit of analysis is very difficult
or impossible to obtain.
4.4. Reliability and validity
Interrater agreement scores (rwg) were estimated for
the 17 instances where two respondents were obtained
per firm. Values over .70 are acceptable and justify using
the mean of the two respondents (James et al., 1993).
The interrater agreement scores, provided in Table 3, all
exceed .70, the acceptable minimum. The data was
collapsed down to 208 firms by taking the average
across respondents when two existed.
Testing of the measurement model and hypotheses
was conducted using 2-group LISREL with the
covariance matrices as input (Jöreskog and Sörbom,
565
1993). In the initial 2-group confirmatory factor analysis
(CFA), factor loadings and errors were estimated freely
across groups (baseline x2 = 209.060; d.f. = 143;
p < .01; this is equivalent to estimating each separately).
The loadings and errors were then declared invariant, or
equal, across groups (x2 = 242.591; d.f. = 170; p < .01).
The difference in x2 between the two models is not
significant (Dx2 = 37.571; Dd.f. = 28; p > .10). This
means that no asymmetries exist in the loadings or errors
across the two groups; i.e., the loadings and errors can be
modeled as equal across the two groups in all subsequent
analyses. This is a critical result because such measure-
ment equality greatly facilitates maximum likelihood
estimation in multi-group structural equations modeling
(SEM) (Hair et al., 1998).
Several measures of overall fit were then assessed.
The root mean square error of approximation (RMSEA)
equaled .065 and is below the maximum acceptable
value of .08. The confirmatory fit index (CFI) equaled
.941 and is above the minimum acceptable value of .90.
The goodness of fit index (GFI) was low (.821) and
below the acceptable cut-off of .90. However, the non-
normed fit index (NNFI) value of .923 exceeds the
acceptable minimum of .90. Based on these mixed
results, we tentatively conclude an adequate measure-
ment model fit exists.
The results of the 2-group CFA with loadings and
errors set equal across groups are summarized in
Table 3. All standardized loadings exceed .40 ( p < .01)
and the scale composite reliabilities exceed .60. This
suggests adequate reliability and convergent validity.
One final model restriction was examined: the correla-
tion between formal control and integration was set
equal across groups. Model fit was not impaired
(Dx2 = .09; Dd.f. = 1; p > .10). The correlation
between the two exogenous constructs was declared
invariant across groups in the SEM.
5. Results
The first 2-group SEM model tested (Fig. 2)
corresponds directly to the hypothesized model shown
in Fig. 1. Paths from formal control to supply chain
process variability and to financial performance were
estimated in the ‘‘low’’ demand unpredictability group
only; paths from integration to supply chain process
variability and financial performance were estimated in
the ‘‘high’’ demand unpredictability group only; and the
path from supply chain process variability to financial
performance was set equal across groups. This
specification directly tests the model as stated in the
hypotheses. Furthermore, factor loadings, errors, and
566 R. Germain et al. / Journal of Operations Management 26 (2008) 557–570
Fig. 2. Empirical model.
the non-causal correlation between formal control and
integration were set equal across groups (as justified by
the measurement model results). With the exception of
the low GFI (.826), the remaining fit indices were
adequate: RMSEA = .062; CFI = .944; NNFI = .942.
The x2 = 245.464 (d.f. = 176) was significant ( p < .01),
providing strong support for the model.
Table 4 summarizes the results of testing the hypo-
thesized model. In the predictable demand group, the path
from formal control to supply chain process variability is
significant (g11 = .295; p < .05), but the path to
financial performance is not (g21 = .136; n.s.). H1a,
but not H1b, is supported. In the unpredictable demand
group, the paths from integration to supply chain process
variability (g12 = .337; p < .01) and to financial
performance (g22 = .239; p < .05) are significant,
Table 4
Summary of hypothesized Two-group LISREL model results
Parameter (hypothesis)
g11: Formal control ! Supply chain process variability
g21: Formal control ! Financial performance
g12: Integration ! Supply chain process variability
g22: Integration ! Financial performance
b21: Supply chain process variability ! Financial performance (set equal)
Notes: Parameter estimates are common metric completely standardized estimates. Fit statistics: x2 = 245.464; d.f. = 176; p = <.01;
RMSEA = .062; CFI = .944; GFI = .826; NNFI = .942. a, p < .01; b, p < .05.
supporting H2c and H2d. The path from supply chain
process variability to financial performance is significant
(b21 = .210; p < .05; this was set equal across groups).
The remaining hypotheses were tested by selectively
estimating paths in specific groups. The results of these
single degree of freedom Dx2-tests are summarized in
Table 5. The first row of Table 5 shows that no
significant improvement in fit was observed when the
path from integration to supply chain process variability
was estimated in the predictable demand group
(Dx2 = .128; p > .10). This path is not significant and
thus H1c is supported. The next three rows in Table 5
can be similarly interpreted: the inclusion and estima-
tion of paths that had been set to zero in the
hypothesized model led to no significant improvement
in model fit. This supports H1d, H2a, and H2b.
Parameter estimate (t-value)
Demand environment
Predictable Unpredictable
.295 (2.239b) Set to zero
.136 (1.249) Set to zero
Set to zero .337 (2.403a)
Set to zero .239 (2.027b)
.210 (2.214b)
 R. Germain et al. / Journal of Operations Management 26 (2008) 557–570 567

Table 5
Summary of Dx2 (Dd.f. = 1) tests
Model
Integration ! supply chain process
variability estimated in predictable
demand environment
Integration ! financial performance
estimated in predictable
demand environment
Formal control ! supply chain
process variability estimated in
unpredictable demand environment
Formal control ! financial
performance estimated in
unpredictable demand
environment
Supply chain process
variability ! financial
performance estimated
freely in each group
All of the above
Model x2 (d.f.) Dx2 between hypothesized
and freed model ( p-value)
245.336 (175) .128 (Dd.f. = 1; p > .10)
245.433 (175) .031 (Dd.f. = 1; p > .10)
244.735 (175) .729 (Dd.f. = 1; p > .10)
243.430 (175) 2.034 (Dd.f. = 1; p > .10)
245.361 (175) .083 (Dd.f. = 1; p > .10)
241.346 (171) 4.118 (Dd.f. = 5; p > .10)
Conclusion
No significant change in fit.
H1c is supported
No significant change in fit.
H1d is supported
No significant change in
fit. H2a is supported
No significant change
in fit. H2b is supported
No significant change in fit.
The effect is equal across
groups: H3 is supported
Simultaneous support
of the above

The next row of Table 5 shows what happens when
the path between supply chain process variability and
financial performance is estimated freely in each group.
The paths in the predictable (b2,1 = .225; t = 1.702;
p < .10) and in the unpredictable demand groups
(b2,1 = .208; t = 1.698; p < .10) are both signifi-
cant, however, separate estimations did not lead to a
significant change in fit (Dx2 = .083; p > .10). The
paths are not different across groups and H3 is
supported.
A final model simultaneously incorporating the
above findings was examined. The null paths were
estimated and the path from supply chain process
variability to financial performance was estimated
freely in each group. The last row in Table 5 shows
that the difference between this model and the
hypothesized one is not significant (Dx2 = 4.118;
Dd.f. = 5; p > .10). This suggests that the original
hypothesized model is a parsimonious representation of
the data (with the exception that the hypothesized path
from formal control to financial performance was found
to be nonsignificant in the predictable demand group).
6. Discussion: implications and limitations
A summary of the research findings is presented in
Fig. 3. Our research theme is supported: demand
uncertainty is a key contingency variable that firms
should take into account when selecting an organiza-
tional structure for managing supply chain process
variability and influencing performance. The research
contributes to contingency theory and the theory of
swift, even flow in several ways.
First, from a contingency perspective, managers
should understand that: (1) in a predictable demand
environment, formal control is a driver of performance
(total effect = .201; p < .05), but its impact is com-
pletely mediated by supply chain process variability;
and (2) in an unpredictable demand environment,
integration is a driver of performance (total
effect = .305; p < .01) and its impact is partially
mediated by supply chain process variability.
Second, supply chain process variability is equally
detrimental to financial performance in unpredictable
and predictable demand environments. One way to
interpret supply chain process variability is as a proxy
for depth and breadth of knowledge, which is a key
resource to engender long-lived competitive advantage
(Roth, 1996a,b). Deming (1986) long argued that
variability and knowledge are inversely related; indeed,
the quest for knowledge is driven by the existence of
unexplained variability (Anderson et al., 1994). Mana-
ging supply chain process variability successfully
through organizational mechanisms – which ultimately
represents managerial ‘‘knowing how’’ (Grant, 1996) –
is based on deeply rooted knowledge, and thus can be an
intangible core competency. For example, General
Motors was able to closely imitate the lean, low
variance operations of Toyota only after many years of
experimentation, joint ventures, and worker/manager
568 R. Germain et al. / Journal of Operations Management 26 (2008) 557–570
Fig. 3. Summary of findings.
education and training. However, with rapid supply
chain process change, effective managerial knowledge
regarding managing supply chain process variability
deteriorates. According to Bohn (1994, p. 71), ‘‘one of
the most painful forms of ignorance is false knowl-
edge’’; hence managers must continually evaluate
supply chain process variability and ways to alleviate
it. Managers should understand that supply chain
process variability associates with poorer performance
regardless of the demand unpredictability environment.
We should also note that scope of our supply chain
process variability construct is focused. The construct
may be expanded to: (1) process variability as spanning
the entire supply chain (e.g., incorporating second tier
suppliers) and (2) process variability in domains other
than flow evenness (e.g., product quality variability).
Variability is important to sets of firms in a supply chain
because it is amplified as it moves upstream from its
source (i.e., the ‘‘bullwhip effect;’’ see Kahn, 1987; Lee
et al., 1997a,b; Chen et al., 2000). The bullwhip effect in
the entire supply chain is an important area for further
research. For example, does supply chain process
variability, operationalized either as in our research or
in an expanded fashion, affect the performance of the
supply chain as a whole?
While the theory of swift, even flow is supported, we
did not model the ‘‘swiftness’’ component of the theory.
Further research should address the antecedents of both
speed and evenness, whether they are related to one
another, and whether both predict financial performance
when modeled together. Managers should also under-
stand that formal control and integration are not the only
mechanisms that the firm may use to control supply
chain process variability. Others include: (1) just-in-
time, when conceived of as a variance reducing set of
practices; (2) every day low pricing, which reduces the
effects of forward buying that result from trade and
retail promotions; (3) CPFR, which reduces supply
chain surprises through the cross-firm exchange of
planned promotional activities and joint forecast
development (Wisner et al., 2005); (4) concurrent
engineering or product design for manufacturability/
distribution (Fixson, 2005).
Third, while the research supported the effect of
environment on how organizational structure associates
with supply chain process variability and financial
performance, managers should understand that addi-
tional environmental moderators and dimensions of
organizational structure exist. Environmental modera-
tors include the industry’s pace of technological change,
exchange rate variability, regulation variability, and
seasonality. The latter may associate with supply chain
process variability, yet this uncontrollable but partially
predictable contextual factor was not one we considered
 R. Germain et al. / Journal of Operations Management 26 (2008) 557–570
separately. Additional dimensions of organizational
structure include decentralization and complexity or
specialization (Miller and Dröge, 1986). It may be that
decentralization in the supply chain domain (e.g.,
decentralization of transportation and production
scheduling decisions) associates with lower supply
chain process variability only when demand is
unpredictable. Uncertain environments require flex-
ibility, and decentralization may provide managers the
leeway necessary to adapt and control process
variability. However, when the environment is pre-
dictable, complexity and centralization (typically
associated with mechanistic structures) may foster less
process variability. Further research should thus
integrate decentralization and complexity into the
theoretical framework.
Fourth, managers should consider better organizing
their firms’ suppliers, customers, and partners; this
implies that cross-firm organization and governance
systems are important areas for further research. For
instance, which cross-firm governance systems reduce
the firm’s variability and/or chain wide variability? To
give a more specific example, researchers could look at
the effect of network partner selection as a way to
control supply chain process variability in predictable
versus unpredictable environments, based on the work
of Beckman et al. (2004). It could be that firms form
new relationships with new partners for exploration
purposes and/or additional relationships with existing
partners for exploitation (March, 1991), depending on
the predictability of the demand environment. Beckman
et al. (2004, p. 273) found ‘‘that firms use networks
primarily as a means to exploit under conditions of
market uncertainty,’’ supporting the well-established
idea that networks provide access to knowledge (which
reduces uncertainty). If supply chain process variability
is inversely related to knowledge, then the more
networking, the less variability there should be.
Fifth, further research should examine the relation-
ship between supply chain process variability and
agility. Supply chain agility concerns flexibility
(Swafford et al., 2006) and agility may thus be a
way of coping with supply chain process variability. In
other words, agility may not eliminate variability but
rather mitigate variability’s impact. It may be that
investments in agility really pay off only when demand
is unpredictable, for example (Anand and Ward, 2004;
Fisher, 1997). A predictable environment may require
supply chain efficiency, while an unpredictable
demand environment may require flexibility or agility.
Focusing only on productivity gains may lead to long-
term organizational difficulties if the firm forgoes
569
flexibility and an ability to innovate (Benner and
Tushman, 2003).
Finally, some additional limitations should be noted.
These include the lack of ‘‘hard’’ performance measures
(e.g., actual return on investment, which is difficult to
obtain for SBUs), the lack of a rigorous test for non-
response bias, and the use of purchasing executives as
survey respondents. These shortcomings aside, the
research was successful in casting supply chain process
variability within a contingency theory framework.
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