A structural equation model of supply chain management strategies and firm performance

By Wisner, Joel D Publication: Journal of Business Logistics Date: Wednesday, January 1 2003

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Joel D. Wisner University of Nevada, Las Vegas Supply chain management is the integration of key business processes among a network of interdependent suppliers, manufacturers, distribution centers, and retailers in order to improve the flow of goods, services, and information from original suppliers to final customers, with the objectives of reducing system-wide costs while maintaining required service levels (Christopher 1998; New and Payne 1995; Simchi-Levi, Kaminsky, and Simchi-Levi 2000). Other terms including integrated logistics, value chain management, JIT purchasing and logistics, quick response, and supply chain synchronization describe subsets of, or specific initiatives within supply chain management, and have been used in the literature to address the topic of supply chain management (La Londe and Masters 1994; Tan, Handheld, and Krause 1998). Immediate supplier and customer relationship activities have thus played an important role in the development of effective supply chain management (SCM) strategies. Unfortunately, the terms listed here in many cases have been used synonymously with supply chain management and have clouded the issue and understanding of SCM. As a result, many practitioners view SCM strictly from a supplier-base perspective, value chain, or customer-base perspective. This research takes the broader view of SCM, including the focal firm and integrative activities with its suppliers, its suppliers' suppliers, its customers, and its customers' customers (for a good

discussion of SCM and its history see Lambert, Cooper, and Pagh 1998; Lummus and Vokurka 1999). The primary objective of SCM is to increase the value of products and services to customers in the supply chain vis-A-vis improved customer service and quality, and lower inventory carrying costs. The value created by a firm's SCM efforts clearly supports organizational strategy. Successful SCM can result in lower system inventories, a network of firms that responds more quickly to market changes, and products that more closely match customer expectations. Thus, firms pursuing differentiation, cost leadership, or quick response strategies, or combinations of these can all find benefits from value system or supply chain management (Porter 1985). Today, the SCM concept and its associated activities continue to evolve as new communication technologies and cooperative efforts emerge to facilitate system-wide process integration. The body of supply chain-oriented research continues to grow along a number of fronts; many of these efforts are concerned with further defining the SCM concept and its impact on organizational characteristics and practices. Interestingly, several researchers have argued that supply chain management is not feasible in many situations such as when the focal organization is not in a position of power or structural dominance over its network of suppliers (Cox 2001; Cox and Thompson 1998). Still others have brought attention to the lack of success in many supply chain management endeavors (Handfield et al. 2000). However, to date, there has been limited attention paid to identifying specific processes which have been successfully integrated, supply chain-oriented issues to be concerned with, how best to design and manage supply chains, empirically testing supply chain models, and the performance expectations of successful SCM program implementations (Lambert, Cooper, and Pagh 1998). This paper adds to the existing body of research by developing and analyzing a theoretical framework for supplier and customer issues and concerns, supply chain management strategy, and firm performance using structural equation modeling. This research contends that, like JIT practices, all firms can benefit from some form or at least limited use of supply chain integrative practices. As discussed in Porter's landmark book on competitive advantage, differentiation and thus value are created by activities taking place within the value system (or supply chain) to get products to the ultimate buyer (1985). Pitting one value system against another can be the source of competitive advantage for the more effective value system members. Thus, each firm's value chain (logistics system or network of suppliers, channels, and buyers) should impact the value created by the entire supply chain, which relates to the current study. The primary research

question under study is: Are there positive linkages between supplier management strategy, customer relationship strategy, supply chain management strategy, and firm performance? While these linkages may seem intuitive, as alluded to above, to date there has been limited empirical research testing these relationships. LISREL8-SIMPLIS was employed to analyze a hypothetical model for the supplier, customer, supply chain management, and firm performance items. The findings presented were obtained using a comprehensive survey circulated to a wide variety of U.S. and European business executives regarding a wide range of supply chain issues and strategies. Survey participants were asked if their firm practiced supply chain management. Participants responding in the affirmative were then asked questions regarding supplier management and customer relationship strategies, supply chain management strategies, and firm performance. The objective of the research was to test a number of hypotheses regarding the linkages between these activities and strategies, and firm performance. Study results supported the proposed structural equation model. Supplier management and customer relationship strategies were found to be correlated and to impact supply chain management strategies. Further, these practices and strategies were found to impact firm performance. Based on these findings, a clearer picture of the practice and benefits of SCM and its strategic implications emerges. It is interesting to note that while many respondents had differing views of these activities and strategies, there was still considerable agreement as to the impact of these practices on the firm. The following sections describe the existing literature relevant to the study, the research methodology, the demographic characteristics of the respondents, and an analysis of the proposed model. Finally the managerial or strategic implications of the study and future research directions are presented and discussed. REVIEW OF THE RELEVANT LITERATURE Increasing global competition, the demands of customers for higher product quality, greater product selection, and better customer service, the desire of firms to shrink their supply bases while striving to contain costs, and the rising costs of natural resources today have led many organizations to adopt cooperative, mutually beneficial partnership strategies with suppliers, distributors, retailers, and other firms within their supply chains to maintain or improve profitability and overall firm performance.

The strategic management literature has discussed the relationship between these activities and firm performance. For instance, Porter (1980) stressed the importance of buyers and suppliers matching their individual needs with the relative capabilities of the other in order to maximize product differentiation and minimize cost. Later, Porter (1985) advanced his earlier theories by presenting discussion of the value system (today, more commonly referred to as the supply chain) and its impact on competitive advantage. These seminal works have formed the basis for the development of supply chain management strategies today and their ties to firm competitiveness and performance. Further, Teece, Pisano, and Shuen (1997) provided an explanation of how a firm's specific asset position and uniqueness shape its competitive advantage. The practices of logistics and supply chain management along with their associated benefits (better customer service, lower cost, higher quality, and improved competitive advantage) are linked closely with the strategic management literature. Further, these practices and strategies continue to evolve and the link between supply chain management and firm performance is beginning to be realized as firms begin to understand and implement SCM. Specifically, the relevant literature can be classified and discussed from three perspectives: supplier management activities and strategy, customer relationship activities and strategy, and system-wide supply chain management strategy. While there is certainly significant overlap existing among these classifications, the purchasing and logistics literature generally is either internally focused or spans the boundaries between the firm and its first-tier suppliers and customers, while the supply chain management literature focuses on the integrating activities taking place among a network of firms encompassing in many cases several tiers of suppliers and customers. However, the term supply chain management is not used consistently within the literature, and in many cases, the reader is left to decide how best to classify a particular piece of research (Mabert and Venkataramanan 1998). Supplier Management Strategy The concept of SCM has slowly evolved. However, greater involvement is noted. For example, manufacturers have utilized the knowledge and resources of key suppliers to support new product development efforts (Morgan and Monczka 1995). Further, many firms have successfully reduced their supply bases in order to form a smaller set of highly competent suppliers to achieve improvements in purchased product quality and timing (Inman and Hubler 1992). Much of the recent literature on SCM focuses on attempts to form alliances with suppliers to co-manage the purchasing and supply function.

Recently, for instance, McGinnis and Vallopra (1999) found that purchasing's strategic involvement with suppliers contributed significantly to process development and improvement in a number of industry categories. As an example, involving suppliers early on in product design efforts allows manufacturers to develop alternative conceptual solutions, select the best and most affordable components, materials and technologies, and receive help in design assessment (Burt and Soukup 1985). Future projections indicate supplier selection will increasingly be based on strategic contributions to the supply chain and will extend beyond first-tier suppliers (Carter et al. 2000). For a number of years, there has been significant disagreement regarding purchasing's ability to contribute to the firm's sustainable competitive advantage. While a number of researchers have suggested that firms cannot "purchase" competitive advantage (since freely traded assets are available to all competitors, and all purchasing activities can be replicated), others are now suggesting the contrary view: that purchasing functions and resources are not identical among competing firms, and can result in proficiencies that are impossible or difficult to copy. Ramsay (2001) provides a compelling discussion and review of this line of thinking. Several researchers have discussed or tested for the relationship between supplier management activities and various performance outcomes. Whipple, Frankel, and Anselmi (1999) discuss case studies in the grocery industry to highlight inbound supply relationships and their impact on firm effectiveness and efficiency. In a survey of 57 automotive supplier CEOs, Scannell, Vickery, and Droge (2000) found significant positive relationships between JIT purchasing, supplier partnership, and supplier development practices and several performance measures. Customer Relationship Strategy To speed the delivery process and improve customer service, manufacturers, distributors, and retailers today are integrating their supply chain logistics functions by using transportation partners for crossdocking and direct store deliveries without the need for incoming inspections (Ellram, La Londe, and Weber 1989; St. Onge 1996). Transportation and other outbound logistics functions focus on a number of strategically important supply chain management issues such as JIT and customized delivery, warehouse and facility location, customized product/service issues, customer relationship management, and communication/information system deployment. Supply chain management's origins can be traced to an effort to better manage these transportation and logistics functions (Fisher 1997; Lamb 1995; MacDonald 1991; Turner 1993; Whiteoak 1994).

Increasingly, product and service customization is performed within the distribution channel to improve customer satisfaction (Lee and Billington 1995). This in turn, creates the need for thirdparty logistics service providers. In a recent survey of European manufacturers, van Hoek (1999) found customized transportation services, postponement, and the need for consistent, reliable, on-time delivery to be top considerations in structuring and managing the supply chain. One of the strategic goals of the transportation and outbound logistics functions is to reduce inventory along the supply chain while simultaneously maintaining or improving customer service (Houlihan 1988; Jones and Riley 1987). A supply chain can accomplish this task by efficiently redistributing stock within the supply chain using effective postponement and speculation strategies (Davis 1993; Pagh and Cooper 1998; Scott and Westbrook 1991). Inventory must be replenished quickly and arrive when and where it is needed, in smaller lot sizes. Indeed, a number of researchers have focused on the relationship between customer relationship considerations or activities, and firm performance. For example, Deshpande, Farley, and Webster (1993) found that customer orientation was positively related to firm performance. Ellinger, Daugherty, and Keller (2000) used structural equation modeling to test among other things, whether there was a relationship between distribution service performance and firm performance (consisting of measures for firm profitability, sales growth, and customer satisfaction). They found a significant positive association. Supply Chain Management Strategy The short-term objective of SCM is primarily to increase quality and productivity while reducing inventory and cycle time; its long-term strategic goals are to increase customer satisfaction, market share, and profits for all members of the supply chain network. Supply chain management is evolving into a common body of literature, with a primary focus on key process integration throughout the supply chain which should ultimately lead to a balance between customer requirements and supply chain capabilities (Lummus and Alber 1997). In general, SCM seeks improved participant performance through elimination of waste and better use of internal and external supplier capabilities and technologies (Morgan and Monczka 1996). The SCM philosophy expands the traditional internally-focused integrating activities of logistics (Kahn and Mentzer 1996) by bringing trading partners along the supply chain together with the common goals of efficiency, speed, and end-customer satisfaction (Harwick 1997). When successful, SCM creates a virtual organization composed of several independent entities, often linked by sophisticated enterprise resource planning (ERP) systems providing global visibility of

real-time information from any part of a company or its supply chain partners. The visibility enables more effective forecasting, production, and inventory decisions (Chopra and Meindl 2001). To accomplish this, SCM must integrate a number of key business functions, including purchasing, demand management, distribution planning, transportation, quality management, production planning, and materials management throughout the supply chain. Since the wholesaling and retailing industries incorporate a logistics focus into their strategic decisions, use of the SCM concept would enable channel members to compete as a unified entity instead of merely pushing inventories down the supply chain to end customers. Thus, the benefits of vertical integration can be obtained by coordinating the logistics functions of independent firms in the chain (Gustin, Daugherty, and Stank 1995; La Londe and Masters 1994). In this respect, SCM involves the integration of logistics systems to control the movement of goods from original suppliers to satisfied end-customers without waste (Ellram 1991). Where improving customer service once meant increasing warehouse inventories along the supply chain, today, integrated logistics systems seek to manage inventories through close relationships with suppliers and transportation, distribution, and delivery services. A goal is to replace inventory with frequent communication and sophisticated information systems to provide visibility and coordination, so that merchandise can be replenished quickly and arrive where and when it is needed in smaller lot sizes (Handheld 1994; Shapiro, Singhal, and Wagner 1993). Firms that use advanced process technology to increase flexibility while involving manufacturing and logistics managers in strategic decision making increase the role logistics plays in firm success (Tracey 1998). Quick, frequent, and accurate information transfer among members of the supply chain can counteract the distortion of information (known as the bullwhip effect) as it passes sequentially up the supply chain (Metters 1997). When utilized effectively, communication systems and information technology systems can replace inventory and improve organizational performance (Lewis and Talayevsky 1997). Recent research papers have explored linkages between supply chain management practices or strategies and firm performance, either directly or indirectly. For instance, in a survey of North American manufacturers, distributors, and retailers, Stank, Keller, and Daugherty (2001) found that supply chain management practices tended to improve internal collaboration which, in turn, positively affected logistics service performance. Brewer and Speh (2000) examined how the balanced scorecard could be used to leverage a firm's supply chain into a source of competitive advantage. An earlier work by Armistead and Mapes (1993) using a very small sample, found that

an increasing level of supply chain integration corresponded with increased manufacturing performance. Today, despite its importance, theoretical development, and popular usage in the business press, there is little empirical research clearly defining the role of external relationship activities in the development of supply chain management strategy, identifying the specific linkages between supplier management and customer relationship strategies and supply chain strategy, and perhaps more importantly, the corresponding impact these strategies have on firm performance. This research addresses these issues, with particular attention paid to both supplier and customer oriented activities and their roles in successful SCM. THE PROPOSED MODEL AND RESEARCH HYPOTHESES Figure 1 presents the proposed structural equation model and associated hypotheses. Supplier-and customer-focused activities and their value to the firm and its customers have been the subject of a number of research efforts (examples include Innis and La Londe 1994; Morash, Droge, and Vickery 1996; Novack, Rinehart, and Langley 1996; Stank and Lackey 1997). This body of research has shown that inbound and outbound capabilities such as delivery speed, reliability, and low cost distribution were significantly related to a number of firm performance indicators and to competitive advantage. Thus, the first two hypotheses are: H1: Inbound logistics strategy positively affects firm performance. H2: Outbound logistics strategy positively affects firm performance. Supply chain management strategy, as discussed earlier in the literature review, is ideally a linkage of internally-focused, mature, and successful supplier/customer-oriented capabilities throughout the supply chain's members. A number of recent studies have discussed this relationship between these boundary-spanning activities and supply chain management (Cooper, Lambert, and Pagh 1997; Stank, Keller, and Daugherty 2001). Although supplier management and customer relationship management is considered a subset of SCM strategy, other valueadding concepts are also included such as information system integration and top-level planning and control activities. However, literature suggests that firms must possess a high level of supply side and distribution effectiveness prior to initiating SCM strategies. Thus, it is hypothesized that supplier management and customer relationship strategies are positively linked to supply chain management strategy. These hypothesized links can be stated as: H3: Supplier management strategy positively affects supply chain management strategy.

H4: Customer relationship strategy positively affects supply chain management strategy. One of the primary objectives of supply chain management is to create greater levels of customer value and competitive advantage for organizations comprising the supply chain. While the linkage between SCM and firm performance has been theoretically argued in the literature (Carter and Narasimhan 1996; Christopher 1998), there has been limited empirical research in the area (Armistead and Mapes 1993; Narasimhan and Jayaram 1998; Tan, Kannan, and Handheld 1998). The fifth hypothesis thus becomes: H5: Supply chain management strategy positively affects firm performance. Finally, it is hypothesized that as firms implement various boundary-spanning activities, these activities tend to impact both supplier management and customer relationship capabilities. For instance, as firms become more accustomed to JIT deliveries from suppliers, they should find their outbound delivery timing impacted as well, as better transportation providers and delivery arrangements are found. Additionally, as stronger partnerships and better collaborative efforts are realized with suppliers through use of supplier reduction strategies and more effective sourcing decisions, the firm's distribution performance and capabilities also tend to improve (Stank, Keller, and Daugherty 2001). The final hypothesis can be stated as: H6: Supplier management and customer relationship strategies impact each other. RESEARCH METHODOLOGY The Structural Equation Modeling Approach Structural equation modeling is a confirmatory approach to data analysis requiring the a priori assignment of inter-variable relationships. It tests a hypothesized model statistically to determine the extent the proposed model is consistent with the sample data. Structural equation modeling incorporates observed (indicator) and unobserved (latent) variables, which are separated into measurement models and a structural equation model. Observed variables are those that can be measured, while unobserved variables cannot be directly measured and must be inferred or hypothesized from the observed variables. The measurement models specify how the latent variables are measured in terms of the indicator variables as well as address the reliability and validity of the indicator variables in measuring the latent variables or hypothetical constructs. The structural equation model provides an assessment of predictive validity, specifies the direct and indirect relations among the latent variables, and describes the amount of explained and unexplained variance in the model (Byrne 1998; Schumacker and Lomax 1996).

IMAGE CHART 19 FIGURE 1 In structural equation modeling, there is no single test of significance that can absolutely identify a correct model given the sample data (Schumacker and Lomax 1996). Many goodnessof-fit criteria have been established to assess an acceptable model fit. Consequently, several authors recommend presenting a number of indices to support model fit (Bentler 1992; Garver and Mentzer 1999). This paper presents and discusses a number of fit indices with the results and in Figures 2 through 6. LISREL8-SIMPLIS was used to analyze the hypothesized model. A two-step model building approach was used, wherein the measurement models were tested prior to testing the structural model. The rationale behind this two-step approach is discussed in Joreskog and Sorbom (1993, p. 113) wherein they state, "The testing of the structural model, i.e., the testing of the initially specified theory, may be meaningless unless it is first established that the measurement model holds." (Interested readers are also directed to Anderson and Gerbing (1988) for a further discussion of this approach). The maximum likelihood estimation method was used which has desirable asymptotic properties (e.g., minimum variance and unbiasedness) and is scale-free. This estimation method assumes multivariate normality of the observed variables. Recent research has shown that the maximum likelihood method can be used for data with minor deviations from normality (Raykov and Marcoulides 2000). As a check of normality, the P-P plots for a number of variables were checked in the sample, and the data appeared approximately normally distributed. Research Constructs and Items The existing research was reviewed to identify relevant practices comprising the supplier management, customer relationship, and supply chain management strategies. Additionally, feedback from 30 senior purchasing managers was used to further validate the use of these activities in developing each of the strategies. Thus, the practices used in each of the research constructs were based on the literature and management feedback. For this study, respondents stating they practiced supply chain management were asked to assess 14 supplier management practices, 16 customer relationship practices, 20 supply chain management practices, and finally, six performance measures. For each of the questions, assessments were made using a 5-point Likert scale. These constructs are shown in Table 1.

Data Collection To examine the relationships described above, a survey was designed, pre-tested, and validated using 30 senior U. S. supply and materials managers. Feedback from the pre-test was then used to revise the questionnaire (the pre-test questionnaires were not used for further analysis). Senior managers, identified from the American Production and Inventory Control Society (APICS) and the National Association of Purchasing Management (NAPM) databases, were asked to complete the survey only if they practiced some form of supply chain management, as defined in the survey. The following definition was supplied in the survey: "Supply chain management is the integration of key business processes from end user to original suppliers to provide products, services, and information that add value for customers." The survey was circulated and responses were received in three phases from senior managers in U.S. and European manufacturing and service organizations between December 1998 and October 1999. In each phase, three mailings were conducted, consisting of the survey with a cover letter, a reminder post card, and a second survey with a follow-up letter. The mailings for each phase were conducted consecutively over the ten-month period due to the relatively large manpower requirements. In the first phase, the survey was mailed to 1,500 U.S. manufacturing firm supply and materials managers, randomly selected from the NAPM membership database. For the second phase of the study, 3,000 surveys were sent to senior U.S. managers, randomly selected from the APICS membership database. This sample included 1,000 manufacturing firms and 2,000 service firms. For the third and final phase of the study, 970 surveys were mailed to senior European managers, also randomly selected from the APICS membership database. Multiple databases were used to maximize the sample size. Care was taken in both databases to delete multiple listings for firms with more than one NAPM or APICS membership listing. A total of 556 useable surveys, consisting of 411 U.S. firm responses and 145 European firm responses, were received for a response rate of 10.2%. The response rate was considered reasonable, given the subject matter and complexity, and the survey length. The survey respondents practicing SCM as defined on the survey were used for this study (350 respondents). IMAGE TABLE 27 TABLE 1 Non-Response Bias

To investigate the possibility of non-response bias in the data, a test for statistically significant differences in the responses of early and late waves of returned surveys was performed (Armstrong and Overton 1977; Lambert and Harrington 1990). For each phase, the last wave of surveys received was considered to be representative of non-respondents. Each survey sample was split into two groups on the basis of early and late survey return times; t-tests were performed on the responses of the two groups. The t-tests yielded no statistically significant differences among the survey items tested. These results suggested that non-response bias did not significantly impact the study. Reliability Analysis Since the data for this research was generated using scaled responses, it was deemed necessary to test for reliability. Table 2 contains this information. Cronbach Alpha tests were performed on the four constructs shown in Table 1. Based on the coefficient values, the items tested were deemed reliable for this type of exploratory research (Nunnally 1978). RESULTS Respondent Firm Demographics General demographic information of the respondent firms is presented in Table 3. Over 61 % of the firms were either final product or raw material/component manufacturers with the remainder classifying themselves as wholesalers, retailers, or other services (including third party logistics providers, warehousing, healthcare, software, telecommunications, and utility companies). A large percentage of the respondents (approximately 63%) stated they practiced some form of supply chain management. A wide variety of firm sizes (based on number of employees and annual sales) was also represented in the sample. Over 41 % had fewer than 500 employees, while over 13% of the respondent firms had over 10,000 employees. Similarly, firm size based on annual sales was also well dispersed. Eighteen percent had annual sales of less than $25 million, while over 17% had sales in excess of $1 billion annually. Analysis of the Measurement Models To ensure model identification, one can separate the measurement models and the structural model. If each measurement model is identified independently, then the structural model is identified (Maruyama 1998). IMAGE TABLE 37

TABLE 2 IMAGE TABLE 43 TABLE 3 The first measurement model tested was the Supplier Management Strategy model (SMGT). This model was evaluated using the 14 items shown in Table 1. The model was checked to assure that the parameter estimates exhibited the correct sign and magnitude and were consistent with the underlying theory. Seven of the 14 items exhibited either large error variances or insignificant parameter estimates. These items were considered unimportant to the model and thus were deleted (Byrne 1998). The modification indices suggested Ql J (quick response time for emergencies, problems, special requests) and Q IK (flexibility to respond to unexpected demand changes) influenced each other. Since the firm's flexibility with respect to unexpected demand changes is likely to influence its ability to respond quickly to emergencies or special requests, and vice-versa, an error covariance between the two items (0.22) was included in the supplier management strategy model (see Figure 2). The Customer Relationship Strategy (CREL) measurement model was tested next. The 16 items shown in Table 2 were used to evaluate this measurement model. Six of these items were found to have large error variances and thus were dropped from the model. The modification indices implied that a number of items were correlated, and this is shown in Figure 3. Q2B (the firm's ability to meet customer due dates) was found to be correlated with both Q2D (successfully resolving customer complaints) and Q2I (the firm's flexibility in meeting customers' changing needs). This seems intuitive, since successfully meeting customer due dates implies a lower level of customer complaints and a sustained ability to meet changing customer due dates, for instance. It was also found that Q2J (using a customer satisfaction measurement system) and Q2L (determining key factors for improving customer satisfaction) were correlated. This is not surprising, since one of the primary objectives of customer satisfaction surveys is to determine areas where the firm can concentrate additional resources to boost customer satisfaction. Finally, Q2N (employing routine follow-up procedures for customer complaints) was correlated with both Q2M (understanding how customers use the firm's products and services) and Q20 (interacting with customers to set reliability, responsiveness, and other standards). Customer interaction is likely to occur as customers communicate complaints and concerns to the firm. The outcomes from these interactions are also likely to include the setting of customer responsiveness standards and, in time, will result in a greater understanding of how the firm's products are used

by customers. The model was thus modified and the error covariance terms were added to link the appropriate sets of indicator variables (see Figure 3). Figure 4 shows the Supply Chain Management Strategy (SCM) measurement model. The 20 items shown in Table I were initially tested in the model. Examination of the error terms revealed that eight of the items should be dropped from the model. The modification indices suggested that improving the integration of activities across the supply chain (Q3C) was correlated with both reducing supply chain response times (Q3B) and searching for new ways to integrate supply chain activities (Q3D). In theory, SCM practice should support these correlations. One reason firms integrate inter-organizational activities is to achieve reductions in response times as products move through the supply chain. Additionally, firms practicing SCM often look for new ways to integrate these activities, such as in the implementation of better communication systems. The end result of these efforts should be better integration and shorter response times. Creating a greater level of trust throughout the supply chain (Q3E) was correlated with identifying and participating in additional supply chains (Q3H). As firms become more comfortable with their supply chain partners, greater levels of supply chain management success can be achieved, leading firms to seek out still other supply chain relationships. Additionally, establishing more frequent contact with supply chain members (Q3I) was correlated with creating a compatible supply chain communication/information system (Q3J). Again, this seems intuitive - more frequent contact is likely to result in a more compatible communication system, and vice versa. Also, involving all supply chain members in the firm's marketing plans (Q3N) was correlated with communicating the firm's future strategic needs to suppliers (Q3Q). Certainly, one way to involve suppliers in the firm's marketing plans is to communicate upcoming strategic material needs to them in a timely fashion. The SCM measurement model was modified accordingly to reflect the dropped items and the additional error covariance terms (see Figure 4). Finally, the Firm Performance (PERF) measurement model was evaluated using the six observed measures shown in Table 1. One of the performance measures exhibited a large error variance so it was eliminated. The modification indices suggested that market share (Q4A) affected both return on assets (Q4B) and overall competitive position (Q4E). Understandably, as market share improves for a particular firm, asset utilization would likely increase, resulting in higher return on assets. Also, market share is typically used as a proxy for competitive position, so this relationship would be expected. Overall product quality (Q4D) and overall customer service levels (Q4F) were also correlated. With respect to services in particular, service product quality and

customer service can be seen as synonymous. The final firm performance model is shown in Figure 5 with the three error covariance terms. When viewing the model fit indices for each of the measurement models in Figures 2-5, a good fit is apparent regarding each of the measurement models. The x2/df statistic for each of the measurement models was less than 3.0, suggesting that each of the measurement models fit the sample data well. The commonly cited fit indices such as GFI, NFI, CFI, and IFI were all greater than 0.90, suggesting excellent model fit. Finally, the critical N, or CN, was greater than 200 for each of the measurement models, indicating the sample size of 350 was sufficient to yield adequate model fit. Analysis of the Structural Model and Hypotheses The structural model was analyzed based on the modified measurement models using the maximum likelihood estimation method. The initial model as shown in Figure 1 was tested, resulting in two insignificant path coefficients, suggesting a lack of support in the data for this model. Acting on the assumption that the original model was specified incorrectly, the model was subsequently modified in stepwise fashion (see discussions of post-hoc modification in Hoyle 1995; Maruyama 1998; Raykov and Marcoulides 2000) resulting in a final model exhibiting good fit, as shown in Figure 6. The data thus supported hypotheses H3-H6, namely, that the supplier management and customer relationship strategies significantly impacted supply chain management strategy, supply chain management strategy significantly influenced firm performance, and that supplier management and customer relationship strategies significantly impacted each other. IMAGE CHART 48 FIGURE 2 IMAGE CHART 53 FIGURE 3 IMAGE CHART 58 FIGURE 4 IMAGE CHART 62 FIGURE 5

Figure 6 shows the modified structural equation model, standardized coefficients, and model fit indices. All coefficients shown were significant at the die.05 level. The X2/df statistic (1.53) indicates the modified hypothesized model fit the sample data well. The other fit indices shown in Figure 6 also tended to confirm this. The results thus support the structural equation model and the underlying theory. IMPLICATIONS AND CONCLUSIONS This study endeavored to identify and empirically verify relationships between current supplier, customer, and supply chain management practices. Firms operating in the U.S. and Europe were examined and a structural equation model for supply chain management was derived from the literature. In general, the data supported the proposed structural equation model. A bi-directional relationship exists between the items used to assess supplier management and customer relationship strategy. Additionally, both supplier management and customer relationship strategy positively impact supply chain management strategy, which in turn, influences firm performance. These findings have a number of managerial implications. Firms should not view or evaluate their supplier or customer practices independently. Instead, a systems approach should be used, wherein firms recognize for instance, that inbound delivery timing and material quality, price, and quantity all impact the firm's outgoing product and customer services (as represented by H6 in Figure 1). Increasing information and coordination capabilities with suppliers tends to increase those same capabilities with customers as well. Managers should be cognizant that increasing a firm's external relationship capabilities in one area has a synergistic impact on yet other external capabilities. The significant relationships represented by H3 and H4 in Figure 1 suggest that firms seeking to initially develop or further refine their supply chain management capabilities should look to improve or expand their immediate supplier and customer relationship capabilities first. For instance, finding and developing suppliers that can deliver on time, in the right quantities with more flexibility, and directly to the points of use in the firm, can improve the integration of these activities in the supply chain. Building and improving interdependent and trusting relationships and then expanding them throughout the supply chain should begin with sound logistics practices. Managers investing resources in the implementation of various external relationship practices will find they lead to the generation and adoption of more effective supply chain management strategies later.

Finally, the significant relationship represented by H5 implies that immediate and second-tier supply chain management strategies all impact firm performance either directly or indirectly. Specifically, managers wanting to improve market share, competitiveness, product quality, and customer service should begin a process of internal assessment whereby their firm's immediate supplier and customer relationship capabilities are assessed and potentially modified. Following this, firms should consider identifying highly capable supply chain partners, creating better interfirm cooperation and integration capabilities through information sharing and exchange, reducing response times throughout the supply chain, and sharing future strategic plans and requirements. These relationships between supplier and customer strategies, supply chain management strategy, and firm performance may well be the key to sustained competitive advantage. The research here empirically illustrates the relationships between strategies focusing on immediate suppliers and customers, supply chain management strategy, and firm performance. Managers can thus use this information to effectively create a general supply chain management strategy that will lead to improved firm performance. This is particularly important as competition and customer requirements increase, forcing firms to continually evaluate and improve their capabilities. This study attempted to increase the understanding of supply chain management, in order to provide useful insights to managers seeking to improve firm performance. This study, like others, has limitations. The random sample for the survey was obtained from the NAPM and APICS membership databases; thus, the results are generalizable only to the extent that the NAPM and APICS members resemble the population of all U.S. and European firms and were knowledgeable about their firms' SCM efforts. The response rate was also somewhat low; however given the length, complexity, and subject matter, this is considered reasonable. Some potential respondents may have decided not to reply once they learned the survey was primarily for firms practicing SCM. For this reason, the percentage of firms practicing SCM (as shown in Table 3) may be overstated, The survey mailings and returns covered a ten-month time period, which may have introduced a slight time lag problem. Readers should also be reminded that much of the data reported here is based on management perceptions. Past research however, supports the use of qualitative assessments and has found them to be a reliable alternative to actual performance data (Dess and Robinson 1984; Venkatraman and Ramanujam 1986). Because of the use of qualitative assessments from managers, firm performance data were not collected. Only general overall performance assessments relative to competitors were requested.

This could be seen as a limitation. Also, the term supply chain management may be interpreted differently across industry and academic groups alike. These varied perceptions may have played a role in the answers provided on the survey and impacted the findings. To minimize potential confusion, a commonly used definition of supply chain management was provided on the survey. Finally, respondents whose firm did not practice SCM were not used in this study beyond the general sample description provided in Table 3. Thus, the measurement models and structural equation model were based on the set of respondent firms practicing SCM. This could be seen as a limitation of the study, given that certain responses were omitted, however the aim of the study was to analyze firms practicing SCM. Future research efforts in this topic area should include further studies of the supply chain management and firm performance relationship, such as an assessment of the type of performance measurements used among firms practicing supply chain management, and studies that look at the triads of suppliers-buyers-customers and their specific interactions and practices. Additional studies of the specific processes integrated, the types of information shared, and the linkages between second- and third-tier suppliers and customers should also be investigated. Finally, the dynamic roles power and trust play in the success of supply chain management has yet to be fully investigated. ACKNOWLEDGMENT This research was funded by a grant from the APICS Educational and Research Foundation, Inc. The author would also like to thank the editor and reviewers for their many thoughtful and valued comments. REFERENCE NOTES REFERENCE Anderson, James and David Gerbing (1988), "Structural Equation Modeling in Practice: A Review and Recommended Two-Step Approach," Psychological Bulletin, Vol. 103, No. 3, pp. 411-423. Armistead, Colin and John Mapes (1993), "The Impact of Supply Chain Integration on Operating Performance," Logistics Information Management, Vol. 6, No. 4, pp. 9-14. REFERENCE Armstrong, J. Scott and Terry Overton (1977), "Estimating Nonresponse Bias in Mail Surveys,"Journal of Marketing Research, Vol. 15, No. 8, pp. 396-402.

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AUTHOR_AFFILIATION Joel D. Wisner, Ph.D., C.P.M., CTL is an Associate Professor of Supply Chain Management at the University of Nevada, Las Vegas. He received his Ph.D. in Operations Management and Logistics from Arizona State University in 1991. Dr. Wisner's research interests are in the areas of quality assessment and improvement strategies across the supply chain. His articles have appeared in numerous journals including the European Journal of Purchasing and Supply Management, Journal of Business Logistics, Journal of Operations Management, Journal of Supply Chain Management, Journal of Transportation, Production and Operations Management and Quality Management Journal.

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