International Journal of Operations & Production Management

Supply chain processes: linking supply logistics integration, supply performance, lean processes and
competitive performance
Daniel I. Prajogo Adegoke Oke Jan Olhager
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Daniel I. Prajogo Adegoke Oke Jan Olhager , (2016),"Supply chain processes: linking supply logistics integration, supply
performance, lean processes and competitive performance", International Journal of Operations & Production Management,
Vol. 36 Iss 2 pp. -
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 1

Supply chain processes: Linking supply logistics integration, supply performance, lean

processes and competitive performance

1 Introduction

Increasing competition has driven firms to not only improve their internal operations

(including through process control and inventory management), but also focus on integrating

their suppliers into the overall value chain processes. The contribution of suppliers in building

competitive capabilities (quality, delivery, flexibility, and cost), hence delivering values to
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customers has been well recognized. Much has been written on the importance of supply chain

management on firm’s performance. Supply chain management (SCM) can be conceptualized

as comprising the management of the external and internal aspects of a firm’s operations

including the sourcing, logistics, production and distribution processes involved in the offering

of goods and services (Chen and Paulraj 2004b, Pagell 2004, Prajogo et al. 2008). While

previous operation management (OM) research studies have generally focused on the internal

aspects of the value chain, previous studies on SCM have largely focused on the external

aspects of the value chain and performance implications (Chen and Paulraj 2004a, Li et al.

2005). For instance, many studies which examined the effect of supply chain management

practices suggest a direct effect of supplier integration on (outbound) competitive operational

performance (Ellram et al. 2002, Chen et al. 2004, Tracey et al. 2005, Li et al. 2006, Tan and

Tracey 2007) while ignoring the internal processes involved in the relationship. In other

words, the internal flows within firms are considered as a “black box” which has no decisive

impact on the relationship between supply integration and competitive operational

performance. This research aims to address this gap in knowledge by investigating how the

external and internal aspects of the value chain align to impact or contribute to a firm’s

performance.
 2

As Pagell (2004) pointed out, the conceptual “black box” between supply chain

integration and superior performance needs to be more fully examined. To examine the

relationships between the external aspects of the supply chain, the internal processes and

performance, we draw from the value chain analysis framework and the relational view of

resource based theory (Chen and Paulraj 2004a). Value chain analysis describes the activities

within and around an organization, and relates them to an analysis of the competitive strength

of the organization (Porter 1985). Porter argues that the ability to perform particular activities
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and to manage the linkages between these activities is a source of competitive advantage.

According to the relational view of resource based theory (RBT) a firm’s competitive

performance is dependent on the firm’s internal resources as well as the external resources

within the firm’s relational networks or supply chain (Dyer and Singh 1998, Lavie 2006, Arya

and Lin 2007).

Porter distinguishes between primary activities and support activities. Primary activities

are directly concerned with the creation or delivery of a product or service. They can be

grouped into five main areas: inbound logistics, operations, outbound logistics, marketing and

sales, and service. Each of these primary activities is linked to support activities which help to

improve their effectiveness or efficiency. There are four main areas of support activities:

procurement, technology development (including R&D), human resource management, and

infrastructure (systems for planning, finance, quality, information management, etc.). This

study seeks to investigate the inter-relationships between the key primary activities of a firm’s

value chain – particularly, the inbound supply chain processes and internal production

processes of firms and their implications on inbound and competitive performance outcomes.

We define inbound supply chain processes in terms of supply logistics integration – the

extent to which inbound inter-organizational processes are seamless and closely co-ordinated.

We define lean production processes in terms of the extent to which internal operations are in
 3

line with lean production processes and principles, specifically Just In Time (JIT) and Total

Quality Control (TQC) principles. Schonberger (2007) identified that JIT and TQC have

essentially merged into the concept of lean production. Inbound performance reflects the

performance of the sourcing, procurement and logistics operations including total procurement

costs, inventory carrying costs and material costs. Competitive performance reflects a firm’s

performance relative to competitors, in terms of delivery speed, production cost, volume

flexibility and product variety as they relate to the end customer or market.
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Few studies have examined how the internal and external aspects of an organization’s

value chain are interrelated as a “pipeline” in building values for customers. For example,

Kannan and Tan (2005) considered the parallel effects of Total Quality Management (TQM),

JIT, and supply chains on firms’ performance. Jayaram et al. (2008) investigated the link

between building lean systems and firm performance. However, little is known about the links

between inbound processes, internal processes, inbound performance and competitive

performance (see for example, Shin et al. (2000) and Tracey et al. (2005)). This paper seeks to

advance previous studies by integrating inbound, internal, and outbound activities as a set of

value chain activities in creating maximum values for customers. We first discuss the related

literature, and the hypotheses. We then present the research methodology, and the results.

Implications for managers and researchers are discussed and finally the conclusions are drawn.

2 Theoretical development and research hypotheses

In this section, we draw from relevant theoretical frameworks to establish the relationships

between logistics integration, lean production processes, and inbound and competitive

performance along with the hypotheses concerning their relationships.

 4

2.1 Inbound supply chain processes - logistics integration and performance

In this study, we focus on the inbound process of logistics integration which is defined as

the extent to which inbound inter-organizational processes are seamless and closely co-

ordinated for the smooth flow of information and materials. To understand how logistics

integration impacts competitive performance, we draw from the relational view of RBT. RBT

has been widely used to explain differences in firms’ performances. It posits that differences

exist due to firm’s heterogeneity. Specifically, it argues that a firm that possesses resources
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that are valuable, rare, not substitutable and difficult-to-imitate will achieve sustained

competitive performance (Barney 1991, Peteraf 1993, Acedo et al. 2006). The relational view

of resource based theory is an extension of RBT. It integrates the core tenets of RBT and

relational network theory to explain how cooperation and collaboration between firms can lead

to sustainable competitive performance. The main argument of the relational view of resource

based theory is that firms’ resources (i.e. resources that are rare, valuable, not substitutable and

difficult-to-imitate) can span firm boundaries and be embedded in the firms’ networks and

relationships between firms suggesting that a firm’s competitive performance is not only as a

result of the firm’s internal resources but also as a result of external resources within the firm’s

relational networks or supply chain as in our study (Dyer and Singh 1998, Lavie 2006, Arya

and Lin 2007).

The integration of supplier and buyer-firm logistics processes may involve integration of

resources to share information and co-ordinate the activities between the two entities. It may

also involve collaborative activities that facilitate visibility and information flow between the

two entities (Barratt and Oke 2007). By and large, these involve trust between the

collaborating partners and close relationships which take time to build. According to the

relational view of RBT, with highly integrated logistics processes, the buyer firm’s strategic

resources are embedded within those of the supplier to develop processes, capabilities and
 5

relationships that are tacit and intangible and are typically valuable, hidden from and difficult-

to-imitate by competitors. As such, highly integrated logistics activities with suppliers

represent a source of competitive advantage for the firms.

Supply logistics integration involves a well-coordinated flow of materials from suppliers

which allows firms to have a smooth production process (Frohlich and Westbrook 2001). Such

coordination produces a seamless connection between firms and suppliers in such a way that

the boundary of activities between the two parties is blurred (Stock et al. 1998, Stock et al.
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2000). One enabler of logistics integration is vendor managed inventory (VMI) principle,

which can lead to customer service benefits (Hvolby et al. 2007, Claassen et al. 2008).

Logistics integration brings a number of benefits to the parties involved (i.e. buyers and

suppliers), including improving product quality, reducing response time and cost, and

improving operational efficiencies (Paulraj and Chen 2007). Indeed, a number of empirical

studies have reported a positive relationship between supply chain integration and performance

(van der Vaart and van Donk 2008). DeToni and Nassimbeni (1999) found that better

performing plants exhibit a higher level of logistic interactions. Frohlich and Westbrook

(2001) as well as Kannan and Tan (2010) argued that the widest arcs of integration have the

strongest association with performance improvement while Sheu et al. (2006) argued that

higher levels of collaboration result in operational efficiency in the supply chain system, and

Li et al. (2008) noted that supply chain integration is significantly related to supply chain

performance. Therefore, we hypothesize as follows:

Hypothesis 1: Supply logistics integration has a positive relationship with competitive

performance.
 6

Previously, using the relational view of RBT, we argue that supply logistics integration

will positively impact a firm’s competitive performance. However, if we consider the value

chain perspective (Porter 1985, Huemer 2006), there exists several processes and intervening

factors between the inbound logistics activities of a supply chain and outbound competitive

performance. The value chain perspective evaluates the value that each particular activity adds

to the organization’s products or services. This idea was built upon the premise that an

organization is more than a random compilation of machinery, equipment, people and money.
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Only if these things are arranged into systems and systematic activities will it become possible

to produce something for which customers are willing to pay a price. Based on this system

perspective of value chains, we propose that highly integrated supply logistics activities are

connected with a firm’s inbound and internal processes which are in turn connected with the

firm’s outbound competitive performance.

The inbound supply performance is a key component in the value chain perspective. It is

defined as the performance of the sourcing, procurement and logistics operations including

inventory carrying costs and material costs. Supply logistics integration ensures that materials

required for production processes arrive with the right quality, the right quantity, and at the

right time, thus, improving inbound supply performance. Highly integrated supply logistics

processes involve the development of unique links with suppliers that facilitate the flow of

quality materials expediently thus, enhancing supply management's or inbound operational

performance (Eltantawy et al. 2009). However, only a few studies have examined the link

between supply logistics integration and inbound supply performance. Related works include

those of Shin et al. (2000) who showed that supply management has a strong and positive

effect on supplier performance in terms of quality, cost, and on-time delivery, and Tan et al.

(1998) who found that supplier performance mediates the relationship between supply chain

management and firm’s (buyer) performance. But the relationship between supply logistics
 7

integration and inbound supply performance has not been empirically investigated.

Accordingly, we hypothesize as follows:

Hypothesis 2: Supply logistics integration has a positive relationship with inbound

supply performance.

Another key component in the value chain of supply operations are the internal production

processes. In particular, we focus on lean production processes which we define in terms of the
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extent to which internal operations are in line with lean production processes and principles.

The source of the term lean production can be traced to the International Motor Vehicle

Program, published in the book “The Machine that Changed the World” (Womack et al.

1990), while the origins of lean thinking can be related back to the practices and innovations at

Toyota Motor Corporation (Hines et al. 2004, Bhamu and Sangwan 2014), using the concept

of Toyota Production System (Sugimori et al. 1977, Ohno 1988). Womack and Jones (1996)

provided five lean principles: value, the value stream, flow, pull, and perfection. Following

these principles, internal lean practices include set-up reduction, pull production system, small

lot sizes, and streamlining the layout through cellular manufacturing or focused factory

concepts (Shah and Ward 2003, Shah and Ward 2007). More specifically, these are internally

related practices, rather than customer or supplier related.

Adopting the systemic view of the supply chain, lean production processes will act as

intervening factors between logistics processes and outbound competitive performance. As a

process, logistics integration enables companies and their supply chain partners to act as a

single entity by integrating their production processes with their supply chain processes.

Through logistics integration, firms can build “quasi” vertical integration without having it in

the physical sense (La Londe and Masters 1994). As we have previously argued, logistics

integration is undertaken in order to improve a firm’s performance and satisfy its end
 8

customers. However, in order to reap the full benefits of logistics integration, the internal

production processes of the firm must be streamlined so that gains from integrating logistics

activities are not lost within the system. Lean production systems, including elements of JIT

and TQC (Flynn et al. 1995, Schonberger 2007), enable reliable order cycles and inventory

reduction as well as process control, thus, achieving streamlined internal processes that help to

translate the gains of logistics integration to improved performance. We use the term TQC

instead of TQM to indicate our focus on the internal production processes with emphasis on
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process control rather than a wider scope of quality management at the organizational level

covered by TQM. Specifically, integrated logistics trigger firms to adopt lean production

systems in internal operations.

It has been suggested that one of the key success factors for the implementation of lean

production systems is the selection of a good supplier base and building long-term relationship

(MacDuffie and Helper 1997, Jayaram et al. 2008, Zikmund 2010). Lean production requires

firms to process raw materials parts in small lot sizes, frequently, and deliver the products

directly to the point of use with minimal incoming inspection, warehousing, and inventory.

Manufacturers must ensure that incoming materials are of the quality and quantity expected,

and that deliveries are on-time. To achieve these, firms need to build supply logistics

integration with their key suppliers where both information and materials flow smoothly

between the partners (Beal 1988). In other words, successful implementation of lean

production systems requires highly integrated supply logistics activities.

A number of related studies have highlighted the inherent relationships between supply

chain management practices and internal operational practices such as quality management.

For example, Kannan and Tan (2005) showed that, while supply chain management practices

and quality management practices have distinctive elements, they are strongly correlated with

each other to the extent that they can be considered as integrated practices. Kanji and Wong
 9

(1999) investigated the relationship between total quality management and supply chain

management and concluded that failure to consider the impact of SCM practices on total

quality management programs helps to explain the inadequacies of existing models of supply

chain management. Theodorakioglou et al. (2006) found that supplier management practices

have a positive relationship with internal quality management practices. However, the link

between logistics integration and internal production processes has not been empirically

investigated in spite of the fact that effective lean production processes require highly
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integrated logistics processes which help to ensure smooth and just in time material flows into

the production system (Adamides et al. 2008). Accordingly, we hypothesize as follows:

Hypothesis 3: Supply logistics integration has a positive relationship with lean

production processes.

2.2 Lean production processes and inbound supply performance

A number of studies have investigated the consequences of lean production processes on

performance. For example, the study by Shah and Ward (2003) on 1748 US manufacturing

firms indicated that lean bundles contribute substantially to the operating performance of

plants, and explain about 23% of the variation in operational performance (including quality,

cycle time, delivery, cost and productivity) controlled for industry effects and contextual

factors. Fullerton and Wempe (2009), using data provided by 121 US manufacturing

executives showed that the utilization of non-financial manufacturing performance measures

(e.g. on time delivery, efficiency, labour productivity) mediates the relationship between lean

manufacturing and financial performance (in terms of profitability). The study by Chavez et al.

(2013) based on empirical data gathered from 228 manufacturing companies in the Republic of

Ireland showed that the relationships between internal lean practices and quality, delivery,
 10

flexibility and cost were found to be positive and significant. The relationships, however, are

moderated by industry clockspeed, except for cost.

Our concern in this study, however, relates to the effect of lean production processes on

inbound supply performance. Within the value chain perspective of our study, lean production

processes and inbound supply performance are within the “black box” (or internal processes)

of an integrated supply chain which includes inbound supply activities, internal activities and

outbound activities. As we have previously noted, lean production processes require or are
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characterized by fast and quick deliveries from the supply base. Because the production

process is operated on a JIT basis, materials must be delivered on time and at the right quantity

and quality (Sakakibara et al. 1993). In addition, lean production processes require deliveries

in small batches from reliable suppliers. These help to minimize the level of inventories and

the associated inventory holding costs (Demeter and Matyusz 2011). With reliable and quality

deliveries, rejects are minimized, thus, having positive impact on incoming material costs and

supply performance. Furthermore, lean production processes require buyer-firms to regularly

measure and monitor supplier performance across multiple dimensions and provide timely

information for suppliers about their expectations in terms of efficiency (Talluri and Sarkis

2002). These provide motivation to suppliers to strive for a high level of performance leading

to improved inbound supply performance in terms of reduced incidences of wrong deliveries

and rejected suppliers. Achieving and maintaining a smooth production flow is a key to the

effective implementation of lean production processes. In sum, we argue that the

implementation of lean production processes require reliable supplies, smooth and timely flow

of high quality materials into and through the production systems. As such a positive impact

on inbound supply performance is attained when lean production processes are implemented

internally in an operations system leading to the following hypothesis:

 11

Hypothesis 4: Lean production processes have a positive relationship with inbound

supply performance.

2.3 Lean production processes and competitive performance

Drawing further from the value chain perspective, we explore the relationship between

lean production processes (internal processes) and competitive (outbound) performance. As

mentioned earlier, the lean production processes studied in this paper relates to the extent to
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which internal operations are in line with lean production processes and principles, specifically

JIT and TQC principles. The RBT also helps to understand the effect of lean production

processes on competitive performance. Lean practices such as JIT and TQC are difficult to

implement, hence, difficult to imitate. This inimitability increases when firms successfully

bundle a set of practices (such as JIT and TQC together) which create complexity and

uniqueness in their organizational routines (Shah and Ward 2003, Shah and Ward 2007). Such

a complex organizational routine resulting from tacit learning will deploy rent-yielding

resources and will be difficult to imitate, thus creating a competitive advantage (Grant 1991).

Indeed, both JIT and TQC are among the most sustainable management philosophies to

have been adopted for decades and still continue to add value to company performance (Shah

and Ward 2003). Vokurka et al. (2007) suggested that JIT philosophy that is aimed at the

elimination of waste and continuous improvement is closely associated with TQC, with the

ultimate goal of meeting or exceeding customer requirements. Dean and Snell (1991) noted

that JIT and TQC are implemented in tandem to deliver high level of performance in

operations, while Flynn et al. (1995) demonstrated that JIT and TQC practices are mutually

supportive, and that their synergy contributes positively to manufacturing performance.

Specifically, they pointed out that both JIT and TQC involve a few relatively simple central

concepts and an amorphous array of peripheral associated practices on manufacturing process

 12

so that it operates as expected without breakdowns, missing materials, fixtures, tools, etc.,

despite work force variability. TQC emphasizes the importance of conformance to

specification via standardization of processes to minimize variation of their outputs. Similarly,

JIT operations help create efficient equipment layouts and encourage processing of smaller lot

sizes which increase the speed by which a product is made. Schmenner and Swink (1998) also

suggested that with a JIT pull system, smooth flow is more assured, thus, avoiding the

flooding of the operation with work-in-process inventory. Because work-in-process inventory

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levels are capped by the number of containers or spaces permitted, low throughput times are

achieved. In sum, both TQC and JIT provide a solid foundation for lean production processes

to yield high level of competitive operational performance in terms of quality, delivery,

flexibility, and cost (Dowlatshahi and Taham 2009, Wee and Wu 2009). Accordingly, our

view of supply chain processes from a value chain and systemic perspective leads us to

hypothesize as follows:

Hypothesis 5: Lean production processes have a positive relationship with competitive

performance.

2.4 Inbound supply performance and competitive performance

To complete the examination of supply chain processes from a value chain and systemic

perspective, we explore the link between inbound supply performance and competitive

(outbound) performance. The direct link between inbound performance and competitive

performance has been suggested in previous studies (Sakakibara et al. 1997, Droge et al.

2004). The slogan “garbage-in garbage-out and quality-in quality-out” (which was popularized

during TQM era) adds credence to the fact that the inbound performance has a direct effect on

competitive performance (Dedhia 1990). For example, inbound raw materials quality, delivery

performance, and costs can affect the quality, delivery and cost performance of end products
 13

delivered to customers (Shin et al. 1998). Indeed, a number of empirical studies have provided

support for this notion. For example, Pagell and Shew (2001) found that on-time delivery from

suppliers will have positive and significant effects on on-time delivery to the end customer in

the value chain. The study by Vonderembse and Tracey (1999) showed that supplier

performance has a positive effect on manufacturing performance. Similarly, the study by Shin

et al. (2000) showed that supplier performance has a positive relationship with buyer’s

performance. In other words, a gain or a loss in performance in the upstream end of the supply
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chain can be translated into gains or losses in the downstream end of the supply chain. This

notion is also captured in the well-known “bullwhip effect” phenomenon in which inventory

levels increase in response to demand changes as one moves further back into the supply chain

(Lee et al. 1997). In this study, one could conceptualize the effect of inbound performance on

outbound performance as “reverse bullwhip effect”. But at the very least, we would expect a

relationship between inbound supply performance and outbound competitive performance. In

essence, performance improvements that result from a buyer–supplier relationship directly

influence a buying firm and, thus, become a critical consideration for a buyer firm (Prahinski

and Benton 2004). Indeed, the increasing attention on supply chain management in recent

times is due to the recognition of the importance of the upstream end of the supply chain as a

key determinant of competitive performance (Fabbe-Costes and Jahre 2008). For example, the

purchasing function is central to the strategic operations of effective supply chain

management; this centrality is mainly due to the significant impact of material costs on profits

(Talluri and Sarkis 2002). In other words, with production processes held constant, the

inbound supply performance will have an impact on competitive performance. Accordingly,

we hypothesize as follows:

Hypothesis 6: Inbound supply performance has a positive relationship with competitive

performance.
 14

3 Research model

The research model is shown in Figure 1. In this model, we consider that supply logistics

integration has an impact on inbound supply performance which will affect the competitive

performance. For example, if supply logistics integration can result in lower total purchasing

cost, this should translate into better competitive cost performance. At the same time, it

facilitates the production processes of the firm which in turn will affect the competitive
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performance. Overall, this model suggests that the effect of supply logistics integration on

competitive performance is partly mediated by inbound performance as well as lean

production processes.

[Insert Figure 1 about here]

In this paper we have chosen to use structural equations modelling (SEM). SEM allows

for the testing of an implied sequence since it is a “statistical technique that uses empirical

evidence to estimate the strengths of a priori hypothesized structural relationships” (Mueller

1996, Kline 2011). Furthermore, it allows for “the distinctions between direct, indirect, and

total effects of one variable on another” (Bollen 1989). Thus, the issue of whether a

relationship is direct versus indirect (or both direct and indirect) can be tested.

4 Methods

4.1 Sample and procedures

The empirical data for this study was drawn from managers of Australian manufacturing

firms. The list of the respondents was randomly selected and purchased from a mailing list

company. In total, 1,800 surveys were mailed out, and 232 usable responses were received;

hence, the response rate is 13.1%. The data was checked for bias using correlations of
 15

responses between early respondents and late respondents based on industry sectors and

organizational size. The chi-square tests on both categories did not indicate any significant

difference between the two groups of respondents. The industry sectors of the respondents

include electronic/electrical (16%), machinery (25%), automotive (8%), chemical (11%), food

processing (4%), construction (12%), and “other” sectors, including medical equipment, wood,

printing and paper, defence (12%).

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4.2 Measures

The measurement items for all constructs are based on earlier empirical research discussed

in previous sections. For measuring logistics integration, we adapted the scale developed by

Chen and Paulraj (2004a) which was focused on key practices that are necessary to achieve

seamless integration of logistics activities with key suppliers. In responding to the items in this

scale, the respondents were asked to assess the integration of their logistics activities with their

key suppliers with whom the firms conduct maximum business in dollar terms.

The items included in the scale for measuring lean production processes reflect a

combination of two major concepts underlying lean processes as applied in the production area

(i.e. JIT and TQC): (i) building preventive-oriented and standardized processes which are

continuously controlled using statistical techniques, and (ii) building efficient processes by

streamlining the layout and efficient set up times to make a quick response. In operationalizing

these two concepts, we combined selected items from the scales of lean production process,

incorporating elements from JIT and TQC from previous studies, including Cua et al. (2001),

Flynn et al. (1994), and Kannan and Tan (2005). For inbound supply performance, we adapted

the scale from previous studies, including those by Paulraj et al. (2008), and Vonderembse and

Tracey (1999) and Tracey et al. (2005) (See Table 1). A 7-point Likert scale was used for
 16

measuring all items in the above three scales with the responses ranging from 1 (strongly

disagree) to 7 (strongly agree).

The measure for competitive performance captures the four key competitive dimensions

namely quality, speed of delivery, flexibility (in terms of volume and variety), and costs,

following previous studies in operations and supply chain management topics (Rosenzweig et

al. 2003, Li et al. 2006, Paulraj et al. 2008, White et al. 2010). The respondents were asked to

assess their firm’s business performance relative to the best competitor in the market with the
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scale ranging from 1 (weakest in the industry) to 7 (strongest in the industry).

[Insert Table 1 about here]

5 Result

5.1 Scale validity and reliability

We applied confirmatory factor analysis (CFA) to simultaneously validate the measures of

all variables used in this study using LISREL 8.80 software. The results of the confirmatory

factor analysis and the Cronbach’s alpha are presented in Table 1. The items loaded

significantly and strongly on their respective constructs. The item loadings and the overall

model fit results suggest acceptable unidimensionality and convergent validity for the

measures (Bollen 1989, Bagozzi et al. 1991). Cronbach’s alphas suggest satisfactory reliability

of the five constructs (Nunnally 1978). We confirm this result by checking the composite

reliability values of the five constructs (Bollen 1989, Hair et al. 2006), and the values meet the

recommended cut-off point of 0.7, except for competitive performance, although it still meets

the acceptable cut-off point of 0.6. The slightly lower than standard acceptable value of

Cronbach’s alpha or composite reliability for competitive performance (< 0.7) is probably due

to the fact that it is indeed composed of multiple dimensions. Measures such as quality,

delivery, flexibility, and cost performance contribute to this construct, suggesting that perhaps
 17

some firms may choose to specialize or focus on only a subset of these performance

dimensions (Samson and Terziovski 1999).

5.2 Common method bias

We used Harman’s single-factor test to check for common method variance (Podsakoff

and Organ 1986). This test was conducted using a measurement model which loaded all 19

items into one latent factor. The result shows that the one-factor measurement model produced
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a poor fit with the data as reflected in the fit indices and the poor path loadings of the items to

the latent variable. These results suggest that common method variance was not a significant

problem in the data set.

5.3 Discriminant validity

Discriminant validity was checked using the method suggested by Venkratraman (1989)

where two CFAs were conducted on each pair of the constructs in this study with the first CFA

allowing the correlation between the two constructs to be freely estimated and the second CFA

fixing the correlation between the two constructs to 1.0. The difference of the chi-square

values between the models were calculated, and if the difference was greater than 6.64, the

discriminant validity between the two constructs was established (Ahire et al. 1996). With four

constructs incorporated in this study, we conducted six chi-square tests. The values of ∆χ2 for

all tests confirm the discriminant validity of the constructs and lend further evidence towards

the lack of common method variance.

 18

5.4 Structural relationships model

We present the results of the structural equation model (SEM) in Figure 2. The ratio of χ2

(282.54) to degrees of freedom (161) is less than the recommended value of 3.0 for

satisfactory fit of a model to data (Bollen 1989, Hair et al. 2006). In line with prescriptions

(Mulaik et al. 1989), the fit indices (NFI = 0.930; NNFI = 0.962; CFI = 0.968) and the Root

Mean Square Error of Approximation (RMSEA) of 0.057 is deemed acceptable. We included

organizational size (in terms of number of employees) as a control variable. 46% of the
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sampled firms employed less than 100 people, 35% of them had between 100 and 500

employees, and 19% of the firms were large manufacturing with over 500 employees. The

result shows that firms’ size had no significant effect on competitive performance (-0.00 at

p>0.05).

[Insert Figure 2 about here]

The six hypotheses were examined simultaneously using SEM techniques. The direct

effect of supply logistics integration on competitive performance was not statistically

significant (0.01 at p>0.05); thus, H1 is not supported. On the other hand, supply logistics

integration has a positive relationship with both inbound supply performance (0.32 at p<0.01)

and lean production processes (0.40 at p<0.01); therefore, both H2 and H3 are supported. Lean

production has a positive relationship with both inbound supply performance (0.56 at p<0.01)

and competitive performance (0.47 at p<0.01); therefore, H4 and H5 are supported. Finally,

inbound performance has a positive relationship with competitive performance (0.29 at

p<0.05); supporting H6. The values of R2 for lean production, inbound performance, and

competitive performance are 0.16, 0.56, and 0.49 respectively.

The direct effect of supply logistics integration is not significantly related to competitive

performance (H1), but the effect is directly related to inbound supply performance and lean
 19

production processes which in turn are both significantly related to competitive performance.

In other words, there is an indirect effect of supply logistics integration on competitive

performance through both inbound supply performance and lean production processes. We

carried out the Sobel test to check for mediation in the model. The result of the Sobel test

showed that the indirect effect of supply logistics integration on competitive performance via

lean production and inbound supply performance was 0.35 (t = 3.94 or p<0.01) confirming the

mediating roles of lean production and inbound supply performance. We checked this result
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further by testing a competing model where the direct path between supply logistics

integration and competitive performance was deleted. The result showed a slight change in the

χ2 value from the original value of 282.54 to 282.50 with one less degree of freedom (162).

This result confirms that deleting the supply logistics integration - competitive performance

path does not weaken the model’s fit. This demonstrates that both inbound supply performance

and lean production processes fully mediate the effect of supply logistics integration on

competitive performance. Furthermore, the direct effect of lean production processes on

competitive performance and inbound supply performance, and, the subsequent direct effect of

the latter on competitive performance suggest that inbound supply performance partially

mediates the relationship between lean production processes and competitive performance.

6 Discussion of the findings and their implications

Our study suggests that supply logistics integration is not a direct predictor of competitive

performance in firms. Such integration needs to be translated into inbound supply performance

including gains in costs of managing inventories and materials to impact the competitive

performance of the firm. Supply logistics integration produces a streamlined supply chain

where material and information flows are highly connected and there is high visibility across

the chain which includes both internal and external processes. Such connectivity improves the
 20

inbound supply performance by eliminating or reducing incidences of late or wrong deliveries,

thus, positively impacting competitive performance.

The findings of this study contribute to knowledge in the supply chain management and

logistics fields in several ways. First, the finding that both inbound supply performance and

lean production processes fully mediate the relationship between supply logistics integration

and competitive performance is a contribution to the supply chain management field. The

general assumption in the literature is that supply logistics integration directly affects
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performance without a full exploration of the underlying mechanisms or processes between

this relationship (Vonderembse and Tracey 1999, Li et al. 2006, Lawson et al. 2009). This

finding uncovers what happens “in between” the incoming materials and the end outputs

delivered by firms into the market. This “in between black box” is important in improving our

understanding of how inbound supply activities are translated into outbound competitive

performance outcomes.

Second, this study supports the examination of supply chain processes from a value chain

and systemic perspective. In essence our study shows the importance of managing both

internal (production processes) and external processes (logistics and supply chain) of firms’

operations in an integrated manner in which supply logistics integration acts through key

internal processes to impact competitive performance which the end customers actually

experience. In other words, both intra-organizational and inter-organizational supply chain

management activities are important, thus, a firm is likely to obtain superior performance

when achieving high levels of internal and external process efficiency.

Third, it is noteworthy that this study is able to extend the relational view of RBT into the

supply chain context. It does so by demonstrating that the inimitability of lean production

processes (which incorporate JIT and TQC), when combined with relational aspects of a

supply chain (i.e. uniquely specific connections with suppliers and customers) would facilitate
 21

the flow of inbound materials and outbound products of the firm in such a way as to positively

affect the firm’s competitive performance (Rungtusanatham et al. 2003).

In terms of managerial implications, this study re-emphasizes the importance of building

production process capabilities based on the effective principles of lean practices and supplier

management. Managers should understand that integrating these philosophies is critical for

building and improving a firm’s competitive performance. Managers must understand the

importance and implication of having strong integration of inbound logistics operations with
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internal production processes and the far reaching subsequent effect on competitive

performance (Moyano-Fuentes et al. 2012). Concerted efforts must be made to secure

integration and coordination of inbound supply activities with suppliers to achieve highly

integrated logistics operations.

7 Limitations and further research

This study has a number of limitations. First, we acknowledge that there are other

practices not identified in this study that can be drivers of lean production processes and

inbound supply performance other than supply logistics integration. Second, there may be

other factors that affect the relationship between supply logistics integration and competitive

performance, which can be included in future studies. For example, the links between

departments or functions (i.e. procurement, production, and marketing/distribution) which

encompass the whole value chain activities within organizations may influence these

relationships; cf. Pagell (2004). Third, there are other practices that can be related to lean

production processes which have not been included in this study, such as TPM (total

preventive maintenance), 5S, Six sigma, and other wider aspects defined in the literature; see

for example, Bhamu and Sangwan (2014), Hines et al. (2004) and Shah and Ward (2003,

2007). Fourth, the fact that only one party in the supply chain (the buyer or focal firm) is
 22

incorporated in this study as survey respondents could be a limitation. Although the

information provided captured the interfaces between the suppliers, the focal firm, and the

customers, future research can improve on this study by allowing for data gathering from

multiple supply chain partners. Finally, the sample population of this study is restricted to

Australian firms. Although we expect these results to hold for supply chains in general, we

cannot claim that this is the case. Therefore, future research may extend this study to a broader

population of firms, including other countries, for the generalizability of the results and to
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detect potential country effects (Jasti and Kodali 2014). Future research may also include

outbound logistics integration to provide a broader picture of integration aspects in a supply

chain network. Nevertheless, we believe that this study contributes to the understanding of

how supply logistics integration, inbound supply performance, lean production processes are

related to competitive outbound performance in a manufacturing firm.

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 28

FIGURES and TABLES:

Inbound Supply
Performance
H2 H6

Supply Logistics Competitive

H4
Integration Performance
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H3 H5
Lean Production
Processes

H1
Figure 1 Research model

Organizational
Inbound Supply size
0.32** Performance 0.29*
(4.16) (1.96) -0.00
(-0.04)

Supply Logistics 0.56** Competitive

Integration (4.73) Performance

0.40** 0.47**
(4.44) Lean Production (3.06)
Processes

0.01
(0.06)
t-values are in brackets; * t>1.96 or p<0.05, ** t>2.51 or p<0.01
χ2 = 282.54, df = 161, NFI = 0.930, NNFI = 0.962, CFI = 0.968, GFI = 0.890, RMSEA = 0.057, SRMR = 0.058

Figure 2 Results of Structural Relationship Analysis

 29

Table 1 Scale validity and reliability

Loading paths Cronbach’s
Scales Items (t-value) alpha
Supply Inter-organizational logistic activities are closely coordinated. 0.79 (14.03) 0.93
logistics Our logistics activities are well integrated with suppliers’
integration logistics activities 0.92 (17.85) (0.92)a
We have a seamless integration of logistics activities with our
suppliers 0.87 (16.35)
Our logistics integration is characterized by excellent
distribution, transportation and/or warehousing facilities 0.84 (15.29)
The inbound and outbound distribution of goods with our
suppliers is well integrated 0.75 (13.00)
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Lean Processes in our plant are designed to be ‘fool proof’

production (preventive-oriented) 0.79 (7.06) 0.79
processes We have standardized process instructions which are given to
personnel 0.70 (8.78) (0.79)a
We make extensive use of statistical techniques to reduce
variance in our processes 0.72 (13.08)
We have laid out the shop floor so that processes and
machines are in close proximity to each other 0.48 (11.14)
We are aggressively working to lower set-up times in our
plant 0.58 (11.59)
Inbound We have reduced our inventory carrying costs 0.57 (8.50) 0.74
supply We have reduced incoming material costs 0.55 (8.18) (0.75)a
performance We have reduced supplier rejection rate 0.70 (11.13)
We have reduced the percentage of late or wrong supplier
deliveries 0.79 (12.96)
Competitive Performance of our final products 0.45 (6.21) 0.64
performance Speed of deliveries 0.58 (8.09) (0.65)a
Volume or capacity flexibility 0.67 (9.60)
Degree of product variety 0.48 (6.31)
Production costs 0.42 (5.74)
χ2 = 248.89, df = 144, NFI = 0.937, NNFI = 0.965, CFI = 0.971, GFI = 0.897, RMSEA = 0.056, SRMR = 0.057

a
Composite reliability