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Int. J.

Production Economics 171 (2016) 361–370

Contents lists available at ScienceDirec t

Int. J. Production Economics


journal homepage: www.elsevier.com/locate/ijp e

Risk, risk management practices, and the success of supply


chain integration
Frank Wiengarten a,n, Paul Humphreys b,1, Cristina Gimenez a,2, Ronan McIvor b
a

ESADE School of Business, Ramon Llull University, Av. de Pedralbes, 60-62, 08034 Barcelona, Spain
b
University of Ulster, Jordanstown Campus, Shore Road Newtownabbey, Co. Antrim, United Kingdom
articleinfo abstract
Companies have reacted to the apparent opportunities and threats of globalization through various global production practices
that have increased supply chain complexity and various forms of risk. Through increasing supply chain integration, companies
Article history: have attempted to manage this increased level of complexity. Supply chain integration has been identi fied as a key practice to
Received 12 February 2013 manage supply chains and achieve superior performance. The intent of this paper is to explore the role of risk and risk
Accepted 18 March 2015 Available
management practices in the success of supply chain integration in terms of their impact on cost and innovation performance.
online 28 March 2015
By applying the relational view and through cross-country survey and secondary country data we explore differences in supply
chain integration efficacy based on the risk of conducting business (measured in terms of the strength of a country's rule of law)
and the mitigating effect of supply chain risk management practices. One of the main conclusions suggests that supplier
Keywords:
Supply chain integration
integration is also effective in weak rule of law (i.e., high risk) environments. Furthermore, companies can complement and
strengthen the performance impact of their supplier integration practices through supply chain risk management practices in
Rule of law
risky environments.
Risk management
Operational performance & 2015 Elsevier B.V. All rights reserved.
Relational view

1. Introduction
It is generally accepted that tighter integration leads to improved
The current trend towards globalization has not only provided companies performance (e.g., Forrester,1961; Kim, 2009). Integrating supply chain
with various opportunities, but also a number of challenges. On a global basis, processes with customers and suppliers enables companies to improve and
companies have established warehouse facilities, production plants and streamline information and data exchange, which may lead to the improvement
distribution centers across countries for various reasons, such as cost of product and material flows throughout the supply chain (Wiengarten et al.,
advantages, access to raw material sources or specialist skills and capabilities 2015). In addition, SCI may enable companies to access various resources and
(Choi et al., 2012). However, globalizing supply chains also results in many capabilities in the form of knowledge embedded within other supply chain
challenges, that may include, increased complexity and various associated risks members and subsequently increase a company's innovativeness (Craighead et
(Chopra and Sodhi, 2004; Blackhurst et al., 2005; Tang, 2006). Companies have al., 2009; Cao and Zhang, 2011).
been managing supply chain complexity through tightly integrated supply Whilst the general consent is that SCI leads to improved performance, some
chains (Schoenherr and Swink, 2012). Supply chain integration (SCI) can be studies have failed to show this link ( see for example, Flynn et al., 2010;
defined as the extent to which a company strategically interconnects and aligns Schoenherr and Swink, 2012). During the recent years, a contingency view of
its supply chain with its partners, upstream and downstream (Jayaram et al., SCI has been adopted, showing that the relationship between integration and
2010; Schoenherr and Swink, 2012). performance depends on different contingency factors (Wong et al., 2011; van
der Vaart et al., 2012). Most of the studies

n
Corresponding author. Tel.: þ34 932 806 162. opportunistic behavior of supply chain members, geopolitical risk, sovereign
E-mail addresses: Frank.wiengarten@esade.edu (F. Wiengarten), risks or exchange rate risks (Aron et al., 2005). All of these forms of risk may
pk.humphreys@ulster.ac.uk (P. Humphreys), cristina.gimenez@esade.edu (C.
1
Gimenez), r.mcivor@ulster.ac.u (R. McIvor). Tel.: þ44 28 90368410. 2
hinder companies to experience the full performance capabilities of their
Tel.: þ34 932 806 162. integrated supply chains. For example, the outsourcing literature has identified
that various forms of risk have a significant impact on the success of outsourcing
http://dx.doi.org/10.1016/j.ijpe.2015.03.020 0925-5273/& (Ellram et al., 2008; Handley and Benton, 2009; 2012). Additionally, a recent
2015 Elsevier B.V. All rights reserved.
study by Wong et al. (2011) identified that the impact of SCI on operational
have considered contingency factors at the firm level, such as product performance is contingent on varying levels of environmental uncertainty.
complexity, complexity of business conditions, uncertainty. Recently,
To manage the various forms of risk that supply chains are exposed to
Wiengarten et al. (2014) extended the SCI literature including country-
companies are increasingly investing in risk management tools such as mitigation
level factors, such as the country's logistical capabilities. We aim to
practices and contingency planning (Kleindorfer and Saad, 2005; Ellis et al.,
contribute to this recent stream of literature by analysing the moderating
2011). In applying mitigation practices, companies have relied on supplier
role of the strength of a country's legal system (i.e., the rule of law), which
involvement, selection evaluation and supplier development activities (Krause,
can be viewed as a proxy for the risk of firms facing opportunistic
1999; Krause et al., 2000; Kannan and Tan, 2002; Fawcett et al., 2006; Ellis et
behavior.
al., 2011). Contingency planning practices, on the other hand, include securing
The advantages and positive effects of globally integrated supply
chains may be threatened through various forms of risk, such as the
362 F. Wiengarten et al. / Int. J. Production Economics 171 (2016) 361–370

excess capacity or holding inventory at strategic positions within the Japanese automakers, Dyer and Singh (1998) empirically verified that close
supply chain (Zsidisin and Ellram, 2003; Tomlin, 2006). supplier relationships lead to more relationship specific assets (investments),
Building on the concept of SCI and applying the arcs of integration lower transaction costs, and ultimately superior operational performance.
framework along with the relational view, our objective is to explore how Applying the relational view to our research setting, SCI can be viewed as an
risk impacts on the success of SCI. Specifically, we explore how risk, in alliance as opposed to an arm's length relationship. Subsequently, from a
the form of the “rule of law”, at the country level affects the impact of SCI theoretical viewpoint higher levels of integration might lead to higher
on operational performance in terms of cost and innovativeness. In other performance outcomes because of increased knowledge exchange, finding
words, we use the strength of a country's legal system (i.e., the rule of law) complementarities and lower transaction costs.
as a proxy for the likelihood of supply chain members to conduct Therefore, from a cost perspective, increasing the degree of supplier and
opportunistic or ill-behavior. In addition, we explore how supply chain customer integration may benefit companies in terms of reducing
risk management practices can complement SCI under different risk manufacturing cost, increased inventory turnover or even an increase in labor
scenarios. Subsequently, this research is set out to investigate the productivity. However, the longer-lasting benefit, in the form of sustainable
following research questions: competitive advantage, could be achieved through the exchange and joint
development of expertise and capabilities leading to the development of new
RQ1: To what extent does the risk associated with a weak rule of law and innovative products. Subsequently, by increasing SCI, companies may
affect the impact of SCI on operational performance (i.e., cost and gain cost and innovation advantages as stated in the following hypotheses:
innovation)?
RQ2: To what extent can supply chain risk management practices Hypothesis 1. Customer integration is positively associated with (a) cost and (b)
complement SCI under different risk scenarios? innovation performance.

Hypothesis 2. Supplier integration is positively associated with (a) cost and (b)
We have chosen the dimensions of cost and innovativeness to
represent the two ends of the operations strategy spectrum in the context innovation performance.
of the overall organizational strategy in terms of cost leadership and
differentiation strategy (through innovation) (Porter, 1998; Craighead et 2.2. Supply chain integration and performance: a contingent view
al., 2009). In doing so we attempt to further develop and explore theory
and literature in terms of SCI and the relational view. Additionally, we
Whist previous research has generally concluded that having close and
will explore how SCI and risk will behave and interact differently under
integrated supply chain relationships is a means to achieve superior
these two dimensions.
performance (e.g., Lee et al., 1997; Chen et al., 2004; Vereecke and Muylle,
2006) a large body of research has also identified mixed or negative results
(Stank et al., 2001 ; Cousins and Menguc, 2006; Flynn et al., 2010;
2. Literature review and hypotheses development Narasimhan et al., 2010). Devaraj et al. (2007) identified that supplier
integration does significantly contribute to operational firm performance in
2.1. Supply chain integration and performance terms of cost, quality, flexibility, and delivery performance, whereas customer
integration does not. Similarly, Flynn et al. (2010) identified that whilst
SCI can be categorized along multiple dimensions and aspects (van internal integration was directly related to business and operational
der Vaart et al., 2012; Ahmed and Pagell, 2012). Van der Vaart and van performance, customer integration was only related to operational
Donk (2008) noted that integration covers a broad array of practices, from performance. Furthermore, supplier integration was neither directly related to
sharing of operational information such as stock levels to strategic operational nor to business performance. Flynn et al. (2010) further
activities such as collaboration for new product development. Integration investigated these results through various contingency and configuration
can also be studied from a company boundary perspective (Frohlich and factors. Moreover, Narasimhan et al. (2010) identified that customer and
Westbrook, 2001; Schoenherr and Swink, 2012). In that sense, integration supplier integration had no significant impact on cost performance and that
can be defined from an internal perspective if it refers to the integration supplier integration even had a negative effect on quality performance.
among different functional areas within the firm's boundaries and Recently, Schoenherr and Swink (2012) also highlighted these mixed findings
externally if it refers to how the firm integrates with its upstream and through retesting and extending the arcs of integration framework by
downstream supply chain partners (i.e., customers and suppliers) (Flynn investigating the moderating role of internal integration on the relationships
et al., 2010). between arcs of integration and performance. They identified that internal
Research assessing the impact of SCI on firm performance has integration strengthens the impact of supplier and customer integration on
been extensive (Schoenherr and Swink, 2012). Frohlich and delivery and flexibility performance; however, not on quality and cost
Westbrook's (2001) “arcs of integration” framework can be viewed as performance.
a seminal article that conceptualized and measured the performance Although internal integration has been one of the moderating factors
implications of SCI. They conceptualized integration through its considered in the literature (Flynn et al., 2010; Schoenherr and Swink, 2012),
direction (towards customers and/or suppliers) and extent. Frohlich other authors have considered additional types of contextual factors. For
and Westbrook (2001) identified that an outwardfacing strategy example, Fynes et al. (2005) considered supply chain relationship dynamics;
characterized by a high level of customer and supplier integration leads Wong et al. (2011) environmental uncertainty (considering change in
to higher levels of firm performance compared to companies with customer orders, unpredictability in suppliers performance, change in
lower levels of integration. production technology, etc.) and van der Vaart et al. (2012) the DWV3
(Duration of the life cycle, time Window for delivery, Volume, Variety, and
Many researchers have linked the potential performance benefits
Variability) of Childerhouse et al. (2002). The main characteristic of all these
of SCI through the theoretical foundations of the resourcebased view
studies is that the contingent factor was measured at the supply chain
and its relationship specific view, the relational view (Dyer and Singh,
relationship level (i.e., it refers to the specific context of the buyer–supplier
1998; Chen et al., 2004; Mesquita et al., 2008). Dyer and Singh (1998)
relationship, such as the level of uncertainty, the complexity of the product,
argue that organizations engaging in alliances can gain supernormal
etc.). Recently, Wiengarten et al. (2014) extended the SCI literature by adding
profit (relational rents) through the following four sources: (1) relation- a contextual factor at the country level. The authors show the moderating role
specific assets, (2) knowledge-sharing routines, (3) complementary of a country's level of logistical capabilities on the SCI–performance
resources/capabilities, and (4) effective governance. In a case study of relationship. In particular, they show that plants located in countries with high
F. Wiengarten et al. / Int. J. Production Economics 171 (2016) 361–370 363

logistical capabilities do not gain the same performance improvements implicitly suggests that the less rules are specified, followed and enforced the less
from SCI as the plants located in countries with low levels of logistical efficient SCI may become.
capabilities. This can also be theoretically further explored and underpinned by the
In the following section, we will argue that other type of factors relational view. We have highlighted that significant performance benefits or
such as risk need to be incorporated in the study of the SCI– determinants of interorganizational competitive advantage fall into the categories
performance relationship. These factors are also at the country level. of relation-specific assets, knowledge sharing routines, complementary resources
and capabilities and effective governance (Dyer and Singh, 1998). However, the
2.3. Supply chain integration and risk risk inherent with weak rules of law may prevent companies gaining benefits
from their SCI initiatives in terms of supernormal profits. Firstly, weak rules of
Risk research, in general, has been given increased attention by law may require companies to invest in additional safeguards to prevent
supply chain researchers and practitioners (Speckman and Davis, illbehavior. This would require effective governance tools in the form of
2004; Knemeyer et al., 2009; Tang and Musa, 2011; Sodhi et al., enforcement and governance practices (Poppo and Zenger, 2002). In terms of
2012). Mitroff and Alpaslan (2003) have identified three general types knowledge-sharing routines, weak rules of law may make these sources of
of threats or risk that can impact the supply chain and affect SCI in relational rents less effective. Supply chain members may not only experience
particular: natural accidents (fires, earthquakes, etc.), normal accidents higher levels of illbehavior in weak rule of law environments, but because of
(technology failure/breakdowns), and abnormal accidents (ill-will by these experiences may also not share and transfer specific knowledge that would
insiders/outsiders). As highlighted in the introduction we are otherwise permit the creation of new specialized knowledge. In addition, false
specifically interested in the third potential risk category, the abnormal information may have been deliberately transferred in order to gain short-term
accidents, characterized through illwill by insiders/outsiders. advantages or benefits over other supply chain members. Based on these
We could study risk at the buyer–supplier relationship level but our premises, potential complementarities between the member firms' resources and
study would not differ much from the existing studies that consider capabilities may not have been identified or explored. All these factors may even
environmental uncertainty or business conditions (e.g. Wong et al., lead to a negative effect of SCI on performance, if practiced in environments with
2011; van der Vaart et al., 2012). By considering risk at the country- weak rules of law. Subsequently, the following hypotheses are stated:
level we will join Wiengarten et al. (2014) in their search for aspects
that help explain the differences in the SCI–performance relationship Hypothesis 3. Weak rules of law reduces the strength of the positive relationship
across countries. In the following, we provide a discussion as to why between customer integration and (a) cost and (b) innovation performance.
a country's rule of law can be considered as an appropriate indicator of Hypothesis 4. Weak rules of law reduces the strength of the positive relationship
opportunistic behavior. between supplier integration and (a) cost and (b) innovation performance.
We adopt the strength of a country's legal system (i.e., the rule of
law) as a proxy for the likelihood of supply chain members to conduct
opportunistic behavior. We argue that in countries with weak rules of 2.4. Supply chain risk management practice, risk and supply chain
law the likelihood or the risk of opportunistic behavior is higher than integration
in countries with strong rules of law (Kaufmann et al., 2011).
Opportunistic behavior is expected to be higher in countries with weak
In terms of our first research question, it has been argued that SCI might not
rules of low, as companies and individuals in these countries are more
be as effective in companies situated in nations with weak rules of law as
likely, for example, to be exposed to cheating and stealing, and they
compared to being situated in countries with strong rules of law. In this section
cannot rely on the courts of law or the police to be impartial.
we discuss our second research question through exploring the importance of risk
It is argued that the success of SCI depends on the behavior of the management practices in order to complement SCI under different risk scenarios.
buyer–supplier dyad and therefore on the country specific rule of law.
Companies implement risk management practices depending on their risk
Countries with weak rules of law can be characterized as having low
strategy and the severity and likelihood of risk events (Brindley, 2004; Knemeyer
levels of abiding society, poor contract enforcement, weak property
et al., 2009). Various risk events have been observed and researched, such as the
rights, corrupt police and court systems, as well as an increased likelihood
disruption of supply, breakdown of transportation, production, or warehousing,
of crime and violence resulting in high levels of environmental
procurement failures and forecast inaccuracies (Johnson, 2001; Chopra and
uncertainty (Kaufmann et al., 2011). Subsequently, the strength of the
Sodhi, 2004; Speckman and Davis, 2004). Whilst these events might be very
host country's legal system (i.e., the rule of law) can be viewed as a proxy
severe in terms of their impact on supply chain performance, the likelihood might
for the likelihood of opportunistic behavior at the country level.
be somewhat predictable (Brindley, 2004). However, due to constantly focusing
Therefore, the focal company's supply chain may be more exposed to
supply chain strategy on cost objectives, these risk events might have increased
opportunistic behaviors if based in a country characterized by weak rules
in terms of likelihood and severity (Speier et al., 2011). Tightly coupled and
of law. Companies and individuals in countries with weak rules of law are
synchronized supply chain processes make these disruptions even more likely
more likely, for example, to be exposed to crime and do not trust the courts
and severe. Companies are attempting to strike a balance and increase their
of law or the police to be impartial. From a supply chain perspective this
process slack or buffering of product/ people/etc. to manage risk, but at the same
may imply that SCI might not be as successful in environments
time taking into consideration the added costs (Speier et al., 2011).
characterized by weak rules of law compared to strong rule of law
environments. Giving individuals and companies the opportunity to Supply chain risk management is the integrated process of identification,
behave opportunistically may actually lead to ill-behavior in supply chain analysis and either acceptance or mitigation of uncertainty and risk in the supply
relationships, which has an adverse impact on performance (Mitroff and chain (Manuj and Mentzer, 2008; Blome and Schoenherr, 2011). Risk
Alpaslan, 2003). identification include practices vendor and supplier rating programs, contingency
programs or early warning systems whereas risk mitigation include practices such
As an example, the literature on contract management has identified
as rethinking and re-evaluating their supply and distribution strategy (for
that the less complete or specified a contract is, the less successful
example, through the use of postponement, changing the location of some
outsourcing practices may be (Poppo and Zenger, 2002 ; Goo et al., 2009).
facilities, etc.) and supplier development (Manuj and Mentzer, 2008; Blome and
Handley and Benton (2009) have highlighted that effective contracts
Schoenherr,
which are reflected in clear service level agreements, with established
2011).
penalty and reward structures, guard against opportunistic behavior.
Reflecting this on the more intangible aspects at the country level Conducting business in countries with weak rules of law may require
additional managerial effort to gain the full benefits of SCI. In hypotheses three
and four we proposed that the rule of law has an adverse effect on the efficacy of
364 F. Wiengarten et al. / Int. J. Production Economics 171 (2016) 361–370

SCI and in this section we discuss the possibilities to compensate for these We also included a secondary data source by The World Bank. In order to
negative effects through managing these inherent associated risks in measure the risk of opportunistic behavior we use the rule of law index

Table 2
Sample overview by industry.

Industry Frequency

Manufacturer of metal products 233

Manufacturer of machinery and equipment 183


Manufacturer of office, accounting and computing machinery 12
Manufacturer of other electrical machinery/apparatus 91
Manufacturer of TV, radio and communication machinery/apparatus 42
Manufacturer of medical, precision and optical instruments, watches and clocks 39
Manufacturer of motor vehicles, trailers and semi-trailers 52
Manufacturer of other transport equipment 33
637

practicing SCI in weak rule of law environments. The relational view developed and measured by The World Bank. The rule of law index measures
underpins the importance of effective governance for the success of the level of confidence that citizens have in their legal/regulatory system as
interorganizational relationships (Dyer and Singh,1998). Companies well as their likelihood to abide by the rules of the system in the specific
could ensure the success of their SCI efforts through rethinking and re- country context. For consistency purposes we also used scores provided for
evaluating their supply and distribution strategy (e.g., relocating 2009 (Kaufmann et al., 2011).
inventories and using postponement) whilst considering potential risk
scenarios (Manuj and Mentzer, 2008). Also, other risk management
practices could be employed such as vendor and supplier rating programs,
contingency programs or early warning systems (Blome and Schoenherr, Table 1
2011). Sample overview by country and rule of law score.

However, these systems require managerial and monetary Country Frequency Rule of law score (2009)
investments, which could also have a negative effect on the efficacy of
Belgium 33 1.382
SCI. Subsequently, we propose that companies need to choose and align
their investments in risk management practices with the risk environment Brazil 37 .208 1.790
(Brindley, 2004). This would mean that companies practicing SCI in weak Canada 17
China 51 .345 1.896
rule of law environments (i.e., high risk environments) could complement
Denmark 18
their SCI efforts through investing in supply chain risk management
Estonia 27 1.110
practices. Subsequently, the following hypotheses are proposed: Germany 35 1.648
Hungary 69 .785
Italy 56 .354
Hypothesis 5. Higher levels of supply chain risk management practices Japan 20 1.290
implementation complements customer integration when being Korea, Rep. 33 .978
situated in weak rule of law environments and subsequently strengthen Mexico 14 .592 1.802
the positive relationship between customer integration and (a) cost and Netherlands 44
(b) innovation performance. Romania 30 .0480
Spain 36 1.154
Switzerland 31 1.762
Hypothesis 6. Higher levels of supply chain risk management practices Taiwan 27 .924
UK 15 1.732
implementation complements supplier integration when being situated
USA 44 1.540
in weak rule of law environments and subsequently strengthen the Total 637
positive relationship between supplier integration and (a) cost and (b)
innovation performance. The final sample selected for the purpose of this study consisted of 637
plants situated in 19 countries situated in Europe, Asia and North America.
Tables 1 and 2 provide overviews of our sample in terms of country, rule of
3. Research method law score and industry.
Before starting with the analyses we tested our sample for common
method bias or variance. We assessed common method bias through the
3.1. Sampling and data collection Harman's one factor test (Sanchez and Brock, 1996). Results indicate that the
single factor model produced a significantly worse model fit compared to our
Data collected through the International Manufacturing Strategy proposed and confirmed five-factor model (χ2/d.f.¼16.64; RMSEA¼.167;
Survey (IMSS) was used to explore the importance of a country's AGFI¼.59; CFI¼.75; GFI¼.66; IFI¼.79; NFI¼.78; RFI¼.78). Furthermore,
logistical capabilities on the SCI and its efficacy. The IMSS is a we assessed potential issues regarding response bias. Unfortunately, we could
research network of business schools and assembly manufacturing not obtain information regarding the date of response to compare the
firms, designing a common database and collecting data for the study responses across early and late respondents for each country.
of manufacturing management strategies and practices on both a However, we could compare responses from individuals that provided
global and national scale. The network was originally set up in 1992 answers to all survey questions to those that only partially completed the
by a group of 20 business schools led by the London Business School, questionnaire. We utilized the latter group as a proxy for non-respondents that
UK and Chalmers University of Technology, Sweden. In this study we
have been included in our final sample. We conducted independent samples t-
utilize data collected from the 5th round of the survey collected in 2009.
tests that indicated non-significant differences between complete and
The companies were contacted multiple times through emails and
incomplete questionnaires suggesting that non-response bias is not a serious
telephone calls. The final combined response rate of the companies in
concern (Schoenherr and Narasimhan, 2012).
the different countries was 24.18 %.
Table 3
Confirmatory factor analysis results.
Construct Mean S.D. R2
t- Std.
S
Value error
F. Wiengarten et al. / Int. J. Production Economics 171 (2016) 361–370
tand. loading 365
Customer integration α¼.827 .998
Share inventory level information with key/strategic customers 2.97 .71
19.00 .050 .51
Share production planning and demand forecast information with key/strategic customers .74 20.11 .045 .55
Agreements on delivery frequency with key/strategic customers .68 17.85 .046 .46
Dedicated capacity for key/strategic customers .71 18.75 .048 .50
Vendor managed inventory or consignment stock with key/strategic customers .69 17.93 .048 .47
Plan, forecast and replenish collaboratively with key/strategic customers .76 20.54 .044 .57
Supplier integration α¼.862 3.07 .850
Share inventory level information with key/strategic suppliers .66 17.15 .046 .53
Share production planning and demand forecast information with key/strategic suppliers .59 15.13 .042 .44
Agreements on delivery frequency with key/strategic suppliers .63 15.91 .040 .31
Dedicated capacity for key/strategic suppliers .73 19.49 .044 .39
Vendor managed inventory or consignment stock with key/strategic suppliers .65 16.53 .045 .42
Plan, forecast and replenish collaboratively with key/strategic suppliers .75 20.04 .044 .56
Risk management practices α¼.768 2.82 .894
Rethinking and restructuring supply strategy and the organization and management of supplier portfolio .63 15.64 .047 .39
Implementing supplier development and vendor rating programs .69 17.60 .046 .48
Rethinking and restructuring distribution strategy in order to change the level of intermediation .66 16.53 .047 .43
Implementing practices including early warning system, effective contingency programs for possible supply chain disruptions .72 20.04 .046 .52

Cost performance α¼.777 3.21 .651


Unit manufacturing cost .71 16.45 .032 .50
Labor productivity .70 16.04 .030 .49
Inventory turnover .68 15.28 .033 .46
Manufacturing overhead costs .67 14.97 .031 .44
Innovation performance α¼.742 3.43 .703
Product customization ability .62 14.26 .034 .37
Time to market .73 16.39 .035 .54
Product innovativeness .74 16.60 .034 .54

3.2. Measures et al., 2011). The indicator in Table 1 is a perception of rule of law within a
country. It is a proxy for how confident the citizens are in the legal/regulatory
SCI was conceptualized through customer and supplier side system as well as their likelihood to abide by the rules of the system in the specific
integration. Respondents were asked multiple identical questions with country context. The rule of law measure ranges from 2.5 (weak) to 2.5 (strong)
regards as to how they coordinate planning decisions and flow of goods on a continuous scale. The associated values that are listed in Table 1 are provided
with their key/strategic suppliers and customers. Customer and by The Word Bank.1
supplier integration were each measured through six items ranging In addition, we employed three control variables to ensure the generalizability
from one (none) to five (high) indicating the level of adoption of our results in terms of industry, level of globalization and location. Level of
(Frohlich and Westbrook, 2001). The customer and supplier items are globalization was conceptualized as the percentage of sourcing and sales outside
listed in Table 3. the plant's country. Furthermore, we included the variable geographical focus to
Supply chain risk management practice was measured through control for the location of the plant.
various indicators assessing the level of effort that companies have
invested in action programs within the previous 3 years. Items 3.3. Reliability and validity
representing supply chain risk management practice focus on the risk
identification and mitigation phases (Manuj and Mentzer, 2008; Blome
We conducted confirmatory factor analysis (CFA) to validate our measures
and Schoenherr, 2011). More specifically, regarding risk identification
and to confirm our proposed factor structure. In the following we analyse and
we include vendor monitoring and rating programs and early warning
discuss validity in terms of content validity, convergent validity, discriminant
systems and contingency programs (Blome and Schoenherr, 2011). To
validity and reliability (Nunnally, 1978; Anderson and Gerbing, 1988). Firstly,
measure the level of adoption of risk mitigation strategies we include
content validity is assured through the several development and design stages of
practices such as the restructuring and rethinking of the supply and
the IMSS survey. Secondly, we used our CFA results to test for convergent
distribution strategy (Manuj and Mentzer, 2008) and supplier
validity as suggested by O’Leary-Kelly and Vokurka (1998). Our proposed
development programs (Blome and Schoenherr, 2011). All items were
structure of the items measuring the two dimensions of SCI, supply chain
also measured on a five point likert scale ranging from one (none) to
management risk practices and two dimensions of performance resulted in a
five ( high ).
reasonably good fitting model (χ2/d.f.¼2.60; RMSEA¼.049; AGFI¼.91; CFI¼.97
Operational performance was measured across the dimensions of
; GFI¼.93; IFI¼.98; NFI¼.96; RFI¼.95) indicating convergent validity (Bollen,
cost, and innovativeness (Garvin, 1987; Shin et al., 2000; Rosenzweig
1989). Furthermore, all factor loadings exceeded the value of .50 and the t-values
and Roth, 2004; Craighead et al., 2009). Respondents were asked to
were all greater than 2.0 (see Table 3) (Vickery et al., 2003). Finally, the factor
address multiple items for each dimension indicating their
loadings all exceeded twice the value of their associated standard error, which
performance relative to their main competitors' performance on a five
further indicates for convergent validity (Flynn et al., 2010).
point Likert-scale where one indicates much worse, three equal, and
five much better. Again, the performance items are listed in Table 3 To test for discriminant validity we conducted CFA using a constrained
model with every possible pair of latent constructs and set the correlations
Rule of law is defined by the World Bank as the extent to which the between the paired constructs to 1.0 (Flynn et al., 2010). We compared the
agents have confidence in and abide by the rules of society, and in obtained results with the original unstrained model. Results regarding χ2
particular the quality of contract enforcement, property rights, the police,
and the courts, as well as the likelihood of crime and violence (Kaufmann

1
The rule of law indicator provides aggregate views on the quality of governance countries. The data has been gathered by a number of survey institutes, think tanks, non-
provided by a large number of enterprise, citizen and expert survey respondents across governmental organizations, and international organizations (Kaufmann et al., 2011).
366 F. Wiengarten et al. / Int. J. Production Economics 171 (2016) 361–370

differences indicate discriminant validity (O’Leary-Kelly and Vokurka, In hypotheses H1 and H2 we proposed that customer and supplier
1998; Flynn et al., 2010). integration are positively associated with the performance dimensions of cost
Finally, Cronbach's alpha (α) has been used to test for the reliability. and innovation. Results in Table 5 cannot confirm the general propositions of
The Cronbach's alpha values listed in Table 3 are all above the commonly these hypotheses. In model 1, using cost as the dependent variable, supplier
excepted level of .70, which indicates that reliability is relatively high. integration has a significant positive impact on cost performance (B¼.150;
p¼.008). However, customer integration does not significantly improve cost
performance (B¼.016; p¼.759). In the second model, using innovativeness as
3.4. Measurement equivalence
the dependent variable, supplier integration does also significantly improve
innovation performance (B¼.103) but only at the po.1 level. However,
Since we are using cross-country data it is also important to assess the
customer does also not significantly improve innovation performance
equivalence of the measures across countries. To do so we assessed the
following properties of measurement equivalence: calibration, translation, (B¼.066; p¼.235). Subsequently, considering the direct effect of SCI on
and metric equivalence (Douglas and Craig, 1983; Wiengarten and Pagell, performance, only supplier integration significantly
2012).
Calibration equivalence in our dataset is ensured since we are using
Table 4
standardized likert scales items across countries. The scales can be
regarded as being standardized and universally understandable.
Furthermore, we controlled for translation equivalence through
calculating Tucker's (1951) coefficient of factor congruence. Our
calculated values all exceeded the commonly referred threshold of .90.
Finally, we assessed metric equivalence through calculated individual
Cronbach's alpha for each country. The maximum individual difference
of alpha values across country was below .09.
Subsequently, through confirming all three dimensions of
measurement equivalence we conclude that this sample can be interpreted
and utilized across countries. We conclude that the sample
exhibits the required characteristics of
measurement equivalence.

4. Results

We seek to address the research questions as to what extent does


risk associated with a weak rule of law affect the impact of SCI on
operational performance and to what extent can supply chain risk
management practices complement SCI under different risk scenarios.
We carried out a series of ordinary least square (OLS) regression
analyses using the mean composites for supplier and customer
integration, risk management practices and cost and innovation
performance. To do so we calculate the mean scores for our constructs.
Furthermore, we use the z-scores to standardize our measures for the
OLS analysis. Table 4 presents the correlation matrix.
Before carrying out the OLS analysis, we tested the data for
linearity, normality and multicollinearity (Kennedy, 1999). We
assessed linearity and equality of variance through plotting
standardized residuals against the standardized predicted values. Tests
for normality also indicated that none of the assumptions of OLS
regression were violated. To pre-analyze the data, we calculated the
variance inflation factors (VIFs) to detect any possible threats (Aiken
and West, 1991). The results indicate that VIFs are all well below 2
suggesting that multicollinearity is not a serious concern. In addition,
we calculated the Belsley–Kuh–Welsch indices, which confirm that
multicollinearity is not of significance.
All variables including the interaction terms for hypotheses three
to six were introduced in one model for each of the two operational
performance dimensions (i.e., cost and innovation) following a
stepwise approach. In the first step we introduced the control variables,
in the section the independent variables and moderators, in the third
step the two-way interaction terms between supplier integration and
customer integration and rule of law and the fourth step the three-way
interaction terms between supplier integration and customer
integration and rule of law and supply chain risk management
practices. Table 5 presents the results of the final model including all
variables and interaction effects.
F. Wiengarten et al. / Int. J. Production Economics 171 (2016) 361–370 367

Correlations.

(1) (2) (3) (4) (5) (6) (7) (8)

Supplier Integr. (1) 1

Customer Integr. (2) .562nn 1


Supply Chain Risk Management Pract. (3) .512nn .432nn 1
nn
Cost Performance (4) .318 .235nn .348nn 1
Innovation Performance (5) .225nn .147nn .304nn .499nn 1
Rule of Law (6) .247nn .248nn .250nn .195nn .190nn 1
Industry (7) .164nn n
.087 .023 n
.098 .026 .031 .029 .011 .098n .041 1 .038
235 nn 1
Level of Globalization (8) .050
nn
Correlation is significant at the .01 level (2- tailed ).
n
Correlation is significant at the .05 level (2- tailed ).

Table 5
OLS analysis of the moderation model.
Moderation model (1) Cost model (2) Innovation model
Variable Standardized estimate/p-value Standardized estimate/p- value
Intercept 3.140/.000 3.445/.000

Control variables
Industry .013/.767 .046/.302
Level of globalization .037/.461 .042/.422 .103/.046
Geographical focus .086/.089

Independent variables
Supplier integration .150/.008 .103/.081
Customer integration .016/.759 .066/.235

Moderating variables
Rule of law .055/.260 .022/.668
Supply chain management risk practices .205/.000 .144/.008

Interaction terms
2-way Interaction
Supplier integration rule of law .084/.141 .110/.060
Customer integration rule of law .063/.242 .039/.482

3-way Interactions
Supplier integration rule of law supply chain management risk practices .177/.004 .135/.031
Customer integration rule of law supply chain management risk practices .004/.459 .008/.906

Model summary
Step 1:Adjusted R2/Sig. F Change .100/.000 .035/.000
Step 2:Adjusted R2/Sig. F Change .146/.000 .059/.001
Step 3: Adjusted R2 (incl. 2-way interaction term)/Sig. F Change .172/.000 .081/.001
Step 4: Adjusted R2 (incl. 3-way interaction term)/Sig. F Change .188/.004 .089/.057
Highest VIF/highest condition index 2.453/4.447 1.806/4.408

improves cost and innovation performance.


In Hypotheses 3 and 4 we propose that weak rules of law reduces the
strength of the positive relationship between customer and supplier
integration and cost and innovation performance. To test these hypotheses
we calculated the interaction terms between supplier and customer
integration and rules of law. In the cost model our results indicate that
none of the interaction effects were statistically significant.
Furthermore, in the innovation model our results also indicate that the
2-way interaction terms were non-significant. Subsequently, we conclude
that rule of law does not directly moderate the integration–performance
relationship.
In Hypotheses 5 and 6 we propose a 3-way interaction effect between
SCI (supplier and customer integration), rule of law and risk management
practices. Specifically, these hypotheses test our second research question.
We propose that higher levels of investments in supply chain risk
management practices may enable companies to complement their SCI
efforts when being situated in weak rule of law environments and thus
strengthening the positive relationship between customer and supplier
integration and (a) cost and (b) innovation performance.
368 F. Wiengarten et al. / Int. J. Production Economics 171 (2016) 361–370

In the cost model, the 3-way interaction effect between customer indicating a substitution effect between risk and risk management practices.
integration, risk and risk management practices was insignificant A non-significant slope was identified for the impact of supplier integration
(B¼.004; p¼459), thus rejecting H5a. However, in the cost model the 3- on innovation performance when companies are situated in low risk countries
way interaction effect between supplier integration, rule of law and supply practices low levels of supply chain risk management. Additionally, a non-
chain management risk practices was significant (B¼.177; p¼.004) and significant slope was also identified for the impact of supplier integration on
added a significant weight of F (10.940; .000), thus confirming H6a. innovation performance when companies are situated in high-risk countries
Supplier integration has a significant positive impact on cost performance practicing low levels of supply chain risk management.
when the rule of law is low (i.e., high risk) and companies have
implemented supply chain risk management practices. In addition,
supplier integration has a significant negative impact on cost performance
when the rule of law is high and when companies are practicing supply

Direct effects: supply chain integration and performance H1a (rejected): Customer Integration does not significantly improve cost performance.
H1b (rejected): Customer Integration does not significantly improve innovation performance.

H2a (confirmed): Supplier Integration does significantly improve cost performance.


H2b (confirmed): Supplier Integration does significantly improve innovation performance (only at the o.1 level).

2-Way interactions: supply chain integration and risk (rule of law)


H3a (rejected): Rule of law does not moderate the relationship between customer integration and cost performance.
H3b (rejected): Rule of law does not moderate the relationship between customer integration and innovation
performance.

H4a (rejected): Rule of law does not moderate the relationship between supplier integration and cost performance.
H4b (rejected): Rule of law does not moderate the relationship between supplier integration and innovation
performance.

3-Way interactions: supply chain integration, risk (rule of law) and supply H5a (rejected): Companies cannot complement supplier integration through supply chain risk management practices
chain risk management practices when situated in high-risk environments (weak rule of law) through
implementing, thus strengthening the impact of customer integration on cost performance. H5b (rejected):
Companies cannot complement supplier integration through supply chain risk management practices when
situated in high-risk environments (weak rule of law) through implementing, thus strengthening the impact of
customer integration on innovation performance.

H6a (confirmed): Companies can complement supplier integration through supply chain risk management
practices when situated in high-risk environments (weak rule of law) through implementing, thus strengthening the
impact of supplier integration on cost performance. H6b (confirmed): Companies can complement supplier
integration through supply chain risk management practices when situated in high-risk environments (weak rule
of law) through implementing, thus strengthening the impact of supplier integration on innovation performance.

chain risk management practices, indicating a substitution effect between 5. Discussion


risk and risk management practices. A none-significant slope was
identified for the impact of supplier integration on cost performance when
With this paper we intended to explore the role risk and risk management
companies are situated in low risk countries practices low levels of supply
practices for the success of SCI on cost and innovation performance. Our first
chain risk management. Additionally, a non-significant slope was also
two hypotheses tested the general impact of customer and supplier integration
identified for the impact of supplier integration on cost performance when
on cost and innovation performance. Previous studies provide mixed evidence
companies are situated in high-risk countries practicing low levels of
regarding the direct impact of SCI on performance and so does our study (e.g.,
supply chain risk management.
Narasimhan et al., 2010; Schoenherr and Swink, 2012). We somewhat
Results in the innovation model somehow mirror our results from the confirm these mixed results. Our results indicate that whilst supplier
cost model. The 3-way interaction effect between customer integration, integration does significantly improve cost and innovation performance,
risk and risk management practices was insignificant (B¼.008; p¼.806) strong integration with customers does not pay off in terms of cost and
thus rejecting H5b. However, in the innovation model the 3-way innovation performance (see Table 6 for summary of results). We have
interaction effect between supplier integration, rule of law and supply supported the development of these direct effect hypotheses through the
chain management risk practices was significant (B¼.135; p¼.031) and relational view but could not identify unifying confirmation.
added a significant weight of F (5.271;.000), thus confirming H6b.
Subsequently, we followed numerous calls within the literature to
Supplier integration has a significant positive impact on innovation consider contextual factors. The impact of risk, measured in terms of the rule
performance when the rule of law is low (i.e., high risk) and companies of law, was evaluated in terms of its influence on the SCI–performance
have implemented supply chain risk management practices. In addition, relationship (Flynn et al., 2010). In Hypotheses 3 and 4 we have proposed that
supplier integration has a significant negative impact on innovation SCI has a stronger impact on performance in environments characterized by
performance when the rule of law is high and when companies are low levels of risk (i.e., strong rules of law), taking a focal company
practicing supply chain risk management practices, perspective. We found no support that risk directly moderates the
impact of customer and supplier integration on
Table 6 Hypotheses and innovativeness.
discussion. In Hypotheses 5 and 6 we then continued through exploring the possibility
as to whether or not companies can complement their supply chain integration
F. Wiengarten et al. / Int. J. Production Economics 171 (2016) 361–370 369

efforts through implementing supply chain risk management practices. in terms of a country's rule of law, per se is not a factor to be considered when
We have identified that in the customer integration model companies practicing SCI. Furthermore, we identified that supply chain risk management
cannot gain significant performance benefits from complementing practices can, in selected contexts; increase the efficacy of supplier integration.
their integration efforts through additional practices. Supply chain risk There are some limitations with the existing research that should be
practices as proposed in this paper are not effective to complement considered in future studies. The current study uses a cross-sectional design.
customer side integration practices in weak rules of law environments. Since integration between customers, suppliers and focal companies takes place
However, implementing supply chain management risk practices does over time, it would be useful to investigate SCI practices longitudinally.
compensate for opportunistic behavior in risk environments for Secondly, the data was collected from the perspective of the focal organization,
supplier integration. This has been confirmed for the cost and future work could broaden the scope by considering customers and suppliers as
innovation model. well, who potentially could be operating in different rule of law environments.
These results have various theoretical and managerial implications Thirdly, the data was only collected from single respondents and the sampling
that will be discussed in the following. From a theoretical perspective was carried out not randomly. However, this large and multinational dataset does
our research extends the work of Flynn et al. (2010) and Schoenherr provide valuable insights on the aggregate level. Fourthly, risk management
and Swink (2012) who urged researchers to consider other contextual practices were considered in general, not distinguishing between different types
factors that influence SCI. In addition, both research teams suggested of suppliers/customers. Further research should consider risk management
the need to consider regional differences. The research reported in this practices for specific types of suppliers/customers (e.g. strategic suppliers/
paper utilizes the findings from the World Bank Report on Governance customers, local suppliers/customers, etc.). Finally, other contextual factors
(Kaufmann et al., 2011) and looks specifically at one contextual factor, could be considered, such as cross-cultural differences, specific industry sectors
the influence of the rule of law at the country level on SCI. and company size.
We have identified mixed results in our direct effects hypotheses. Global supply chains form the backbone of the global economy, promoting
Thus these results show that customer integration does not weight the trade, consumption and economic growth. Trends such as globalization, lean
same importance as supplier integration when it comes to cost and processes and the geographical concentration of production have made supply
innovation performance. It seems that the more supply chain chain networks more efficient, but have also changed their risk profile. Many
integration the higher performance relationship that has already been global organizations rely on companies who operate in environments were the
questioned by previous researchers such as (Wiengarten et al., 2014) rule of law is weak and so it is important to have in place contingencies to assess
does also not hold in our research setting. Supply chain integration the potential impact of such legal risks.
comes at a cost. This needs to be taken into consideration when
identifying the “right” level of integration to gain performance
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