The Impact of Supply Chain Ope (1) (Cd6)

The Impact of Supply Chain Operational Capabilities ISSN 1985-692X
Research Received 01/03/2010

Accepted 09/08/2010
Paper SAFA = 0.70
Chief Editor: Mohammad Safa

Special Issue Editor: Keng-Boon Ooi& Alain Yee-Loong Chong
The Impact of Supply Chain Operational

Capabilities on Business Performance of Small and
Medium Enterprises in Malaysia: A Preliminary
Analysis
ab
SitiNurAtikahZulkiffli ♣
aSydney Business School, University of Wollongong, Australia
bFaculty of Management and Economics, Universiti Malaysia Terengganu, Malaysia
Abstract: This study determines the underlying determinants of supply chain

operational capabilities (SCOC) and empirically tests a framework that can be used
to identify the relationship among those determinants and business performance
with special emphasis on small and medium enterprises (SMEs) in Malaysia. The
study is based on a quantitative approach using a questionnaire survey from 135
Malaysian manufacturing SMEs. The empirical findings provide evidence on the
relationship between structural and technological capability with business
performance. However, it was found that there was no support on the impact of
logistical capability on business performance. The most critical limitation of this
study was its narrow focus on the manufacturing sector in Malaysian SMEs, thus,
preventing the generalisation to other sectors and also to other countries that may
gain the benefits from the responsiveness of SCOC. This study might offer several
practical implications which could have some practical values for SMEs’
practitioners and managers particularly in Malaysia.
Keywords: Supply Chain Operational Capabilities, Small and Medium Enterprises,

Business Performance, Malaysia
INTRODUCTION
The Malaysian Government appreciates the importance of small and medium-sized

enterprises (SMEs) to the development of the Malaysian economy. A number of
♣
snaz167@uowmail.edu.au
International Journal of Business and Management Science, 3(2): 147-168, 2010 1

agencies – for example, the Small and Medium Enterprise Corporation (SME
Corp), SME Bank and the Ministry of International Trade and Industry (MITI) –
have been created as part of the Government’s various initiatives, programmes and
strategies to promote and foster Malaysian SMEs. The awareness of SMEs is also
important to recognise andexploit the capabilities which existed in the industry.
However, sometimes SMEs managers donot realise the existence of their
organisation’s capability or they do not know how to make use of such
capabilities. Therefore, this paper attempts to highlight the existence of capabilities
in the operations activities of Malaysian SMEs.
The studies of capability have been carried out for many years ago to identify
its significance to an organisation (Ogulin, 2003; Ting, 2004). Capability can be
defined as internal and external organisation skills, resources and functional
competencies which are utilised within firms to meet the requirement of the
changing environment (Teece, Pisano and Shuen, 1997). Capabilities are generated
by sets of skills and resources to contribute to value-added tasks (Hart, 1995).
Fundamentally, capability and asset have a mutual connection with each other.
However, capability is slightly different from asset, in terms of its inability to
provide monetary value, tangible plants and equipment to a firm, and also it cannot
be traded and imitated (Dierickx, Cool and Barney, 1989; Day, 1994). Capability
can also be referred as “the exploitation of specific practices to attain performance
gains” (Narasimhan, Swink and Kim, 2005:1014). It can be concluded that
capability and practice are different in several aspects because various plants are
feasible to invest equally in practice, but they do not have the same degree of
capability to achieve a good manufacturing performance outcome (Narasimhan et
al., 2005).
In terms of supply chain activities, capability is linked to the organisation’s
ability in the aspects of handling correct orders on time, communicating and
providing information with other channel members as accurate as possible,
handling and filling orders using web-based system, managing return product, and
also establishing global distribution penetration (Cho, Ozment and Sink, 2008). As
classic examples, there are three premier companies that recognise the importance
of managing capability effectively; Wal-Mart which has an expertise in inventory
replenishment and Honda which has skills in managing their dealers shows that
organisation could improve its strong business process if it realises and
understands its capability (Stalk, Evans and Shulman, 1992). Toyota has also
designed the Toyota Production System which is able to assist the company to
achieve a good performance indicator (Narasimhan et al., 2005).
Most of the empirical studies have rarely focused on the supply chain issues in
Malaysia compared to other developed countries such as US and Japan (Closs,
Goldsby and Clinton, 1997; Kim, 2006b). Additionally, most of the related studies
show a positive effect with performance (Ellinger, Daugherty and Keller, 2000;
Morash, 2001; Corbett and Claridge, 2002; Cho et al., 2008). However, there is
still inadequate evidence or result to conclude that such capabilities (structural,
logistical and technological) have the same effect between huge and smaller
geographical areas such as between US and Malaysia.
2 International Journal of Business and Management Science, 3(2): 233-258, 2010

Therefore, this paper aims at identifying the weaknesses of operating activities

in Malaysian SMEs. To manifest the preceding work, this paper endeavours to
analyse “which operational capabilities affects the business performance of SMEs
in Malaysia” by presenting some research work that is well grounded in theory and
provides evidence through quantitative analysis. In short, this paper provides an
initial analysis on the role of SCOC in Malaysian SMEs.
This paper is organised as follows: the first part focuses on the discussion on
the small and medium enterprises (SMEs) in Malaysia, followed by literature
analysis on the determinants of supply chain operational capability (SCOC) and
business performance of SMEs. Then, it will be followed by the discussion on the
development of research model and hypotheses, methodology, data analysis and
finally in the conclusion, implications and further recommendations will be
presented.
SMALL AND MEDIUM ENTERPRISES IN MALAYSIA
The Malaysian economy has been geared by the rapid development of small and
medium enterprises (SMEs) since the 1970s. It represents an important fragment to
the economic growth and has become a significant role to the whole production
network, producing high-value-added parts and components and improving itself
as a downstream supplier or/and service provider to larger and developed
organisations (MOF, 2003; Munusamy, 2008).In the 1990s, Malaysia has started
to transform its economics basis from a commodity-based producing nation to a
manufacturer of industrial products which focused on the export market. This
transformation wasled by SMEs through backward and forward integration
activities to strengthen its industrial linkages (Sohail and Hoong, 2003).
The definitions of Malaysian SMEs arebased on the sectors which have been
approved by the National SME Development Council (NSDC). The bases of the
definition are annual sales turnover and number of employees (Table 1).
Table 1:Definition of SMEs in Malaysia

Sector Category Definition
Manufacturing, 1. Micro-EnterprisesAnnual sales turnover less than
manufacturing- RM250,000*ORfewer than 5
related services employees
and agro-based 2.Small Enterprises Annual sales turnover between
industries RM250,000*and RM10 million OR
employees between 5 and 50
3. Medium Enterprises Annual sales turnover between RM10
million and RM25 million*OR
employees between 51and 150
Services 1. Micro-Enterprises Annual sales turnover less than
(including ICT) RM200,000*ORfewer than 5
and primary Agri. employees

Table 2 continues.....
Sector Category Definition
2.Small Enterprises Annual sales turnover between
RM200,000*and RM1 million OR
3. Medium Enterprises Annual sales turnover between RM1
million*and RM5 million*OR
Note: Current rate of RM1 equivalent to USD 0.31
Source: SMIBD (2008, p. A87) and SMIDEC (2008)
This paper focused primarily on the evolution of manufacturing sector in

Malaysian SMEs. As a vital component in the Ninth Malaysia Plan (9MP), this
sector is expected to generate a robust and sustainable competitiveness of the
Malaysian economic, with an average growth rate of 6.7 percent per annum and
the manufacturing share to gross domestic product (GDP) is projected to increase
to 31.8 percent(EPU, 2006). Malaysian SMEs are the leading force in providing
employment opportunity as they provide over 56 percent of the total workforce in
more than 500,000 SMEs in Malaysia;contributing to 37 percent of Malaysia’s
GDP(NSDC, 2008). In the supply chain perspective, Malaysian SMEs are
recommended to improve their inside and out-side capability, capacity and
flexibility to meet the changes in demanding patterns of domestics and
international market, including the competition from regional firms. This
improvement may contribute to the firms’ competitive advantage (NSDC, 2008).
Malaysian SMEs also encounter similar problems as faced by other countries
that could impede the value of competitiveness and efficacy. Malaysian SMEs
need to be more concerned in several factors: access to export market, inadequate
technological capability and low adoption in enabling technologies (EPU, 2006).
Table 2lists other major problems encountered by Malaysian SMEs.
Table 3:Problems of Malaysian SMEs

No. Description
i. Lack of awareness and knowledge in obtaining funds from financial
institutions and the Government
ii. Lack of human-capital development
iii. High level of competition in the international market
iv. Lack of access to ICT and technology development
v. High level of bureaucracy in government agencies
vi. Very low allocationsto research and development
vii. A substantial orientation towards domestic as opposed to international
markets
Source: Adapted from Saleh and Ndubisi(2006)

The above-mentioned problems point out challenges that may affect the
performance of Malaysian SMEs in terms of: strengthening the capacity and
capability to compete in global market; competing with other producers (for
example, China and India); expanding firms’ capabilities in meeting with the
challenges of market liberalisation and globalisation; improving firms’ capacity for
technology management and knowledge acquisition; increasing productivity and
output quality; entering new markets; strengthening relevant skills to enter new
business environments; getting extensive access to financial and capital facilities
and venture funds in initial or mezzanine financing; reducing the high cost of
infrastructural and technological development; and gaining more general
knowledge and information (SMIDEC, 2002; MITI, 2006; Saleh and Ndubisi,
2006).
The existence of problems and challenges were more critical during the
economic crisis in 2008-2009. In 2008, the Small and Medium Industries
Development Corporation (SMIDEC) and the Federation of Malaysian
Manufacturers (FMM) worked together to conduct a survey which aimed at
alleviating the adverse impact of the economic crisis on SMEs. The result of the
survey concluded that for the Fourth Quarter (Q4) of 2008, more than nine percent
of the respondents indicated that their sales-export and sales-domestics had been
badly affected by the crisis (SMIDEC, 2009). This result proved that the economic
crisis tends to create and develop some challenges for SMEs to deal with.
The next section will present a brief discussion on the problems and challenges
which are related to the operational capabilities of SMEs in Malaysia.
THE DETERMINANTS OF SUPPLY CHAIN OPERATIONAL

CAPABILITIES
Three determinants have been categorised under the supply chain operational
capabilities (SCOC): structural capability, logistical capability and technological
capability. Many literatures discussed on some issues related to these capabilities
(Handfield and Withers, 1993; Morash, 2001; Tracey, Lim and Vonderembse,
2005; Kim, 2006a; Kim, 2006b; Zulkiffli, Jie and Perera, 2009). In this study,
those determinants are analysed from the Malaysian SMEs’ perspectives.
SCOCcan be defined as “the building blocks for supply chain strategy and a source
of competitive advantage for firm’s success”(Morash, 2001:37).It involves the
entire supply chain activities including core business and upstream and
downstream business (Yong, Shi-hua and Feng-mei, 2007), and contributes to the
development of competitive advantage and business performance of a firm (Tracey
et al., 2005). The next section will offer a detailed discussion about the
significance of SCOC which may affect the development of inside and outside SC
activities in Malaysian SMEs.

Structural Capability
Structural capability is considered to be one of the enablers for SCOC.

Sometimes it is referred to as “people”, “human resources” or “human capital”.
Indeed, Zairi(1998) emphasises that people are the most important asset in an
organisation, and its success depends more on its people than on its products.
A firm’s success depends on both internal and external structure. According to
Bowersox and Daugherty (1995:71), internal structure is defined as “the allocation
or assignment of roles and relationships within the firm”. This structure controls
several functional tasks such as sales/marketing, accounting,
manufacturing/operations and logistics; these tasks are derived from the firm’s
capabilities and core competencies and are the backbone of its ability to develop a
good performance index.The external structure, by contrast, aims to maintain a
good alliance between trading partners or channel members and the firm
(Bowersox and Daugherty, 1995). In the Japanese environment, the management
structure is based on extensive training and intensive supervision of front-line and
marketing personnel (Allen, Helms, Takeda and White, 2007). These factors
enhance each employee’s skills development.
As indicated, a firm’s success is primarily generated by its people. For that
reason, managers are encouraged to possess a good knowledge of how to deal with
other people both inside and outside of their organisation (Handfield and Withers,
1993). Similarly, firms must also train managers to direct their employees’
energies towards desirable goals and achievements (Kumagai and Kleiner,
1995).Scholars also concern on the “empowerment” factor to improve the
structural capability (Pastor, 1996; Pechlivanidis and Katsimpra, 2004). As a
classic example, Toyota has implemented the empowerment aspect in an attempt
to achieve its strategic and operational goals (Mills, 1995).
In the Malaysian business environment, most companies, including SMEs, rely
on their people to produce a good product. Nearly 40 percent of the problems
faced by SMEs owners or managers, as reported by Saleh and Ndubisi(2006),
show that difficulties with human resource management (HRM) and a shortage of
skilled workers hinder firms’ development (Sayuti, 2007). This is supported by the
study of Omar (2006) and Ting (2004), which describes these issues as pivotal for
Malaysian SMEs to address. Some researchers encourage SMEs to use electronic
human resource management systems (Hooi, 2006) as a way to ultimately improve
service to customers.
Logistical Capability
Since the 1990s, many scholars in the US and other developed countries
realised the importance of studying logistical capability. There are several
discussions that are related to this capability as a key factor in the operation of
supply chain activities to obtain and sustain competitive advantage (Yong et al.,
2007). These discussions are inspired by a study of McGinnis and Kohn (1993)
that focuses on logistics strategy within the US manufacturing firms.

Ellinger et al. (2000) state that the relationship between logistical capability and
performance incorporates integration with the firm’s other functional areas, such
as marketing, finance and operations. Most scholars agree that performance and
logistical capability relate to each other in the context of developing both
traditional and new markets (Morash, Droge and Vickery, 1996; Ellinger et al.,
2000; Cho et al., 2008). The contribution of logistics to the company’sperformance
is also influenced – and, ideally, improved – by collaboration with third-party
logistics (3PL) providers or logistics outsourcing (Cho et al., 2008).
Nowadays, the growth of 3PL becomes the most prominent approach in
Malaysia. According to Sohail and Sohal(2003), most of the companies are
satisfied with the services provided by 3PL as it encourages positive developments
within the organisation. Most of them utilise 3PL to enter international market
because it gives benefits in terms of cost and delivery lead time or time saving
compared to a good customer service(Sohail, Bhatnagar and Sohal, 2006; Mustaffa
and Potter, 2009).
However, in the Malaysian context, one of the problems which is encountered
by SMEs is lack of foreign channels of distribution (Zain, Khalili and Mokhtar,
2007). Indirectly, it contributes to several problems (as could be referred in Table
2) and also to the difficulty to access the export market (EPU, 2006). Therefore,
firms should concern on a good logistics activity for developing a good channel
distribution (Gill and Allerheiligen, 1996), setting up a coherent distribution
planning (Waller, 1995) and creating a smooth delivery process (Kallio, Saarinen,
Tinnila and Vepsalainen, 2000). Hence, logistical capability could be improved
once firms employ an international production-sharing strategy in their activities
(Fawcett, Stanley and Smith, 1997). In line with this, according to the report
provided by Business-in-Asia.com (2007), logistics infrastructures in Malaysia are
regarded as among the best in ASEAN region for each mode: port, airport, railway
and land. Thus, SMEs should explore and fully-utilise these infrastructures to
boost their ability in logistical activities.
Technological Capability
The implementation of technology aspect is imperative for each firm. As such,

another focus of this paper is on the development of technological capability as
part of SCOC in Malaysian SMEs. It focuses on the abilities of productive
enterprises to handle industrial technologies and the changes in technology (Lall,
1993). The concept of technology has been widely studied from the viewpoints of
economics, sociology, anthropology, management, etc. (Zhao and Reisman, 1992).
Handfield and Withers (1993) claim that technological capability can be
implemented differently depending on the situation. For example, the application
of technological capability differs in Hungary and China, as they also differ in
their government policies, technological knowledge base, skills and economics
level. Similarly, firms in Malaysia may also face changing circumstances,
particularly when the Government changes its policies.
Many studies consider information technology (IT) as a function of
technological capability. In general, the purpose of IT is to increase firms’

capability while decreasing costs (Closs et al., 1997). The use of IT can be a
logistics resource and a competitive weapon to achieve world-class logistics
capability; it also allows a firm to rely less on local scientific and technological
capability. Other factors, such as type and size of firm, also play an important role
in IT usage. IT usage rates differ between small and large firms, and between
socialist and capitalist firms (Handfield and Withers, 1993; Dawe, 1994).
Smallfirms should focus on upgrading to the latest technology, making use of their
ability to adjust more quickly than larger firms (Kennedy and Hyland, 2003).
However, several factors inhibit firms from implementing IT successfully: (i) IT is
seen as very complicated and too complex; (ii) it requires a large investment; (iii)
firms can fail to determine their IT strategy and outsourcing; (iv) firms may lack
technological knowledge development (Handfield and Withers, 1993; Dawe,
1994).
Malaysian SMEs are deficient in the development of technological capability
and also have low adoption of enabling technologies (EPU, 2006). In relations
with those issues, Malaysian SMEs need to upgrade their technological capability
to be more competitive in the international market (Saleh and Ndubisi, 2006). In
supporting the view, Sayuti(2007) said that Malaysian SMEs should focus on
developing a learning organisation by continuously adopting technology in their
operations system in order to be more competitive in today’s global market. The
failure to identify capability in technology will contribute to the difficulty in
developing new products or production techniques, thus, it will lead to the lack of
experience in international exposure and management of Malaysian SMEs
(Munusamy, 2008).
BUSINESS PERFORMANCE OF SMALL AND MEDIUM ENTERPRISES

(SMEs)
Generally, business performance can be described as “the operations ability to

satisfy the desires of the company’s major stakeholders” (Smith and Reece,
1999:153). It should be assessed to achieve organisational goals by measuring its
success or failure and indeed can be defined in several ways. For instance,
performance measures may be based on profit, return on investment and turnover
or number of customers (Wood, 2006). The enlarged domain of business
performance related to marketing and finance, for example, profitability, market
share and sales growth (Feng, Terziovski and Samson, 2008). Business
performance can also be measured using two quality variables: design quality and
product improvement (Laura, Shawnee and Cornelia, 1996).
However, there is a debate regarding the usage of return on investment (ROI)
and profit to measure the financial performance. If there is a change in operational
activity, ROI will be affected and resulted in a poor performance measurement
(Simpson, Padmore, Taylor and Frecknall-Hughes, 2006). In the same way, profit
is also not a good performance indicator for measuring SMEs, which will follow
the remuneration policy that reduces profit and tax obligation (Simpson et al.,
2006).

The current study assesses the BPM system introduced by Mann and Kehoe
(1994). This system analyses and investigates the effect of quality activity and all
functions at high and low levels of activity, and as an effective communication
tool that indicates any expected effects of quality activity for every function in an
organisation.The system is also appropriate for both quantitative and qualitative
research methods. According to their system, business performance is categorised
into two broad areas: strategic business performance (SBP) and operational
business performance (OBP). SBP measures are concerned with the performance
evaluation of organisations in terms of their major corporate goals, meanwhile,
OBP measures on a daily or weekly basis the everyday running of the
organisation.
RESEARCH MODEL AND HYPOTHESES
Based on a review of literature, it is a fundamental proposition of this study that

the three determinants of SCOC are linked to business performance of Malaysian
SMEs. As a result, a conceptual model is developed to address the research paper
as shown in Figure 1.
A firm’s performance can be differentiated accordingto the characteristics and
utilisation focus of SCM practices (Kim, 2006b) and as an important role, SCOC
can lead to the development of performance measurement (Kim, 2006a). Most
scholars have verified that logistical capability has a significant impact on
performance (Clinton and Closs, 1997; Morash, 2001; Liu and Ma, 2005; Cho et
al., 2008). However, the development of different logistical capabilities is required
in order to gain the specific performance objectives (Morash et al., 1996) as well
as technological capability, where it could not stand alone in contributing to the
firm’s performance(Ward, Leong and Boyer, 1994). Indeed, manufacturing system
that involves human resource and technology should be designed to focus on
capabilities. It must also be proactive in order to meet customer needs and improve
the firm’s performance (Ward et al., 1994). However, the small-firm organisation
structure has a weak influence on business position and profitability (Pelham and
Wilson, 1996). These three determinants can contribute to the firms’ competitive
advantage and business performance (Tracey et al., 2005; Cho et al., 2008). For
these reasons, the hypotheses are:
H1: The greater the structural capability of a firm, the better business
performance of Malaysian SMEs.
H2: The greater the logistical capability of a firm, the better business
H3: The greater the technological capability of a firm, the better business

Supply Chain Operational

Capabilities (SCOC)
Structural Capability H1 (+/-)
H2 (+/-)
Logistical Capability Business Performance
Technological Capability H3 (+/-)
(Independent Variables) (Dependent Variable)
Figure 1: Research model of the study
METHODOLOGY
SMEs firms were randomly selected from the directory of the Federation of
Malaysian Manufacturers (FMM) which was recorded in 2008. In 2008, the
directory listed 2,225 manufacturing firms of varying sizes. Firms were chosen
from the 16 sub-sectors of manufacturing industry in Malaysia such as electrical
and electronics, machinery, plastics andfood andbeveragewhich had been
classified by the SME Corporation (SME Corp). The SMEs are located throughout
Malaysia including Sabah and Sarawak. SMEs selected in this research
represented by 1,402 firms based on the definition provided by the SME Corp.
Every firm was represented by one key informant only. The key informant might
be a chief executive officer, owner, managing director, supply chain manager,
logistics manager, operations manager or marketing manager.
The primary data collection method for this research was quantitative method
which focused on survey questionnaire. It was designed to meet the standard of
SMEs industry in Malaysia. The process of questionnaire development began with
an extensive analysis on the related literature. Most of the scales which were used
in this research have been adapted from previous studies. However, most of the
previous research is based on the Western context and a few research studies
focused on the Eastern context especially the ones that are related to SMEs
perspectives. This research has also undertaken a pilot study in order to examine
the “reliability” and “validity” of the questionnaire content (Thomas, 1996). The
simple pilot study was conducted to a small group of 12 participants consisted of
six academics and six industry practitioners. This type of group was chosen based
on the study of Cho et al. (2008) and Ellinger et al. (2000). The implementation of
this pilot study was to ensure that the final survey instrument of questionnaire will
be clearly understood by the participants and to identify the exact time frame to
complete the questionnaire. In respect to these reasons, the participants were asked
to evaluate the questionnaire based on several aspects; bias, clarity, lucidity,

ambiguous questions and the relevancy to the Malaysian SMEs business context.
Practically, the pilot study was also important for modification of the questionnaire
from academic language to business language (Sahakijpicharn, 2007). In addition,
the participants were asked to give comments and opinions on the instrument in
terms of time duration, sequencing and sentences.
After the pilot study evaluation, the data were collected through the
questionnaires sent to one of the top managers for each SME. The questionnaire
sets were transmitted through mail-out either by post or individual visit (Kim,
2006b) in order to cover a wide geographical area, providing low cost and energy
levels and providing a convenience for the key informants (Sekaran and Bougie,
2010). The questions utilised the Likert scale because it comprises statements that
express either a favourable or an unfavourable attitude toward the object of interest
(Cooper and Schindler, 2006), easy to develop, more reliable and could be used
both in respondent-centred and stimulus-centred studies (Emory, 1985). Therefore,
the seven-point Likert scale has been developed based on extant literatures (Kim
and Arnold, 1993; Bontis, Keow and Richardson, 2000; Kathuria, 2000; Moore
and Fairhurst, 2003; Cho et al., 2008; Jusoh and Parnell, 2008). There were seven
responses used in this scale from “extremely low” to “extremely high” for all the
questions of structural capability, logistical capability and technological capability.
However, for business performance instruments, different responses consisted of
“worst in the industry” to “best in the industry” have been applied.
A total of 139 out of 950 questionnaires were returned, which resulted in an
overall response rate of 14.63 percent. This response rate could be considered high
and not uncommon due to the Malaysian business environment. According to
Jusoh and Parnell (2008), Malaysian managers are typically unwilling to
participate and response to mail survey. Of the 139 returned questionnaire, four
were unusable due to several reasons. Successively, three respondents (75 percent)
did not complete the questionnaire and one respondent (25 percent) did not pass
the assessment for determining their appropriateness to be the key informant.
Consequently, 135 or 14.21 percent of usable questionnaires have been considered
to be further analysed.In addition, the overall response rate (14.21 percent) is
considered relatively high as a comparison with similar type of mail survey
research in Malaysia (Abdul-Aziz, Chan and Metcalfe, 2000; Sohail and Hoong,
2003; Jusoh and Parnell, 2008). A majority of the studies showed that 10 to 20
percent of response rate should be accepted (please refer to Table A1 in the
Appendix).
DATA ANALYSIS
This section discusses the outcome of the study in the factor analysis and multiple
regression analysis.

Results
All constructs were measured by items rated on a seven-point Likert scale. All
items for each construct were tested for reliability and validity. Reliability test is
performed to ensure that only items that measure the same concept are included
under each dimension. The reliability of the entire scale under each dimension is
measured using Cronbach’s alpha. The alpha coefficient value can vary from 0.00
to 1.00. The value 0.00 indicates no reliability at all and 1.00 means perfect
reliability. The study required a minimum Cronbach’s alpha value of 0.60 which is
considered low (Singh, 2007) and item to total correlations above 0.30 (Pallant,
2007).
Meanwhile, the principal component analysis (PCA) is utilised to extract
maximum variance from the data set with each component and is also employed
for the purpose of data reduction and summarisation. Indeed, PCA facilitates to
provide a regression equation for an underlying process. It considers each observed
variable as a dependent variable which is a function of the originally observed
variables (Tabachnick and Fidell, 2007). It is conducted to ensure uni-
dimensionality of the scales. Any items load more than two factors or with factor
loadings greater than 0.5 are significant (Hair, Black, Babin and Anderson, 2010).
As a result, two items have been deleted in respect to this concern.
All constructs in this study have recorded a reliability value of more than 0.80
which are desirable, while the items to total correlation, factor loading and
percentage of explained total variance were well above the required threshold
value. Thus, our scales appear to be valid. Table A2(see Appendix) summarises
the results of these analyses for each dimension separately.
To validate the effects of the research variable on SMEs’ business performance,
this study classifies business performance as the dependent variable while
structural capability, logistical capability and technological capability as the
independent variables. Table 3 summarises the results of the multiple regression
analysis to test the impact of these independent variables on business performance.
Table 4: Multiple regression analysis

Independent Variables Standardised Beta t Sig.
Structural Capability 0.400 4.370 0.00*
Logistical Capability 0.141 1.515 0.13
Technological Capability 2.963 2.963 0.04*
R² = 0.472
Note: *p<0.05
As expected, the analysis shows that greater structural capability would lead
towards better business performance for the SMEs’. The multiple regression
analysis explains that structural capability has a positive significant impact on
business performance (p<0.05), which confirms the contribution of human capital
to the firm’s bottom line and therefore H1 is statistically supported by the data.

Meanwhile, the result of the analysis shows that the analysis is insufficient to
support the H2 (p>0.05) and thus, it cannot be said that greater logistical capability
will lead to engender better business performance of the Malaysian SMEs.
On the contrary, the results of multiple regression analysis also confirm that
greater technological capability would generate better business performance for
the SMEs. From the analysis, it was found that technological capability is
statistically significant and positively associated with the SMEs’ business
performance (p<0.05) and this acknowledges the impact of technological
capability to improve firm’s performance in the ever challenging business
environment and thus, H3 is supported.
As a final point, the overall relationship between structural, logistical and
technological capability with business performance is moderate (R-squared =
0.472) and it is quite a respectable result as shown in Table 3.
DISCUSSION AND CONCLUSIONS
In the current business environment, SMEs are still threatened by the same issues
confronted by large firms or MNC firms. Therefore, drawing on earlier works, this
paper has examined, reviewed and analysed studies that address the importance of
SCOC in Malaysian SMEs. This paper may be the first attempt to identify which
operational capabilities contribute to the business performance of Malaysian
SMEs. Besides, the literature review highlights three major SCOC determinants
which are significant to SMEs in Malaysia: structural, logistical and technological
capability. Indeed, most scholars agree that these factors have some impacts on
firm operations at the business level activity.
This paper has provided an empirical justification for a framework that
identifies three determinants of SCOC and has analysed the relationship of such
determinants with business performance in the Malaysian SMEs manufacturing
sector. The data of the study were collected from a sample of 135 manufacturing
SMEs in Malaysia and the research framework was tested using SPSS version 17.
The statistical results support twoout of three hypotheses that represented the
study’s conceptual framework.
Furthermore, H1 pertains to the impact of structural capability on SMEs’
business performance. The empirical result has revealed a positive significant
importance of structural capability on SMEs’ business performance. This result
confirms that the importance of developing human resource in any organisations is
a major building block for structural capability dimension, since it could directly
impact the overall business performance of the SMEs. This result is consistent
with the previous study on the relationship between structural capability and
business performance (Pelham and Wilson, 1996). Since the focus of the study is
on SMEs’ in developing country, particularly in Malaysia, these findings also help
to clarify and confirm to a certain extent, the cause of consistency with the
previous findings that may shed some light on understanding more deeply on the
relationship between these two variables.

H2 represent the association between logistical capability and business

performance. The result shows that the data is inadequate to support the notion of
logistical capability would improve SMEs’ business performance. The approach of
introducing logistical capability in business performance model seems to have
been rejected by the data. However, this stands in contrast withthe experience
within firm where, logistical capability can improve the firm’s business
performance. The plausible explanation for this contradiction could be found in the
newness of Third-Party Logistics (3PL) and other logistical activities in Malaysia.
Given the 3PL and other logistics outsourcing activities which are the latest trend
in Malaysia (Sohail and Sohal, 2003), the Malaysian SMEs may not yet recognise
the linkage between logistical capability and business performance and this should
be exploited even for the unforseen opportunities to acquire the full potential of
such capabilities. As such, this possibility might affectthe resultin this dimension;
hence the need for further empirical studies in the logistic-performance
relationship is suggested.
On the other hand, H3 corresponds to the association between technological
capability and business performance. The empirical result confirms that acquiring
technological capability would enhance business performance of Malaysian SMEs.
This result showed a strong indication that Malaysian manufacturers do
emphasiseon acquiring technological capability in their manufacturing operations.
It also appears that the Malaysian SMEs have taken the full advantage of this
capability after seeing an impact on their profitability, sales growth and the overall
business performance.
In conclusion, this study supports the point of Demsetz(1973) where firms may
have a huge differentiation in their ability to execute an excellent strategy.
This study offers several practical implications which could be practised by
practitioners and managers. Firstly, this study provides all the managers
(especially SC and SMEs-related managers) in Malaysia with a useful tool for
recognising the operational capabilities that exist in their organisation. Secondly,
the empirical data suggests that structuraland technological capability could impact
on the progression of SMEs business performance. However, given the scarcity of
resources faced by the SMEs, it is important for the management to carefully
identify the existence of any capabilities in their organisation before making
decision to upgrade or acquire new operational capabilities since there is a
dimension of SCOC that may not significantly contribute to the overall business
performance.Managers could also be envisaging with the existence of
intermediating variables that may influence the relationship of SCOC and business
performance in the first place. Thirdly, the findings of this study have the
inclination to support the opinion that the execution of SCOC has a significant
impact on the improvement of SMEs business performance. This opinion might be
useful to be implemented in the context of developing countries particularly in the
Southeast Asia region. Thus, researchers can use the findings as a reference to
engender valuable ideas for future studies and at the same time, top managers of
SMEs (regardless from which countries and sectors) may glean the valuable
thought in order to understand and completely utilise their capabilities to improve
business performance.

It should be acknowledged that this study is subject to some limitations. In this

issue, the most critical limitation of this study was the narrow focus on the
manufacturing sector of Malaysian SMEs. Thus, the lack of the generalisation of
findings to other sectors (e.g., service industry) and to any developing countries
may inhibit to the richness of the findings. Furthermore, the data was collected
from single key informants that may contribute to the possible biased response of
this study.
Future research should endeavour to analyse the SCOC in other sectors in
Malaysia and probably in other neighbouring countries such as Thailand,
Indonesia and Singapore. Additionally, future studies may also investigate the
proposed relationship with other determinants of competitive capabilities and the
level of supply chain integration of SMEs particularly in the Malaysian
perspective.
NOTES
1. In 1996, SMIDEC was established to assist SMEs development in Malaysia.

2. In 2008, SMIDEC has taken over the role of the National SME Development
Council (NSDC) Secretariat from Bank Negara Malaysia to coordinate the
policy formulation and SME development programmes.
3. On 1st September 2009, SME Corp was established as a rebranded version of
SMIDEC. It becomes a ‘one referral centre’ to facilitate effective outreach
programmes to SMEs(SMI Malaysia, 2009; SMIDEC, 2009).
ACKNOWLEDGEMENT
The author would like to thank the editors and anonymous reviewers for their
insights. The author would also like to acknowledge the guidance provided by her
PhD supervisor, Associate Professor Nelson Perera. She would also like to
acknowledge Mr. NorAzrinMdLatipfor hisopinionduring the preparation of this
manuscript. However, the author accepts responsibility for all errors and omissions
in this article.
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Appendix
Table A1: Review of research methodologies of previous studies

Study Methodolog Country Unit of Sampl Respons Analytical
y Analysis e Size e Rate Technique
(%)
Lefebvre, Langley, Mail Survey Canada Firm Level 651 12.1 Correlatio
Harvey Lefebvre (one n Analysis
(1992) informant)
Morash et al. (1996) Mail Survey US Firm Level 65 20 Stepwise
(one Regression
informant)
Kathuria(2000) Mail Survey US Firm Level 196 62 Analysis
(multiple of
informants Variance
)
Narasimhan& Das Mail Survey US Cross 322 19 Analysis
(2001) Industry of
(multiple Variance
informants
)
Moore Mail Survey US Firm Level 60 17 Structural
&Fairhurst(2003) (one Equation
informant) Modelling
Weerawardena(2003 Mail Survey Australia Firm Level 326 25.6 Structural
) (one Equation
Sum, Kow& Chen Mail Survey Singapor Firm Level 43 86 Cluster
(2004) e (one Analysis
informant)
Cousins (2005) Mail Survey UK Firm Level 142 58.3 Structural
(one Equation
Hooi(2006) Mail Survey Malaysia Firm Level 60 15 Descriptiv
(one e Analysis
informant)
Kim (2006b) Mail Survey Korea SBU 623 41.8 Structural
and Japan (one Equation
Jusoh& Parnell Mail Survey Malaysia Firm Level 120 12.3 Analysis
(2008) (one of
informant) Variance
Sawers, Pretorius Mail Survey South Firm Level 43 23.9 Logistics
&Oerlemans(2008) Africa (one Regression
informant) Analysis

Table A2: Constructs measurement

Item Factor Cronbach’s Item-total Explained Total
Loading Alpha Correlation Variance (%)
Structural Capability 0.843 56.521

Organisation formalisation 0.771 0.651
Extensive training 0.758 0.682
Subordinatessupervision 0.712 0.607
Interaction degree 0.701 0.497
Human resourcescapability in IT 0.657 0.681
Empowerment 0.538 0.634
Logistical Capability 0.896 52.506

Logistics infrastructure 0.737 0.715
Close location 0.678 0.634
Fast delivery 0.797 0.722
Reliable delivery 0.816 0.749
Low-cost distribution 0.831 0.772
Local distribution coverage 0.672 0.642
Distribution outlets 0.668 0.638
Global distribution coverage 0.615 0.589
Technological Capability 0.861 56.320

Advanced manufacturing technology 0.843 0.657
Information networks 0.719 0.643
Operational efficiency 0.710 0.768
Information sharing 0.705 0.647
Low defect rate 0.704 0.652
Production capacity 0.666 0.617
Just-in-time strategy 0.540 0.505
Business Performance 0.916 68.412

Market share growth 0.528 0.514
Sales turnover 0.555 0.545
Supplier product quality 0.786 0.739
Supplier communication 0.732 0.686
Supplier delivery performance 0.695 0.641
Work-in-process (WIP) inventory 0.592 0.547
Lead time 0.682 0.637
Product quality 0.650 0.622
Performance appraisal 0.698 0.661
Employees skill level 0.647 0.619
Departmental communication 0.627 0.581
Resolution of customers complaints 0.686 0.650
Customer loyalty or retention 0.726 0.698
Quality and award achievement 0.578 0.552
Order handling and processing 0.678 0.652

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The Impact of Supply Chain Operational Capabilities ISSN 1985-692X

Research Received 01/03/2010

Chief Editor: Mohammad Safa

The Impact of Supply Chain Operational

Abstract: This study determines the underlying determinants of supply chain

Keywords: Supply Chain Operational Capabilities, Small and Medium Enterprises,

The Malaysian Government appreciates the importance of small and medium-sized

International Journal of Business and Management Science, 3(2): 147-168, 2010 1

2 International Journal of Business and Management Science, 3(2): 233-258, 2010

Therefore, this paper aims at identifying the weaknesses of operating activities

SMALL AND MEDIUM ENTERPRISES IN MALAYSIA

Table 1:Definition of SMEs in Malaysia

International Journal of Business and Management Science, 3(2): 147-168, 2010 3

This paper focused primarily on the evolution of manufacturing sector in

Table 3:Problems of Malaysian SMEs

4 International Journal of Business and Management Science, 3(2): 233-258, 2010

THE DETERMINANTS OF SUPPLY CHAIN OPERATIONAL

International Journal of Business and Management Science, 3(2): 147-168, 2010 5

Structural capability is considered to be one of the enablers for SCOC.

6 International Journal of Business and Management Science, 3(2): 233-258, 2010

The implementation of technology aspect is imperative for each firm. As such,

International Journal of Business and Management Science, 3(2): 147-168, 2010 7

BUSINESS PERFORMANCE OF SMALL AND MEDIUM ENTERPRISES

Generally, business performance can be described as “the operations ability to

8 International Journal of Business and Management Science, 3(2): 233-258, 2010

RESEARCH MODEL AND HYPOTHESES

Based on a review of literature, it is a fundamental proposition of this study that

International Journal of Business and Management Science, 3(2): 147-168, 2010 9

Supply Chain Operational

Structural Capability H1 (+/-)

Technological Capability H3 (+/-)

(Independent Variables) (Dependent Variable)

Figure 1: Research model of the study

10 International Journal of Business and Management Science, 3(2): 233-258, 2010

International Journal of Business and Management Science, 3(2): 147-168, 2010 11

Table 4: Multiple regression analysis

12 International Journal of Business and Management Science, 3(2): 233-258, 2010

DISCUSSION AND CONCLUSIONS

International Journal of Business and Management Science, 3(2): 147-168, 2010 13

H2 represent the association between logistical capability and business

14 International Journal of Business and Management Science, 3(2): 233-258, 2010

It should be acknowledged that this study is subject to some limitations. In this

1. In 1996, SMIDEC was established to assist SMEs development in Malaysia.

Abdul-Aziz, Z., Chan, J. F. L. & Metcalfe, A. V. (2000). Quality practices in the

International Journal of Business and Management Science, 3(2): 147-168, 2010 15

Bowersox, D. J. & Daugherty, P. J. (1995). Logistics paradigms: The impact of

16 International Journal of Business and Management Science, 3(2): 233-258, 2010

Hart, S. L. (1995). A natural-resource-based view of the firm. Academy of Management.

International Journal of Business and Management Science, 3(2): 147-168, 2010 17

Munusamy, M. (2008). Development of SMEs in Malaysia. Regional Workshop on SME

18 International Journal of Business and Management Science, 3(2): 233-258, 2010

SMIDEC (2008). Definition of SMEs by size. Available from:

International Journal of Business and Management Science, 3(2): 147-168, 2010 19

20 International Journal of Business and Management Science, 3(2): 233-258, 2010

Table A1: Review of research methodologies of previous studies

International Journal of Business and Management Science, 3(2): 147-168, 2010 21

Table A2: Constructs measurement

Structural Capability 0.843 56.521

Logistical Capability 0.896 52.506

Technological Capability 0.861 56.320

Business Performance 0.916 68.412

22 International Journal of Business and Management Science, 3(2): 233-258, 2010

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