- Email: [email protected]
Discussion of some Recent Empirical Research on Integration, Uncertainty and their Influence on Performance
6th IFAC Conference on Management and Control of Production and Logistics The International Federation of Automatic Control September 11-13, 2013. Fortaleza, Brazil
Discussion of some Recent Empirical Research on Integration, Uncertainty and their Influence on Performance Juliana K. Sagawa*. Marcelo S. "agano** *Federal University of São Carlos - UFSCar, São Carlos, SP 13565-905 Brazil (Tel: 16-3351-9511; e-mail: [email protected]). **University of São Paulo - USP, São Carlos, SP 13566-590 Brazil (e-mail: [email protected]) Abstract: As long as the production processes become more complex, specialized and geographically dispersed, the need for reintegrating functions and firms becomes stronger. Recently, several researchers have been investigating this topic. The uncertainty faced by the companies in their competitive environment must also be considered in this investigation, as a contingency variable. This paper reviews and discusses the empirical research that focus on integration, uncertainty and their relationships with firm performance. The different dimensions that form each construct are presented, and a conceptual framework to classify the reviewed studies is also proposed. Integration, uncertainty, and performance are multidimensional constructs and their definitions may slightly vary among the authors. Before answering the fundamental question, which is how these constructs are related to each other, some definitions will be presented.
1. INTRODUCTION Recently, large attention has been given to the integration of organizations, systems and functions. The integration nowadays involves multi-plants of the same organization as well as the whole supply chain of a product or service. Integration is a structural rather than a punctual matter, and allows a company to better fulfill its customer orders, accomplishing, thus, its primary function.
2.1 Basic Constructs: Integration, Uncertainty and Performance According to Pagell (2004), the construct of integration has been used to study different organizational phenomena and has been defined in several ways. In general, it is related to collaboration, cooperation, coordination, communication, information exchange, mutual agreement, and shared decisions. O’Leary-Kelly and Flores (2002) define the level of integration as “the extent to which separate parties work together in a cooperative manner to arrive at mutually acceptable outcomes”.
Many companies are also being encouraged to become more agile. It means that they must be able to easily adapt to changing conditions in the production environment. Thus, the uncertainties that affect production and performance, such as demand changes, machine breakdowns, financial fluctuations, and so on must be taken into account. In this paper, we consider the impact of these two factors – integration and uncertainty – on firm performance. The importance of these elements is long recognized in conceptual studies and several empirical investigations have also been carried out. This paper aims to present a short review of the existing empirical research that focus on the relationships among integration, uncertainty and firm performance. The review comprises papers from approximately one decade ago up to now. Some older publications were reviewed only in order to present some classical definitions of the concepts.
The integration may be viewed from different perspectives (Fig. 1). The first perspective refers to the internal and external dimensions of integration. The internal integration occurs among the various functional areas within an organization, while external integration is related to the collaborative interaction between companies or organizations. These two dimensions are considered by several authors such as Bagchi and Skojoett-Larsen (2002), Gustavsson (2008), Flynn, Huo, and Zhao (2010) and others.
We also present a conceptual framework that outlines the relationships already explored in empirical research. This framework may be used to categorize the reviewed research into different classes according to the level of analysis and the scope addressed by the authors. Directions for future works in the area are also suggested.
It is interesting to note that the internal integration may be examined in different levels. Gustavsson (2008) studied the integration within the ambit of the Production Planning and Control function (PPC), defining internal integration as the interface that supports the planning information exchange between two or more PPC processes. Droge, Jayaram, and Vickery (2004), analyzed internal integration in the context of product development, denoting it as the set of practices focused on the expansion of the internal boundaries between
2. LITERATURE REVIEW
978-3-902823-50-2/2013 © IFAC
608
10.3182/20130911-3-BR-3021.00007
IFAC MCPL 2013 September 11-13, 2013. Fortaleza, Brazil
the Design Engineering and the Manufacturing functions. Pagell (2004) highlights that the internal integration construct has been explored in three levels of analysis: strategic, interfunctional and intrafunctional levels. In the strategic level, the alignment or fit has been traditionally related to competitive advantage.
regarding the environmental factors associated with a given decision-making situation, (2) not knowing the outcome of a specific decision in terms of how much the organization would lose if the decision were incorrect, and (3) inability to assign probabilities with any degree of confidence with regard to how environmental factors are going to affect the success […] of the decision unit”
organizational
As for integration, the researchers also propose different dimensions for the uncertainty construct (Fig. 2). The disturbances that affect production may be split up into two groups, according to Mula et al. (2006): environmental uncertainty and system uncertainty. Variations in external demand and external supply, which are beyond the production system, belong to the first group. The second group comprises the disturbances that are internal to the production process, such as failures and machine breakdowns, lead time uncertainty, quality problems, absenteeism, etc. De Snoo, Wezel and Jorna (2011) label this second group as executional uncertainty, since it encompasses the factors that prevents the schedule from being executed as intended.
technical external (Supply Chain Integration)
integration internal
between strategy and execution
environmental
Fig. 1. Dimensions of integration, according to different authors
system
On the other hand, the external integration is directly related the supply chain relationships. Bagchi and Skojoett-Larsen (2002) state that “supply chain integration involves rallying the key members of a supply chain network including external entities towards a common goal”. Authors such as Swink, Narasimhan and Wang (2007), Flynn, Huo, and Zhao (2010) e Wong et al. (2011) consider three kinds of integration in the supply chain – customer, supplier and internal integration - arguing that this latter kind is an important element to support the Supply Chain Integration (SCI).
execution
objects
uncertainty attributes
perceived
Fig. 2. Dimensions of uncertainty, according to different authors
Another perspective from which integration can be seen comprises the organizational and technical dimensions. Lemahieu, Snoeck and Cumps (2005) discuss the concept of extended enterprise, which comprises a set of companies that “pursue repeated, enduring exchange relations with one another”. This net of enterprises shows an important feature: the presence of values based on reciprocity. Thus, internal organizational integration may be associated to the mechanisms, practices and culture that encourage collaborative and reciprocal relationships between functions or organizations. Gustavsson (2008) lists some factors that characterize the organizational integration: the presence of teams or workgroups and standardized operating procedures, the development of plans in mutual understanding, open exchange of ideas, and aligned goals.
Burgeois (1980) and Vokurka and O’Leary-Kelly (2000) classify the environment in which the companies compete according to three elements: objects, perceived uncertainty and attributes of environment. The first element is associated to the different uncertainties of the environment that surrounds the companies, such as customer demand patterns, suppliers’ delivery reliability or product life cycle. This dimension is similar to the environmental dimension of uncertainty defined by other researchers. The second element, “attributes”, comprises three other factors: the amount and diversity of external factors facing a firm, the resources availability in the environment to support growth and the level of instability of the market where the firm competes. Finally, the “perceived uncertainty” concerns the ability or inability of the managers to accurately foresee futures events in their environment.
Technical integration, on the other hand, is associated to the technological means that enable communication, such as internet, EDI, fax, ERP software and so on.
Uncertainty is one of the main variables of Contingency Theory. “Contingency theory contains the concept of a fit
The concept of uncertainty defined by Duncan (1972) comprises three elements: “(1) the lack of information 609
IFAC MCPL 2013 September 11-13, 2013. Fortaleza, Brazil
share, profit growth and Return on Investment (ROI) are used.
that affects performance, which, in turn, impels adaptive organizational change.” (Donaldson, 2001). The performance is also represented by most of the researchers as a multidimensional construct (Fig. 3). Some dimensions often used to evaluate the performance of the operations function, specifically, are cost, quality, speed, dependability and flexibility (Hayes and Wheelwright, 1984; Slack and Lewis, 2001; Swink, Narasimhan, and Wang, 2007; Wong, Boon-itt, and Wong, 2011). Cost reduction or cost control is always a perceived goal, no matter if the company follows the cost leadership or the differentiation strategy (Porter, 1980). The concept of quality, as known, is related to product features, customer service and also to internal activities, i.e, the quality of processes, which leads to reduced scap and rework. Speed refers to the elapsed time between the beginning of a process and its end; it is closely related to customer responsiveness, which, on its turn, depends on fast material and information flows. Dependability is the ability of keeping delivering promises and correcting mistakes on time. Finally, the ability of firms to respond to unpredictable events of the environment or changes in customer needs characterizes the manufacturing flexibility.
2.2 Relationships Involving these Constructs After scanning the specific literature, it was possible to see that most of the reviewed empirical research addresses the dyadic relationship between integration and performance. First of all, two different levels of analysis may be considered in the investigation of this dyad: the interfunctional and the intrafunctional level. Droge, Jayaram and Vickery (2004) explored the intrafunctional level of product development process, examining the relationships among internal and external practices, time-based performance and company overall performance. They found that both internal and external integration present a positive relationship with the time-based constructs, which, on their turn, positively influence firm’s financial performance. O’Leary-Kelly and Flores (2002), on the other hand, focused on the interfunctional level. They investigate the integration of sales/marketing-based decisions and manufacturing-based decisions, including uncertainty as a contingency variable. It was observed that sales/marketing decisions integration led to a better performance in firms that were subjected to high levels of environmental uncertainty. For these firms, it was beneficial to integrate the Manufacturing team into the product development plan and sales plan decisions, which are originally made by the Sales team. On the other hand, the participation of the Sales function in the manufacturing decisions, which includes process development and manufacturing planning, did not cause a positive impact on performance.
cost quality delivery (speed and dependability) f lexibility
performance
Besides internal integration, recent studies have investigated the positive impact of Supply Chain Integration (SCI) on operational and strategic firm performance. Li et al. (2006) examined the relationships between Supply Chain Management (SCM) practices, competitive advantage and organizational performance. The authors do not explicitly refer to the integration construct; however, some of the practices they analyze are closely related to it. Five dimensions are defined to characterize SCM practice: strategic supplier partnership, customer relationship, level of information sharing, quality of information sharing and postponement. The level of information sharing is related to internal integration, while strategic supplier partnership and customer relationship are practices that directly contribute to external integration. Li et al. (2006) confirmed that higher levels of SCM practice can lead to enhanced competitive advantage and improved organizational performance. The authors defined the construct of competitive advantage by means of the five performance objectives listed in section 2.1 (cost, quality, speed, dependability and flexibility), and found that these dimensions have a direct impact on organizational performance.
operational
business (strategic)
growth in sales
f inancial
return on sales
market share
growth in prof it
product development perf ormance measures (specif ic)
return on investment (ROI)
supply chain perf ormance measures (specif ic)
growth in ROI
Fig. 3. Dimensions of performance, according to different authors Other authors established specific dimensions to evaluate the supply chain performance (Forslund and Jonnson, 2007), product development and time-based performance (Droge, Jayaram, and Vickery, 2004). On the other hand, in several empirical studies, the researchers assess the impact of integration on overall firm performance. In this case, strategic and financial measures, such as customer satisfaction, market
The relationship between supply chain management elements and organizational performance was also investigated by Chow et al. (2008). They classified the supply chain components into three groups: practices, concerns and 610
IFAC MCPL 2013 September 11-13, 2013. Fortaleza, Brazil
competences. The integration may be placed in the first group, because, according to the authors, supply chain practices include involving suppliers in the decision making process, encouraging information sharing and developing customer contacts. In other words, the practices are elements that lead to the integration of downstream and upstream activities. An empirical survey was carried out in US and Taiwan, and regional differences were observed: in Taiwan the supply chain practices had a direct impact on organizational performance, but in US they had only an indirect impact.
a certain level and the new activities become too distant to the firm’s core business, then the resources and learning may be not enough to guarantee competitiveness in the new field. The lack of economies of scope may lead to internal administrative difficulties, which explain the decreasing portion of the U-shape curve. The hypothesis stated by the authors is that the firms may attenuate the risks of unrelated diversification by coordinating and integrating the various functional units of the firm. In other words, internal integration across marketing, logistics and production would generate a positive influence on the relationship between unrelated product diversification and performance. Similarly, they proposed that integration with suppliers and customers, i.e. external integration, positively influences the firm’s efforts to diversify to international markets, leading to a better performance. Through external and internal integration, the firm may find new organizational forms to operate, extending its competitive capabilities. The results of the survey carried out by the aforementioned authors confirmed the formulated hypotheses.
Another group of researchers (Flynn, Huo, Zhao, 2010; Wong, Boon-itt, Wong, 2011) focused on the same dyad, i.e., supply chain integration and performance; however, in this case, the uncertainty was included in the analysis as a moderating variable. According to these authors, there seems to be some contradictory findings regarding this relationship. Previous research had shown that the dyad SCI-performance is not always is moderated by environmental uncertainty. Also, there seems to be no consensus about the direction in which uncertainty affects this relationship, nor about what dimensions of performance are affected. For this reason, Flynn, Huo, Zhao (2010) and Wong, Boon-itt, Wong (2011) defend the use of multidimensional constructs to represent, integration and performance. In this way, it is possible to separate the effect of each integration dimension on each performance dimension. For integration, the dimensions considered are internal, supplier and customer integration. For performance, the first mentioned author considered operational and business performance, while the second considered the five performance objectives of cost, quality, speed, dependability and flexibility. Flynn, Huo, and Zhao (2010) have found that internal integration and customer integration are differentials for a good performance, whereas supplier integration seems not to be directly related to performance. Wong, Boon-itt, and Wong (2011) proposed that, under a high environmental uncertainty, internal integration influences both product cost and product quality performance. External integration, on its turn, impacts on delivery and flexibility, and these relationships tend to be strengthened when the company is subjected to high uncertainty.
Configuration Theory may be used as an alternative approach to Contingency Theory when studying the influence of uncertainty on the integration-performance dyad. According to this theory, an organization is seen as a set of interrelated activities that form different configurations, i.e., different patterns. According to Flynn, Huo, and Zhao (2010), these patterns may be described in terms of their strength and balance. The strength is the extent to which Supply Chain Integration activities are carried out, while the balance is related to the weight given to the development of each dimension: internal integration, integration with suppliers and with customers. The aforementioned authors found that the companies where integration was stronger tend to present a better performance, as expected. The results indicated, however, that the balance does not affect performance, since either companies that presented a balanced integration pattern or companies that had a predominance of internal or customer integration presented a high performance. Unlikely most of the empirical research on this subject, which investigates the correlations between variables making use of surveys, the work of Pagell (2004) has a qualitative approach. By means of multiple case studies and cross case analysis, this research aimed to determine the drivers of the internal integration between Operations, Purchasing, and Logistics, which are key internal supply chain functions according to the aforementioned author. It is an attempt of understanding the factors that enable and inhibit integration across the mentioned functions, since the literature lacks the prescription of how companies actually create integration (Pagell, 2004). The results showed that formal and informal communication as well as the measurement and reward systems are the main antecedents of integration. In addition, it was observed that informal communication has a greater influence on the level of integration in the plant than formal communication, and that the rewards must be based on organizational level goals in order to foster integration.
Instead of directly examining the relationship between Supply Chain Integration and performance, Narasimhan and Kim (2002) considered SCI as a moderating variable of the relationship between product diversification strategy and performance. The authors argued that an inverted U-shape relation exists between diversification and performance. This hypothesis is supported by the resource-based view and the theory of transaction costs, which are two theoretical domains from strategic management and organization theory. According to these theories, performance is positively influenced by increasing levels of diversification due to scale and scope economies, market power effects, risks reduction effects and learning effects. If the diversification is within the scope of the firm’s strategic resources and capabilities, increasing long-term profitability must be obtained. The increasing portion of the U-shaped curve is related to this situation. On the contrary, if diversification increases beyond 611
IFAC MCPL 2013 September 11-13, 2013. Fortaleza, Brazil
According to Pagell (2004), the communication level is influenced by job rotation, cross functional teams and facility layout. The organizational structure and culture are also important drivers of communication and measurement systems, thus they consequently lead to interfunctional integration.
integration and performance; (3) studies that also examined this integration-performance dyad, but considering uncertainty as a contingency variable. The research of Pagell (2004), where the integration and its antecedents are studied in depth, falls in the first category. The second category includes the studies of Frohlich and Westbrook (2001), Narasimhan and Kim (2002), Droge, Jayaram and Vickery (2004), Li et al. (2006), Swink, Narasimhan and Wang (2007) and Chow et al. (2008). In the third group, the researchers aimed at extending the knowledge built from the studies of the second group, verifying the moderating influence of uncertainty (represented by a dashed line in the framework). The research carried out by O’Leary-Kelly and Flores (2002), Germain et al. (2008), Flynn, Huo, and Zhao (2010) and Wong et al. (2011) may be classified in this category.
The research of De Snoo, Wezel and Jorna (2011) addressed the influence of the uncertainty on the definition of the scheduling performance metrics. Firstly, the authors investigated the set of criteria that firms use to assess scheduling performance, based on a qualitative research carried out in manufacturing and service companies. They divide the scheduling performance metrics into two categories: product and process, where the product is the result of the scheduling activity and the process is the activity itself. From the qualitative research, they found that scheduling process performance is related to reliability, flexibility, and response speed of the scheduling activity, as well as to the communication and harmonization ability of the schedulers. Additionally, they observed a conditional influence of uncertainty on the definition of the company focus on product or process scheduling performance. In situations of high uncertainty, the response speed was much more relevant than schedule optimization. In this case, thus, firms tend to focus on scheduling process performance rather than on scheduling product performance.
The level of analysis adopted in the studies is another relevant classification factor. The research concerning integration, uncertainty and performance is usually developed considering either one of the three levels: intrafunctional, interfunctional or supply chain level (external level). Droge, Jayaram, and Vickery (2004) and De Snoo, Wezel, and Jorna (2011) explored the intrafunctional perspective of product development and Production Planning and Control, respectively. The internal level or interfunctional level is investigated by O’Leary-Kelly and Flores (2002) and Pagell (2004). The supply chain level, on its turn, concentrates most of the existing research, such as Frohlich and Westbrook (2001), Narasimhan and Kim (2002), Li et al. (2006), Swink, Narasimhan and Wang (2007), Chow et al. (2008), Germain et al. (2008), Flynn et al. (2010) and Wong et al. (2011).
3. CONCEPTUAL FRAMEWORK The empirical research addressing integration, uncertainty and their relations with performance is varied. In this section, we propose a conceptual framework that summarizes the presented analysis and helps to classify the reviewed works into different categories, according to the subject and the level of analysis addressed by the authors (Fig. 4).
The proposed framework also exhibits the conceptual basis for the analysis of the relationships between the constructs, i.e., the Contingency Theory and the Configuration Theory. Most of the reviewed studies are based on Contingency Theory, which argues that external environment shapes the structure of an organization. The Configuration Theory, related to the identification of patterns of systems, is employed in few studies, such as in Frohlich and Westbrook (2001) and Flynn, Huo, and Zhao (2010).
uncertainty Contingency Theory
4. CONCLUSIONS AND DIRECTIONS FOR FUTURE WORKS
performance
integration
Configuration Theory intrafunctional level firm level (internal)
This paper analyzed some recent empirical studies concerning integration, uncertainty and their relationship with performance. A simple structure was proposed to classify the existing research on this subject. As a result of the analysis, the following aspects may be pointed out:
Supply Chain level (external) direct relationship
moderating relationship
•
The body of knowledge regarding the relationship between integration and performance has been significantly increasing. In special, substantial attention has been given to the Supply Chain Integration impact on performance.
•
The moderating effect of uncertainty on the integrationperformance correlation is investigated in many of the
Fig. 4. Proposed framework to represent the relationships investigated in the existing empirical research First of all, the reviewed empirical research can be divided into three categories: (1) studies that aimed to understand one of the constructs by means of qualitative empirical research; (2) studies that examined the dyadic relationship between 612
IFAC MCPL 2013 September 11-13, 2013. Fortaleza, Brazil
Duncan, R.B. (1972). Characteristics of organizational environments and perceived environmental uncertainty. Administrative Science Quarterly, 17, 313–327. Flynn, B.B., B. Huo and X. Zhao (2010). The impact of supply chain integration on performance: a contingency and configuration approach. Journal of Operations Management, 28, 58–71. Forslund, H. and P. Jonsson, (2007). The impact of forecast information quality on supply chain performance.
studies. The hypotheses of this investigation are based on the Contingency Theory. •
There are still some mixed findings about the subjects mentioned above. The use of different definitions of the constructs and different dimensions to represent them may explain some of these divergences. They may also occur due to regional differences, since the surveys were taken in different geographic locations. In order to clarify these results, this paper presented the multiple dimensions of the constructs adopted by several researchers.
•
As it can be seen, there is a significant amount of quantitative empirical research addressing the mentioned constructs and their relationships, but there are few qualitative studies providing managerial recommendations to actually achieve integration or performance improvement. With this kind of study, the focus of the research on integration would change from a descriptive to a more prescriptive direction.
•
Most of the studies about integration presume a functional perspective of the company, not considering the business process view of it. This perspective should be also investigated.
International Journal of Operations Production Management, 27, 90-107.
Frohlich, M.T. and R. Westbrook (2001). Arcs of integration: an international study of supply chain strategies. Journal of Operations Management, 19, 185–200. Fynes, B., S. deBuĭrca and D. Marshall (2004). Environmental uncertainty, supply chain relationship quality and performance. Journal of Purchasing & Supply Management, 10,179–190. Germain, R., C. Claycomb and C. Droge (2008). Supply chain variability, organizational structure, and performance: the moderating effect of demand Journal of Operations unpredictability. Management, 26, 557–570. Hayes, R.H. and S.C. Wheelwright (1984). Restoring our
The points listed above show that the empirical research on integration, uncertainty and performance can be further developed, on one hand, to dismiss some mixed findings and, on the other hand, to consider the business process view of the firm. Moreover, a suggestion for future works would be the development of qualitative in-depth studies about the presented constructs, aiming to provide the managers with recommendations on how to achieve integration, better performance and minimize uncertainties.
competitive edge: competing manufacturing. John Wiley, New York.
Bagchi, P.K. and T. Skjoett-Larsen (2002). Organizational integration in supply chains: a contingency approach.
Flexible
through
Hayes, R.H., G. Pisano, D. Upton and S.C. Wheelwright (2005). Operations, Strategy and Technology: Pursuing the Competitive Edge. New York, John Wiley. Lemahieu, W., M. Snoeck and B, Cumps (2005). Two basic types of business-to-business integration. International Journal of E-business Research, 1, 1-15. Li, S., B. Ragu-Nathan, T.S. Ragu-Nathan and S. Subba Rao (2006). The impact of supply chain management practices on competitive advantage and organizational performance. Omega, 34, 107-124. Mula, J., R. Poler, J.P. García-Sabater and F.C. Lario (2006). Models for production planning under uncertainty: a review. International Journal of Production Economics, 103, 271–285. Narasimhan, R. and S. W. Kim (2002). Effect of supply chain integration on the relationship between diversification and performance: evidence from Japanese and Korean firms. Journal of Operations Management, 20, 303–323. O’Leary-Kelly, S.W.O. and B.E. Flores (2002). The integration of manufacturing and marketing/sales decisions: impact on organizational performance. Journal of Operations Management, 20, 221–240. Pagell, M. (2004). Understanding the factors that enable and inhibit the integration of operations, purchasing and logistics. Journal of Operations Management 22, 459–487.
REFERENCES
Global Journal of Management, 3, 1-10.
&
Systems
Bourgeois, L.J. (1980). Strategy and environment: a conceptual integration. Academy of Management Review, 5, 25-39. Chow, W.S., C.N. Madu, C.-H. Kuei, M.H. Lu, C. Lin, and H. Tseng (2008). Supply chain management in the US and Taiwan: An empirical study. Omega, 36, 665-679. De Snoo, C., W. Van Wezel and R.J. Jorna (2011). An empirical investigation of scheduling performance criteria. Journal of Operations Management, 29, 181-193. Donaldson, L. (2001). The Contingency Theory of Organizations. Sage Publications, Thousand Oaks. Droge, C., J. Jayaram, and S.K. Vickery (2004). The effects of internal versus external integration practices on timebased performance and overall firm performance. Journal of Operations Management, 22, 557–573.
613
IFAC MCPL 2013 September 11-13, 2013. Fortaleza, Brazil
M. E. (1980). Competitive Strategy: Techniques for Analyzing Industries and Competitors. Free Press, New York. Slack, N. and M. Lewis (2001). Operations strategy. Porter,
Prentrice Hall, New York. Swink, M., R. Narasimhan and C. Wang (2007). Managing beyond the factory walls: effects of four types of strategic integration on manufacturing plant performance. Journal of Operations Management, 25, 148–164. Vokurka, R. J. and S.W. O’Leary-Kelly (2000). A review of empirical research on manufacturing flexibility. Journal of Operations Management, 18, 485-501. Wong, C. Y., S. Boon-itt and C.W.Y. Wong (2011). The contingency effects of environmental uncertainty on the relationship between supply chain integration and operational performance. Journal of Operations Management, 29, 604–615.
614
Discussion of some Recent Empirical Research on Integration, Uncertainty and their Influence on Performance Juliana K. Sagawa*. Marcelo S. "agano** *Federal University of São Carlos - UFSCar, São Carlos, SP 13565-905 Brazil (Tel: 16-3351-9511; e-mail: [email protected]). **University of São Paulo - USP, São Carlos, SP 13566-590 Brazil (e-mail: [email protected]) Abstract: As long as the production processes become more complex, specialized and geographically dispersed, the need for reintegrating functions and firms becomes stronger. Recently, several researchers have been investigating this topic. The uncertainty faced by the companies in their competitive environment must also be considered in this investigation, as a contingency variable. This paper reviews and discusses the empirical research that focus on integration, uncertainty and their relationships with firm performance. The different dimensions that form each construct are presented, and a conceptual framework to classify the reviewed studies is also proposed. Integration, uncertainty, and performance are multidimensional constructs and their definitions may slightly vary among the authors. Before answering the fundamental question, which is how these constructs are related to each other, some definitions will be presented.
1. INTRODUCTION Recently, large attention has been given to the integration of organizations, systems and functions. The integration nowadays involves multi-plants of the same organization as well as the whole supply chain of a product or service. Integration is a structural rather than a punctual matter, and allows a company to better fulfill its customer orders, accomplishing, thus, its primary function.
2.1 Basic Constructs: Integration, Uncertainty and Performance According to Pagell (2004), the construct of integration has been used to study different organizational phenomena and has been defined in several ways. In general, it is related to collaboration, cooperation, coordination, communication, information exchange, mutual agreement, and shared decisions. O’Leary-Kelly and Flores (2002) define the level of integration as “the extent to which separate parties work together in a cooperative manner to arrive at mutually acceptable outcomes”.
Many companies are also being encouraged to become more agile. It means that they must be able to easily adapt to changing conditions in the production environment. Thus, the uncertainties that affect production and performance, such as demand changes, machine breakdowns, financial fluctuations, and so on must be taken into account. In this paper, we consider the impact of these two factors – integration and uncertainty – on firm performance. The importance of these elements is long recognized in conceptual studies and several empirical investigations have also been carried out. This paper aims to present a short review of the existing empirical research that focus on the relationships among integration, uncertainty and firm performance. The review comprises papers from approximately one decade ago up to now. Some older publications were reviewed only in order to present some classical definitions of the concepts.
The integration may be viewed from different perspectives (Fig. 1). The first perspective refers to the internal and external dimensions of integration. The internal integration occurs among the various functional areas within an organization, while external integration is related to the collaborative interaction between companies or organizations. These two dimensions are considered by several authors such as Bagchi and Skojoett-Larsen (2002), Gustavsson (2008), Flynn, Huo, and Zhao (2010) and others.
We also present a conceptual framework that outlines the relationships already explored in empirical research. This framework may be used to categorize the reviewed research into different classes according to the level of analysis and the scope addressed by the authors. Directions for future works in the area are also suggested.
It is interesting to note that the internal integration may be examined in different levels. Gustavsson (2008) studied the integration within the ambit of the Production Planning and Control function (PPC), defining internal integration as the interface that supports the planning information exchange between two or more PPC processes. Droge, Jayaram, and Vickery (2004), analyzed internal integration in the context of product development, denoting it as the set of practices focused on the expansion of the internal boundaries between
2. LITERATURE REVIEW
978-3-902823-50-2/2013 © IFAC
608
10.3182/20130911-3-BR-3021.00007
IFAC MCPL 2013 September 11-13, 2013. Fortaleza, Brazil
the Design Engineering and the Manufacturing functions. Pagell (2004) highlights that the internal integration construct has been explored in three levels of analysis: strategic, interfunctional and intrafunctional levels. In the strategic level, the alignment or fit has been traditionally related to competitive advantage.
regarding the environmental factors associated with a given decision-making situation, (2) not knowing the outcome of a specific decision in terms of how much the organization would lose if the decision were incorrect, and (3) inability to assign probabilities with any degree of confidence with regard to how environmental factors are going to affect the success […] of the decision unit”
organizational
As for integration, the researchers also propose different dimensions for the uncertainty construct (Fig. 2). The disturbances that affect production may be split up into two groups, according to Mula et al. (2006): environmental uncertainty and system uncertainty. Variations in external demand and external supply, which are beyond the production system, belong to the first group. The second group comprises the disturbances that are internal to the production process, such as failures and machine breakdowns, lead time uncertainty, quality problems, absenteeism, etc. De Snoo, Wezel and Jorna (2011) label this second group as executional uncertainty, since it encompasses the factors that prevents the schedule from being executed as intended.
technical external (Supply Chain Integration)
integration internal
between strategy and execution
environmental
Fig. 1. Dimensions of integration, according to different authors
system
On the other hand, the external integration is directly related the supply chain relationships. Bagchi and Skojoett-Larsen (2002) state that “supply chain integration involves rallying the key members of a supply chain network including external entities towards a common goal”. Authors such as Swink, Narasimhan and Wang (2007), Flynn, Huo, and Zhao (2010) e Wong et al. (2011) consider three kinds of integration in the supply chain – customer, supplier and internal integration - arguing that this latter kind is an important element to support the Supply Chain Integration (SCI).
execution
objects
uncertainty attributes
perceived
Fig. 2. Dimensions of uncertainty, according to different authors
Another perspective from which integration can be seen comprises the organizational and technical dimensions. Lemahieu, Snoeck and Cumps (2005) discuss the concept of extended enterprise, which comprises a set of companies that “pursue repeated, enduring exchange relations with one another”. This net of enterprises shows an important feature: the presence of values based on reciprocity. Thus, internal organizational integration may be associated to the mechanisms, practices and culture that encourage collaborative and reciprocal relationships between functions or organizations. Gustavsson (2008) lists some factors that characterize the organizational integration: the presence of teams or workgroups and standardized operating procedures, the development of plans in mutual understanding, open exchange of ideas, and aligned goals.
Burgeois (1980) and Vokurka and O’Leary-Kelly (2000) classify the environment in which the companies compete according to three elements: objects, perceived uncertainty and attributes of environment. The first element is associated to the different uncertainties of the environment that surrounds the companies, such as customer demand patterns, suppliers’ delivery reliability or product life cycle. This dimension is similar to the environmental dimension of uncertainty defined by other researchers. The second element, “attributes”, comprises three other factors: the amount and diversity of external factors facing a firm, the resources availability in the environment to support growth and the level of instability of the market where the firm competes. Finally, the “perceived uncertainty” concerns the ability or inability of the managers to accurately foresee futures events in their environment.
Technical integration, on the other hand, is associated to the technological means that enable communication, such as internet, EDI, fax, ERP software and so on.
Uncertainty is one of the main variables of Contingency Theory. “Contingency theory contains the concept of a fit
The concept of uncertainty defined by Duncan (1972) comprises three elements: “(1) the lack of information 609
IFAC MCPL 2013 September 11-13, 2013. Fortaleza, Brazil
share, profit growth and Return on Investment (ROI) are used.
that affects performance, which, in turn, impels adaptive organizational change.” (Donaldson, 2001). The performance is also represented by most of the researchers as a multidimensional construct (Fig. 3). Some dimensions often used to evaluate the performance of the operations function, specifically, are cost, quality, speed, dependability and flexibility (Hayes and Wheelwright, 1984; Slack and Lewis, 2001; Swink, Narasimhan, and Wang, 2007; Wong, Boon-itt, and Wong, 2011). Cost reduction or cost control is always a perceived goal, no matter if the company follows the cost leadership or the differentiation strategy (Porter, 1980). The concept of quality, as known, is related to product features, customer service and also to internal activities, i.e, the quality of processes, which leads to reduced scap and rework. Speed refers to the elapsed time between the beginning of a process and its end; it is closely related to customer responsiveness, which, on its turn, depends on fast material and information flows. Dependability is the ability of keeping delivering promises and correcting mistakes on time. Finally, the ability of firms to respond to unpredictable events of the environment or changes in customer needs characterizes the manufacturing flexibility.
2.2 Relationships Involving these Constructs After scanning the specific literature, it was possible to see that most of the reviewed empirical research addresses the dyadic relationship between integration and performance. First of all, two different levels of analysis may be considered in the investigation of this dyad: the interfunctional and the intrafunctional level. Droge, Jayaram and Vickery (2004) explored the intrafunctional level of product development process, examining the relationships among internal and external practices, time-based performance and company overall performance. They found that both internal and external integration present a positive relationship with the time-based constructs, which, on their turn, positively influence firm’s financial performance. O’Leary-Kelly and Flores (2002), on the other hand, focused on the interfunctional level. They investigate the integration of sales/marketing-based decisions and manufacturing-based decisions, including uncertainty as a contingency variable. It was observed that sales/marketing decisions integration led to a better performance in firms that were subjected to high levels of environmental uncertainty. For these firms, it was beneficial to integrate the Manufacturing team into the product development plan and sales plan decisions, which are originally made by the Sales team. On the other hand, the participation of the Sales function in the manufacturing decisions, which includes process development and manufacturing planning, did not cause a positive impact on performance.
cost quality delivery (speed and dependability) f lexibility
performance
Besides internal integration, recent studies have investigated the positive impact of Supply Chain Integration (SCI) on operational and strategic firm performance. Li et al. (2006) examined the relationships between Supply Chain Management (SCM) practices, competitive advantage and organizational performance. The authors do not explicitly refer to the integration construct; however, some of the practices they analyze are closely related to it. Five dimensions are defined to characterize SCM practice: strategic supplier partnership, customer relationship, level of information sharing, quality of information sharing and postponement. The level of information sharing is related to internal integration, while strategic supplier partnership and customer relationship are practices that directly contribute to external integration. Li et al. (2006) confirmed that higher levels of SCM practice can lead to enhanced competitive advantage and improved organizational performance. The authors defined the construct of competitive advantage by means of the five performance objectives listed in section 2.1 (cost, quality, speed, dependability and flexibility), and found that these dimensions have a direct impact on organizational performance.
operational
business (strategic)
growth in sales
f inancial
return on sales
market share
growth in prof it
product development perf ormance measures (specif ic)
return on investment (ROI)
supply chain perf ormance measures (specif ic)
growth in ROI
Fig. 3. Dimensions of performance, according to different authors Other authors established specific dimensions to evaluate the supply chain performance (Forslund and Jonnson, 2007), product development and time-based performance (Droge, Jayaram, and Vickery, 2004). On the other hand, in several empirical studies, the researchers assess the impact of integration on overall firm performance. In this case, strategic and financial measures, such as customer satisfaction, market
The relationship between supply chain management elements and organizational performance was also investigated by Chow et al. (2008). They classified the supply chain components into three groups: practices, concerns and 610
IFAC MCPL 2013 September 11-13, 2013. Fortaleza, Brazil
competences. The integration may be placed in the first group, because, according to the authors, supply chain practices include involving suppliers in the decision making process, encouraging information sharing and developing customer contacts. In other words, the practices are elements that lead to the integration of downstream and upstream activities. An empirical survey was carried out in US and Taiwan, and regional differences were observed: in Taiwan the supply chain practices had a direct impact on organizational performance, but in US they had only an indirect impact.
a certain level and the new activities become too distant to the firm’s core business, then the resources and learning may be not enough to guarantee competitiveness in the new field. The lack of economies of scope may lead to internal administrative difficulties, which explain the decreasing portion of the U-shape curve. The hypothesis stated by the authors is that the firms may attenuate the risks of unrelated diversification by coordinating and integrating the various functional units of the firm. In other words, internal integration across marketing, logistics and production would generate a positive influence on the relationship between unrelated product diversification and performance. Similarly, they proposed that integration with suppliers and customers, i.e. external integration, positively influences the firm’s efforts to diversify to international markets, leading to a better performance. Through external and internal integration, the firm may find new organizational forms to operate, extending its competitive capabilities. The results of the survey carried out by the aforementioned authors confirmed the formulated hypotheses.
Another group of researchers (Flynn, Huo, Zhao, 2010; Wong, Boon-itt, Wong, 2011) focused on the same dyad, i.e., supply chain integration and performance; however, in this case, the uncertainty was included in the analysis as a moderating variable. According to these authors, there seems to be some contradictory findings regarding this relationship. Previous research had shown that the dyad SCI-performance is not always is moderated by environmental uncertainty. Also, there seems to be no consensus about the direction in which uncertainty affects this relationship, nor about what dimensions of performance are affected. For this reason, Flynn, Huo, Zhao (2010) and Wong, Boon-itt, Wong (2011) defend the use of multidimensional constructs to represent, integration and performance. In this way, it is possible to separate the effect of each integration dimension on each performance dimension. For integration, the dimensions considered are internal, supplier and customer integration. For performance, the first mentioned author considered operational and business performance, while the second considered the five performance objectives of cost, quality, speed, dependability and flexibility. Flynn, Huo, and Zhao (2010) have found that internal integration and customer integration are differentials for a good performance, whereas supplier integration seems not to be directly related to performance. Wong, Boon-itt, and Wong (2011) proposed that, under a high environmental uncertainty, internal integration influences both product cost and product quality performance. External integration, on its turn, impacts on delivery and flexibility, and these relationships tend to be strengthened when the company is subjected to high uncertainty.
Configuration Theory may be used as an alternative approach to Contingency Theory when studying the influence of uncertainty on the integration-performance dyad. According to this theory, an organization is seen as a set of interrelated activities that form different configurations, i.e., different patterns. According to Flynn, Huo, and Zhao (2010), these patterns may be described in terms of their strength and balance. The strength is the extent to which Supply Chain Integration activities are carried out, while the balance is related to the weight given to the development of each dimension: internal integration, integration with suppliers and with customers. The aforementioned authors found that the companies where integration was stronger tend to present a better performance, as expected. The results indicated, however, that the balance does not affect performance, since either companies that presented a balanced integration pattern or companies that had a predominance of internal or customer integration presented a high performance. Unlikely most of the empirical research on this subject, which investigates the correlations between variables making use of surveys, the work of Pagell (2004) has a qualitative approach. By means of multiple case studies and cross case analysis, this research aimed to determine the drivers of the internal integration between Operations, Purchasing, and Logistics, which are key internal supply chain functions according to the aforementioned author. It is an attempt of understanding the factors that enable and inhibit integration across the mentioned functions, since the literature lacks the prescription of how companies actually create integration (Pagell, 2004). The results showed that formal and informal communication as well as the measurement and reward systems are the main antecedents of integration. In addition, it was observed that informal communication has a greater influence on the level of integration in the plant than formal communication, and that the rewards must be based on organizational level goals in order to foster integration.
Instead of directly examining the relationship between Supply Chain Integration and performance, Narasimhan and Kim (2002) considered SCI as a moderating variable of the relationship between product diversification strategy and performance. The authors argued that an inverted U-shape relation exists between diversification and performance. This hypothesis is supported by the resource-based view and the theory of transaction costs, which are two theoretical domains from strategic management and organization theory. According to these theories, performance is positively influenced by increasing levels of diversification due to scale and scope economies, market power effects, risks reduction effects and learning effects. If the diversification is within the scope of the firm’s strategic resources and capabilities, increasing long-term profitability must be obtained. The increasing portion of the U-shaped curve is related to this situation. On the contrary, if diversification increases beyond 611
IFAC MCPL 2013 September 11-13, 2013. Fortaleza, Brazil
According to Pagell (2004), the communication level is influenced by job rotation, cross functional teams and facility layout. The organizational structure and culture are also important drivers of communication and measurement systems, thus they consequently lead to interfunctional integration.
integration and performance; (3) studies that also examined this integration-performance dyad, but considering uncertainty as a contingency variable. The research of Pagell (2004), where the integration and its antecedents are studied in depth, falls in the first category. The second category includes the studies of Frohlich and Westbrook (2001), Narasimhan and Kim (2002), Droge, Jayaram and Vickery (2004), Li et al. (2006), Swink, Narasimhan and Wang (2007) and Chow et al. (2008). In the third group, the researchers aimed at extending the knowledge built from the studies of the second group, verifying the moderating influence of uncertainty (represented by a dashed line in the framework). The research carried out by O’Leary-Kelly and Flores (2002), Germain et al. (2008), Flynn, Huo, and Zhao (2010) and Wong et al. (2011) may be classified in this category.
The research of De Snoo, Wezel and Jorna (2011) addressed the influence of the uncertainty on the definition of the scheduling performance metrics. Firstly, the authors investigated the set of criteria that firms use to assess scheduling performance, based on a qualitative research carried out in manufacturing and service companies. They divide the scheduling performance metrics into two categories: product and process, where the product is the result of the scheduling activity and the process is the activity itself. From the qualitative research, they found that scheduling process performance is related to reliability, flexibility, and response speed of the scheduling activity, as well as to the communication and harmonization ability of the schedulers. Additionally, they observed a conditional influence of uncertainty on the definition of the company focus on product or process scheduling performance. In situations of high uncertainty, the response speed was much more relevant than schedule optimization. In this case, thus, firms tend to focus on scheduling process performance rather than on scheduling product performance.
The level of analysis adopted in the studies is another relevant classification factor. The research concerning integration, uncertainty and performance is usually developed considering either one of the three levels: intrafunctional, interfunctional or supply chain level (external level). Droge, Jayaram, and Vickery (2004) and De Snoo, Wezel, and Jorna (2011) explored the intrafunctional perspective of product development and Production Planning and Control, respectively. The internal level or interfunctional level is investigated by O’Leary-Kelly and Flores (2002) and Pagell (2004). The supply chain level, on its turn, concentrates most of the existing research, such as Frohlich and Westbrook (2001), Narasimhan and Kim (2002), Li et al. (2006), Swink, Narasimhan and Wang (2007), Chow et al. (2008), Germain et al. (2008), Flynn et al. (2010) and Wong et al. (2011).
3. CONCEPTUAL FRAMEWORK The empirical research addressing integration, uncertainty and their relations with performance is varied. In this section, we propose a conceptual framework that summarizes the presented analysis and helps to classify the reviewed works into different categories, according to the subject and the level of analysis addressed by the authors (Fig. 4).
The proposed framework also exhibits the conceptual basis for the analysis of the relationships between the constructs, i.e., the Contingency Theory and the Configuration Theory. Most of the reviewed studies are based on Contingency Theory, which argues that external environment shapes the structure of an organization. The Configuration Theory, related to the identification of patterns of systems, is employed in few studies, such as in Frohlich and Westbrook (2001) and Flynn, Huo, and Zhao (2010).
uncertainty Contingency Theory
4. CONCLUSIONS AND DIRECTIONS FOR FUTURE WORKS
performance
integration
Configuration Theory intrafunctional level firm level (internal)
This paper analyzed some recent empirical studies concerning integration, uncertainty and their relationship with performance. A simple structure was proposed to classify the existing research on this subject. As a result of the analysis, the following aspects may be pointed out:
Supply Chain level (external) direct relationship
moderating relationship
•
The body of knowledge regarding the relationship between integration and performance has been significantly increasing. In special, substantial attention has been given to the Supply Chain Integration impact on performance.
•
The moderating effect of uncertainty on the integrationperformance correlation is investigated in many of the
Fig. 4. Proposed framework to represent the relationships investigated in the existing empirical research First of all, the reviewed empirical research can be divided into three categories: (1) studies that aimed to understand one of the constructs by means of qualitative empirical research; (2) studies that examined the dyadic relationship between 612
IFAC MCPL 2013 September 11-13, 2013. Fortaleza, Brazil
Duncan, R.B. (1972). Characteristics of organizational environments and perceived environmental uncertainty. Administrative Science Quarterly, 17, 313–327. Flynn, B.B., B. Huo and X. Zhao (2010). The impact of supply chain integration on performance: a contingency and configuration approach. Journal of Operations Management, 28, 58–71. Forslund, H. and P. Jonsson, (2007). The impact of forecast information quality on supply chain performance.
studies. The hypotheses of this investigation are based on the Contingency Theory. •
There are still some mixed findings about the subjects mentioned above. The use of different definitions of the constructs and different dimensions to represent them may explain some of these divergences. They may also occur due to regional differences, since the surveys were taken in different geographic locations. In order to clarify these results, this paper presented the multiple dimensions of the constructs adopted by several researchers.
•
As it can be seen, there is a significant amount of quantitative empirical research addressing the mentioned constructs and their relationships, but there are few qualitative studies providing managerial recommendations to actually achieve integration or performance improvement. With this kind of study, the focus of the research on integration would change from a descriptive to a more prescriptive direction.
•
Most of the studies about integration presume a functional perspective of the company, not considering the business process view of it. This perspective should be also investigated.
International Journal of Operations Production Management, 27, 90-107.
Frohlich, M.T. and R. Westbrook (2001). Arcs of integration: an international study of supply chain strategies. Journal of Operations Management, 19, 185–200. Fynes, B., S. deBuĭrca and D. Marshall (2004). Environmental uncertainty, supply chain relationship quality and performance. Journal of Purchasing & Supply Management, 10,179–190. Germain, R., C. Claycomb and C. Droge (2008). Supply chain variability, organizational structure, and performance: the moderating effect of demand Journal of Operations unpredictability. Management, 26, 557–570. Hayes, R.H. and S.C. Wheelwright (1984). Restoring our
The points listed above show that the empirical research on integration, uncertainty and performance can be further developed, on one hand, to dismiss some mixed findings and, on the other hand, to consider the business process view of the firm. Moreover, a suggestion for future works would be the development of qualitative in-depth studies about the presented constructs, aiming to provide the managers with recommendations on how to achieve integration, better performance and minimize uncertainties.
competitive edge: competing manufacturing. John Wiley, New York.
Bagchi, P.K. and T. Skjoett-Larsen (2002). Organizational integration in supply chains: a contingency approach.
Flexible
through
Hayes, R.H., G. Pisano, D. Upton and S.C. Wheelwright (2005). Operations, Strategy and Technology: Pursuing the Competitive Edge. New York, John Wiley. Lemahieu, W., M. Snoeck and B, Cumps (2005). Two basic types of business-to-business integration. International Journal of E-business Research, 1, 1-15. Li, S., B. Ragu-Nathan, T.S. Ragu-Nathan and S. Subba Rao (2006). The impact of supply chain management practices on competitive advantage and organizational performance. Omega, 34, 107-124. Mula, J., R. Poler, J.P. García-Sabater and F.C. Lario (2006). Models for production planning under uncertainty: a review. International Journal of Production Economics, 103, 271–285. Narasimhan, R. and S. W. Kim (2002). Effect of supply chain integration on the relationship between diversification and performance: evidence from Japanese and Korean firms. Journal of Operations Management, 20, 303–323. O’Leary-Kelly, S.W.O. and B.E. Flores (2002). The integration of manufacturing and marketing/sales decisions: impact on organizational performance. Journal of Operations Management, 20, 221–240. Pagell, M. (2004). Understanding the factors that enable and inhibit the integration of operations, purchasing and logistics. Journal of Operations Management 22, 459–487.
REFERENCES
Global Journal of Management, 3, 1-10.
&
Systems
Bourgeois, L.J. (1980). Strategy and environment: a conceptual integration. Academy of Management Review, 5, 25-39. Chow, W.S., C.N. Madu, C.-H. Kuei, M.H. Lu, C. Lin, and H. Tseng (2008). Supply chain management in the US and Taiwan: An empirical study. Omega, 36, 665-679. De Snoo, C., W. Van Wezel and R.J. Jorna (2011). An empirical investigation of scheduling performance criteria. Journal of Operations Management, 29, 181-193. Donaldson, L. (2001). The Contingency Theory of Organizations. Sage Publications, Thousand Oaks. Droge, C., J. Jayaram, and S.K. Vickery (2004). The effects of internal versus external integration practices on timebased performance and overall firm performance. Journal of Operations Management, 22, 557–573.
613
IFAC MCPL 2013 September 11-13, 2013. Fortaleza, Brazil
M. E. (1980). Competitive Strategy: Techniques for Analyzing Industries and Competitors. Free Press, New York. Slack, N. and M. Lewis (2001). Operations strategy. Porter,
Prentrice Hall, New York. Swink, M., R. Narasimhan and C. Wang (2007). Managing beyond the factory walls: effects of four types of strategic integration on manufacturing plant performance. Journal of Operations Management, 25, 148–164. Vokurka, R. J. and S.W. O’Leary-Kelly (2000). A review of empirical research on manufacturing flexibility. Journal of Operations Management, 18, 485-501. Wong, C. Y., S. Boon-itt and C.W.Y. Wong (2011). The contingency effects of environmental uncertainty on the relationship between supply chain integration and operational performance. Journal of Operations Management, 29, 604–615.
614