the role of supply chain processes and information sharing in supply chain management

Structural equation modeling is used to explore the relationships among five supply chain processes, four aspects of information sharing, supply chain dynamism, and five dimensions of bu

THE ROLE OF SUPPLY CHAIN PROCESSES AND INFORMATION SHARING IN SUPPLY CHAIN MANAGEMENT

DISSERTATION

Presented in Partial Fulfillment of the Requirement for

the Degree Doctor of Philosophy

in the Graduate School of The Ohio State University

By Honggeng Zhou, B.S., M.S., M.A

*****

The Ohio State University

2003

Dissertation Committee: Approved by

Professor W.C Benton, Advisor

Professor Glenn Milligan _

Professor David Schilling Graduate Program in Business Administration

Copyright by Honggeng Zhou

2003

ABSTRACT

Supply chain process and information sharing play critical roles in today’s supply chain management Previous research in supply chain management has studied various supply chain processes and different aspects of information sharing separately Therefore, this dissertation proposes a comprehensive framework to study the relationships among supply chain process, information sharing, supply chain dynamism, and business

The empirical part of this dissertation uses a cross-sectional survey method Structural equation modeling is used to explore the relationships among five supply chain processes, four aspects of information sharing, supply chain dynamism, and five

dimensions of business performance Responses from 120 executives in manufacturing industries, representing a 18 percent response rate, suggest that both effective supply chain process and effective information sharing are necessary to achieve optimal business performance When supply chain dynamism increases, effective information sharing

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becomes more important Information sharing does not have direct positive impact on business performance, but it has positive impact on business performance through

effective supply chain process Effective supply chain process has positive influence on all performance dimensions, but the degrees of positive influence vary for different performance dimensions

The analytical methodology tests three of the six research hypotheses proposed in this dissertation, one of which can not be tested by the empirical methodology The empirical methodology tests five of the six research hypotheses, three of which can not

be tested by the analytical methodology The analytical and empirical research

methodologies corroborate and complement each other The results of this dissertation research show that both effective supply chain process and effective information sharing are necessary for achieving optimal business performance under alternative supply chain dynamism Effective information sharing is important for assimilating supply chain dynamics information and using that information to guide the use of effective supply chain process Effective supply chain process is important for mediating the influence of effective information sharing on business performance Executives must balance the investment in information sharing and supply chain process

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Dedicated to My Grandfather, My Father, My Mother, and My Sister

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ACKNOWLEDGMENTS

I am forever grateful to my advisor, Dr W.C Benton, who provided guidance, support, and love throughout the research Dr Benton taught me not only how to conduct

scholarly research, but also how to become a better person Without his help, this

dissertation as well as my future career would never be possible

I would like to thank the committee members, Dr Glenn Milligan and Dr David

Schilling, for their critical insights, suggestions, and support throughout my education at the Ohio State University

I also would like to thank Drs William Berry, David Collier, Nicholas Hall, Keong Leong, and Dr Peter Ward for their guidance and help during my coursework and in my research

Further thanks are extended to my dear colleagues, especially Dr Hojung Shin, Dr Carol Prahinski, and Eric Olsen And for those friends, family, and students who provided me fun in my non-academic life, thank you very much

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VITA

October, 19, 1974 ……… Born - Hangzhou, Zhejiang, P R China

1993-1997 ……… B.S., Computer Science and Engineering

1997-1999 ……… M.S., Statistics and Computer Science

1999-2002 ……… M.A., Business Administration

FIELDS OF STUDY Major Field: Business Administration

Concentration: Operations Management

Minor Field: Management of Information Systems

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TABLE OF CONTENTS

Page

ASTRACTS……… ii

DEDICATION……… iv

ACKNOWLEDGEMENT……… v

VITA……… vi

LIST OF TABLES……… xi

LIST OF FIGURES……… xiii

CHAPTER 1: RESEARCH OVERVIEW……… 1

1.1 Introduction……… 1

1.2 Research Background and Motivation……… 3

1.3 Research Objectives……… 5

1.4 Overview of Research Methodology……… 6

1.5 Contributions and Findings……… 9

1.6 Summary……… 12

CHAPTER 2: LITERATURE REVIEW……… 14

2.1 Introduction……… 14

2.2 Supply Chain Processes……… 16

2.2.1 Supply Chain Operations Reference (SCOR) Model………… 16

2.2.2 “Plan” Process……… 19

2.2.3 “Source” Process……… 23

2.2.4 “Make” Process……… 26

2.2.5 “Deliver” Process……… 31

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2.2.6 “Return” Process……… 33

2.2.7 Relationship between Supply Chain Processes and Business Performance………

34 2.3 Information Sharing……… 34

2.3.1 Information Sharing Support Technologies……… 35

2.3.2 Information Content……… 37

2.3.3 Information Quality……… 39

2.3.4 Information Sharing and Supply Chain Processes……… 42

2.3.5 Information Sharing and Business Performance……… 44

2.4 Supply Chain Dynamism……… 48

2.4.1 Supply Chain Dynamism……… 48

2.4.2 Supply Chain Information Sharing System Dynamics……… 50

2.5 Business Performance……… 52

2.6 Summary……… 54

CHAPTER 3: RESEARCH PROBLEM FORMULATION AND RESEARCH PLAN………

65 3.1 Introduction……… 65

3.2 Research Problem Formulation……… 65

3.2.1 General Research Problem Formulation……… 66

3.2.2 Analytical Problem Formulation……… 68

3.2.3 Empirical Problem Formulation……… 70

3.3 Analytical Research Plan……… 73

3.4 Empirical Research Plan……… 76

3.4.1 Prior Structural Equation Models……… 76

3.4.2 Instrument Design and Development……… 85

3.4.3 Data Collection……… 94

3.5 Summary……… 97

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CHAPTER 4: ANALYTICAL MODELS……… 98

4.1 Introduction……… 98

4.2 Research Motivation and Model Description……… 98

4.3 Two Suppliers……… 102

4.4 Three Suppliers……… 112

4.5 Many Suppliers……… 118

4.5.1 Model Description……… 119

4.5.2 Experimental Results……… 124

4.6 Summary……… 130

CHAPTER 5: MEASUREMENT VALIDATION RESULTS OF THE EMPIRICAL STUDY………

134 5.1 Introduction……… 134

5.2 Sample Demographics……… 134

5.2.1 Characteristics of the Respondents and Their Firms………… 135

5.2.2 Missing Data and Model Assumption Checking……… 136

5.2.3 Non-response Bias……… 138

5.3 Measurement Validation and Results……… 147

5.3.1 Measurement Validity……… 147

5.3.2 Measurement Reliability……… 148

5.3.3 Item Deletion Process……… 149

5.3.4 Sampling Adequacy and Correlation Matrix Sphericity Testing 166 5.4 SUMMARY……… 167

CHAPTER 6: TESTING THE STRUCTURAL EQUATION MODELS AND HYPOTHESES………

169 6.1 Introduction……… 169

6.2 Fit Indices……… 169

6.3 COST Model……… 171

6.4 FLEXIBILITY Model……… 177

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6.5 RESPONSIVENSS Model……… 181

6.6 DELIVERY Model……… 185

6.7 FINANCIAL Model……… 189

6.8 Summary……… 193

CHAPTER 7: RESEARCH FINDINGS, CONTRIBUTIONS, AND IMPLICATIONS………

196 7.1 Introduction……… 196

7.2 Research Findings and Managerial Implications……… 197

7.2.1 Methodological Contributions……… 198

7.2.2 Influence of Supply Chain Process on Business Performance… 202

7.2.3 Influence of Information Sharing on Supply Chain Process and Business Performance………

205 7.2.4 Influence of Supply Chain Dynamism on Supply Chain Process and Information Sharing………

210 7.3 Summary……… 215

CHAPTER 8: CONCLUSION……… 218

8.1 Introduction……… 218

8.2 Research Overview……… 218

8.3 Research Findings……… 220

8.4 Limitations……… 221

8.4.1 Limitations of Empirical Study……… 221

8.4.2 Limitations of Analytical Study……… 223

8.5 Future Research ……… 224

Bibliography……… 226

Appendix: A: Survey Questionnaire……… 242

x

LIST OF TABLES

2.1 Summary of Literature on Supply Chain Process, Information Sharing,

Supply Chain Dynamism, and Business Performance……… 55

2.2 Research Hypotheses Addressed in Analytical and Empirical Models 63

3.1 Summary of Responses……… 97

4.1 Overview of Six Cases in Two Suppliers Model……… 102

4.2 Total Costs of the Three Cases in the Three Suppliers Model………… 115

4.3 Simulation Factors and Factor Levels……… 120

4.4 Percentage of Cost Saved in Hypothesis A……… 125

4.5 Percentage of Cost Saved in Hypotheses B……… 126

4.6 Percentage of Cost Saved in Hypothesis C……… 127

4.7 Percentage of Cost Saved in Hypothesis D……… 128

4.8 Critical Mass Number of Suppliers in Hypothesis E……… 129

5.1 Reported Average Number of Employees in the Responding Companies………

136 5.2 Manufacturing Process Technology……… 136

5.3 Annual Sales Value of the Responding Companies……… 137

5.4 Public or Private Company……… 137

5.5 Summary of Measurement Scales……… 139

5.6 Comparing Early to Late Respondents……… 146

5.7 Original Factor Loadings of Information Sharing Support Technology 152 5.8 Original Factor Loadings and CITCs of Manufacturer’s Information… 153 5.9 Original Factor Loadings and CITCs of Supplier’s Information……… 154

5.10 Original Factor Loadings and CITCs of Plan Scale……… 154

5.11 Original Factor Loadings of Source Scale……… 155

5.12 Original CITCs of Deliver Scale……… 155

5.13 Original CITCs of Return Scale……… 156

5.14 Original CITCs of Supply Chain Dynamism Scale……… 156

5.15 Original Factor Loadings and CITCs of Responsiveness Scale……… 157

5.16 Item Deletion Process……… 158

5.17 Final Results of Measurement Validation……… 160

6.1 Desirable Ranges of Fit Indices……… 171

6.2 Estimations of Measurement Model Parameters for the COST Model 174

6.3 Measures of Overall Model Fit for the COST Model……… 175 6.4 Summary of Statistical Tests for the Hypotheses in the COST Model… 175 6.5 Estimations of Measurement Model Parameters for the FLEXIBILITY 178

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Sharing………

213

xii

LIST OF FIGURES

Figure Page

1.1 Dissertation Overview……… 13

2.1 The Conceptual Model……… 15

2.2 Supply Chain Operational Reference (SCOR) Model……… 18

2.3 The Conceptual Model with Research Hypotheses……… 61

3.1 Empirical Models……… 71

3.2 COST Model……… 79

3.3 FLEXIBILITY Model……… 80

3.4 RESPONSIVENESS Model……… 81

3.5 DELIVERY Model……… 82

3.6 FINANCIAL Model ……… 83

4.1 Flow Diagram of the Simulation Model……… 124

4.2 Critical Mass Number of Suppliers in Hypothesis E ……… 130

5.1 Overview of the Empirical Analysis Procedures……… 135

5.2 Item Deletion Process……… 151

6.1 Overview of the Structural Equation Model Analysis……… 170

6.2 COST Model……… 176

6.3 FLEXIBILITY Model……… 180

6.4 RESPONSIVENESS Model……… 184

6.5 DELIVERY Model……… 188

6.6 FINANCIAL Model ……… 192

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of purchasing managers suggests that the wave of new online business-to-business

activities is far from cresting … New technologies for supply-chain management and

flexible manufacturing imply that businesses can perceive imbalance in inventories at a very early stage – virtually in real time – and can cut production promptly in response to the developing signs of unintended inventory building.”1 In addition to inventory

reduction, information technology can benefit many other areas of supply chain

management such as purchasing and delivery

The concept of supply chain management extends the operations within a single business unit to the entire supply chain A supply chain consists of a set of processes that coordinate independent business units in a supply chain Since supply chain members are independent, they tend to optimize their own performance objectives, without considering

1 By Federal Reserve Board Chairman Alan Greenspan before the Senate Banking Committee in Feb 2002

the impact on the entire supply chain Thus, it is important to manage supply chains from

an entire supply chain perspective rather than an individual supply chain member

perspective

In this study, an industrial supply chain is defined as a set of independent firms that participate in different activities to produce a product or service for an ultimate customer This definition is broad enough to incorporate both the supply and the

customer side of a chain This dissertation focuses on five supply chain processes:

planning process, sourcing process, production process, delivery process, and product return process A supply chain process is regarded as an effective process if a set of selected best practices has been implemented

Information technology management is another focus of this dissertation During the past decade, information technology investment in Corporate America has increased significantly The Aberdeen Group estimates that information technology spending which includes hardware, software, and services totaled $462 billion in the United States in

2001 (Supply Chain Council, 2002) As information technology has developed in the past decade, it has had an impressive impact on supply chain management While the concept

of information technology management covers many aspects of a supply chain, the focus

of information technology management in this dissertation is information sharing among supply chain members In particular, this study focuses on three aspects of information sharing: information sharing support technology, information content, and information quality Information sharing support technology includes the hardware and software needed to support information sharing Information content refers to the information shared between suppliers and buyers (manufacturers) It includes two directions of

information flows: (1) the information that suppliers share with their manufacturers; and (2) the information that manufacturers share with their suppliers Information quality measures the quality of information shared between suppliers and manufacturers In sum, the three aspects of information sharing measure the technologies used to support

information sharing, the information shared among supply chain partners, and the quality

of information shared

In today’s industry, effective supply chain process and effective information sharing are two major approaches to improve business performance (Piszczalski, 2002) While some companies emphasize improving supply chain process capabilities, others emphasize leveraging information technology such as Enterprise Resource Planning (ERP) Since these two major approaches are not independent, firms should work on both supply chain processes and information sharing simultaneously A good example is

Toyota which is well known for its effective processes Realizing the importance of information sharing, Toyota began to implement SAP in late 1990 and work on both effective processes and information sharing However, extant research provides very little guidance on the role of supply chain processes and information sharing in supply chain management, which is the focus of this dissertation

1.2 RESEARCH BACKGROUND AND MOTIVATION

Both supply chain processes and information sharing are important to improve business performance for today’s companies Furthermore, it is important to integrate supply chain processes with information sharing Supply chain processes focus on material movement (Chopra and Meindl, 2000), while information sharing focuses on

information flow (Premkumar and William, 1994) In practice, information sharing is important in supply chain management Japanese-style supply chain relationships result

in better performance because partnering firms share more information and are better at coordinating interdependent tasks (Fruin, 1992) Michael Dell of Dell Computer states that the companies that position themselves to take advantage of the Internet to build information partnerships with their suppliers and customers have the potential to fundamentally change the face of global competition and change the definition of the value provided to customers and constituents.2

A good example of leveraging information sharing in supply chain management is Covisint, which was jointly developed by Daimler-Chrysler, Ford, and GM in 2000 "Co" stands for cooperation and communication, "vis" is for visibility and visions, and "int" is for Internet and international The Big Three automotive manufacturers hoped to use Covisint to purchase materials electronically from most of their suppliers A global

business-to-business supplier exchange was developed Among the Big Three, GM is the most aggressive user of Covisint In 2001, GM purchased $96 billion dollars from

suppliers through Covisint Daimler-Chrysler purchased $3 billions dollars of goods and services through Covisint during the same period Moreover, Ford announced that it saved $70 million during 2001 as a direct result of using Covisint While the owners of Covisint are reaping benefits from this online transaction space, most auto suppliers are still not willing to subscribe to Covisint3 To date, 2000 of the 5000 automotive suppliers acknowledge the use of Covisint for their transaction In addition, Covisint as an

independent entity still has not become profitable yet The reasons why the majority of

2 Presentation at the Fisher college of Business duing the Spring of 2001

3 See Freep.com, Feb 2002

auto suppliers are not willing to sign onto the system are still not clear yet One possible reason is that most suppliers may not have the information technology capabilities

required for the Covisint system Another possible reason is that most suppliers believe that Covisint may not be economically beneficial to their firms It is unclear whether auto suppliers can benefit from using Covisint

Although practitioners are enthusiastic about integrating supply chain processes with information sharing, no comprehensive scholarly research has yet investigated the role of information sharing and supply chain processes in supply chain management under alternative supply chain dynamism that includes both supply chain business

environment dynamics and supply chain information sharing system dynamics The purpose of this dissertation is to investigate the influence of supply chain processes and information sharing on business performance under alternative supply chain dynamism

1.3 RESEARCH OBJECTIVES

The purpose of this dissertation is twofold First, from the practitioner viewpoint, this study addresses an important practical question: how should manufacturing firms make investment in information sharing and supply chain processes? Especially, how should firms balance the investment in information sharing and supply chain processes?

To date, there are no clear answers Hopefully, the results of this study provide managers with some guidance on this question Second, this dissertation is expected to make the following contributions to academic literature:

• It provides complementary analytical and empirical models that explore the

relationships among information sharing, supply chain processes, supply chain

dynamism, and business performance In particular, it provides insights on the

following research questions:

1 How does information sharing enable effective supply chain process?

2 How do effective supply chain process and effective information sharing affect business performance?

3 How does supply chain dynamism impact effective supply chain process and effective information sharing?

• It contributes to the theory development in supply chain management research The results of the analytical and empirical studies help better understand the different roles of information sharing and supply chain processes in supply chain management

• It develops and validates several new high order multidimensional constructs for information sharing and supply chain process as well as several first order constructs

1.4 OVERVIEW OF RESEARCH METHODOLOGY

To achieve the research objectives, this research utilizes both analytical and empirical research methodologies, corroborating and complementing each other The analytical methodology provides insights and intuitions of the research problem and helps formulate the empirical models The empirical methodology confirms the results found

by the analytical methodology and adds the generality of the findings Chapter 2 of this dissertation reviews the literature and proposes six research hypotheses Chapter 3

formulates the research problem and lays out the research plans for both analytical and

empirical studies Three of the six research hypotheses are addressed by the analytical models in Chapter 4, and five of the six research hypotheses are addressed by the

empirical models in Chapter 5 and Chapter 6 The three hypotheses that are not

appropriate to test with analytical models are tested with the empirical models The hypothesis that is not appropriate for empirical models to test is tested in the analytical models

Chapter 4 of the dissertation uses mathematical models and simulation models to consider the value of sharing production progress information in supply chains The particular supply chain practice considered is Vendor Managed Inventory (VMI) The source of supply chain dynamism is supply lead-time uncertainty The performance criterion is the sum of inventory holding cost and inventory shortage cost Mathematical models are used to explore the value of sharing production progress information among two and three suppliers Next a simulation approach is used to extend the mathematical models to many suppliers The theorems derived from the mathematical models are verified by the simulation models in more generalized supply chain environments The analytical models evaluate the impact of information sharing and supply chain dynamism

on business performance in the presence of a good supply chain practice – Vendor Managed Inventory

Chapter 5 and Chapter 6 of the dissertation use an empirical approach to

comprehensively test the relationships among supply chain processes, information

sharing, supply chain dynamism, and business performance The supply chain processes considered in the empirical models include supply chain planning, sourcing, production, delivery, and product return Information sharing includes information sharing support

technology, information quality, information that manufacturers share with suppliers, and information that suppliers share with manufacturers Supply chain dynamism includes the dynamics of both product and process Business performance includes both financial performance and operational performance such as cost, flexibility, responsiveness, and delivery

A sample of 414 business executives from tier 1 automotive suppliers was

surveyed for the pilot study These business executives primarily hold the position of CEO, COO, president or vice president at firms that supply Daimler-Chrysler, Ford, General Motors and Honda Thirty two responses were received for a 7.7% response rate The large-scale cross-industry survey was conducted in manufacturing industries Three hundred thirty one companies were surveyed One hundred and two responses were received for a 31% response rate

The three research methods (mathematical modeling, simulation, and empirical survey research) have their own advantages and disadvantages They corroborate and complement each other The mathematical modeling method is the most rigorous method and provides good insights and intuitions The mathematical modeling method is a good starting point for this dissertation research, because it helps the research design of

simulation models and empirical models The simulation method is more flexible than mathematical modeling and models much more realistic supply chain environments It extends the two and three suppliers mathematical models to many suppliers (up to sixty suppliers) and validates the theorems derived from mathematical models In sum, the simulation models provide more insights and generalize the findings from the

mathematical models It is a good research method to complement the mathematical

modeling and the empirical research The empirical research uses the real world data to test the research hypotheses, thus improving the generality of the findings While the pilot study focuses on the first tier suppliers in auto industry, the large-scale study is based on a cross-industry survey

1.5 CONTRIBUTIONS AND FINDINGS

This study attempts to address the role of effective supply chain process and effective information sharing in improving business performance under alternative supply chain dynamism The research shows that it is important to balance the investment in supply chain process and information sharing Both effective supply chain process and effective information sharing are necessary for achieving optimal business performance

A firm is unlikely to improve business performance by having only effective supply chain process or only effective information sharing The findings of the research

questions addressed in this dissertation are summarized as follows

Research Question 1: does effective supply chain process improve business performance?

This dissertation shows that effective supply chain process has positive influence

on all performance dimensions, but the degrees of influence are different on different performance measures This finding suggests that firms do not have to sacrifice some performance dimensions to improve others, which contradicts the traditional wisdom (Skinner, 1974, Abernathy, 1978) Skinner (1974) suggests that firms should focus on performance dimensions one by one Abernathy (1978) questions whether it is possible to achieve both efficiency and flexibility

Research Question 2: does effective information sharing enhance effective supply chain

process?

This study shows that effective information sharing significantly enhances

effective supply chain process, which implies that effective supply chain process is necessary for leveraging the value of effective information sharing, because the result of research question 3 below shows that effective information sharing does not have direct positive impact on business performance

Research Question 3: does effective information sharing improve business performance?

While the analytical study shows that effective information sharing improves business performance in the presence of effective supply chain process, the empirical study shows that effective information sharing does not have direct significant positive impact on business performance One possible reason for the difference between the analytical study result and empirical study result is that the analytical study considers only the benefits of sharing information, not the costs of sharing information Since many costs of information sharing are intangible, it is hard for the analytical study to consider costs of information sharing However, the empirical study considers both benefits and costs of sharing information by measuring financial return performance, thus

corroborating the analytical study

Research Question 4: does high supply chain dynamism require effective information

sharing?

Both analytical study and empirical study show that higher supply chain

dynamism requires more effective information sharing Since higher supply chain

dynamism usually accompanies with more information sharing needs, the importance of information sharing increases when supply chain dynamism increases Firms need to have appropriate level of information sharing to capture the dynamics in supply chains

Research Question 5: does high supply chain dynamism require effective supply chain

process?

This dissertation shows that high supply chain dynamism does not have direct positive impact on effective supply chain process This finding implies that effective information sharing is necessary for firms, because firms need to use the information captured from dynamic supply chain environment to guide effective supply chain process Without effective information sharing, firms are not likely to have effective supply chain process or coordinate with other supply chain members effectively

Research Question 6: how does the value of information sharing change as the number of

supply chain members participating in information sharing change?

The study shows that the value of information sharing increases as the number of supply chain members participating in information sharing increases This corroborates the positive network externality property and suggests the importance of having enough supply chain members joining the information sharing system when initially establishing the system

Besides the above research findings, this dissertation also validates several

important new constructs for future research Multidimensional scales are developed for information sharing and supply chain process The information-sharing construct

comprehensively includes four dimensions: information sharing support technology, manufacturers’ information (the information that manufacturers share with suppliers), suppliers’ information (the information that suppliers share with manufacturers), and information quality The supply chain process construct includes five supply chain

processes These validated new constructs provide great value for future research

1.6 SUMMARY

An overview of this dissertation was presented in this chapter The remainder of the dissertation is organized as follows Chapter 2 reviews the related literature and proposes six research hypotheses Chapter 3 formulates the research problem and lays out the research plans for both analytical and empirical studies The analytical study is in Chapter 4, which describes the mathematical models and simulation models as well as discusses the research results Chapter 5 describes the sample demographics and the measurement validation results of the empirical study Chapter 6 describes the structural model testing of the empirical study Chapter 7 discusses the research findings,

contributions, and managerial implications Chapter 8 summarizes the research study, the limitations, and future research opportunities An overview of this dissertation is in Figure 1.1

Figure 1.1: Dissertation Overview

Chapter 1: Research Overview

Chapter 2: Literature Review

Chapter 3: Research Problem Formulation and Research Plan

Chapter 4: Analytical Study

Chapter 5: Measurement Scale Validation of the Empirical Study

Chapter 6: Structural Model Testing of the Empirical Study

Chapter 8: Conclusion Chapter 7: Research Findings, Contributions, and Implications

In manufacturing industries, effective supply chain process and effective

information sharing are two major approaches to improve business performance While some companies emphasize improving supply chain process capabilities, others

emphasize leveraging information technology Since these two major approaches are not independent, firms should work on both supply chain processes and information sharing simultaneously However, extant research provides very little guidance on the role of effective supply chain process and information sharing in supply chain management Therefore, this dissertation proposes the integrated conceptual framework in Figure 2.1

The rest of the chapter is organized as follows Section 2.2 reviews the literature about five supply chain processes and their relationship with business performance One

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subsection is devoted to each of the five supply chain processes Section 2.3 reviews the literature about four aspects of information sharing Information sharing support

technology is reviewed in Section 2.3.1 Section 2.3.2 reviews the literature of

information content, which includes both manufacturers’ information (the information manufacturers share with suppliers) and suppliers’ information (the information suppliers share with manufacturers) Information quality literature is reviewed in Section 2.3.3 Section 2.3.4 and Section 2.3.5 review the literature of the relationships among

information sharing, supply chain process, and business performance Section 2.4 reviews the literature of supply chain dynamism and its relationship with supply chain process and information sharing The literature of five performance measures is reviewed in Section 2.5 Section 2.6 summarizes the chapter

2.2 SUPPLY CHAIN PROCESSES

2.2.1 Supply Chain Operations Reference (SCOR) Model

In this study, the supply chain operations reference (SCOR) model, a oriented model, is adopted The SCOR model is one of the first models that have

process-holistically framed the supply chain processes from an operational process perspective It was developed by Supply Chain Council together with Pittiglio Rabin Todd & McGrath (PRTM) and AMR in the late 1990’s and focuses on the operational aspects of supply chain management The SCOR model includes all customer interactions (order entry through invoice payment), all physical transactions (including equipment, suppliers, spare parts, bulk products, software, and etc.), and all market interactions (from demand

forecast to order fulfillment) The strength of the SCOR model is that it provides a

taxonomy of the supply chain at the process level and defines process elements at three level (see Figure 2.2 for the description, schematic, and comments of the three levels):

• Top level: Defines the scope and content of the SCOR model It divides a supply chain into five processes: Plan, Source, Make, Deliver, and Return, which this

dissertation focuses on

• Configuration level: Configures supply chain processes at the process level by using

26 core “process categories” Each of the five processes identified at the top level are divided into several core “process categories”

• Process element level: At the process element level, the SCOR model identifies information needs, best practices, performance metrics for each process element, and each process element’s position in the overall framework (Supply Chain Council, 2000)

Recently, the SCOR model has been widely adopted by many companies in multiple industries including Intel, Daimler-Chrysler, and Coca-cola Currently, more than 700 companies have become members of the Supply Chain Council Intel was one

of the first major firms that have implemented the SCOR model

The SCOR model was established several years ago It has been widely adopted and practiced by many companies in different processes of supply chains To date, however very little rigorous research has been conducted to investigate the SCOR

model’s effectiveness A few practitioners (McCormack, 1998, Supply Chain Council, 2002) have attempted to measure the SCOR model’s impact on business performance In addition, some scientific performance benchmarking studies have been conducted

(http://www.pmgbenchmarking.com) To date, there is no published study that

Figure 2.2: Supply Chain Operational Reference (SCOR) Model

Return

Level

Top Level (Process Types)

Level 1 defines the scope and content for the Supply Chain Operations Reference-model Here basis of competition performance targets are set

1

#

Configuration Level (Process Categories)

A company’s supply chain can be

“configured-to-order” at Level 2 from

26 core “process categories.”

Companies implement their operations strategy through the configuration they choose for their supply chain.

2

Process Element Level (Decompose Processes)

Level 3 defines a company’s ability to compete successfully in its chosen markets, and consists of:

• Process element definitions

• Process element information inputs, and outputs

• Process performance metrics

• Best practices, where applicable

• System capabilities required

to support best practices

P1.2

Identify, Assess, and Aggregate Supply-Chain Requirements

P1.3

Balance Production Resources with Supply- Chain Requirements

P1.4

Establish and Communicate Supply-Chain Plans

Companies implement specific supply-chain management practices at this level Level 4 defines practices to achieve competitive advantage and to adapt to changing business conditions.

Implementation Level (Decompose Process Elements)

has systematically examined the relationship between supply chain processes and use of information technology The remainder of this section reviews the five processes in the SCOR model: Plan, Source, Make, Delivery, and Return

2.2.2 “Plan” Process

Supply chain planning process is to process information from suppliers,

customers, and internal operations, and then coordinate the operations of supply chain partners to fulfill the ultimate customer desires (Supply Chain Council, 2000) The “Plan” process in the SCOR model includes forecasting supply chain demands and coordinating different players in a supply chain The supply chain planning process is similar to

production planning in traditional operations management within a firm Supply chain planning is different from traditional master production scheduling in that it crosses firm boundaries instead of function boundaries within a firm The supply chain planning process coordinates manufacturers with suppliers and customers and includes primarily two objectives: (1) make a good forecast of future demand, and (2) coordinate various functions within a firm and coordinate the firm with its suppliers and customers

The importance of supply chain demand forecast was addressed by Joseph

Andraski, Vice President of Customer Development for Nabisco

“If supply chain management begins with a forecast that is substantially in error in terms of timing

or quantity, the ramifications will be felt throughout the entire process The consequences of bad

forecasting are many: manufacturing will have to adjust and run at less capacity or work overtime to meet customer demand; logistics expenses will be less than efficient; products will be at the wrong place at the wrong time, impacting customer services; the list could go on ad infinitum.” (Andraski, 1998)

Numerous operations management researchers have documented the importance

of supply chain demand forecast (Lee et al., 1997, Aviv, 2001, Krajewski and Wei, 2001)

Several studies have shown the impact of supply chain forecast on business performance (Cook and Rogowski, 1996, Krajewski and Wei, 2001) As an example, the study of Dow Chemical found that Dow’s supply chain waste was reduced significantly when the

demand forecast accuracy was improved by 25% (Cook and Rogowski, 1996) In another

study, Lee et al (1997) considered the bullwhip effect and showed that demand variation

increases upstream in a supply chain Thus, the forecast error downstream in a supply

chain needs to be reduced in order to achieve supply chain efficiency Chen et al (2000)

studied the impact of sharing demand forecasting among supply chain members The authors showed that sharing demand information can mitigate the bullwhip effect Later, Aviv (2001) found that the value of collaborative forecasting increases when quick

response and/or advanced demand information initiatives are implemented, and that joint planning is important for supply chain management when efficient consumer response is

desirable In master scheduling design studies, Lin et al (1994) and Lin and Krajewski

(1992) explored the impact of demand forecast on a firm’s manufacturing performance The review of the demand forecast literature suggests that supply chain demand forecast

as one of the supply chain planning practices has significant impact on business

performance

The second aspect of supply chain planning is to coordinate various functions within a firm and coordinate the firm with its suppliers and customers Inter-functional coordination within a firm is important because the alignment among the functions is

necessary to achieve a firm’s goal (Hodge et al., 1996) From the process perspective, it

is always important to have a designated process team The team can provide strong

leadership and make the process work more efficiently Womack et al (1990) found that

one of the reasons that Japanese automobile firms had a big advantage is that they used designated teams A team has a designated team leader with additional permanent team members This arrangement makes the team members more committed Thus, having a dedicated team is important from the process perspective In terms of the inter-functional coordination mechanisms, Mintzberg (1996) proposed six basic coordination mechanisms: (1) mutual adjustment; (2) direct supervision; (3) standardization of work processes; (4) standardization of output; (5) standardization of skills; (6) standardization of norms In terms of the consequences of coordination, several researches (Jones, 1998, Mintzberg, 1996) suggest that better coordination can reduce cycle time and improve profitability Among the coordination between different functions, the most intensively studied

coordination in the operations management literature is the coordination between

marketing and operations, which is proven to be critical for achieving good business performance (Shapiro, 1977, Crittenden, 1992, Whybark, 1994, Karmaker, 1996) The literature review above shows that inter-functional coordination is an important part of supply chain planning process and has positive impact on business performance

Besides the coordination across functions within a firm, the coordination with suppliers and customers is also critical for a firm Hill (1994) emphasized the importance

of aligning customer’s priorities (“order winner” in Hill’s term) and product priorities

Monczka et al (1998) identified seven characteristics of cooperative inter-firm

relationships that include reward sharing, information exchange, and existence of

conflict-resolution mechanisms Mentzer (2001) provided a framework for the nature,

antecedents, and consequences of inter-firm cooperation Antecedents of cooperation include trust and commitment, interdependence, compatibility, manager’s perception of environmental uncertainty, cooperative norms, and extendedness of a relationship The consequences of inter-firm cooperation include improved product quality and

productivity, reduced lead-time, quick market entry, and cost reduction A good example

of inter-firm cooperation is Toyota’s cooperation with its suppliers, which enhances its competitive positions Besides the qualitative studies (Hill, 1994, Mentzer, 2001), many

quantitative studies (Aviv and Federgruen, 1998, Gavirneni et al., 1999, Cachon and Fisher, 2000, Lee et al., 2000) have shown the value of the inter-firm cooperation as a

result of sharing information among supply chain members Aviv and Federgruen (1998) studied a one-supplier-multiple-retailers model, where the retailers are heterogeneous in terms of cost structure and other parameters They compared three models: a

decentralized model without information sharing, a decentralized model with information sharing, and a centralized model with information sharing They found that the value of information sharing increases as the degree of heterogeneity among the retailers increases,

or the lead-time becomes longer Gavirneni et al (1999) studied the impact of sharing

retailer’s demand information on supplier’s production lot sizing decisions The study showed that sharing information between supplier and customers can lead to significant

economic values Lee et al (2000) studied the value of sharing demand process

information between a supplier and a manufacturer The savings in inventory costs were significant Cachon and Fisher (2000) showed the value of retailer’s inventory

information in a one-warehouse-multi-retailer system The multiple retailers were

identical The literature suggests that inter-firm cooperation especially sharing

information among supply chain partners is valuable for a firm’s planning process and business performance

The literature review for the supply chain planning process as one of the five supply chain processes in the SCOR model suggests that both good supply chain demand forecast and supply chain coordination are important for achieving good business

performance This dissertation measures the effectiveness of a supply chain planning process by the extent to which supply chain demand forecast and coordination practices are implemented and evaluate the impact of effective supply chain planning process on business performance

2.2.3 “Source” Process

The “Source” process in the SCOR model refers to purchasing, which has been studied extensively in literature Sourcing is critical for a manufacturing firm, because a manufacturing firm usually spends more than half of its revenue on purchasing The extant literature shows that sourcing has a huge impact on business performance,

including both financial performance and operation performance (Watts et al., 1992,

Gadde and Hakansson, 1994, Narasimhan and Das, 2001)

In the sourcing literature, several sourcing practices have been identified as good practices First, similar to the “Plan” process, it is important to have a designated

purchasing team for sourcing process (Ellram and Pearson, 1993, Johnson et al., 2002)

Such teams can span across several functions to facilitate the timely completion of

purchasing related activities A purchasing team can organize the resources for specific company objectives

Second, establishing long-term supplier-buyer relationship and reducing supplier

base have been shown as good sourcing practices Hahn et al (1983) showed that

companies would have more benefits than costs by giving a larger volume of business to

a fewer suppliers using long-term contracts Suppliers should become part of a supply chain in a long term relationship (Choi and Hartley, 1996) By reducing the supplier base,

economies of scale based on order quantity can be realized (Hahn et al., 1983) Moreover,

it is less costly to manage a smaller supplier base than a large supplier base in terms of account management and other managements costs (Treleven, 1987) Therefore, reducing supplier base is considered as a good sourcing practice Having one or two strategic suppliers for one item and few backing suppliers is usually the suggested configuration

Suppliers should also be involved with product development According to Womack et al

(1990), Toyota’s first tier suppliers are involved in Toyota’s new product development,

which reduces the new product development cycle Hartley et al (1997) found a

significant relationship between the supplier’s involvement in product development and overall product development delays They concluded that in order to reduce product development delay, the suppliers should be involved early in the process

Third, Just-In-Time (JIT) delivery from suppliers is considered a good sourcing practice The benefits of JIT delivery have been widely documented As an example,

Dong et al (2001) found that JIT purchasing directly reduced buyer’s logistic costs They

also found that supply chain integration could directly impact JIT purchasing The

elements of JIT purchasing can be found in various studies (Hahn et al., 1983,

Schonberger and Ansari, 1984) Typically, JIT purchasing can reduce order size, reduce lead-time, improve quality control, and so on One of the components in JIT delivery is Vendor Managed Inventory (VMI) program, which is the practice the analytical models focus on in Chapter 4 When the supply chain partners adopt a VMI program, as

discussed by Cetinkaya et al (2000), suppliers pay the inventory holding cost even if the

inventory is physically located at buyers' warehouse If the buyers' production or sales is adversely affected due to late delivery from the supplier, then the supplier has to pay inventory shortage costs Therefore, suppliers have an incentive to deliver their products

as late as possible without delaying buyers’ production or sales VMI programs were introduced by Wal-mart and K-mart in early 1990s According to Dong and Xu (2002), vendor managed inventory always leads to a higher buyer’s profit and reduced the total cost of the supply chain costs JIT delivery is critical for any buying firm because if the delivery is not on-time, it will affect the buyer’s production schedule and even may shut down the buyer’s plant If delivery is not reliable, the buyer has to invest in safety stock

in order to prevent delivery problems Both practitioners and academicians have used time delivery performance to measure the supplier’s performance Performance

on-Measurement Group found that the average on-time delivery rate across industries is between 80%-90%, while the top 20% firms can achieve 94% on-time delivery rate (http://www.pmgbenchmarking.com) Ahmad and Schroeder (2001) studied the impact of EDI on delivery and used on-time delivery to measure JIT delivery performance of a supplier

Fourth, suppliers’ performance evaluation and feedback is a good sourcing

practice Carr and Pearson (1999) tested the relationship between supplier evaluation system, supplier-buyer relationship, and firm’s financial performances According to Carr and Pearson (1999), supplier evaluation systems have a direct significant positive impact

on buyer-supplier relationship, and indirect impact on firm’s financial performance More recently, Prahinski and Benton (2003) studied the role of communication in supply chain management They found that executives at buying firms need to incorporate indirect influence strategy, formality and feedback into supplier development programs

The literature review for the sourcing process as one of the five supply chain processes in the SCOR model identifies the importance of following sourcing practices: (1) a designated purchasing team; (2) long-term supplier-buyer relationship and reduced supplier base; (3) JIT purchasing; and (4) frequent suppliers’ performance evaluation and feedback This dissertation measures the effectiveness of a supply chain sourcing process

by the extent to which the above four groups of sourcing practice have been implemented and evaluate the impact of effective supply chain sourcing process on business

performance

2.2.4 “Make” Process

The “Make” process in the SCOR model refers to production The traditional operations management literature has extensively explored good production practices and has studied the relationship between production process and business performance The production process has evolved from mass production in early 1900’s to lean production

in the past twenty years (Womack et al., 1990) The relationship between lean production