Management and Marketing - Theses
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ItemSupply chain integration and operational performance of Australian manufacturing firms: a transaction cost economics perspective( 2012)Firms are building collaborative relationships with their supply chain partners in order to achieve higher efficiency, flexibility, and sustainable competitive advantage. Although the benefits and fundamental importance of Supply Chain Integration (SCI) and collaboration are widely accepted in the literature, many firms are struggling to achieve the desired level of integration and/or the expected benefits of such integration. In this study SCI and its outcomes are analysed by looking at ‘manufacturer-supplier’ and ‘manufacturer-customer’ relationships from a manufacturer point of view. Transaction Cost Economics (TCE) constitutes the main theoretical foundation to explain those relationships and the governance structure of SCI upstream versus downstream. Although SCI has been widely promoted in the supply chain literature to achieve higher performance, it has not been clearly specified what should be involved in SCI, with which trading partner, and under what environmental conditions to achieve that promised performance improvement. While SCI is often viewed by supply chain scholars as operational with a minimum level of equity involved, inter-organizational relationship studies by TCE scholars are more focused on strategic type of integration with a high level of equity involvement defined as ‘asset specificity’. Thus, in this study ‘supplier integration’ and ‘customer integration’ as two distinct dimensions of SCI are both studied at two different levels, where ‘strategic’ or ‘equity-based’ integration and ‘operational’ or ‘non-equity’ based integration are examined as two different levels of integration. While the former is a more unilateral type of governance mechanism through idiosyncratic asset-specific investments in supply chain partners, the latter is a bilateral mechanism characterised by bi-directional agreements with minimum investments in specific assets (e.g. involvement in product development, information exchange agreements, connecting processes, etc.). According to TCE, equity based integration in terms of idiosyncratic investment exposes manufacturing firms as investing parties to risk of opportunism by invested supply chain partners. Such risk is high for firms performing in uncertain environments due to unanticipated contingencies. Trust has been consistently discussed in the literature grounded in sociology as being crucial for SCI to be successful. However, in classic TCE grounded in economics trust in commercial relationships has been relatively ignored and treated as redundant or even illusive. Thus, this study empirically examines the effects of equity and non-equity based integration with suppliers and customers on ‘trust’ and ‘opportunism’ risk perceived by manufacturing firms, and the way these two paradoxical concepts may impact manufacturing performance. A sequential explanatory approach is applied through application of a survey (186 Australian manufacturers) and 3 case studies. Structural Equation Modeling is applied to compare a ‘supplier integration model’ with a ‘customer integration model’. Invariance Testing are then applied to examine how direction and significance of hypothesized relationships in each model differ under low versus high uncertainty in supply and demand. The overall results show higher risk of opportunism is associated with customer integration compared to supplier integration when integration is equity based with high levels of asset specificity. In dealing with suppliers, manufacturers perceived this risk to be high only when supply uncertainty is high (supportive of the predictions of TCE). However, with customers they perceived this risk to be high independent of the level of demand uncertainty. The results show that non-equity based integration with supply chain partners through sharing information, communications, and connecting processes acts as a bilateral safeguard against supply chain partners’ opportunism and builds trust in supply chain partners, especially under high uncertainty. As a result of such coordination and information sharing among exchange partners, more stability can be achieved. Under volatile market conditions manufacturers’ access to timely and accurate information is more critical for making the right decisions and pre-planning of operations in a more optimal and proactive way. The results also show that it is only under high degrees of uncertainty that dealing with trustworthy suppliers and customers has a significant positive impact on manufacturing performance. In dealing with suppliers and under low degrees of supply uncertainty, competition among suppliers combined with suppliers’ concern for positive reputation and business continuity encourages them to perform well and be responsive to manufacturers’ needs. Under steady supply conditions, manufacturing firms in a buying position have more freedom to choose alternative suppliers if their expectations are not met. On the other hand, in dealings downstream they know that customers have similar options and are likely to do likewise in dealing with them as suppliers. In fact, manufacturers’ dependency on customers in terms of economic factors of a transaction (e.g. on-time payments in full or futures business in a competitive global market) put the customer in a more dominant position. Hence, manufacturers’ perceived risk of customer opportunism is higher and trust is lower due to customers’ position and control over payments and future purchases. Thus, under high uncertainty, when the stakes are high and integration with a customer is equity based manufacturers must adopt further safeguards to promote bilateral dependency. This study provides multiple implications for theory and practice by proposing a framework that aims to help decision makers to evaluate what type of integration (strategic / equity based vs. operational / non-equity based), with whom (supplier vs. customer), to what extent (low, medium, high) and under what conditions (low vs. high uncertainty in supply or demand) will be associated with lower risk and higher benefit.