Int. J.

Production Economics 135 (2012) 514–522

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Int. J. Production Economics

journal homepage: www.elsevier.com/locate/ijpe

Supply chain integration and performance: The effects of long-term

relationships, information technology and sharing, and logistics integration
Daniel Prajogo a,n, Jan Olhager b
a
Department of Management, Monash University, PO Box 197, VIC 3141, Australia
b
Department of Management and Engineering, Linkoping University, Sweden

a r t i c l e i n f o a b s t r a c t

Article history: Supply chain integration is widely considered by both practitioners and researchers a vital contributor
Received 6 July 2010 to supply chain performance. The two key flows in such relationships are material and information.
Accepted 1 September 2011 Previous studies have addressed information integration and material (logistics) integration in separate
Available online 10 September 2011
studies. In this paper, we investigate the integrations of both information and material flows between
Keywords: supply chain partners and their effect on operational performance. Specifically, we examine the role of
Supply chain integration long-term supplier relationship as the driver of the integration. Using data from 232 Australian firms,
Logistics integration we find that logistics integration has a significant effect on operations performance. Information
Information integration technology capabilities and information sharing both have significant effects on logistics integration.
Performance
Furthermore, long-term supplier relationships have both direct and indirect significant effects on
performance; the indirect effect via the effect on information integration and logistics integration.
& 2011 Elsevier B.V. All rights reserved.

1. Introduction
Most concepts of supply chain integration explicitly recognize
the existence of two flows through the chain; there is a flow of
goods and an equally important flow of information (Fisher, 1997;
Huang et al., 2002; Pagell, 2004; Power, 2005). Supply chain
integration must comprise both information and material, and
cannot restrict itself to only one. Higher levels of integration are
characterized by increased logistics-related communication, greater
coordination of the firm’s logistics activities with those of its
suppliers and customers, and more blurred organizational distinc-
tions between the logistics activities of the firm and those of its
suppliers and customers (Stock et al., 2000). Coordination, collabora-
tion, and cooperation are often used more of less interchangeably for
describing integrative efforts among partners to improve the overall
efficiency of the supply chain (Holweg et al., 2005; Matopoulos et al.,
2007; Singh and Power, 2009), such as collaborative planning,
forecasting and replenishment, CPFR (Danese, 2006).
Logistics integration refers to specific logistics practices and
operational activities that coordinate the flow of materials from
suppliers to customers throughout the value stream (Stock et al.,
2000). Logistics provides industrial firms with time and space
utilities, by providing the necessary quantity of goods in the right
n
Corresponding author. Tel.: þ61 3 9903 2030; fax: þ 61 3 9903 2718.
E-mail addresses: daniel.prajogo@buseco.monash.edu.au (D. Prajogo),
jan.olhager@liu.se (J. Olhager).
place at the right time (La Londe, 1983; Caputo and Mininno,
1998). Grounded on earlier research, the theoretical construct of
logistic integration is derived to include the seamless integration
of the logistics function of the various supply chain partners
(Stock et al., 1998, 2000; Childerhouse and Towill, 2003).
Information integration refers to the sharing of key informa-
tion along the supply chain network which is enabled by
information technology (IT). One of the main purposes of infor-
mation integration is to achieve real-time transmission and
processing of information required for supply chain decision
making. Lee et al. (2000) show that information sharing can lead
to lower cost through reductions in inventories and shortages.
However, in order to realize this value, changes in the logistics
system are required, such as Vendor-Managed Inventory (VMI)
programs, lead time reductions, order quantity reductions, and
more frequent deliveries (see for example, Selldin and Olhager,
2007; Claassen et al., 2008).
In the light of supply chain integration concept, logistics and
information integration originally reflect two interrelated forms of
integration which flow in opposite directions (i.e. forward and
backward, respectively). Forward integration is concerned with the
physical flows of materials from suppliers to manufacturers which
we refer to logistics integration. On the other hand, backward
integration is concerned with the coordination of information
technologies and the flows of information from manufacturers to
suppliers.
Frohlich and Westbrook (2001) modeled supply chain integration
in terms of both information and material using eight items

0925-5273/$ - see front matter & 2011 Elsevier B.V. All rights reserved.
doi:10.1016/j.ijpe.2011.09.001
 D. Prajogo, J. Olhager / Int. J. Production Economics 135 (2012) 514–522
concerning IT, information sharing as well as logistics integration.
They found that wider scope of integration had a positive association
with performance improvement. However, since the items were
combined into a single construct, they were unable to identify any
relationship between information integration and logistics integra-
tion. Based on a study of five pairs of suppliers and retailers in
Taiwan, Sheu et al. (2006) proposed a conceptual relationship model,
including long-term relationship, supply chain architecture (including
e.g. information sharing and IT capabilities), supplier–retailer colla-
boration, and performance. They concluded that better IT capabilities
as well as better communication contribute to a better platform for
both parties to engage in supply chain coordination, participation, and
problem-solving activities. Zhou and Benton (2007), studied the effect
of information sharing on supply chain practice; the latter captured as
a construct including elements of planning, production, and delivery
practice. They found that information sharing significantly impacts
supply chain practice, and a significant effect of delivery practices on
delivery performance. The study by Li et al. (2009) found that IT
capabilities and information sharing had a significant effect on supply
chain integration of logistics systems, and indirectly on performance.
No direct effect on performance by IT implementation was noted.
In this paper we investigate the relationships among informa-
tion integration, logistics integration, long term relationships, and
the effects on performance. We use constructs developed and
verified by Chen and Paulraj (2004). We review the relationships
and present the hypotheses. Then, the survey methodology and
results are presented. Finally, the implications for managers and
researchers are discussed. The novel aspect of this research is that
the variables have not been studied in this context before. To the
best of our knowledge, this is the first study to include all of these
variables.
2. Theoretical background and hypotheses
In this section, we first explain the notion of logistics integration
and its impact on competitive performance. We then discuss the
role of supply chain information integration – both IT and informa-
tion sharing – in supporting the material flow integration. Thirdly,
the long term relationship with suppliers is discussed as an ante-
cedent of supply chain information management and its potential
direct impact on performance. Subsequently, we develop our
research hypotheses linking long term relationship with suppliers,
information integration, logistics integration, and performance.
2.1. Logistics integration
The increasing competition has driven firms to not only
improve their internal operations (such as process control and
inventory management), but also focus on integrating their
suppliers and customers into the overall value chain processes.
The contribution of suppliers in delivering values to customers,
hence, building competitive capabilities (quality, delivery, flex-
ibility, and cost) has been well recognized. The essence of logistics
integration is well-coordinated flow of materials from suppliers
which allow 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 getting blurred
(Stock et al., 1998, 2000). It has been well argued that having solid
logistics integration will reduce various problems, such as the
bullwhip effect (Lee et al., 1997; Geary et al., 2006). Integrated
logistics also allow firms to adopt lean production systems which
are characterized by reliable order cycles and inventory reduction
(Cagliano et al., 2006; Schonberger, 2007). By and large, logistics
integration allows companies and their supply chain partners to
515
act as a single entity which would result in improved perfor-
mance throughout the chain (Tan et al., 1998). In other words,
through logistics integration, firms can have the potential benefits
of vertical integration (quality, dependability, planning and con-
trol, and lower costs) without having it in the physical sense (La
Londe and Masters, 1994). Improved logistics integration between
supply chain partners yields a number of operational benefits,
including reduction in costs (Nooteboom, 1992), lead time (Liu
et al., 2005), and risks (Clemons et al., 1993) as well as improve-
ment in sales, distribution, customer services, and service levels
(Seidmann and Sundararajan, 1997) and customer satisfaction
(Kim, 2009).
The majority of empirical surveys on supply chain integration
report a positive relationship between integration and performance
(Van der Vaart and van Donk, 2008). De Toni and Nassimbeni (1999)
found that better performing plants exhibit a higher level of
logistical interactions, Frohlich and Westbrook (2001) found that
the widest arcs of integration had the strongest association with
performance improvement, Sheu et al. (2006) found that higher
levels of collaboration result in operational efficiency in the supply
chain system, and finally Li et al. (2009) found that supply chain
integration is significantly related to supply chain performance.
Thus, we can formulate our first hypotheses:
H1. Logistics integration has a positive relationship with opera-
tional performance.
2.2. Supply chain information integration
As Frohlich and Westbrook (2001) suggested, the material flow
from upstream to the downstream supply chain entities must be
supported by the information flow from downstream to
upstream. Based on five case studies of dyads (supplier–retailer),
Sheu et al. (2006) found that better IT capabilities as well as better
communication contribute to a better platform for both parties to
engage in coordination, participation, and problem-solving activ-
ities. Thus, both information technology and information sharing
can be viewed as antecedents to material flow integration.
Our review of the literature concerning the topics related to
supply chain information integration suggest two major aspects:
the technical aspects (information technology connection), and
the social aspects (information sharing and trust). For example, a
number of studies (Narasimhan and Kim, 2001; Frohlich, 2002;
Gunasekaran and Ngai, 2004; Devaraj et al., 2007; Sanders, 2007)
focused on the importance of adopting e-business technologies as
a means for information integration. The other group of studies
(Yu et al., 2001; Narasimhan and Nair, 2005; Carr and Kaynak,
2007; Zhou and Benton, 2007; Li and Zhang, 2008; Sezen, 2008)
focused on the importance of information sharing and commu-
nication between firms and suppliers. It is the notion of this paper
that both aspects of information integration are important. Over
reliance on technology without willingness to share the critical
information pertaining to supply chain will not make the firms
meaningfully connected; thus, failing to produce logistics inte-
gration. Only firms that are capable of building both the technical
and social aspects of information integration will see the max-
imum benefits of logistics integration (Chae et al., 2005; Fiala,
2005; Fawcett et al., 2007). Each of the two aspects of information
integration is discussed below.
2.2.1. Information technology
Information (and communication) technology plays a central role
in supply chain management in the following aspects. First, IT allows
firms to increase the volume and complexity of information which
needs to be communicated with their trading partners. Second, IT
allows firms to provide real-time supply chain information, including
516 D. Prajogo, J. Olhager / Int. J. Production Economics 135 (2012) 514–522
inventory level, delivery status, and production planning and sche-
duling which enables firms to manage and control its supply chain
activities. Third, IT also facilitates the alignment of forecasting and
scheduling of operations between firms and suppliers, allowing
better inter-firms coordination. As such, the problems in coordinating
supply chain activities which often are hindered by time and spatial
distance can be reduced (Paulraj and Chen, 2007). The use of IT in
supply chain has received considerable attention with various
technologies being introduced for Business-To-Business (B2B) com-
munication, including web internet, B2B private (Ethernet), and EPOS
(Electronic Point of Sale). Studies have shown that effective IT
connection improves the integration between supply chain partners
in terms of material flows (Soliman and Youssef, 2001). In this regard,
IT supports key processes in supply chains, including sourcing,
procurement, and order fulfillment (Kehoe and Boughton, 2001;
Swaminathan and Tayur, 2003). Accordingly, we hypothesize:
H2. The intensity of information technology connection between
firms and their suppliers has a positive relationship with logistics
integration.
2.2.2. Information sharing
While the technological aspect of information integration is
important, it is the frequency, the quantity and the quality of
information that is shared that really matters. According to
Fawcett et al. (2007), large investments in IT could fail to produce
expected benefits if it is not supported by willingness to share
needed information. Information sharing requires firms to
exchange strategic supply chain information and not only trans-
actional data, such as materials or product orders. The strategic
supply chain information provides leverages to the supply chain
partner for making strategic decision in their operations (Li et al.,
2006). For example, point of sale history helps suppliers to
successfully forecast demand which subsequently improves ser-
vice level and efficiency to their customers. Similarly, real-time
inventory position helps suppliers to plan their replenishment
and delivery schedules; thus, improving service levels and redu-
cing inventory costs (Seidmann and Sundararajan, 1997). Such
level of information sharing requires frequent and intense com-
munication between firms and suppliers. The intensity of com-
munication constitutes high levels of cooperative behavior
between supply chain partners which leads to high degree and
symmetry of strategic-information flows between them (Klein
et al., 2007). A number of studies have demonstrated various
logistics benefits of having information sharing with supply chain
partners concerning inventory management (Cachon and Fisher,
2000; Lee et al., 2000; Yu et al., 2001; Zhao et al., 2002), agility
and flexibility (Swafford et al., 2008), and the bullwhip effect
(Dejonckheere et al., 2004). For example, Vendor-Managed Inven-
tory (VMI) integration with suppliers has been shown to reduce
the bullwhip effect (Disney and Towill, 2003). As such, we
hypothesize:
H3. The intensity of information sharing between firms and their
suppliers has a positive relationship with logistics integration.
2.3. Long term relationships
The ways firms relate with suppliers have changed considerably.
Given that manufacturing firms are getting more and more focused
on their core competence, their reliance on strategic supplier
increases (Prahalad and Hamel, 1990). Among the changes, three
key aspects of supplier relationships are highlighted here. First, the
trend now is to build a long-term relationship with suppliers rather
than short-term contracts (Helper, 1991; Ogden, 2006). Second, in
conjunction with the first point, firms now use fewer suppliers over
a longer period of time rather than keeping a large base of suppliers
which allow them to change suppliers for almost every contract. The
benefits of having low price resulted from creating competition
among suppliers are now changed into low total cost of ownership
due to long-term and large volume of purchases (Helper, 1991).
Third, the relationship with suppliers has been enhanced into
strategic level where suppliers are now considered as the integral
part of the firm’s operations (Choi and Hartley, 1996; Kotabe et al.,
2003; Chen and Paulraj, 2004). This change has led to various
avenues of collaboration, including joint improvement program,
early supplier integration in product design, and profit and risk
sharing. One aspect of strategic supplier relationship is extended
longevity. Long-term relationships have several implications, and
one of them is that firms may be ready for putting large investments
in building the relationship, including IT and information sharing
(De Toni and Nassimbeni, 1999). Klein et al. (2007) found that the
greater the mutual trust, the greater the IT customization, and the
greater the strategic information flows. Sheu et al. (2006) found that
long-term orientation affects supply chain architecture, which
includes IT capabilities and information sharing. Paulraj et al.
(2008) found a significant relationship between long term relation-
ship with suppliers and information sharing. We can thus formulate
the following two related hypotheses:
H4. Long term relationship with suppliers has a positive relation-
ship with information technology connection between firms and
their suppliers.
H5. Long term relationship with suppliers has a positive relation-
ship with information sharing between firms and their suppliers.
Chen and Paulraj (2004) modeled a long-term relationship as a
potential antecedent of buyer performance. Vickery et al. (2003)
suggested that long-term relationships can result in improved
firm performance, and De Toni and Nassimbeni (1999) found that
better performing plants exhibit a better use of long-term supply
agreements with sources. Similarly, Singh and Power (2009)
found that effective supplier collaboration has a direct effect on
firms’ competitive performance. With this, we arrive at our final
hypothesis:
H6. The long term relationship with suppliers has a positive
relationship with performance.
3. Research framework
The research model is shown in Fig. 1. The six hypotheses
build up the model, linking long term relationships, information
integration, logistics integration, and performance. Overall, the
model captures the three principal elements of an integrated
supply chain suggested by Handfield and Nichols (1999), namely
information flow, product and material flows, and long term
relationships between supply chain partners.
Our model is different from those in previous studies with
several respects. Sheu et al. (2006) studied five pairs of suppliers
and retailers in Taiwan. Based on their main findings, they
developed a conceptual relationship model. The model includes
long-term relationship, supply chain architecture (incl. e.g. infor-
mation sharing and IT capabilities), supplier–retailer collabora-
tion, and performance. Thus, their proposed theoretical model
contains similar elements as our research model. There are two
key differences, though, in that we differentiate between IT and
information sharing (while they consider them jointly to be part of a
supply chain architecture construct), and we allow for a direct effect
of long term supplier relationships on performance. Different to
Fawcett et al. (2007), we propose that IT connection and information
sharing are antecedents of logistics integration, and not directly
related to operational performance. In order to achieve higher levels
 D. Prajogo, J. Olhager / Int. J. Production Economics 135 (2012) 514–522
Information integration
Information
H4 technology
Long term
relationship
H5 Information
sharing
Fig. 1. Research framework.
of performance, the information dimension of integration must be
transferred to the physical materials integration. In other words,
both information and materials flow must be integrated in order to
reach higher levels of performance. Using data drawn from 182
Chinese companies, Li et al. (2009) investigated the relationship
among IT implementation, supply chain integration, and supply
chain performance. Our study expands their model by incorporating
strategic relationships with suppliers as a potential antecedent of IT
implementation as well as adding the social aspects of information
integration (i.e. information sharing) to provide a more comprehen-
sive framework.
In summary, our research framework provides contribution to
the knowledge in three ways. First, it tests the link between
information flow and material flow in supply chain. Second, it
tests the technological and social aspects of information integra-
tion. Third, it integrates previous studies on the topic and
provides a comprehensive framework on the driver (long-term
relationship) and enabler (information integration) of logistics
integration and its effect on performance.
4. Methods
4.1. Sample and procedures
The data for this study was drawn from managers of Australian
manufacturing firms via a mail survey that was conducted
between end of 2008 and early 2009. The list of the respondents
was randomly selected and purchased from a mailing list com-
pany. In total, 1800 surveys were mailed out, and 232 usable
responses were received; hence, the response rate is 13.1%. The
data were checked for bias using correlations of responses
between early respondents and late respondents based on indus-
try sectors and organizational size. The chi-square tests on both
categories did not indicate any significant difference between the
two groups of respondents.
The dataset used in this study has also been used in two other
studies (Olhager and Prajogo, 2012; Prajogo et al., 2011). Olhager
and Prajogo (2012) analyse differences between two production
systems (Make-To-Stock versus Make-To-Order) with regard to
the role of supply chain management practices in enhancing
business performance. Prajogo et al. (2011) examine the unique
effects of different supplier management practices on different
aspects of operational performance. Each paper includes logistics
integration as a key variable but considers it in a different
research framework, accompanied by different variables relevant
to the specific purpose of the study.
In terms of industry sectors, 16% of the respondents came from
electronic/electrical, 25% from machinery, 8% from automotive,
11% from chemical, 4% from food processing, 7% from construc-
tion, and 12% from other manufacturing sectors. The remaining
sectors identified as ‘‘others’’ included medical equipment, wood,
517
H6
H2
Logistics H1
Performance
integration
H3
printing and paper, defense. In terms of organizational size (based
on the number of employees), 46% of the respondents came from
firms with less than 100 employees, 35% of the firms have
between 100 and 500 employees, and the remainder 19% of the
respondents came from large manufacturing with over 500
employees. We also identified the process type of the sampled
firms following Hayes and Wheelwright’s (1979) classification.
32% of the firms used assembly line, 27% batch, 3% cellular, 20%
job shop, and the rest 18% project.
In terms of the position of the respondents, nearly half of the
respondents (45%) held a position as operations managers, 27%
supply chain/logistics managers, 18% procurement/purchasing,
and 3% customer services managers.
4.2. Measures
Most items used to build the scales in this study were adapted
from the study by Chen and Paulraj (2004) to ensure their content
validity. A 7-point Likert scale was used to provide responses. For
long term relationship, information technology, information shar-
ing, and logistics integration, the scales ranged from 1 (strongly
disagree) to 7 (strongly agree). We retained the original construct
names, except for information sharing which Chen and Paulraj
(2004) originally labeled as communication. We excluded one
item from the original scale of Logistics Integration (i.e. ‘‘Informa-
tion and materials flow smoothly between our suppliers and us’’)
for the reason that the item includes both information and
materials flow which contrasts to our framework which not only
distinguishes them but also examines their relationships. The
measure for operational performance comprises four key compe-
titive dimensions in operations, namely quality, delivery, flex-
ibility, and cost. In this regard, the respondents were asked to
assess their performance relative to the best competitor in the
market with the scale ranging from 1 (weakest in the industry) to
7 (strongest in the industry). The items used in this study can be
found in Table 1.
5. Data analysis
5.1. Scale validity and reliability
We used confirmatory factor analysis to simultaneously validate
the measures of all variables used in this study. The results of the
confirmatory factor analysis and the Cronbach’s alpha are presented
in Table 1. The items loaded significantly on their respective
constructs. The item loadings and the overall model fit results
suggest acceptable unidimensionality and convergent validity for
the measures (Carmines and McIver, 1981; Bollen, 1989; Bagozzi
et al., 1991; Hoskisson et al., 1993). Cronbach’s alphas suggest
satisfactory reliability of the five constructs (Nunnally, 1978).
518 D. Prajogo, J. Olhager / Int. J. Production Economics 135 (2012) 514–522

Table 1
Scale validity and reliability.

Scales Items Loading Cronbach’s

Paths alpha

Long term relationship We expect our relationship with key suppliers to last a long time 0.71 0.88
We collaborate with key suppliers to improve their quality in the long run 0.79
The suppliers see our relationship as a long-term alliance 0.87
We view our suppliers as an extension of our company 0.86

Information technology There are direct computer-to-computer links with key suppliers 0.76 0.87
Inter-organizational coordination is achieved using electronic links 0.91
We use information technology-enabled transaction processing 0.85
We have electronic mailing capabilities with our key suppliers 0.50
We use electronic transfer of purchase orders, invoices, and/or funds 0.55
We use advanced information systems to track and/or expedite shipments 0.62

Information sharing We share sensitive information (financial, production, design, research, and/or 0.64 0.84
(communication) competition)
Suppliers are provided with any information that might help them 0.75
Exchange of information takes place frequently, informally, and/or timely 0.84
We keep each other informed about events or changes that may affect the other party 0.77
We have frequent face-to-face planning/communication with our suppliers 0.60

Logistics integration
Inter-organizational logistic activities are closely coordinated. 0.76 0.93
Our logistics activities are well integrated with suppliers’ logistics activities 0.89
We have a seamless integration of logistics activities with our key suppliers 0.89
Our logistics integration is characterized by excellent distribution, transportation, 0.85
and/or warehousing facilities
The inbound and outbound distribution of goods with our suppliers is well integrated 0.77

Performance Performance of our final products 0.48 0.64

Speed of deliveries 0.52
Volume or capacity flexibility 0.62
Degree of product variety 0.54
Production costs 0.47

w2 ¼ 397.26, df¼ 260, RMSEA ¼ 0.048, NFI ¼ 0.936, NNFI¼0.970, CFI¼ 0.974.

The slightly lower than standard acceptable value of Cron-
bach’s alpha for performance ( o0.7) is interpreted such that
performance is indeed composed of multiple dimensions or
elements. Such disparate measures as quality, delivery, flexibility,
and cost performance contributed to this construct, and this could
suggest that some firms (often) specialize or focus to excel in only
a subset of these performance dimensions.
5.2. Common method variance and discriminant validity
We used Harman’s single-factor test to check for common
method variance (Podsakoff and Organ, 1986). This test was
conducted using principal component analysis and loading all
26 items on one factor. The test checks if one single factor would
emerge from factor analysis, which would point towards the
presence of common method bias. The factor analysis indicated
that less than 25% variance was extracted and that half of the
items suffered from poor factor loadings, well below 0.5. These
results suggest that common method variance was not a sig-
nificant problem in the data set.
As an additional check, we conducted discriminant validity
analysis to examine if the explanatory and the dependent constructs
significantly overlap each other. As suggested by Venkatraman
(1989), discriminant validity was established by conducting Con-
firmatory Factor Analysis (CFA) on each pair of the constructs in this
study. For each pair, CFA was conducted twice. The first CFA allowed
the correlation between the two constructs to be freely estimated.
The chi-square value of this model was estimated. In the second CFA
the correlation between the two constructs was fixed to 1.0, and the
chi-square value of this model was estimated. If the difference
between the chi-squares obtained from the first and second CFA (i.e.
Dw2) is greater than the chi-square value at the degree of freedom of
1 and significance level of po0.01 (i.e. 6.64), this provides a
reasonable evidence of discriminant validity of the constructs
(Ahire et al. 1996). With five constructs incorporated in this study,
we conducted ten chi-square tests. The values of Dw2 for all tests
confirm the discriminant validity of the constructs and lend further
evidence towards the lack of common method variance.
5.3. Structural model
We present the results of the structural equation model (SEM)
in Fig. 2. The ratio of w2 (497.14) to degrees of freedom (309) is
less than the recommended value of 3.0 for satisfactory fit of a
model to data (Carmines and McIver, 1981; Bollen, 1989; Hair
et al., 1998). In line with the prescriptions (Mulaik et al., 1989),
the fit indices (NFI¼0.923; NNFI¼0.963; CFI¼0.967) and the
Root Mean Square Error of Approximation (RMSEA¼0.051 with
90% confidence interval 0.043–0.060) are deemed acceptable. We
included organizational size (in terms of number of employees)
and process type (ranging from assembly line to project) as
control variables for operational performance and found no
significant effect on operational performance (  0.00 and  0.08,
respectively, both with p4 0.05).
The results of the six hypotheses are outlined below.
H1: Logistics integration has a positive relationship with
performance. This hypothesis is supported, as the parameter
estimate (0.26) is significant.
H2: The intensity of information technology connection
between firms and their suppliers has a positive relationship
with logistics integration. This hypothesis is supported, as the
parameter estimate (0.38) is significant.
H3: The intensity of communication between firms and their
suppliers has a positive relationship with logistics integration.
 D. Prajogo, J. Olhager / Int. J. Production Economics 135 (2012) 514–522
Information integration
Information
0.25* technology
Long term
relationship
0.53* Information
sharing
* The path is significant at the 0.01 level.
χ 2 = 497.14 df = 309 RMSEA = 0.052
Fig. 2. Results of path analysis.
This hypothesis is supported, as the parameter estimate (0.39)
is significant.
H4: Long term relationship with suppliers has a positive
relationship with information technology connection between
firms and their suppliers. This hypothesis is supported, as the
parameter estimate (0.25) is significant.
H5: Long term relationship with suppliers has a positive
relationship with communication between firms and their
suppliers. This hypothesis is supported, as the parameter
estimate (0.53) is significant.
H6: Long term relationship with suppliers has a positive
relationship with performance. This hypothesis is supported,
as the parameter estimate (0.26) is significant.
5.4. Competing structural model
For a confirmatory purpose, we tested a competing model by
adding three paths which were not estimated in the tested model;
namely long term relationship-logistics integration, information
technology-performance, and information sharing-performance.
The fitness indices (w2 ¼492.63, df¼306; NFI¼0.923; NNFI¼0.963;
CFI¼0.968 and the RMSEA¼0.052) suggests that there is no
significant improvement on the original model. This is indicated
by the increasing ratio between the chi-square and degree of
freedom. Moreover, the three added paths in the competing model
were found to be non-significant at 5% level, confirming our a priori
model which did not include them.
6. Discussion of the findings and their implications
This study contributes to the research stream on logistics
integration by investigating the relationships between long term
relationships, information integration, logistics integration, and
competitive performance. In general, the results of this research
provide empirical evidence that effective external logistics inte-
gration is engendered by long term relationships and information
integration. Specifically, this study contributes to supply chain
studies with the following respects.
First, it demonstrates that the integration of material flow
needs to be underpinned by information integration. In this way,
the supply chain (material flows from suppliers) will be neatly
guided by the demand chain (information flows from customers).
This finding is consistent with previous studies which suggested
that the key to building a seamless supply chain is by establishing
data and information connection at the supply chain interface. By
integrating the supply chain information, supply chain partners
519
0.26*
0.38*
Logistics 0.26*
Performance
integration
0.39*
NFI = 0.923 NNFI = 0.963 CFI = 0.967
can virtually work as a single entity which will enable them
together to respond to market’s demands and to create best value
for customers. The importance of having material and information
integration has provided both opportunities and challenges for
business firms today. The increasing rate of competition, custo-
mer expectations, and market’s dynamic has increased the supply
chain uncertainty which poses greater risks for companies. In
addition, operational activities have become more fragmented as
firms get more focused on the core competence and relinquish the
non-core activities to their suppliers whose locations could be
geographically dispersed. This trend calls for the need for building
a solid integration mechanism between business entities of
the supply chain members underpinned by accurate and timely
information.
Second, this study also highlights the need for observing the
two aspects of information integration which have been
addressed separately in previous studies on supply chain. Our
findings indicate that both IT capabilities and information sharing
have a relatively similar effect on logistics integration, signifying
their equal importance. The balance between technical and
attitudinal aspects of supply chain information management
highlights the integration between hard and soft aspects of
management. This issue is important since many firms are
primarily attracted by the hard factors which are relatively easy
to acquire (as long as the firm has funds) and feel confident that
hard technologies will deliver the expected results. Studies on
supply chain integration, however, have shown that the soft
aspects (i.e. building good communication and trust for informa-
tion sharing) of information integration are the areas where many
firms still struggle (Arshinder and Deshmukh, 2008). Further
analysis from our data indicate a low correlation (r¼0.17 at
po0.05) between IT and information sharing, suggesting that
the improvement of one will not automatically and significantly
improve the other. This result suggests that firms cannot assume
that because they are technically connected, they are also socially
connected. Management need to build both aspects before they
can see the real benefits derived from supply chain information
integration.
Third, this study demonstrates that long term supply chain
relationships help foster collaborative behaviors which are trans-
lated into various forms, including information integration. As
mentioned earlier, information integration cannot be achieved
unless the relationship between supply chain partners goes
beyond trading (transactional) relationships. The risk of putting
huge investment in IT and sharing sensitive information is a
serious hindrance which can only be taken when firms have a
strategic and long-term relationship. At the same time, the
520 D. Prajogo, J. Olhager / Int. J. Production Economics 135 (2012) 514–522
effective use of information integration is also determined by how
well firms understand the exchanged information, and this can
only be achieved through a learning process over a long period of
time. Cagliano et al. (2005) found that the level of the use of
information technologies and sharing information in supply
chains was determined by the level of strategic relationship
between supply chain partners. This relationship determines
whether the information connection (e.g. e-business) is used
simply for tactical (contingent) or strategic purpose. The other
issue related to supplier relationship is that establishing long-
term partnership indicates that both supply chain parties have
developed mutual trust aiming for achieving mutual benefits
from their relationships. Such mutual benefits have been instru-
mental in determining the effects of information integration as
shown in a number of studies (see for example, Ballou et al., 2000;
Lambert and Cooper, 2000).
Fourth, the study also demonstrates the direct effect of long
term relationships on competitive performance which is not
mediated by information integration and logistics integration.
Such practice as joint quality improvement program is one of the
examples which contribute to supply chain performance. This
finding reinforces the importance of network capability in addi-
tion to internal capability of firms. According to the relational
view theory (Dyer and Singh, 1998), firms need to complement
their internal capabilities with other capabilities which they
cannot build internally in order to achieve competitive advantage.
The effective way to access and exploit such capabilities is by
building strong and long-term relationships with their supply
partners who own them. This finding therefore suggests that
while supply chain integration in terms of both information and
materials are important parts of the overall relationship with
suppliers, they alone will not maximize the benefits which firms
can derive from the suppliers.
7. Limitations and further research
A number of limitations of the current study can be noted, as
well as some directions for future research. Any study is limited
to the factors that are included. We included factors identified in
the literature on supply chain integration, capturing information
flow, product and material flows, and long term relationships
between supply chain partners as suggested by Handfield and
Nichols (1999). While studying the integration of information and
material flows between supply chain partners and noting sig-
nificant effects on performance, other factors not included in this
study may exist that may have a positive impact on performance.
We controlled for firm size and industry, which had no significant
effect in this study. However, future research may want to control
for other effects that may be present in other situations, e.g.
between manufacturers of consumer goods and industrial goods.
In the light of supply chain integration concept, logistics and
information integration originally reflect two interrelated forms of
integration which flow in opposite directions (i.e. forward and
backward, respectively). Forward integration is concerned with the
physical flows of materials from suppliers to manufacturers which
we refer to logistics integration. On the other hand, backward
integration is concerned with the coordination of information
technologies and the flows of information from manufacturers to
suppliers.
As clarified from the beginning, this study assumes that
information and material flow in opposite directions within
supply chain pipeline with material having forward flow while
information having backward flow. However, today the flows of
both information and material have expanded into both direc-
tions. The development of the concept of reverse logistics denotes
that the material flow is now going back backward as used
finished goods are delivered from the point of consumption to
the point of origin for possible recycling, remanufacturing, or
disposal (Sarkis, 2003). In supporting the reverse logistics, the
flow of information also needs to go forward as manufacturers
need to provide clear product information to make recycling
processes easier when the product’ s life ends (Ferguson and
Browne, 2001). Future studies can explore the bi-directional flows
of material and information which may need a different model of
supply chain integration.
A limitation of this study is the sample population, which 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 generalizability of
the results and to detect potential country effects. Also, in this study
we rely on the perception of the focal firm on the relationships. It
would be beneficial to investigate multiple parties of supply chain
relationships to hear ‘‘both sides of the story’’ concerning issues of
reciprocity and mutual effects.
8. Conclusions
This study shows that both information and material flow
integration are important for supply chain integration, having
significant effects on performance. At the same time, supply chain
integration is a difficult task as it involves many management
aspects in terms of both ‘‘hard’’ and ‘‘soft’’ information exchange
mechanisms in support of the logistics integration activities con-
cerning the physical material flow between the two parties. Such
complex issues can only be managed where there is a long term
relationship between supply chain partners. This study, therefore,
reinforces the importance of building long term relationships with
suppliers which have been promoted since the emergence of the
quality management era. All in all, competitive performance is
positively affected by all constructs included in this study; either
directly or indirectly. This suggests that the integration of supply
chain partners is multi-faceted, and that many competencies act
complementary to achieve a higher level of performance.
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