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IJOPM 30,1

Supply chain integration and product modularity

An empirical study of product performance for selected Hong Kong manufacturing industries
Antonio K.W. Lau and Richard C.M. Yam
The Department of Manufacturing Engineering and Engineering Management, City University of Hong Kong, Kowloon Tong, Hong Kong, China, and

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Esther P.Y. Tang

The Department of Management and Marketing, The Hong Kong Polytechnic University, Hung Hom, Hong Kong, China
Abstract
Purpose While the benecial impact of supply chain integration (SCI) and modular product design are generally acknowledged, few empirical studies have examined how an organization can achieve better performance through SCI with modular product design. The purpose of this paper is to examine the relationship between SCI and modular product design, as well as their impact on product performance. Design/methodology/approach By surveying 251 manufacturers in Hong Kong, structural equation modelling is used to test the research constructs and the hypothesized model. Findings The results conrm that information sharing, product co-development and organizational coordination are crucial organizational processes within SCI. Companies that have high levels of product modularity appear to be good at product co-development and organizational coordination directly and at information sharing indirectly. Furthermore, companies that have high levels of product co-development or product modularity appear to have better product performance. Research limitations/implications This paper theoretically and empirically identies three specic organizational processes within SCI (information sharing, product co-development and organizational coordination), which affect modular product design and product performance. These more specic ndings were previously absent from the literature. However, the study is limited to the cross-sectional nature of a survey study, the operationalization of SCI and product modularity, and the nature of the product types. Originality/value This paper empirically examines the relationships between SCI and product modularity, which has seldom been attempted in previous research. It clearly identies exactly which processes within SCI are directly and indirectly related to product modularity. Keywords Supply chain management, Product design, Production planning, Manufacturing industries, Hong Kong Paper type Research paper

International Journal of Operations & Production Management Vol. 30 No. 1, 2010 pp. 20-56 q Emerald Group Publishing Limited 0144-3577 DOI 10.1108/01443571011012361

1. Introduction A growing body of literature on operations management has suggested that a company will perform well if it has a high degree of supply chain integration (SCI); SCI is dened as organizational processes to integrate suppliers, customers and internal functional units in order to optimize the total performance of all partners in the supply chain (Frohlich and Westbrook, 2001; Lee, 2000; Mason-Jones and Towill, 1997;

Armistead and Mapes, 1993; Stevens, 1989). Rungtusanatham et al. (2003) argue that supplier and customer integration are useful ways to acquire external resources from suppliers and customers, respectively. Such integration also reduces the uncertainties in process, supply, control and demand in business operations (Towill et al., 2002). It promotes integrative inventory systems or information sharing across the supply chain, which improves customer service and provides for a quick response in a dynamic market (Lee and Whang, 2001; Lambert and Cooper, 2000). In addition to supplier and customer integration, internal integration has focused on product development, using different terminologies such as functional coordination and cross-functional teams (Mentzer, 2004; Vickery et al., 2003). Functional coordination measures the interaction and collaboration within a company (Kahn, 1996, 2001; Stank et al., 1999; Kahn and McDonough, 1997). Cross-functional teams bring marketing, research and development (R&D), manufacturing and purchasing personnel together to reduce costly product redesign, duplication and maintenance, and to improve product reliability and customer satisfaction (Mentzer, 2000, 2004; Ulrich and Eppinger, 2000). Many best-practice companies have taken advantage of SCI to improve their performance (Morash and Lynch, 2002; Dyer, 2000; Lee, 2000). Table I shows the main literature on organizational processes within SCI. In general, Table I shows that SCI involves three dimensions, i.e. supplier, customer and internal integration, and it includes many organizational processes that cut across these three dimensions. Thus, SCI should be seen as a multifaceted construct, which requires a ne-grained empirical analysis (Campbell and Sankaran, 2005). Recent empirical studies may be too coarse to operationalize SCI and may not identify which processes within SCI affect business performance. In their seminal paper, Frohlich and Westbrook (2001) identify the positive effects of SCI on performance, but their measurement of SCI only includes supplier and customer integration, ignoring internal integration. Rosenzweig et al. (2003) improve the measurement of SCI with a new SCI intensity construct, measuring supplier, customers and internal integration, in a single study. While the construct broadly shows that SCI improves multiple manufacturing capabilities and the performance of companies, it does not identify which SCI processes affect performance. Vickery et al. (2003) conceptualize SCI as three organizational processes (supplier partnerships, close customer relationships and cross-functional teams), and measure the effectiveness of SCI on customer service and performance. However, that study does not identify which processes of SCI are the best predictors of performance. Few studies are, therefore, able to bring together an examination of multiple organizational processes within SCI. Statistically, such a study will not only allow us to better predict performance, but it will also help to identify the interactions among the processes within a single construct (Bagozzi and Heatherton, 1994; Carver, 1989). Modular product design is considered to be an effective approach for mass customization and cycle time reduction (Duray et al., 2000; Feitzinger and Lee, 1997; Kotha, 1995; Pine, 1993), and thus increases strategic exibility for manufacturers (Worren et al., 2002; Sanchez, 1995). Modular product design is created by separating a product system into relatively independent components and by specifying the interfaces of the product system across interacting components (Schilling, 2000; Sanchez, 1995). The decision to implement product modularity is an important aspect in modular product design because different levels of modularity require different

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Organizational processes within SCI

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Table I. The organizational processes within SCI

Stevens (1989) Functional integration, internal integration and external integration Armistead and Mapes (1993) Shared ownership of the management process system, level of adherence to manufacturing plans, job titles spanning traditional functions, integration of information systems, visibility and spread of transmission of information Lawrence (1997) Supplier relationship management Bowersox et al. (1999) Customer integration, internal integration, material and service supplier integration, technology and planning integration, measurement integration, relationship integration Lee (2000) Information integration, coordination and resource sharing (decisions, alignment of work), organizational relationship linkage (accountability, risks/costs/gain) Chandra and Kumar (2000) Synchronization of activities at the member entity and aggregating their impact through process, function, business and on to enterprise levels, either at the member entity or the group entity Macdonald and Beavis (2001) Integration of supply chain planning and customer interface Kim and Narasimhan (2001) Independent operation stage, internal integration stage, external integration stage Lee and Whang (2001) Information integration, synchronized planning, workow coordination, new business models Fawcett and Magnan (2002) Internal cross-functional process integration, backward integration with valued rst-tier suppliers, forward integration with valued rsttier customers Han et al. (2002) Joint inventory management, identication of core competency of suppliers, trust building, integrated IT infrastructure Vaart and Donk (2003) Transparency stage, commitment/coordination stage, integrative planning stage Vickery et al. (2003) Supplier partnership, closer customer relationship, cross-functional teams Rosenzweig et al. (2003) Supplier integration, customer integration, internal integration Note: The present study denes SCI in terms of the organizational processes identied in the literature

product design processes (Duray et al., 2000; Ulrich and Eppinger, 2000; Ulrich, 1995). There is a continuum describing a product systems degree of separateness, specicity and transferability of product components, according to whether the product systems are loosely or tightly coupled (Schilling, 2000; Sanchez, 1995; Orton and Weick, 1990; Weick, 1976). Modular product design refers to a product with high product modularity, whereas integrated product design refers to a product with low product modularity (Sanchez, 1995). Although both SCI and modular product design are common practices among manufacturers, only a few empirical studies explore them together (Fine et al., 2005). Parker and Anderson (2002) point out that manufacturers need to decide the modularity of their products with supply chain design; otherwise, they may lose their value-adding activities to the suppliers and be edged out of the business. Sako (2002) argues that modular product design is critical to the product, process and supply chain design and usually requires the integration of designers, producers and consumers. Most of the literature on product modularity focuses on detailed, technical aspects of

product modularity (Mikkola, 2003; Nobelius and Sundgren, 2002; Salvador et al., 2002; Hsuan, 1999). Empirical testing has seldom been used to examine the relationship between product modularity and SCI (Fine et al., 2005). There is considerable discussion in the literature as to whether modular product design and product modularity require closer integration in the supply chain, or whether they are a mechanism which allows manufacturing systems to operate effectively without integration (Gerwin, 2004; Leseter and Ramdas, 2002; Nobelius and Sundgren, 2002; Fleming and Sorenson, 2001; Galvin and Morkel, 2001; Ulrich and Eppinger, 2000; Fine, 1998; Sanchez, 1995, 1996, 1999; Sheu and Wacker, 1997). This debate, which has been conducted at a theoretical level, can only be resolved in the light of empirical studies of the possible relationship between product modularity and SCI (Parker and Anderson, 2002; Salvador et al., 2002; Krishnan and Ulrich, 2001). The present study contributes to existing knowledge in two main ways. First, while previous studies mostly measure SCI as a single-faceted construct, the current study identies SCI as a multifaceted construct including three organizational processes, i.e. information sharing, product co-development and organizational coordination. The study then examines the impact of each process on product design and performance. As a result, the present study can identify the impact of individual SCI processes on product development and performance. In this way, the study follows the recommendation of Rosenzweig et al. (2003) to develop better measurements of SCI. Second, this study explores the relationships between product modularity, SCI and product performance in a single empirical study. The study is thus a response to the literature on SCI, and the literature on product development, both of which suggest that SCI and product modularity should be analysed in a comprehensive way (Mikkola, 2003; Salvador et al., 2002; Krishnan and Ulrich, 2001). In this study, product performance refers to a products market performance, as measured by customer satisfaction, achievement of sales and prot goals, and the protability of a companys products (Song and Parry, 1999; Grifn and Page, 1993). In the following sections the constructs of the study will be dened and the theoretical development of the hypothesized research model will be discussed. This will be followed by the statistical analysis and discussion of the results. The implications of the research will be discussed, together with suggestions for future study, in the conclusion. 2. Theoretical development Recent literature has highlighted SCI as being valuable to improve company performance (Froblich and Westbrook, 2001), but includes few discussions of the indirect effect of SCI on company performance (Vickery et al., 2003; Narasimhan and Kim, 2002). Thus, the present study investigates whether SCI has a direct impact to improve company performance. This study also looks into whether information sharing, product co-development and organizational coordination help manufacturers design modular products and improve product performance. 2.1 Supply chain integration As noted above, SCI involves multiple organizational processes that integrate suppliers, internal functional units, and customers (Rosenzweig et al., 2003; Vickery et al., 2003; Kim and Narasimhan, 2001). It is not a particular process in

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any specic business functions. Rather, it reects multiple organizational activities or processes across suppliers, internal functional units and customers. Among the important processes whose contribution to SCI is evaluated in this study are information sharing, product co-development and organizational coordination across the supply chain. These have been selected for empirical investigation because the literature suggests they are crucial to product design and development. 2.1.1 Information sharing and product performance. One of the key organizational processes within SCI is information sharing. This refers to the sharing of technological, marketing, production and inventory information across suppliers and customers (Stock and Lambert, 2001; Ayers, 2001; Lee, 2000; Fisher, 1997; Andel, 1997; Balsmeier and Voisin, 1996). Various authors have highlighted the importance of information sharing in the supply chain in securing competitive advantage in a variety of ways, including improved understanding of market trends and customer needs, the acquisition of new ideas for products, and identication of ways of improving production methods and reducing total cycle time (Mentzer, 2004; Huang et al., 2003; von Hippel, 1988). Other authors have pointed to corresponding weaknesses produced by poor information sharing across the supply chain (Singh et al., 2005). However, only a few empirical tests have been conducted to verify the inter-relationships between multiple SCI processes and business performance (Rosenzweig et al., 2003). It is also not known which SCI processes have direct or indirect relationships with product performance. In addition, there is a concern about how to capitalize on the information shared across the supply chain as the cost of information sharing cannot be ignored (Frishammar and Horte, 2005). In view of the above, H1 is suggested as follows: H1. Information sharing within SCI has a positive relationship with product performance. 2.1.2 Product co-development and product performance. Product co-development is another important organizational process within SCI as it refers to joint efforts in product development across suppliers, customers and internal functional units (Mentzer, 2004; Takeishi, 2001; Stevens, 1989). Product co-development with suppliers and customers refers to joint product design, process engineering and production operations with key suppliers and customers, respectively. Integrated product development refers to close internal coordination from product design, process development and production to product launch. Different authors have emphasized the co-development of products with suppliers (Ragatz et al., 1997; Carter and Ellram, 1994), customers (Callahan and Lasry, 2004; Song et al., 1997) and between internal functional units (Mentzer, 2004). However, as noted above, few empirical tests have been conducted to verify the inter-relationships between multiple SCI processes and business performance, and it is not clear if SCI processes have direct or indirect relationships with product performance. In particular, the coordination cost and time of product co-development (Weele, 2002) and the risks of technological knowledge leakage to supply chain partners cannot be ignored (Lau and Yam, 2004). To make a testable hypothesis, this study proposes H2 as follows: H2. Product co-development within SCI has a positive relationship with product performance.

2.1.3 Organizational coordination and product performance. Some studies suggest that organizational coordination is crucial for SCI. This refers to internal and external coordination activities, sharing the right to make business decisions, and joint assessment/design of business systems across the supply chain (Lee, 2000). External coordination activities are important to improve trust and commitment across the supply chain partners and to help the partners to delegate decision making (Lee, 2000). Mentzer (2000) suggests that joint system development and shared decision making with suppliers and customers enhances the understanding of management decisions across the partners and, consequently, promotes the sharing of risks and resources within the supply chain. This tends to reduce development cost and time, and improve prot margins, in product development. Internal coordination activities involve functional coordination, creating interaction and collaboration within a company (Kahn, 1996, 2001; Stank et al., 1999; Kahn and McDonough, 1997; Kahn and Mentzer, 1996). Kahn (1996) argues that internal coordination activities increase the understanding of the goals and activities among different functional units, which improves mutual trust and commitment to the organization. As people trust each other and are more committed to their organizations, they are motivated to seek further coordination, which in turn improves product development performance (Bstieler, 2006). Frishammar and Horte (2005) also found that collaboration among internal units is positively related to product innovation. However, there is no empirical test to verify direct and indirect relationships among multiple SCI processes and performance (Rosenzweig et al., 2003). Thus, H3 of the study is posited: H3. Organizational coordination within SCI has a positive relationship with product performance. 2.2 Product modularity The concepts of product modularity emerged in the 1960s. Simon (1962) viewed products as complex systems made up of many interacting parts. Each part is subordinated to the product system hierarchically. To simplify the system, the product can be designed as a set of subsystems so that the assembly of different subsystems can develop new products. If a customer requests a product, the manufacturer can make the product by assembling the subsystems with a short production lead time (Alexander, 1964; Simon, 1962). Starr (1965) dened the subsystems as interchangeable parts modules, which can be transferred between product lines. The process of designing, developing and producing modules that can be combined in different ways to produce new products is called product modularization (Ernst and Kamrad, 2000). In the 1970s and 1980s, while operations research scholars studied the optimization of modular design (Shaftel and Thompson, 1977; Rutenberg and Shaftel, 1971; Evans, 1970), group technology in product design was proposed for streamlining product design, production planning and manufacturing operations (Hyer and Wemmerlov, 1984; Holler, 1980; Rajagopalan and Batra, 1975). Group technology is a concept to capitalize on similarities in recurring tasks and component parts by regrouping them in product and process design (Hyer, 1984). In product design, group technology was analogous to product modularization (Jose and Tollenaere, 2005) and aimed to classify the components based on geometric similarities such as shapes, dimensions or manufacturing processes, by using coding and clustering systems (Hyer, 1984), such as

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production ow analysis (Burbidge, 1982), single linkage clustering (McAuley, 1972) and rank order clustering (King and Nakornchai, 1982). The classication by coding systems was useful for the efcient retrieval of previous design, design standardization and variety reduction (Hyer, 1984). From the 1990s onwards, modularity literature has been adopted by strategic management and organizational behaviour to describe the nature of industry life cycle, strategic exibility and supply chain management (Salvador et al., 2002; Schilling, 2000; Fine, 1998; Sanchez, 1995; Henderson and Clark, 1990). For example, Sanchez (1995) argues that modularity leads to dis-integration of an organization. The re-conceptualization of modularity has also been ourishing in diverse management elds (Salvador, 2007). In brief, the literature on product modularity deals with a number of features of product components, including the extent to which modules are independent or separate, the extent to which components are specic, and the extent to which modules are transferable or reusable within the production process (Garud et al., 2003; Schilling, 2000; Ulrich and Eppinger, 2000; Baldwin and Clark, 1997, 2000; Sanchez and Mahoney, 1996; Sanchez, 1995; Ulrich, 1995; Ulrich and Tung, 1991; Orton and Weick, 1990). The main, relevant literature on the denition of product modularity is summarized in Table II. Salvador (2007) and Jose and Tollenaere (2005) present extensive literature reviews on dening product modularity. In alignment with the above literature, the present study dened product modularity as a continuum describing separateness, specicity and transferability of product components in a product system. Separateness referred to the degree to which a product could be disassembled and recombined into new product congurations without loss of functionality (Schilling, 2000). Specicity referred to the degree to which a product component had a clear, unique and denite product function with its interfaces in the product system (Ulrich, 1995). Transferability referred to the degree to which product components in a product system could be handed over and reused by another system (Starr, 1965). Since most product components can be more or less separated, specied and transferred in a product system, all products may have some degree of product modularity. If a product had high product modularity (i.e. modular product design), the product system had separate modules with well-specied interfaces across the modules, such as those found in personal computers. The product modules could be transferred to different product lines and progressive product development projects. Conversely, if a product had low product modularity (i.e. integrated product design), the product components were highly interlinked without well-specied interfaces across the components. It was very difcult for the product components to be transferred to other product lines and future product development projects. The literature on product modularity also includes some studies that examine different types of modularity (Salvador et al., 2002; Ulrich, 1995). The present study measures the degree of product modularity, without distinguishing between types of modularity. There are two reasons for this. First, there is an extensive literature where product modularity is operationalized as a single measure (Lin, 2003; Sako, 2002; Worren et al., 2002; Duray et al., 2000; Fixson, 1999; Sako and Murray, 1999; Sako and Warburton, 1999). Second, the present study collects empirical data relating to different aspects of product modularity, and reviews the data in two pilot studies, as discussed

Articles Component re-combinability Component commonality Connectivity Standardization, product variety Standardization, inter-changeability Interface standardization, substitution

Denitions

Constructs used in the denitions

Starr (1965)

Dogramaci (1979) McClelland and Rumelhart (1988)

Golbertg and Zhu (1989)

Ulrich and Tung (1991)

Garud and Kumaraswamy (1993)

Ulrich (1995)

Sanchez and Mahoney (1996)

Function-to-physical component mapping, decoupling of interfaces Independence, loose coupling Separateness, specicity Information hiding and visibility Module interfaces, function-to-component mapping and hierarchies of components and functions Standard and new components, degree of coupling, substitutability Similarity, connectivity, independence Component combinability, component separability

Schilling (2000)

Baldwin and Clark (2000)

Sako (2002)

Mikkola and Gassmann (2003)

Gershenson et al. (2003)

Salvador (2007)

The obtaining of the maximum variety of assemblies by combining a given number of parts Component commonality across product lines Highly connected within modules but weakly connected across modules Modular product design consists of using standard parts and subassemblies in a variety of products Similarity between physical and functional product architecture, minimization of incidental interactions between physical components Conforming to standardized interface specications represents a modular design in which inter-temporal substitution of components can occur easily The way of function-component mapping and the degree of decoupling of product interfaces Interdependent and closely coupled within modules but independent and loosely coupled across modules Product modules are specied, decoupled, can be recombined and separated across modules Information is hidden within modules and information is visible across modules A bundle of characteristics concerning module interfaces, the function-to-component mapping and hierarchies in different phases of the product life cycles The combination effects of the ratio of the number of new and standard components with the degree of coupling and substitutability Independence across modules, low connectivity between modules, similar components are grouped In the domain of tangible, assembled artifacts a product system is modular to the extent that its separable components, or modules, are combinable

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Table II. Denitions of product modularity

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in the section on methodology. Different aspects of product modularity, and their contribution to an overall construct of product modularity, can thus be examined empirically. Not distinguishing modularity types simplied the questionnaire design so that the respondents could easily understand the questions. It also helped to rank different levels of product modularity in different types of company. The disadvantage is that it prevented us from understanding the impact of specic modularity types on SCI. 2.2.1 Information sharing and product modularity. Designing a product with high product modularity implies that the product is assembled from a set of independent modules with standardized interfaces across different modules (Ernst and Kamrad, 2000; Sanchez and Mahoney, 1996). The modules are highly differentiated and tightly specied. Consequently, they can be successfully outsourced to module suppliers (Novak and Eppinger, 2001; Schilling, 2000). As product modules are outsourced to external partners, information sharing becomes more important to specify and create modular products. In order to design modular product interfaces effectively, it is necessary to obtain information on market and customer preferences (Du et al., 2001), share information among different designers in the organizations involved (Brusoni and Prencipe, 2001), and share information on engineering parameters with supply chain partners (Erixon, 1996). Marketing, production and technological information obtained from suppliers and customers in existing modular product development projects can be identied and reused to create better modular products in the future (Kotha, 1995). However, some authors argue that as product modules and architectures are clearly dened at the outset, the information within the modules could be hidden (Baldwin and Clark, 2000) and iterative information and communications across the supply chain partners may be reduced in the product development (Fine, 1998). As the relationship between information sharing and modularity is not conrmed, this study proposes H4 as follows: H4. Information sharing within SCI has a positive relationship with product modularity. 2.2.2 Product co-development and product modularity. Other literature suggests that co-development with the module suppliers is an advantage in product development (Mikkola, 2003; Ragatz et al., 2002; Hsuan, 1999). Sabel and Zeitlin (2004) argue that the development of modular products requires a process of iterative co-development with suppliers to redene the interface specications for new products. It also requires co-development with customers to reduce costs and improve performance in future products. In particular, if the modules are to be reused for the future product development projects, product co-development may help manufacturers to anticipate changes in customer needs. Sanchez (1999) also suggests that integration among marketing, engineering design, manufacturing and logistics departments in the use of modular product design is required to address the full range of benets of modular product development. Many case studies have suggested that product co-development with suppliers, internal functional units and customers is important in modular product design (Brusoni and Prencipe, 2001. However, some authors argue that well-dened interfaces of each module help external suppliers to work on their particular modules alone and assure that the

modules will interact effectively in the product development (Schilling, 2000). Thus, the intensity of supplier involvement in product development is lower (Leseter and Ramdas, 2002). This loosely integrated supply chain would extend downstream and could also benet downstream customers. Thus, the relationship between product co-development and modular design is not clearly dened in the literature. H5 is proposed as follows: H5. Product co-development within SCI has a positive relationship with product modularity. 2.2.3 Organizational coordination and product modularity. Empirical studies found that manufacturers tend to coordinate their supply chain strategically and organizationally when adopting modular design. Volkswagen has developed a modular consortium in Brazil (Dyer, 2000). In a case study of Chrysler Jeeps, close and trusting relationships with customers and suppliers are required to resolve problems of interface compatibilities between different modules (Hsuan, 1999). Sabel and Zeitlin (2004) argue that, when adopting modular product design, organizations must mutually assess each others internal business processes in order to nd solutions to technical and marketing problems in the development process. However, some authors suggest that modular products are outsourced to module suppliers in a loosely integrated manner (Fine, 1998; Sanchez and Mahoney, 1996). This loosely coordinated supply chain allows manufacturers to exibly change their suppliers for major components to gain cost or technological advantages (Fine, 1998). To take advantage of this loosely coordinated supply chain, manufacturers should allow their supply chain partners to stay at any physical distance, have independent managerial and ownership structures, and have diverse cultures with a low level of electronic connectivity (Fine, 1998). The organizational coordination can be loose as modular design is adopted. The literature, therefore, suggests that the relationship between organizational coordination and product modularity may not be clearly identied. To make a testable hypothesis, H6 is suggested: H6. Organizational coordination within SCI has a positive relationship with product modularity. 2.2.4 Product modularity and product performance. The literature on product modularity identies a number of benets of modularity. First and foremost among the advantages are the reduced production costs which arise from economies of scale where modules have multiple applications, reducing the costs of setting up production processes and the cost of keeping inventory (Fisher et al., 1999; Feitzinger and Lee, 1997; Ulrich and Tung, 1991). There are also benets in terms of reduced development costs, where design processes have to be carefully specied and managed, and where the development of new modules is less complicated that the development of major integrated projects (Mikkola and Grassmann, 2003; Hargadon and Eisenhardt, 2000; Sanchez, 1999; Erixon, 1996; Ulrich and Tung, 1991). In addition, modularity may improve a companys ability to provide customer service by quickly solving technical problems and delivering common parts and services to clients, as well as making it possible to offer incremental upgrades and improvements at marginal cost (Ulrich and Tung, 1991; Karmarkar and Kubat, 1987).

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The overall effect of these advantages would be improved product performance and customer service. However, some negative effects of modularity on product performance are also found in the literature. For example, the need to design modules for multiple applications may prevent them from being optimized in any specic application, and the use of standard modules may lead to a lack of differentiation in the nal products (Desai et al., 2001; Robertson and Ulrich, 1998). These disadvantages may be particularly important where the modules are visible to the customer, or where the physical size or mass of the products is important (Ulrich and Ellison, 1999; Robertson and Ulrich, 1998; Ulrich and Tung, 1991). Ramdas (2003) argues that empirical research is needed to study the impact of modularity on product performance. The literature, therefore, suggests that the impact of product modularity on product performance may be mixed. However, more scholars have taken a positive view of product modularity and, as a result, the following hypothesis is suggested: H7. Product modularity has a positive relationship with product performance. 3. Methodology To test the research hypotheses, a survey was conducted among Hong Kong manufacturers. This section explains the selection of the instruments for the research constructs, i.e. SCI, product modularity and product performance. Sampling and construct validity are discussed at the end of this section. 3.1 Instruments The Appendix to this paper shows the ve-point Likert-type measurement scales developed for the evaluation of product modularity, SCI and product performance. The scales of SCI were adapted from Narasimhan and Kim (2002), Frohlich and Westbrook (2001), International Manufacturing Strategy Survey (IMSS) II (1996) and Kahn (1996). After testing the measures in two pilot studies as discussed below (Section 3.2), 39 items were developed to measure the organizational processes within SCI (see the Appendix, Table AI). Many operational denitions for the concept of product modularity have been developed. Examples of these are product components separateness, specicity, standardization, interchangeability, reusability, transferability and decomposability (Table II). Some researchers have adapted these concepts to measure product modularity in empirical studies (Worren et al., 2002; Duray et al., 2000). The present study initially adapted measurement items from the work of Worren et al. (2002) and Duray et al. (2000). These items were further changed based on the results of two pilot studies discussed later (Section 3.2). Product performance, as measured in this study, was dened as customer satisfaction, achievement of sales and prot goals, and the protability of a companys products (Song and Parry, 1999; Grifn and Page, 1993). It measured how well the company did routinely in moving key products through the product development process to become commercial goods (Grifn and Page, 1993). Customer satisfaction was a forward-looking performance indicator of how well customers would respond to a companys product performance. Achievement of sales and prot goals and protability were performance indicators of how well the company had done in the past (Best, 2003). By using these indicators, the study could assess how modular product design and SCI affected product performance in both forward and backward-looking ways.

This method of measurement also facilitated comparisons among companies operating in different market situations and company sizes (Ledwith, 2000). Perceptual measurements were used as companies are reluctant to share objective performance data because of condentiality issues (Ward et al., 1996). Pagell and Krause (2004) further argue that where survey studies are cross-industry in nature, the individual objective performance might vary in different industries, which would affect the survey results. It is inappropriate to use objective measurements of sales volumes, return on investment or protability to rate the performance of companies differing in size and market segment as company resources differ in each case (Ledwith, 2000). Furthermore, while there were quantitative modularity indexes to measure a companys product modularity (Holtta-Otto, 2007; Jose and Tollenaece, 2005), the indexes were not commonly used by the sampled industries and could not be clearly understood by the respondents in our pilot studies. 3.2 Two pilot studies In order to improve the comprehensibility of the draft questionnaires, two pilot studies were conducted. In the rst pilot study, 13 experts were interviewed to discuss the content and wording of the questionnaire. On average, interviews lasting between one hour and one and a half hours were conducted for each expert to review the questionnaire. The experts were ten senior managers in the sample industries, and one representative from each of the Federation of Hong Kong Industries, The Institute for Supply Management Hong Kong, and the Hong Kong Logistics Association. The second pilot study was a pre-test carried out with a convenience sample of 37 part-time Master of science students working in local manufacturing industries. The students had an average of more than ve years supervisory experience. Simple statistical analyses were used to test the reliability of the scales and the questionnaire was improved further (Flynn et al., 1990). 3.3 Sampling The scope of the present research was limited to the plastics, electronics and toy industries in Hong Kong. These industries were chosen for two reasons. First, they had high product variety, which made them particularly suitable for research on the topic of the present study. The literature shows that industries with high product variety are more likely to use modular product design. Salvador (2007) argues that product modularity is intrinsically related to product variety. Ulrich (1995) argues that high product variety can be achieved by any product system, but modular product design is an economical way of increasing product variety by combining relatively few product components. Worren et al. (2002) argue that modular product design minimizes the design and development costs of product variety by allowing the reuse of existing components and production lines. A number of previous studies used industries with high product variety as subjects for studying modularity, e.g. the electronics (Meyer and Roberts, 1986), automobile (Nobeoka and Cusumano, 1997) and home appliance (Worren et al., 2002) industries. The Hong Kong electronics, toy and plastics industries usually develop new products with a high product variety (SQW, 2001; Hong Kong Trade Development Council (HKTDC), 1998, 1999, 2000). HKTDC (2000) found that Hong Kong electronics manufacturers provide a wide range of consumer electronics, electrical home

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appliances and electronic parts and components in a cost effective way (HKTDC, 2007). HKTDC (1998) found that Hong Kong plastics manufacturers make a wide variety of products and their products serve diverse manufacturing sectors, from simple plastic containers to electronics and moulding machines. Hong Kongs toy industry also has a high product variety, ranging from relatively simple and low-priced products to computer-controlled robotics and fashionable stuffed dolls with lively features (SQW, 2001). Table III summarizes the product ranges of these three industries. Thus, companies in the three industries could develop both components and end-products in a diverse way for their customers (Enright et al., 2005; SQW, 2001; HKTDC, 1998, 1999, 2000). The second reason for choosing these industries is that they are representative of global manufacturing as the leading export industries in the world (HKTDC, 1998). The electronics, toy and plastics industries are three of Hong Kongs major industries, with manufacturing plants in the Pearl River Delta region of China and exports in 2006 to the value of approximately HK$1,180 billion (HKTDC, 2007). The decisions of managers in these industries have a signicant impact upon the region. The targeted respondents of the survey were senior product development managers, vice presidents or directors. They were requested to ll out the questionnaire. Follow-up faxes and phone interviews were conducted by two trained interviewers to ensure data quality. For some companies, multiple phone interviews were conducted to verify the data quality. Of the 1,452 companies contacted, 1,371 were reached (81 letters were undelivered because of a change of address or the contact person having left the company) of which seven companies were not in the targeted industries. Of the 1,364 targeted companies successfully contacted, 285 responded to the survey, for a response rate of 20.9 per cent. The sample prole is shown in Table IV (Section 5.1). After the data cleaning process, 34 cases were deleted because the companies had not completed the questionnaire properly and refused to clarify their answers over the phone. Finally, 251 completed questionnaires were analysed in this study, for an effective response rate of 18.4 per cent. 4. Data analysis 4.1 Non-respondent bias and common method variance To detect non-response bias, a test was conducted to see if there were differences between early respondents and late respondents in terms of variables relevant to the research hypotheses (Armstrong and Overton, 1977). The average values found by the survey instruments of the rst 10 per cent of respondents were compared with those of
Industry Electronics Toys Major product types Parts and components, consumer electronics, computers and peripherals, telecommunications equipment, automotive electronics, and medical and healthcare electronics Baby and children toy, educational toy, electronic toy, outdoor playground, and video games Polymers, plastic parts and components, plastic houseware, plastic construction materials, plastic packaging, moulding machines, and plastic moulds and dies

Table III. A summary of the major product types in the industries

Plastics

Sources: SQW (2001); HKTDC (1998, 1999, 2000)

n Type of industry Electronics Toys Plastics Company size in Hong Kong a 1-49 50-99 100-199 200-500 .500 Nil Company size in the mainland a No operations 1-99 100-199 200-999 1,000-5,000 .5,000 Nil Location of operations in Hong Kong b Sales and marketing Logistics Production R&D Location of operations in the mainland b Sales and marketing Logistics Production R&D Customer characteristicsc Industrial customer Dealer/retailer End-user/consumer Others Supplier characteristicsc Raw material suppliers Standard component suppliers New component suppliers Module suppliersd Others 115 57 79 168 44 19 11 6 3 17 27 33 79 74 16 5 210 133 34 139 45 115 220 117 103 153 56 1 186 102 44 43 3

Percentage 45.8 22.7 31.5

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66.9 17.5 7.6 4.4 2.4 1.2 6.8 10.8 13.0 31.5 29.5 6.4 2.0 83.6 52.9 13.5 55.3 17.9 45.8 87.6 46.6 41.0 60.9 22.3 74.1 40.6 17.5 17.1 1.1

Notes: aThe total is different from sample size because a few respondents did not provide this information. Considering that company size is not our research construct and the analysis technique used in this study could provide accurate parameter estimates under conditions of missing data (Miles, 2000; Arbuckle and Wothke, 1995), this study used the other data from the respondents; bthe sample includes companies that have operations in both Hong Kong and the Mainland of China, so the total is larger than the sample size; cthe total is larger than sample size because the sample companies may have more than one type of customer or supplier for their main product; dmodule suppliers refers to suppliers that provide a customer-specic component to the sampled company; n 251

Table IV. Demographic characteristics of the sample

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the last 10 per cent of respondents using a t-test. The results of the t-test showed no statistically signicant differences between the two groups in terms of the means for items, indicating that non-response bias should not be a problem in this study. Common method variance was also tested by using the Harman one-factor test (Kotabe et al., 2003). No single factor was apparent in the unrotated factor structure. This can be seen as evidence that common method variance problem may not be present. 4.2 Scale purication and construct validation Scale purication was achieved by using a reliability test and exploratory factor analysis. Cronbachs alpha (a) was used to assess the scale reliability of each construct in the model (Figure 1). The reliability of all factors is reported in the Appendix, Table AI. The Cronbach alpha of every factor was greater than 0.7, which is a good statistical result (Johnson and Wichern, 1998). The instruments for the constructs were then validated by exploratory factor analysis (i.e. principal components analysis, with varimax orthogonal rotation). The results conrmed the structure of the constructs. For example, in product modularity items, the factor analysis produced a one-factor solution from ve items. The factor loadings were generally over 0.7, indicating good factor structures (Johnson and Wichern, 1998). Overall, a total of 39 measurement items were explored and ten factors identied. Construct validation included tests for content, convergent and discriminant validity. Content validity is usually ensured by expert judgment or through an extended literature search. The present study has a high degree of content validity of scales as the survey instruments were mainly adopted from the extant literature (Worren et al., 2002; Narasimhan and Kim, 2002; IMSS II, 1996), and then conrmed by the two pilot studies discussed above. A conrmatory factor analysis was conducted to check the convergent validity and discriminant validity of the prior factor structures.

34

Supply chain integration

Supplier integrationinformation sharing

Customer integrationinformation sharing

Information sharing H1 H4

Supplier integrationproduct co-development Internal integrationintegrated product development Customer integrationproduct co-development

H2 Product codevelopment Product modularity Product performance

H5

H7

H6
Supplier integrationorganizational coordination

H3 Organizational coordination

Figure 1. The hypothesized research model

Internal integrationfunctional coordination Customer integrationorganizational coordination

The results are reported in the Appendix, Table AI. The overall t of the conrmatory factor analysis was good (x 2 1,079.8925, df 644, x 2/df 1.6769, comparative t index (CFI) 0.9838, incremental t index (IFI) 0.9839). All standardized factor loadings were highly signicant, which indicates good convergent validity among the instruments of each construct. The modication indices in the conrmatory factor analysis for omitted paths shown no signicant cross-loadings among the items (i.e. all results are below 0.85), indicating good discriminant validity (Kline, 1998). These results support the overall validity of the proposed factor structure of the model. 4.3 Model and hypothesis testing The hypothesized research model was tested by structural equation modelling. AMOS 4.02 was used to solve the structural equation models (Arbuckle and Wothke, 1995). As the model involves a multifaceted concept of SCI, a partial disaggregation modelling technique was adopted, as suggested by Bagozzi and Heatherton (1994). The three components of SCI (i.e. information sharing, product co-development and organizational coordination) are each addressed using at least two indicators, whereby the components are allowed to covary (Bollen, 1989, p. 244). Composites of validated items for each dimension (e.g. supplier integration-product co-development, customer integration-product co-development, and internal integration) are treated as indicators of a single component (in this case, product co-development). A statistically signicant model suggests that indicators measure a single component which can predict product modularity and performance. A partial disaggregation model is a more ne-grained representation of a multifaceted construct. It can represent the hierarchical structure of components within a single construct, while keeping the concept of the construct as a whole (Bagozzi and Heatherton, 1994). It can also estimate the correlations between dimensions, components and constructs, while taking into account measurement errors in the model. In practice, it has low levels of random error in items, a few parameters that must be estimated, and a small number of items per factor. This modelling technique thus leads to better model specication (Bagozzi and Heatherton, 1994). In the analysis of the model, maximum likelihood estimation and standardized regression weighting were used for interpretation (Schumacker and Lomax, 1996). Composite scales of the corresponding constructs determine each organizational process of SCI, as well as product modularity and performance (Swafford et al., 2006; Bagozzi and Heatherton, 1994). Multiple indices of t were used to specify the overall model t, including CFI, IFI and relative x 2. The combination of maximum likelihood estimation with CFI and IFI has little bias towards underestimating the t of the model and sampling variability, leading to accurate model testing (Bentler, 1990). The values of both CFI and IFI, both over 0.9, indicate a good model t. In addition, the relative x 2, also called the x 2/df ratio, is suggested to test the model t (Arbuckle and Wothke, 1995). The x 2/df ratio of less than ve indicates that there was acceptable model t (Marsh and Hocevar, 1985). The research hypotheses were validated with the signicance of a t-test in each path with parameter estimates from the structural equation modelling. 5. Results 5.1 Company proles Table IV gives details of the companies included in the sample. It indicates the proportions from each of the electronics, toy and plastics industries and the size of the companies.

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36

Table IV also indicates the proportion of the companies having specic functions based in Hong Kong and the mainland of China, distinguishing sales and marketing, R&D, logistics and production. Finally, it gives some details of the companies major suppliers and customers. The gures shown in Table IV indicate that the sample is similar to those in previous surveys of Hong Kongs manufacturing industry (FHKI, 2003; HKTDC, 1998), and is representative of the general situation in the sampled industries. 5.2 Descriptive statistics Table V shows descriptive statistics for all measures in Figure 1. In the table, seven out of eight variables of SCI are positively and signicantly ( p , 0.05) associated with product modularity; the exception is internal integration-functional coordination (II-FC). In addition, six out of eight variables of SCI are positively and signicantly ( p , 0.05) associated with product performance; the exceptions are organizational coordination with customers and supplier integration (CI-OC and SI-OC). A positive association between product modularity and performance was found ( p , 0.01). 5.3 Model testing Figure 2 shows the structural equation model of the hypothesized research model. The two-way arrows represent the correlation coefcients between two connected variables and the one-way arrows represent the regression coefcients from an independent variable to a dependent variable (arrowhead). The standardized path coefcients with the signicance of the t-test are displayed beside the arrows to represent the signicance of the correlation or regression coefcients, respectively, (Worren et al., 2002). According to the empirical results, H1 and H3 are not supported, indicating that information sharing and organizational coordination do not lead to improved product performance. But, H2 is supported, indicating that product co-development across suppliers, customers and internal functional units directly leads to superior product performance (r 0.21, p , 0.01). The result suggests that customer satisfaction, sales and prot goals, and protability can be achieved if manufacturers co-develop products with external and internal parties. As posited in H4-H6, the empirical results show that product co-development (r 0.20, p , 0.05) and organizational coordination (r 0.18, p , 0.05) are positively and signicantly associated with product modularity. As posited in H7, the results show that product modularity is signicantly associated with product performance (r 0.11, p , 0.1) although the coefcient is small. This suggests that products with high product modularity have slightly better performance than products with low product modularity in the sampled industries. Apart from testing the hypotheses, the results show that product co-development is signicantly correlated with organizational coordination (r 0.49, p , 0.01) and information sharing (r 0.53, p , 0.01). Organizational coordination is also correlated with information sharing (r 0.44, p , 0.01). According to the partial disaggregation modelling, these inter-correlations among the three organizational processes indicate that they are facets of a single underlying factor (Bagozzi and Heatherton, 1994), which, in this study, is SCI. The results should not be used to verify any indirect relationship if that relationship goes through these inter-correlations in the model. To be conservative, the present study only proposes indirect relationships if those relationships are supported by the existing literature.

Mean 2.7363 1.0511 1 3.4183 0.7182 0.176 * * 1 2.7649 1.0327 0.187 * * 0.163 * * 1 2.6707 1.0248 0.197 * * 0.196 * * 0.401 * * 1 1.8008 0.9128 0.207 * * 0.053 2.9920 1.0307 0.170 * * 0.128 * 0.708 * * 0.269 * 0.271 * * 1 0.351 * * 0.385 * 1

SD

PM

PP

SI-IS

SI-PC

SI-OC

CI-IS

CI-PC

CI-OC

II-FC

II-IPD

3.1594 1.0546 0.227 * * 0.174 * * 0.222 * * 0.525 * 0.221 * * 0.400 * * 1 1.8825 0.9616 0.272 * * 0.071 3.6922 0.8807 0.103 3.547 0.9746 0.128 * * 0.129 * 0.299 * * 0.353 * 0.788 * * 0.365 * * 0.309 * * 1 0.275 * * 0.188 * * 0.090 1 0.157 * 0.174 * * 0.009 0.665 * * 1

Product modularity (PM) Product performance (PP) Supplier integration-information sharing (SI-IS) Supplier integration-product co-development (SI-PC) Supplier integration-organizational coordination (SI-OC) Customer integration-information sharing (CI-IS) Customer integration-product co-development (CI-PC) Customer integration-organizational coordination (CI-OC) Internal integration-functional coordination (II-FC) Internal integration-integrated product development (II-IPD) 0.207 * * 0.351 * * 0.277 * 0.094 0.239 * * 0.256 * 0.054

Notes: *, * *Correlations are signicant at the 0.05 and 0.01 levels (two-tailed), respectively; n 251

SCI and product modularity

Table V. Correlation matrix built on Pearson correlation

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Supply chain integration

e1 e2
Supplier integrationinformation sharing Customer integrationinformation sharing

0.84*** Information sharing 0.84*** n.s. n.s. 0.21*** 0.20** Product modularity e9 n.s. 0.11* Product performance e10

38

e3 e4 e5 0.65*** e6 e7 e8

Supplier integrationproduct codevelopment Internal integrationintegrated product development

0.78*** 0.13** Product codevelopment

Customer integrationProduct codevelopment

0.68***

Supplier integrationorganizational coordination

0.18** 0.85***

Internal integrationfunctional Organizational coordination coordination 0.14** 0.93*** Customer integration organizational coordination

Overall model fit 2/df = 4.4310; CFI = 0.98; IFI = 0.98 *P<0.1; **P<0.05; ***P<0.01

Figure 2. The structural model results

Notes: Correlation between information sharing and product co-development is 0.53***; correlation between information sharing and organizational coordination is 0.44***; correlation between product co-development and organizational coordination is 0.49***

On the other hand, the study found that the measurement error of functional coordination is correlated with that of integrated product development, as indicated by modication indices. Clearly, functional coordination could be related to integrated product development (Kahn, 1996). In fact, periodic interdepartmental meetings and formal teamwork are common practices usually adopted in integrated product development (Kahn and McDonough, 1997; Kahn and Mentzer, 1996). To further check the correlation among measurement errors, an alterative model was tested. The alternative model is similar to the model in Figure 2, except that both functional coordination (II-FC) and integrated product development (II-IPD) are excluded from the proposed components of SCI. The excluded variables are specied as two indicators of a new component, called internal integration, within the construct of SCI. In other words, in the alternative model, there are four components within SCI, i.e. information sharing, product co-development, organizational coordination, and internal integration. The overall t of the alterative model was poorer than the original model. This result empirically supports the model shown in Figure 2. 6. Discussion The overall model in Figure 2 shows that SCI includes, but may not be limited to, three organizational processes (i.e. information sharing, product co-development and organizational coordination). These processes are interrelated and have different impacts on product modularity and performance. This broadly agrees with the view in the literature that SCI has signicant and positive effects on product design and development. This study further suggests that SCI involves three organizational processes and one of them (product co-development) can directly improve product performance. The other two processes (product co-development and organizational coordination) may be

complementary in nature in that they can indirectly improve product performance through modular product design. Detailed discussion on each hypothesis is developed below. 6.1 SCI and product performance The results of testing H1-H3 provide more evidence and specic information on how SCI is related to product performance. 6.1.1 Information sharing and product performance (H1). The empirical results of the test on H1 are contrary to the expectations based on the literature. According to the literature, information sharing across suppliers and customers on performance should be rmly rooted in product development and supply chain management. However, the present study is not unique in nding evidence against this hypothesis, as similar results have been reported in the eld of market orientation (Frishammer and Horte, 2005). Some literature argues that information shared by customers may be restricted to what is familiar to the customers (Bennett and Cooper, 1981). Hamel and Prahalad (1994) suggest that customers cannot foresee future changes, and that companies may fail to develop innovative products because they are attentive to the needs of current customers. Katz (2003) also argues that customers sometimes ask for familiar products and encourage manufacturers not to innovate, since new products usually require the customer to put in new supporting resources for the product and this leads to a waste of some customers existing resources. Similarly, suppliers may provide familiar ideas to manufacturers in product development in order to protect the value of their existing resources, such as production capacity and engineering knowledge. By limiting themselves to information acquired from current customers and suppliers, manufacturers might restrict their innovation capabilities in product development. Frishammar and Horte (2005) argue that the information which is provided by customers and suppliers may not be used adequately in product development. Sometimes it is difcult to translate the external information into a useful form that can be used in product development in a short period of time. If a product market is characterized by constantly changing technologies and customer preferences, manufacturers may not have enough time to apply the information, and if it is not applied it cannot affect product performance. 6.1.2 Product co-development and product performance (H2). Consistent with the hypothesized model, the results of testing H2 support the existing literature in the conclusion that product co-development is required to improve product performance (Grifn, 2002; Hargadon and Eisenhardt, 2000; Brown and Eisenhardt, 1995; Clark, 1989). The participation of multiple internal parties in product development facilitates knowledge sharing, iterative learning and concurrent problem solving (Clark, 1989). It can potentially bring together multiple functional units so as to address the market requirements of new products. It also allows manufacturers to manage design changes exibly as design problems can be addressed at an earlier stage in the process. A failure to bring together all the internal parties in product development may extend product development time, increase costs and result in products that do not match market requirements, all of which can negatively affect product performance. The results also show that product co-development with suppliers and customers helps manufacturers to develop new products (Dyer, 2000; Brown and Eisenhardt, 1995; Clark, 1989). Where a new product is complex and the product market is rapidly

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changing, technological and marketing capabilities required for product development are often not owned by a single manufacturer (Dyer, 2000). Manufacturers thus tend to keep core capabilities in-house while working together with suppliers and customers in product development. This allows manufacturers to take advantage of their capabilities and to capitalize on supply chain partners capabilities in product development (Takeishi, 2001; Clark, 1989). In addition, the results show that product co-development with suppliers, integrated product development, and product co-development with customers can be combined as an organizational process in SCI. This is in line with the nding of Sherman et al. (2000) that manufacturers that put an emphasis on one integration activity also stress the development of other integration activities. In this vein, the present study suggests that manufacturers that integrate internal functional units in product development also emphasize the opportunities of product co-development with suppliers and customers. Similarly, manufacturers that neglect integrated product development also ignore the opportunities of product co-development with suppliers and customers. 6.1.3 Organizational coordination and product performance (H3). The results of testing H3 show that organizational coordination is not correlated with product performance. One possible explanation for this nding is that there is a trade-off between the cost of organizational coordination and its benets. The adoption of organizational coordination is costly as it may involve frequent travel to partners ofces, inter-organizational information technology (IT) systems, mutual understanding and trust building activities and complex contract agreements (Weele, 2002). A high level of commitment from the supply chain partners is required. Tidd et al. (2001) argue that, although closely integrating supply chain partners may help to reduce manufacturing costs, it complicates the product development processes. Thus, it is possible that the high cost of organizational coordination offsets its benets in product development. A number of empirical studies also nd negative effects of organizational coordination with external parties, such as increased development time for building organizational coordination (Zirger and Hartley, 1994), and expensive coordination costs (Ittner and Larcker, 1997). Another possible explanation for this nding is that organizational coordination efforts may facilitate modular product design, which in turn affects product performance indirectly. As discussed in Section 2.1.3, organizational coordination refers to sharing the right to make business decisions, and joint assessment/design of business systems across the supply chain. These activities probably promote trust and mutual commitment in the long-term and, initially, may involve high coordination costs, as discussed above. Thus, it is possible that the benets of organizational coordination are not signicant in the short-term. Rather, after a period of time, after the organizationally coordinated supply chain partners perform well in product development or other business activities, the benets of organizational coordination could be signicant. Based on the structural model in Figure 2, the present study indicates that after the organizationally coordinated supply chain performs well in modular product design the manufacturer can improve product performance. This cross-sectional empirical study cannot test this argument. Future research will be conducted to examine it on a longitudinal basis. 6.2 SCI and product modularity H4-H6 provide more evidence on how SCI interacts with product modularity.

6.2.1 Information sharing and product modularity (H4). In contrast to the hypothesized model, information sharing is not signicantly related to product modularity. The empirical results of the present study suggest, however, that information sharing is related to product co-development and organizational coordination, as shown in Figure 2. This suggests that information sharing has an indirect effect on product modularity. Sabel and Zeitlin (2004) argue that product co-development requires supply chain organizations to share information on benchmarking, parallel engineering and design problems and modications. Information sharing is required to hold the developers in organizations together (Orton and Weick, 1990). For example, Dell, as one of the leading manufacturers in the modular computer market, has an internet-based information system sharing a range of information with their supply chain partners to ensure system integration and on-time delivery (Sabel and Zeitlin, 2004; Lee, 2000). 6.2.2 Product co-development and product modularity (H5). Consistent with the hypothesized model, the present study found that product co-development is signicantly correlated with product modularity. This nding supports the arguments from the product design literature that product co-development with suppliers, internal functional units and customers is crucial in solving technical problems and specifying the interfaces of product modules in the early stages of product development (Sanchez, 1995). Product co-development is also identied as a crucial component within SCI when solving modularity problems (Sabel and Zeitlin, 2004; Mikkola, 2003; Dyer, 2000; Hsuan, 1999). 6.2.3 Organizational coordination and product modularity (H6). Consistent with the hypothesized model, the present study found that there is a positive relationship between organizational coordination and product modularity. This nding supports the arguments from the product design literature that modular product design requires extensive internal and external coordination in the development processes in order to specify and modify the interface of modules and overall product design (Sabel and Zeitlin, 2004; Brusoni and Prencipe, 2001). Therefore, organizational coordination is crucial to solving the modularity problems, as indicated in the product development literature (Sabel and Zeitlin, 2004; Mikkola, 2003; Dyer, 2000; Hsuan, 1999). Overall, in reviewing the various discussions about product modularity and SCI, the present study concludes that modular product design generally requires the direct support of product co-development and organizational coordination and indirect support from information sharing. In contrast to the ndings of Fine (1998) that loosely integrated supply chains are preferred for modular product design, this study shows that a tightly integrated supply chain is required if modular product design is adopted. In product development, a lot of coordination effort is required to ensure that the interactions among product components are well-developed because it is difcult to establish a set of clearly dened interfaces across product modules (Sabel and Zeitlin, 2004). Malerba and Orsenigo (2000) also argue that using tightly integrated designers to co-develop product modules is essential to make sure that the overall product modules are properly designed, evaluated and rened with appropriate costings in product development. In fact, some leading companies have developed integration mechanisms for suppliers, customers and internal functional units to ensure good interactions among components in product development (Sabel and Zeitlin, 2004; Dyer, 2000). As the rst large-scale empirical study (as far as can be ascertained) directly to

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test the relationship between modularity and SCI, the present study supports the need for further research on this topic. 6.3 Product modularity and product performance (H7) From the survey results, product modularity is signicantly correlated with product performance. The present study supports H7 that, overall, modularity leads to better performance. As discussed in Section 2.2.4, the adoption of modular product design improves design and manufacturing capabilities and thus improves product performance. However, the low coefcient in the relationship may suggest that modularity has some negative effects on performance, as discussed in Section 2.2.4. For example, Kim and Chhajed (2000) found that common modules reduce the perceived difference in quality between premium and economic products and adversely affect prots if there is a higher expectation for the difference in quality. In fact, Toyota is cautious on product modularization as the modular approach may lead to lower standards of product integrity than Toyota demands in its vehicles (Dyer, 2000). Thus, future research will need to be conducted to further examine the relationships between modularity and performance by inserting mediators such as production cost (Robertson and Ulrich, 1998), quality (Ulrich and Tung, 1991) or strategic exibility (Worren et al., 2002) in the model development. 7. Conclusion 7.1 Implications for research The role of tightly integrated supply chains in improving company performance has been identied in previous research (Rosenzweig et al., 2003; Frohlich and Westbrooks, 2001). The present study theoretically and empirically identies three specic organizational processes within SCI (information sharing, product co-development and organizational coordination), which affect modular product design and product performance. These more specic ndings were previously absent from the literature. Consistent with the literature, the ndings of the present study indicate a direct, positive relationship between product co-development and product performance. This suggests that product co-development across suppliers; customers and internal functional units directly affect product performance in the sampled industries. However, in contrast to previous studies, no empirical evidence was found to support direct effects between information sharing and product performance, or between organizational coordination and product performance. Rather, the ndings suggest that it is difcult to capitalize on the benets of information sharing and organizational coordination. A great deal of effort may be required to manage these processes in order to achieve better product performance. This study supports the literature in identifying the importance of product co-development on product performance but, in contrast to the existing literature, suggests that the impact of information sharing and organizational coordination on product development has been overestimated. Information sharing and organizational coordination may benet other aspects of business performance, such as productivity, market share, return on investment or lead time (Rosenzweig et al., 2003; Frohlich and Westbrook, 2001). To further investigate this, future studies might build upon the present study by including additional performance indicators.

42

The present study empirically examines the relationships between SCI and product modularity, which has seldom been attempted in previous research. The empirical ndings show that product co-development and organizational coordination have direct relationships with product modularity, whereas information sharing may be indirectly associated with product modularity. The literature indicates that decisions on modularity require consideration of the supply chain design and coordination (Parker and Anderson, 2002; Sako, 2002; Nobelius and Sundgren, 2002; Salvador et al., 2002) with no reference to specic processes within SCI. The current study clearly identies exactly which processes within SCI are directly and indirectly related to product modularity. This study thus raises interesting questions that require further investigation with Fines (1998) theory of modular product design Can we reject Fines theory? If not, can our empirical ndings be aligned with Fines theory? Specically, which supply chain processes should be kept, or even strengthened, for modular product design? Although the relationship between product modularity and SCI has been an assumption behind much of the product development literature, this is probably the rst time that it has been demonstrated empirically with a large group of companies in the sampled industries. The result has the important implication that, although the association between modularity and performance is weak, modular product design would improve product performance across industries. Researchers should make more effort to study this relationship for companies of different sizes and in different industries. For example, researchers may study the impact of modularity in the clothing and food industries, which have recently adopted modular design in customizing new apparel with different colours and styles, e.g. Nike and Reebok (Kumar et al., 2007) and in personalizing colours, shapes or ingredients in snacks, such as My M&Ms custom candy (Mars, 2008). 7.2 Managerial implications The present study has demonstrated that information sharing, product co-development and organizational coordination affect product performance in different ways. Managers should put more emphasis on these specic aspects of SCI, especially when linked with modular product design (Rosenzweig et al., 2003; Parker and Anderson, 2002). The study also suggests that SCI affects modular product design. Managers should consider involving their suppliers, internal functional units and customers in early design stages, especially in the decisions relating to product modularity. To achieve product co-development with suppliers and customers, managers should identify, assess and qualify competent suppliers as a major supply base for the module design and production (Mentzer, 2004). This would enhance the companys capability to modularize products successfully by leveraging the technological resources from the supply base. By involving customers in modular product design, managers and the customers would derive mutual benet from sharing technological knowledge and R&D skills. Managers would also understand better how their customers will use their products and anticipate their needs. To develop a robust coordination environment for product co-development, managers should share production plans, inventory mix/level, marketing and technological information with the supply chain partners. The present study has demonstrated that product modularity has a direct effect on product performance. Manufacturers should consider how to modularize products by

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adopting proper design methods, such as modular function deployment (Erixon, 1996), design for modularity life cycle (Kamrani and Salhieh, 2002) or design rules proposed by Baldwin and Clark (2000). 7.3 Study limitations This study had limitations as specied below, which help to identify potential areas for future studies. Hong Kong industries consist of a large volume of small and medium-sized enterprises working on contract manufacturing. This structure may be different from that in other regions. Thus, the conclusions of this study may not be directly generalizable to other industries (Rosenzweig et al., 2003). Future studies of a similar kind in other regions would enhance the understanding of the inter-relationships among SCI, product modularity and performance. The present study used a single key informant for data collection. The underlying assumption behind this method is that a senior manager, by virtue of his or her position in the company, is capable of providing opinions and perceptions that can reect the companys behaviour (Philips, 1981). While there might be a concern that respondent bias could be a problem, all the reliability and validity tests in this study indicated that it was not. This study also adopted multiple item scales to measure each construct in the survey questionnaire and had multiple follow-up phone interviews to clarify the survey data. In future research, a multiple informant approach could be adopted. However, the complications of conducting research using multiple informants and the practical difculties of using information from such research should not be under-estimated (Kumar et al., 1993; Philips, 1981). The ndings of the present study are limited to the cross-sectional data used. However, product modules may affect multiple product families across various product life cycles as the modules can be reused several times for future product development. Thus, the relationship of modularity to both short-term and long-term product performance could be measured. In future research, multiple cross-sectional analyses in different time frames could be used to study the impact of modularity on performance over an extended period. The present study only examines three organizational processes within SCI, leaving other organizational processes within SCI unexamined. For example, the adoption of integrative ITs may be an important supply chain activity, which affects business performance (Vickery et al., 2003). Future research may identify more organizational processes within SCI and examine how these processes affect company performance, which would contribute signicantly to the supply chain management literature. The present study is limited to the operationalization of SCI and product modularity. Worren et al. (2002) found that product modularity cannot be captured entirely using existing scales. The multifaceted nature of SCI also means that many organizational processes within SCI could be explored. Even though this research has considered all instruments in the literature, and validated the instruments used via two pilot studies and a large-scale survey, the measure of modularity is limited to different modularity types and other quantitative measurements. The research ndings are also limited to the nature of the product types (i.e. end-products against components), which is not assessed in this study. Future research should re-examine the possibility of developing further measurements.

44

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Appendix

Measurement itemsa Literature support Narasimhan and Kim (2002), Frohlich and Dixon (2001), Frohlich and Westbrook (2001) and IMSS II Research Network (1996)

Information sharing To what extent does your organization integrate/coordinate activities with your suppliers? (None 1, extensive 5) Supplier integration-information sharing (SI-IS) a 0.8492 Share production plans Share inventory mix/level information Share technological information Share marketing information To what extent does your organization integrate/coordinate activities with your customers? (None 1, extensive 5) Customer integration-information sharing (CI-IS) a 0.8759 Share production plans Share inventory mix/level information Share technological information Share marketing information Product co-development To what extent does your organization integrate/coordinate activities with your suppliers? (None 1, extensive 5) Supplier integration-product co-development (SI-PC) a 0.8882 Joint product design Joint process engineering Joint production operations To what extent does your organization engage in integrating/ coordinating activities across departments or business functions? (None 1, extensive 5) Internal integration-integrated product development (II-IPD) a 0.9183 Close coordination in product design and development Information integration in production process Interactive system between production and sales Close coordination in product launch Narasimhan and Kim (2002), Frohlich and Dixon (2001), Frohlich and Westbrook (2001) and IMSS II Research Network (1996) Narasimhan and Kim (2002), Frohlich and Dixon (2001), Frohlich and Westbrook (2001) and IMSS II Research Network (1996) Narasimhan and Kim (2002), Ellinger et al. (2000), IMSS II Research Network (1996) and Kahn and Mentzer (1996)

Table AI. Results of conrmatory factor analysis

Standardized factor loadings * 0.6666 0.5157 0.8977 0.9116 0.6934 0.6923 0.8447 0.8683 0.7413 0.9005 0.9054 0.8263 0.8964 0.8675 0.8900 (continued)

Measurement itemsa Literature support Narasimhan and Kim (2002), Frohlich and Dixon (2001), Frohlich and Westbrook (2001) and IMSS II Research Network (1996) 0.7667 0.9343 0.8807 Narasimhan and Kim (2002), Frohlich and Dixon (2001), Frohlich and Westbrook (2001) and IMSS II Research Network (1996) 0.8296 0.6457 0.8642 0.8049 Narasimhan and Kim (2002), Ellinger et al. (2000), Kahn and Mentzer (1996) and IMSS II Research Network (1996) 0.7778 0.7823 0.8937 0.9022 Narasimhan and Kim (2002), Frohlich and Dixon (2001), Frohlich and Westbrook (2001) and IMSS II Research Network (1996) 0.7949 0.6637 0.8877 0.8499 (continued)

Standardized factor loadings *

To what extent does your organization integrate/coordinate activities with your customers? (None 1, extensive 5) Customer integration-product co-development (CI-PC) a 0.8914 Joint product design Joint process engineering Joint production operations Organizational coordination To what extent does your organization integrate/coordinate activities with your suppliers? (None 1, extensive 5) Supplier integration-organizational coordination (SI-OC) a 0.8636 Decide technical facility location Common use of logistical equipment/containers Mutual business systems design Access to company planning systems To what extent does your organization engage in integrating/ coordinating activities across departments or business functions? (None 1, extensive 5) Internal integration-functional coordination (II-FC) a 0.9177 Periodic interdepartmental meetings Data integration among internal functions Formal teamwork Close coordinating activities To what extent does your organization integrate/coordinate activities with your customers? (None 1, extensive 5) Customer integration-organizational coordination (CI-OC) a 0.8743 Decide technical facility location Common use of logistical equipment/containers Mutual business systems design Access to company planning systems

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Table AI.

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Measurement itemsa Literature support

Product modularity How would you describe your main product(s)? (None 1, Lin (2003), Worren et al. (2002) and Duray et al. (2000) extensive 5) Product modularity (PM) a 0.8722 Product can be decomposed into separate modules We can make changes in the key component without redesigning others Product components can be reused in various products Product has high degree of component carry-over Products components are standardized Product performance To what extent do you describe the main product Ward and Duray (2000), Ellinger et al. (2000) and Song and performances? (None 1, extensive 5) Parry (1999) Product performance a 0.8760 The product has achieved our sales goal The product has achieved our prot goal The product has had great protability Customers are very satised with the product performance 2 x value Degree of freedom x 2 value/degree of freedom CFI IFI

Notes: *All standardized regression weights are signicant at p-value , 0.01; aonly items that are reliable and conrmed by factor analysis are shown; n 251

Table AI.
Standardized factor loadings * 0.6298 0.7023 0.9075 0.9236 0.5749 0.8416 0.9334 0.7972 0.6618 1.6769 0.9838 0.9839