Supply chain agility: Securing performance for Chinese manufacturers

Int. J. Production Economics 150 (2014) 104–113

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Supply chain agility: Securing performance for Chinese manufacturers Jie Yang University of Houston-Victoria 14000 University Blvd, Sugar Land, TX 77479, United States

art ic l e i nf o

a b s t r a c t

Article history: Received 28 April 2013 Accepted 15 December 2013 Available online 22 December 2013

This study develops and empirically tests a conceptual framework to investigate the antecedents of manufacturers0 supply chain agility and the connection of their agility with performance in an emerging economy. Drawing upon the information theory, this study argues that technical (IT capability) and relational factors (information sharing and trust, and operational collaboration) are the antecedents of a manufacturer0 s supply chain agility. This study also posits that cost efficiency mediates the relationship between agility and performance based on transaction cost economics. Employing path analysis, this study shows that strong associations exist between a manufacturing firm0 s IT capability and operational collaboration with suppliers and its supply chain agility. The results also indicate the significant mediating effect of cost efficiency between the manufacturer0 s supply chain agility and performance. Implications are discussed and future research directions are also suggested. & 2013 Elsevier B.V. All rights reserved.

Keywords: Supply chain Information sharing Agility Performance

1. Introduction It has been increasingly recognized that an individual business no longer competes as a stand-alone entity, but rather as member of a supply chain (Christopher, 2000). Companies compete and win based on the capabilities they can assemble across their supply networks (Rice and Hoppe, 2001). A considerable number of studies on supply chain management in the past have focused attention on different ways of improving supply chain performance. However, within unpredictable and turbulent business environment, supply chains are vulnerable to business disruptions such as the occurrence of undesirable events, natural disasters, loss of partnership relationships, and new customization demands from customers. Supply chain disruption risks have been described as the occurrence of these unpredictable and undesirable events (Braunscheidel and Suresh, 2009; Tang and Tomlin, 2008). Supply chain disruptions are risks related to the collaboration and uncertainty of supply chain and the impact of natural disasters, terrorism and labor strikes (Kleindorfer and Saad, 2005). This study focuses on operational collaboration and information asymmetry in buyer–supplier relationships in a transition economy, which are related to supply chain disruptions. Extant studies have been conducted in western cultures, there is a dearth of understanding of buyer–supplier relationships in transition economies (e.g., China). As China is transforming into market-based competition from the centrally planned economy, it experiences complex changes in socio-cultural environment in which interorganizational relations serve as a foundation for economic exchanges

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(Park and Luo, 2001). As a primary location for international outsourcing and its role of global manufacturing center, China serves a sound ground for assessing the effectiveness of channel cooperation. While showing their interest in improving supply chain performance, scholars are increasingly focusing on supply chain agility. Christopher (2000) for example, stated that agility is the effective and flexible accommodation of unique customer demands. Business practitioners and scholars have embraced notion of agility in the supply chain. An agile supply chain enables exchange partners in the supply chain to sense, respond quickly to, and exploit anticipated or unexpected changes in market demand and in the business environment (Sharifi and Zhang, 2001). Improving supply chain agility is a potential strategy for mitigating supply chain disruption risks discussed above (Tang and Tomlin, 2008). It becomes important for a firm to improve its supply chain agility. However, there is a scarce of current research investigating the determinants and consequences of supply chain agility in transition economies from both technical and relational perspective. This study aims to fill several research gaps in the literature and contributes to the existing literature by answering the following two research questions: (1) how technical and relational factors serve as antecedents of supply chain agility and (2) how cost efficiency mediates the relationship between a firm0 s supply chain agility and performance in the context of Chinese manufacturers. In addition, this study supplements the research that focuses on organizational practices as antecedents of supply chain agility (i.e., Braunscheidel and Suresh, 2009) and is case-based (i.e., Mondragon et al., 2004). Empirically, findings of this study will help us better understand how technical and relational factors contribute to the agility of supply chain operations and the

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important role of cost efficiency in improving manufacturers0 performance in the context of an emerging economy. In the rest of the paper, a review of relevant literature is followed by theoretical background and hypotheses development, and research methods and data analysis are discussed. After presenting the results of the analysis, we also discuss theoretical contributions and managerial implications. Future research and limitations of this study are also addressed.

2. Literature review There exist two streams of research that examine supply chain agility. The first stream focuses on the importance of speed and responsiveness to volatile markets in a flexible way (e.g., Van Hoek et al., 2001; Sambamurthy et al., 2003; Swafford et al., 2008). In particular, Swafford et al. (2008) distinguished flexibility and agility of the supply chain and presented a research framework for their connections. In their study, supply chain flexibility is identified as ability embedded in a firm0 s internal supply chain functions and agility as an externally facing capability. They observed that supply chain flexibility represents operational abilities while agility reflects the speed of the adaptation to the evolving markets. Yusuf et al. (2004) advanced a reach and range analysis of agile supply chains. In their two-dimensional framework, reach is on the vertical axis and range is on the horizontal axis. They stated that an agile supply chain should extend to the highest levels on both dimensions of reach and range. Christopher (2000) suggested that supply chain agility is an ability of a firm for handling the changes of volume and variety in customer demand. Agility was tightly associated with the effectiveness of strategic supply chain management (Li et al., 2008) in the competition among supply chains, rather than entities (Christopher and Towill, 2001). Van Hoek et al. (2001) considered agility as an attribute for responding to changes, handling customer requests, and mastering market turbulence. Li et al. (2009) suggested that supply chain agility has two dimensions, alertness to change and response capability, at three levels including strategic, operational, and episodic. Based on five firm supply chain agility dimensions including alertness, accessibility, decisiveness, swiftness, and flexibility, Gligor and Holcomb (2012, 2013) defined a firm0 s supply chain agility as “a firm0 s ability to quickly adjust tactics and operations within its supply chain to respond or adapt to changes, opportunities, or threats in its environment” (p. 95). Costantino et al. (2012) defined supply chain agility as a network of different companies integrated with streamlined material, information, and financial flow, and focused on flexibility and performance. Using data from 121 supply chain management professionals, Blome et al. (2013) showed that supply chain agility mediates the relationship between supply- and demand-side competencies and operational performance building upon the dynamic capabilities perspective. Through regression analysis of a sample of 151 managers, Gligor and Holcomb (2012) suggested that behavioral/relational elements including coordination and communication are positively associated with supply chain agility, which in turn results in superior operational and relational performance. In an investigation of 144 US manufacturers, Chiang et al. (2012) found that strategic sourcing and a firm0 s strategic flexibility are key drivers of the firm0 s supply chain agility and there exists partial mediation of strategic flexibility on the link between strategic sourcing and the firm0 s supply chain agility. Supply chain agility consists of demand response, joint planning, customer responsiveness, and visibility (Braunscheidel and Suresh, 2009). The second line of research into supply chain agility highlights the importance of information-driven relationships in offering awareness to changes (e.g., Dove, 2005; Holsapple and Jones,

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2005; L et al., 2006). For example, information sharing has been found to enhance the firms0 agility while improving the relational stability and performance in buyer and supplier relationships (Li et al., 2006). Agarwal et al. (2007) have presented an agile supply chain model, which consists of information-driven virtual integration, process integration and performance management, centralized and collaborative planning, and market sensitivity and responsiveness. Collaboration intelligence sharing through the use of IT promotes organizational decentralization and a flexible technology focus (Heim and Peng, 2010). Prior studies assert that flexibility is a driver for agility (Chiang et al., 2012); flexibility is an internal and operational ability and agility is an external ability (Swafford et al., 2008); and agility represents both internal and external ability (Braunscheidel and Suresh, 2009). Taking the tenets from both streams, we define a firm0 s supply chain agility as an operational and relational capability in quick response to uncertain and turbulent markets. In such partnerships, both the buyer and supplier stress the relationship outcome through information sharing and joint relationships effort to achieve superior relationship outcomes (Nyaga et al., 2010). Thus, technical and relational factors facilitating continuous information sharing between the manufacturers and their suppliers are conducive to enhancing the agility of a firm0 s operations. Prior studies have advanced our understanding of how information process capabilities enable the sharing of information in a seamless chain (e.g., Bala and Venkatesh, 2007). To date, however, the studies in this field mainly focused on Western cultures with a developed market and stable institutional environment. Yet, little is known about how the technical and relational factors are related to a manufacturer0 s supply chain agility in emerging economies such as China, where a large variety of products are produced and exported to other countries worldwide. Manufacturing has become the most important sector in China and is the major source of its growth. Manufacturers operating in transition economies characterized by a dearth of well-established institutional frameworks can reap the harvest in economic exchanges by acquiring strategic resources through effective information sharing and cooperation among manufacturers. While several researchers have examined the roles of IT and non-IT attributes in improving agility (i.e., Mondragon et al., 2004; Ayyappan and Jayadev, 2010) and the buyer–supplier relationship in the Chinese context (Millington et al., 2006; Pressey and Xin, 2007), these studies are either case-based (former) or focused on companies in general rather than manufacturing (latter), the most important sector as Chinese practices transition their economy from central planning to greater market competition. As a larger proportion of products distributed to advanced economies are produced in emerging economies (i.e., China), an investigation of the agility of operations of the manufacturers in China0 s transition economy is of significant importance to better understand the mechanisms of improving agility and manufacturers0 performance. Second, few studies have assessed the effect of manufacturers0 supply chain agility on performance in a buyer–supplier relationship. Moreover, the connection between supply chain agility and performance could be contingent on the Chinese context. A growing number of Chinese executives feel under pressure from the institutionalization of China0 s legal infrastructure to adapt themselves to the “crooked” ways of guanxi practices (Guthrie, 1998). In comparing doing business in China and western countries, Luo and Chen (1996, p298) stated that, “The Chinese build the relationship and, if they are successful, transactions and profits will follow, whereas Westerners believe that one should build transactions and, if they are successful, a relationship will follow. One should not feel strange when he heard that McDonald was evicted from a central Beijing building

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after two years despite having a 20-year contract-simply because the incomer from Hong Kong had strong guanxi with the government whereas McDonald0 s had not kept its own in good repair.” Third, we have little knowledge about the potential mediating factors that might exist between a firm0 s supply chain agility and its performance. The parties involved in buyer–supplier relationships intend to develop mutually beneficial exchanges to economize the transactions and lower costs (Lai, 2009). The research on the effect of such economization via improved agility is thus far limited. This study will deeply explore the mediating effect of cost efficiency on the supply chain performance. The intention to test the mediating effect of cost efficiency was motivated by the crucial role of guanxi in doing business in China. Guanxi, as a social capital, is imperative in improving the agility since it can facilitate action. A manufacturer forms formal (e.g., alliance) and informal (e.g., guanxi) relationships with their economic exchange partners in order to enjoy advantages of guanxi (e.g., obtain information to mitigate uncertainties) in the development of cooperative relationships. Developing guanxi networks has been regarded as a way to mitigate the uncertainties posed by China0 s bureaucracy (Lee and Ellis, 2000). Guanxi is very useful in coping with the Chinese bureaucracies and it has become a form of social investment for developing, cultivating, and expanding a firm0 s guanxi network (Luo and Chen, 1996). There exist costs of developing and maintaining guanxi with the partners. In China, it has been a daily business practice to build and maintain guanxi with partners and also give mutual preferential treatment, which can be a significant cost of doing business in China, thus, cost efficiency is an important factor affecting a firm to benefit from agility in achieving performance. This study aims to fill these research gaps in the literature in three ways. First, grounded in the information theory, it examines the antecedents of a manufacturer0 s supply chain agility by developing the premise that supply chain agility hinges on continuous information sharing between buyer and supplier. To make the information sharing continuous, relational factors (i.e., information sharing, and operational collaboration) are required as well as technical factors (e.g., IT capability), since continuous information/knowledge sharing is a dynamic process that requires a proper relational infrastructure that governs and facilitates the sharing process (Ruggles, 1998). Strong relationships between buyers and suppliers through effective relational activity initiations contribute to the superior performance (Autry and Golicic, 2010). Such relational initiations can be represented by the willingness to share information, trust, and operational collaboration. Second, drawing upon transaction cost economics, this empirically driven study examines the mediating effect of cost efficiency on the relationship between the manufacturer0 s supply chain agility and its performance in an emerging economy. In economic exchanges between buyers and suppliers, some degree of opportunistic behavior is inevitable (Williamson, 1985). Opportunism mitigation reduces transaction costs in negotiating, monitoring, and safeguarding involved parties0 behavior. When opportunistic behavior is restrained through an agile supply chain, coordination cost and uncertainty between exchange parties are also reduced (Stump and Heide, 1996), which results in improved manufacturers0 performance. Third, prior studies have assessed supply chain agility only in western cultures and market economies. There is limited research in eastern countries, e.g., Asia. The research advances the literature of agility by extending the research to China, which serves as a good setting for an empirical study on supply chains since a growing number of companies outsource their material procurement, production, transportation, and service to China. The units of analysis of this study are manufacturers in China0 s emerging transition economy.

3. Theoretical background and hypotheses development In their efforts to mitigate supply chain disruption risk and improve performance of exchange partners, firms are willing to share information with their partners. Sharing information enhances the understanding of customer expectations while also reducing the product and process development cycle time (Perry and Sohal, 2001). This in turn improves responsiveness in turbulent market as firms and their customers co-evolve. Information sharing, supply chain agility, trust, and collaborative relationships have been identified as enablers of supply chain risk mitigation (Faisal et al., 2006). To construct the conceptual model (Fig. 1), this study adopts an integrated theoretical approach which incorporates the information theory and transaction cost economics. First, informed by the information theory, which suggests that organizations need to access and use information in order to reduce uncertainty and take actions to increase performance (Galbraith, 1973), this study examines the effects of technical (IT capability) and relational (information sharing between the manufacture and its suppliers, and operational collaboration) factors on the manufacturer0 s supply chain agility. Mondragon et al. (2004) suggested that information sharing creates opportunities for increased supply chain agility. The distinguishing enable-attributes of an agile supply chain have been identified as marketing/customer sensitivity, cooperative relationships, process integration, and information integration (Christopher, 2000; Van Hoek et al., 2001). Second, based on the transaction cost economics, this study examines the mediating role of cost efficiency in the connection between a manufacturer0 s supply chain agility and performance. Transaction cost economics suggests that relationship-specific investment by exchange parties can reduce uncertainty and conflict because such investment in recurring transactions discourages efforts to seek a private advantage (Williamson, 1979). As part of transaction costs of business exchanges, threshold costs occur when exchange partners have to set up contacts, contracts and governance schemes in a distant and unfamiliar environment (Verwaal and Donkers, 2003). The trust, commitment, and cooperation embedded in an agile supply chain tend to reduce opportunism in the ongoing partnerships between manufacturers and their suppliers, thus lowering transaction costs. As such, cost efficiency will be assessed in this study as a mediator. Grounded in the information theory and transaction cost economics, this study uses an integrated theoretical approach to construct a conceptual model which aims to identify the crucial factors reducing supply chain disruption risks and justify the proposed mediating role of cost efficiency on supply chain performance. 3.1. Effects of technical and relational factors on a manufacturer0 s supply chain agility Trust of the supplier has become the groundwork for economic exchanges in a buyer–supplier relationship. Trust has been defined as the willingness of a party to be vulnerable to the actions of another party based on the expectation that the other will perform a particular action important to the trustor, irrespective of the ability to monitor or control that other party (Mayer et al., 1995). Trust is a willingness to take the risks inherent in dyadic relationships. In China0 s transition economy, trust plays an important role in developing and maintaining an economic exchange relationship between buyers and suppliers due to the lack of institutional legal frameworks. In this study, trust is a relational means by which opportunistic behaviors of exchange partners are reduced and stable relationships can be established between manufacturers and their suppliers. The presence of trust creates a better working environment for partner firms as it can reduce the specification

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and monitoring of contracts, provide incentives for cooperation, and reduce uncertainty (Fynes and Voss, 2002). Responsibility, equality, and reliability have been considered the three foundations on which trust is based to foster relational stability (Lewis, 1992). Trust encourages the involved parties to feel comfortable in cooperating with one another (Landry, 1998). Firms need to share information to reduce information asymmetries between buyers and suppliers. The information theory indicates the importance of the role of intellectual capital in a firm0 s performance (Collins and Clark, 2003) and specifies the measure of efficiency of an organizational structure (Ehsani et al., 2010). In a buyer–supplier relationship, trust results in greater openness between partner firms, thereby generating greater open protocol for sharing information (Corsten and Kumar, 2005) and bolstering economic bonds and complementary contributions between exchange parties (Dyer, 1996), that promote continuous information sharing to respond to uncertain and turbulent markets. Guanxi has been developed by Chinese firms as a strategic mechanism to overcome competitive and resource disadvantages by cooperating and exchanging favors with their partners (Park and Luo, 2001). In China0 s transition economy, information sharing, trust, and operational collaboration are built upon Guanxi, a socially embedded relationship which is characterized by favor, trust, and interdependence (Gu et al., 2008). It also represents an obligation of one party to another, built over time by the reciprocation of social exchanges and favors. The socially embedded relationships offer a platform for sharing more reliable information between exchange parties and enhancing trust and reciprocity (Morgan and Hunt, 1994). An important long-term relationship helps the exchange parties to cooperate and commit to the economic transaction between the dyads. Information sharing between buyer and supplier exerts a direct positive effect on supply chain proximity (Narasimhan and Nair, 2005), which brings buyer and supplier closer in order to respond to rapidly changing market demand. Thus Hypothesis 1. Informational sharing exerts direct positive effects on a manufacturer0 s supply chain agility. The importance of information processing and sharing has been recognized in the knowledge management literature (Brown and Magill, 1999). The IT capability of firms in processing information inputs can advance know-how and create intellectual capital, which enables firms to make informed decisions and take effective actions (Lai et al., 2008). Such capability reflects the level of firms0 sophistication in using IT to support information sharing within firms, processing information input, and in exploiting knowledge to generate valuable outputs for performance improvement. What we observe is the organizational capability to efficiently convert its information inputs into valuable outputs (e.g., decision and actions) (Tanriverdi and Venkatraman, 2005). In this regard, a firm0 s high level of IT capability suggests improved organizational capability in managing its business processes and supply chain (Venkatraman and Tanriverdi, 2004), as well as enhancing operational efficiency, reducing costs of coordination and improving the transaction lead-time required for economic exchange in a buyer–supplier relationship (Saeed et al., 2005). Therefore, we posit, Hypothesis 2. A manufacturer0 s IT capability exerts a direct positive effect on its supply chain agility. Collaboration has been identified as a crucial factor for successful long-term relationships (Morgan and Hunt, 1994). Operational collaboration between buyer and supplier reflects the fact that exchange partners have a desire to acquire the information and other resources the focal firms need and to share information and organizational resources with their partners. Collaboration enables the firms to integrate, create, reconfigure and share information and resources so that they can respond to the volatile market quickly. Buyers assess

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collaboration outcomes and offer feedback and help to suppliers by means of information sharing, technical support, cross-training, and direct investment in supplier operations with the expectation of mutual improvement of performance (Krause et al., 2007). An agile supply chain requires collaborative working between buyers and suppliers, joint product development, common systems and shared information (Bal et al., 1999; Rigby et al., 2000). The partners in an operational collaboration have built mutual credibility (Spekman et al., 1997, Walton et al., 2008). They work together to leverage their assets and capabilities and make decisions jointly when responding to the changing market demand, which improves the supply chain agility. Accordingly, we hypothesize that Hypothesis 3. Operational collaboration exerts a direct positive effect on a manufacturer0 s supply chain agility. 3.2. The mediating role of cost efficiency between a manufacturer0 s supply chain agility and performance Cost efficiency is the demonstrated ability to execute plant operations using relatively few total input resources (Swink et al., 2005). Supply chain agility may actually reduce cost efficiency since it involve more investments to accomplish increasing ability to customize products, adjust production volumes, respond to changes in delivery performance, and produce a range of products. The collaboration between manufacturers and their suppliers fostered by supply chain agility allows for transactions economizing on bounded rationality and safeguarding against the hazards of opportunism (Lai, 2009), thus, the transaction costs and total input resources are reduced. As the emerging economy0 s society stresses higher relational harmony at individual, group and society levels compared with Western societies (Bruton and Lau, 2008). Thus, we posit that Hypothesis 4. A manufacturer0 s supply chain agility exerts a direct positive effect on cost efficiency. Transaction cost economics suggests that reduced uncertainty and conflict increased supply chain performance and the effectiveness of channel cooperation, result in lower transaction cost. Cost efficiency fostered by reduced conflict and opportunism as well as enhanced commitment and knowledge sharing, which are embedded in an agile manufacturing environment, improves performance for involved exchange parties (Luo et al., 2009). Supply chain agility creates value within firms through cost efficiency (Lambert and Pohlen, 2001), which can be achieved through logistics activities to enhance profitability, sales turnover, and customer satisfaction (Halley and Guilhon, 1997). An agile supply chain is capable of allocating its resources wisely and leveraging costs into customer value, which in turn results in superior performance (Langley and Holcomb, 1992). Hypothesis 5. Cost efficiency exerts a direct positive effect on the manufacturer0 s performance. Hypothesis 6. A manufacturer0 s supply chain agility exerts a direct positive effect on the manufacturer0 s performance. 4. Methods 4.1. Sample and data collection The survey for this study was sent to manufacturers in Shanghai, which has been recognized as the largest base for manufacturing in China. It also has the largest varieties of manufacturing sectors. We believe the manufacturing firms serve as a good setting for this empirical study on supply chain agility. In the data collection, we adopted the key informant approach,

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which has been widely used in previous empirical studies. Firm chief executive officials, general managers and senior managers were respondents of the survey as these top management decision makers obtain access to strategic information, the knowledge of the firm, and familiarity with the environment of the firms. We acknowledge that the potential problems of single respondent may have led to common method bias. To detect the threat of common method variance, we conducted the Harmon0 s one factor test as suggested by Podsakoff and Organ (1986). The factors with eigenvalues greater than one were extracted from all the measurement items. Since no single factor emerged that accounted for most of the variance, common method variance did not appear to be a problem in this study (Podsakoff and Organ, 1986). The English version of the original survey instrument was translated into Chinese by the corresponding author and the Chinese version was then translated back into English by another bilingual scholar and confirmed by the corresponding author of this study to ensure that there is no discrepancy between the two versions. Three academics and four executives in the field of supply chain management were included in the pilot study to get feedback for any further modifications of the survey instrument and ensure that respondents had no difficulties in completing the questionnaire. Based on their suggestions, only minor changes were made to the wordings of several survey items, such as the consistency of the use of words for the measures of a construct. The sectors included in the survey include electronics (6.3%), mechanical manufacturing (28.4%), telecommunication (8.2%), chemicals (10.7%), pharmaceuticals (21.7%), construction (12.1%), automobile manufacturing (6.5%), new materials and energy (3.4%), and others (2.7%), which represents the sector distribution of the manufacturing industry. Four weeks after the initial mailing to the respondents, we conducted follow-up phone calls to those who had failed to return the survey instrument. To ensure the consistency between two rounds of collection, we compared the responses from firms that responded in time with those from late-responding firms. It shows that the responses from these two groups did not differ in terms of number of employees, sales revenue, and years in business in this study (p4 0.10). We also compared between companies that responded to the survey and those that did not, differences do not exist between the two groups. After two rounds of data collections, out of 500 questionnaires, 137 usable responses were received, resulting in a response rate of 27%. 4.2. Measures We used a seven-point scale for all items in the survey to ensure a uniform scale width. To fit the present context well, we adapted and re-worded several items from original sources in prior studies. The measures in this study were drawn from several sources. The measure of informational sharing and trust with suppliers was adapted from Narasimhan and Nair (2005) which includes three items reflecting the importance of trust and use of formal and informal information sharing with suppliers. IT capability refers to the IT management practices that enable firms to deliver IT services, which add value to customers. Such practices include information processing, systems development, and IT applications in support of organizational operations relating to decision making and process improvements (Ravichandran and Lertwongsatien (2005)). The measure of a firm0 s IT capability was adapted from Sanders and Premus (2005) which includes four items reflecting the IT capability of a firm relative to industry standards, key competitors, key customers, and key suppliers. These measurement items can be justified by a similar supply chain study of Kent and Mentzer (2003) which asked if respondent firms were on the leading edge of new information technology when measuring investment in information technology.

The comparative measure gauges a firm0 s ability to access and utilize information in a superior efficient way compared with other players in the market and the firm can obtain competitive advantages due to its higher level of IT capabilities. To measure operational collaboration, we adopted the measures from the work of Cousins (2005), measuring the degree of sharing operations planning information and linking order management systems, moving towards joint capacity management systems. The measure of supply chain agility was adapted from Swink et al., (2005) to capture the degree of capability to customize products, adjust production volumes, respond to changes in delivery requirements, and produce a range of products. Cost efficiency was measured by two items drawn from the same study by Swink et al., (2005), tapping the degree of the respondent firm0 s product unit cost (including all costs occuring for a product) and total manufacturing overhead cost. Performance was adopted from Narasimhan and Nair (2005), indicating the degree of performance in terms of market share, ROA, average selling price, product quality, and customer service levels as compared to the respondent firm0 s major industrial competitors. It focused on the financial and quality performance of the manufacturers in an emerging economy since these financial and quality indicators are used more often than other performance indicators such as cycle time and speed in comparison to the performance of manufacturers in the same industry. 4.3. Control variables Supplier firm size and importance and frequency of the supplier relationship have been used as control variables to control for a firm0 s capability of entering into a beneficial exchange and the commitment to the partnerships in the supply chain in order to improve its performance. The rationale for including the three control variables is twofold. First, the size of key suppliers can affect the levels of responsiveness to the manufacturers0 demands and efficiency of operations due to the bureaucracy of large firms in a transition economy which is characterized by the lack of institutional legal frameworks. Furthermore, the size of suppliers also affects their commitment and cooperation since large firms may have stronger bargaining power in the economic exchanges. The size of key suppliers was included in the model to control for this potential situation. Second, we include the importance and frequency of the supply chain relationship as control variables because they can be seen to influence relational stability, commitment, and cooperation in the buyer–supplier relationships in a guanxi-oriented business culture. Supplier firm size was measured in terms of the size of the supplier and its importance in the market. Importance of the supply chain relationship was measured by five items drawn from Anderson and Weitz (1992), reflecting the firm0 s loyalty, defense, term length, and commitment to and patience with each other in supply chain. Frequency of the supply chain relationship was measured by asking respondents to indicate the monthly frequency of the economic transactions with their key suppliers based on a seven-point scale. In the cover letter of the survey, we explained several items of the questionnaire, e.g., IT capability refers to a firm0 s capability of using technology to acquire and share information for more effective operations. 4.4. Reliability and validity analyses In examining the convergent and discriminant validity of the theoretical constructs, we performed confirmatory factor analysis on the measurement model using LISREL. The fit indices suggest a satisfactory fit for the model (χ2 ¼846.69, p¼0.00, df¼ 296, CFI¼ 0.87, and IFI¼0.88). The results of this analysis and the proportion of variance extracted for each construct are summarized in Tables 1 and 2. The proportion of variance extracted estimates of

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all the theoretical constructs were above the 0.5 threshold and were found to be greater than the squared correlation between any pair of them. The results suggested that the measurement items share common variance with their hypothesized constructs more than with the other constructs, offering evidence of discriminant validity. Informational sharing

The measures and scale reliability for the theoretical constructs are reported in Table 3. All theoretical constructs had a Cronbach0 s α above 0.70, indicating a good evaluation of reliability of these constructs. The results of the confirmatory factor analysis also show that all the measurement items loading on the expected factors had loadings above 0.50.

Cost efficiency

H4

H1

Firm’s IT capability

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H2

Firm’s supply chain agility

H5

H6

Performance

H3

Operational collaboration

Fig. 1. Conceptual framework.

5. Analysis and results We examined the hypothesized structural relationships using latent variable structural equation modeling (SEM) by means of LISREL. SEM was used in testing the research model due to its advantages of combining multiple regression and factor analysis and dealing with multicollinearity and the unreliability of data from respondents. While three-step mediation regression procedures are recommended for investigating mediation effects by Baron and Kenny (1986), this study employed latent variable structural equation modeling since it allowed for simultaneously testing the

Table 1 Construct measurement, reliability, and confirmatory factor analysis. Measures

Standardized loading

Informational sharing (α¼ 0.73; proportion of variance extracted: 0.70) 1. How much does lack of trust among supply chain members prevent your firm from achieving the full potential of supply chain management?a 0.98 2. How important is the use of formal information sharing agreements with suppliers and customers in your supply chain management efforts? 0.66 3. How important is the use of informal information sharing with suppliers and customers in your supply chain management efforts? Firm0 s IT capability (α¼ 0.89; proportion of variance extracted: 0.63) 1. IT capability relative to industry standard 2. IT capability relative to key competitors. 3. IT capability relative to key customers. 4. Use of information networks with key suppliers. Operational collaboration (α ¼ 0.80; proportion of variance extracted: 0.64) 1. Share operations planning information. 2. Develop and share forecast demands and salesa 3. Link order management systems. 4. Move towards joint capacity management systems.

0.74 0.80 0.85 0.77 0.58 0.90 0.88

Firm0 s supply chain agility (α¼ 0.86; proportion of variance extracted: 0.57) 1. Ability to customize products. 2. Ability to adjust production volumes. 3. Ability to respond to changes in delivery requirements. 4. Ability to produce a range of products.

0.71 0.83 0.79 0.69

Cost efficiency (α ¼0.88; proportion of variance extracted: 0.76) 1. Unit cost. 2. Total manufacturing overhead cost.

0.99 0.73

Performance (α¼ 0.79; proportion of variance extracted: 0.51) 1. Please indicate the level of your firm0 s performance in terms of market share as compared to your major industrial competitors. 2. Please indicate the level of your firm0 s performance in terms of return on assets as compared to your major industrial competitors. 3. Please indicate the level of your firm0 s performance in terms of average selling price (higher performance means higher average price) as compared to your major industrial competitors. 4. Please indicate the level of your firm0 s performance in terms of overall product quality as compared to your major industrial competitors. 5. Please indicate the level of your firm0 s performance in terms of overall customer service levels as compared to your major industrial competitors. Supplier firm size (α ¼ 0.77; proportion of variance extracted: 0.68) 1. This supplier is a very large company. 2. This supplier is the industry0 s biggest supplier of this product. 3. This supplier is a small player in the market (reverse coded)a Importance of the SC relationship (α ¼ 0.91; proportion of variance extracted: 0.59) 1. We have a strong sense of loyalty to the supply chain. 2. We defend the supply chain when others criticize it. 3. Our supply chain relationship is a long-term alliance. 4. We are committed to each other in the supply chain. 5. We are patient with each other in the supply chain when someone makes mistakes. Frequency of the SC relationship Please indicate the frequency of supply chain relationship with a key supplier. Model Fit Index χ2 ¼ 846.69 (p¼ 0.00), df ¼ 296, CFI ¼0.87, IFI¼ 0.88 a

This item has been deleted to increase the reliability.

0.55 0.68 0.77 0.88 0.63 0.88 0.77

0.76 0.69 0.74 0.85 0.78 1.00

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Table 2 Correlations of constructs.

1 2 3 4 5 6 7 8

Supply chain performance Cost efficiency Supply chain agility Information sharing Firm IT capability Supplier firm size Operational collaboration Importance of SC relationship

1

2

3

4

5

6

7

8

1.00 0.27 0.44 0.25 0.39 0.22 0.02 0.30

1.00 0.37 0.22 0.29 0.26 0.02 0.04

1.00 0.33 0.42 0.16 0.01 0.45

1.00 0.35 0.38 0.36 0.48

1.00 0.58 0.27 0.39

1.00 0.21 0.22

1.00 0.28

1.00

Table 3 Structural equations. Structural equation

R2

η1 ¼0.24ξ1  0.09ξ2 þ0.07ξ3 þ0.94 η2 ¼0.44ξ1 þ0.10ξ2 þ 0.12ξ3 þ0.71 η3 ¼0.16ξ1 þ0.36ξ2 þ 0.18ξ3 þ0.71 η4 ¼  0.04ξ1 þ 0.22ξ2-0.04ξ3 þ 0.07η1 þ 0.25η2 þ 0.24η3 þ0.76 η5 ¼0.09ξ1  0.09ξ2 þ0.01ξ3 þ0.25η4 þ0.93 η6 ¼0.13ξ1 þ0.19ξ2  0.01ξ3 þ 0.14η4 þ 0.19η5 þ 0.83

0.06 0.29 0.29 0.24 0.07 0.18

To summarize, this study employs path analysis to examine the antecedents of agility and its impact on cost efficiency and performance. Results show that four out of five hypothesized relationships are strongly supported. In particular, a firm0 s IT capability and operational collaboration have been shown to have significant effects on agility. Cost efficiency is dependent on the manufacturer0 s agility and is also a determinant of improving its performance. 5.3. Results for control variables

hypothesized relationships including main and mediating effects, thus providing a better evaluation of the importance of the factors (Modi and Mabert, 2007). Table 3 shows the structural equations of the model. The completely standardized parameter estimates and tvalues for each hypothesized path are presented in the structural model in />Fig. 2. Since the direct effect of supply chain agility on performance (H6) is not significant, the mediating effect of cost efficiency on performance is partial and full mediation is not found in the results (Baron and Kenny, 1986; Preacher and Hayes, 2004; Modi and Mabert, 2007). Overall, the results indicate that the overall fit of the model is acceptable (χ2 ¼31.98, p¼0.00, df¼9, CFI¼0.93, IFI¼0.93, NFI¼0.91, and GFI¼0.95). Hoelter index is used to judge if sample size is adequate. By convention, a Hoelter0 s N under 75 is considered unacceptably low to accept a model by chi-square (Hair et al., 1998). The results show that Hoelter0 s N is 85.55, which indicates it is an acceptable model. As a result, Hypotheses H2–H5 are supported (po0.05), but H1 is not.

5.1. The antecedents of supply chain agility Fig. 2 presents the results of the path analysis using the centered data. The results show a significant positive relationship between a firm0 s IT capability and its supply chain agility (β ¼0.25, t¼2.64). Thus, Hypothesis 2 is supported. Operational collaboration is hypothesized to have a positive effect on supply chain agility. Our results show a significant association between them (β ¼0.24, t¼2.59). Therefore, Hypothesis 3 receives support from the analysis. Hypothesis 1 predicts the effect of information sharing on the manufacturer0 s supply chain agility, but our result failed to support our prediction (β ¼ 0.07, t ¼0.79). 5.2. The consequences of the manufacturer0 s supply chain agility

Hypothesis 4. posits a positive effect of a manufacturing firm0 s supply chain agility on cost efficiency. Results from path analysis support this prediction (β ¼ 0.25, t¼2.59). The link between cost efficiency and the manufacturer0 s performance was hypothesized in H5, which also received support from the results of the analysis (β ¼0.19, t¼2.21).

As discussed earlier in the paper, there are three control variables for the structural model: supplier firm size, the frequency of supply chain interactions and the importance of the relationship. These three control variables were included in each structural equation, as suggested by Williams et al. (2009, p. 583): “Structural equation modeling treat the control variables as exogenous latent variables, allow them to covary with the exogenous variables of substantive interest and they would also have direct paths to all of the endogenous variables. In this manner, the variance of the control variables shared with substantive variables of interest is accounted for when testing the significance of the paths of interest since they are associated with the key hypotheses of the model.” Results show that supplier firm size is positively associated with informational sharing and trust of suppliers and firms0 IT capability, both of which are to be expected. In a Guanxi oriented culture, the larger the supplier firm size, the more informational sharing and trust of suppliers. Usually, a large firm is equipped with higher level of IT capabilities due to its availability of resources and its need for IT applications. Secondly, we found that the more frequent the supply chain relationship is, the more likely the manufacturing firms are to collaborate operationally with their suppliers. The frequency of economic exchange activities contributes to the operational collaboration between exchange partners since the adjustment to and familiarity of each other. And finally, with regard to the importance of the supply chain relationship, the results of analysis show that it improves the manufacturer0 s operational collaboration with its suppliers, the agility, and the performance, which indicates that if the supply chain relationship is important to the manufacturing firms, there is a tendency of those firms to seek opportunities for operational collaboration with their suppliers in order to achieve supply chain agility and improve performance.

6. Discussion This study examined the effects of informational sharing and trust of suppliers, a firm0 s IT capability, and operational collaboration on a manufacturer0 s supply chain agility, which in turn affects cost efficiency and the firm0 s performance. We argue that built

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Fig. 2. Coefficients of the structural model. *p o0.05; **po 0.01; ***p o 0.001. *The solid line represents supported path and dashed line indicates insignificant path. Only significant effects of the control variables are shown in the figure.

upon the information theory, both technical and relational factors are determinants of the manufacturer0 s supply chain agility, where exchange partners are able to reconfigure their information and resources to respond rapidly to the unpredictable and turbulent market, and averse the potential supply chain disruption risks from both buyers and suppliers. We also argued that cost efficiency exerts a mediating effect between agility and performance grounded in the transaction cost economics. Collectively, the results shown above provide partial support to the arguments we advanced and shed light on the importance of a firm0 s IT capability, operational collaboration between partners, and the mediating role of cost efficiency in improving its performance. In particular, the findings suggest that a firm0 s IT capability and operational collaboration with suppliers are associated with its agility. Unexpectedly, information sharing between buyer and supplier are not connected with agility. These counterintuitive findings suggest that trust and information sharing capability of the manufacturers in an emerging economy are not related to agility in the supply chain. We offer two possible explanations for this nonsignificant effect. First, this finding can be explained in the context of China0 s transition economy. In a buyer–supplier relationship, firms may behave opportunistically to capture an inappropriate portion of the quasi-rents from the involved investment (Williamson, 1979) due to the lack of well-established legal frameworks in the institutional context of transition economies (Hoskisson, et al., 2000) even though informational sharing and trust exist. As a result, the operations of the involved parties in the economic transactions suffer from processes of controlling, negotiating, safeguarding, and monitoring. Second, there is too much variance in the responses to this measure due to (a) the confounding and mixing nature of the construct, which could be part of supply chain agility (Van Hoek et al., 2001; Christopher, 2000; Christopher and Towill, 2001; Braunscheidel and Suresh, 2009) and (b) the possible cultural difference (e.g., individualist culture and ownership of the companies) among the respondents. The findings suggest that trust and information sharing are not critical for firms to improve agility. The information sharing may not be sufficient in generating knowledge which requires integration of information (Nonaka, 1994). It also may not be helpful for a firm to generate the needed knowledge in meeting the requirements of specific partner firms (Alavi and Leidner, 2001). In other words, information sharing is insufficient to have a high level of responsiveness to the rapidly changing customer demands. The results of this study support the mediating effect of cost efficiency between agility and performance. The findings are consistent with the extant literature on a firm0 s supply chain agility.

6.1. Theoretical contributions This study extends the limited existing research on a manufacturer0 s supply chain agility between economic exchange parties in a transition economy. In the past decades, a growing number of firms have outsourced their business to China to reduce the costs of production. China0 s economic success and the complexity of the transition status toward a market economy call attention to the agility in buyer–supplier relationships. Manufacturers in transition economies face various problems such as constrained resources due to regulatory frameworks and information asymmetry. This study contributes to this strand of research by offering compelling empirical evidence for the important roles a firm0 s IT capability and operational collaboration play in improving a manufacturer0 s performance in the economic exchanges in China0 s guanxi-oriented culture. Second, this study contributes to the literature on manufacturers in transition economies. To date, research on a firm0 s supply chain agility focused only on either information systems or supply chain integration. For examples, in a study of 441 manufacturers from 13 countries, adoption of multilateral interorganizational information systems was found to positively relate to the improvement of flexibility, which was considered as a priority of dynamic supply chain (Da Silveira and Cagliano, 2006). Firm0 s strategic flexibility is positively associated with the firm0 s supply chain agility in a study of 144 U.S. manufacturing firms (Chiang et al., 2012). There is a dearth of studies (except the case-based study by Mondragon et al. (2004)) considering both technical (i.e., IT capability) and relational (i.e., operational collaboration) factors in examining the effect of agility on manufacturers0 performance in the exchanges between manufacturers and their suppliers. This study embraces a broader view by empirically assessing the roles of a firm0 s IT capability and operational collaboration simultaneously on the performance in an emerging economy. The findings of this study strongly support our premise that both technical and relational factors are significant in enhancing the manufacturers0 supply chain agility in the exchanges. Third, the findings of this study contribute to both information theory and transaction cost economics. This empirical investigation is drawn on the combination of the information theory and transaction cost economics to assess the antecedents of a firm0 s supply chain agility and the mediating role of cost efficiency in the link between agility and performance in an economic exchange in transition economies. The findings of this study stress the mediating role of cost efficiency as well as the antecedent roles of IT capability and operational collaboration for a manufacturer in the

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economic exchanges. This study sheds light on the important, previously under-explored nexus between information theory and transact cost economics. 6.2. Managerial implications The findings of this study offer several implications for managers. In line with information theory, the findings shed light on achieving a high level of a firm0 s supply chain agility, in that firms possessing IT capability are in a better position to respond to turbulent markets to achieve an agile manufacturing posture (Ayyappan and Jayadev, 2010). Our findings suggest that IT capability is important for leveraging firms0 information to better meet the needs of their customers. This requires managers to extend their efforts beyond developing IT capability and effective information sharing with suppliers to attain the manufacturers0 supply chain agility. By providing empirical evidence in emerging economies, this study supports the tenet that both IT and non-IT attributes are important in enhancing agility (Mondragon et al., 2004). It is essential to develop IT capability to facilitate information sharing among partner firms. In particular, firms should assess their relative standings compared with the benchmark IT capability of their industry standard, key competitors, key customers, and key suppliers. Second, the results show that operational collaboration is conducive to improving manufacturers0 agility in an emerging economy. The findings support our ex-ante thinking, which asserts that IT capability is a necessary but insufficient component of supply chain agility because operational collaboration is a critical element for sharing information between buyer and supplier. This finding is consistent with Rigby et al.0 s (2000) opinion that agility calls for effective operational collaboration. It is also in line with the assertion that external integration with key suppliers is conducive to a firm0 s supply chain agility (Braunscheidel and Suresh, 2009). Managers interested in achieving manufacturers0 supply chain agility should seek opportunities for operational collaboration with their potential partners. Such a relational factor is a driving force of satisfaction and performance for both manufacturers and their suppliers (Nyaga et al., 2010). Third, as presented before, cost efficiency has been found to mediate between the agility and performance of the manufacturers. This implies that agility is not a direct performance propeller. There exists a mediator, cost efficiency, between agility and performance, which results from quality improvement, increased customer satisfaction, shortened cycle time for new product development, faster delivery, and reduced resource inputs. Viewed from the theoretical lens of the transaction cost economics in the context of an emerging economy, the findings of this study support and complement the assertion that the cost efficiency, as a manufacturing capability of Chinese manufacturers, mediates the relationship between manufacturing competences (i.e., supplier relationship management and just in time flow) and performance of the manufacturers in North America (Swink et al., 2005). 6.3. Future research This study was subject to some shortcomings that limited the interpretation of the results, and we will leave these for future studies. First, we used cross-sectional data to test the research model and the hypotheses, which captured the perceptions of manufacturing executives at a point in time. Cross-sectional data failed to capture continuous development of the manufacturers0 IT capabilities, attainment of their supply chain agility, cost efficiency, and performance. It may be desirable to conduct a longitudinal study to complement this research endeavor to gain understanding on how and why IT capability and operational collaboration are

connected with agility and cost efficiency to play a mediating role on a temporal dimension. Second, this study only investigated the relationships between a few information sharing factors in the manufacturing context. Further research can extend this study by including more relevant theoretical constructs. For instance, it would be interesting to include some variables relating to intra-and inter-organizational systems adoption to understand their collective association with the agility of the supply chain. Also, future research is needed to address the issue of continuity of information sharing as it is a dynamic process. We still need a better grasp of the longitudinal effects of information sharing in an ongoing economic exchange. Scholars are also encouraged to extend the research to other industries and economies with different institutional characteristics and social culture, which greatly affect buyer–supplier relationship. Third, the limitation of the definition and measures of a firm0 s supply chain agility warrants another line of further research. For the supply chain agility, this study emphasizes a firm0 s ability to customize products, adjust production volumes, respond to changes in delivery performance, and produce a range of products. However, the issue as to whether a firm can achieve a certain level of agility fast enough and in a cost-efficient way is not addressed. Future research may consider these factors as well in the study of flexibility and agility. Finally, the data of this study was collected from Chinese companies, which may possess cultural differences from their western counterparts. Although we tried to reduce such differences by conducting the research in Shanghai of China, which is considered an international business city, it is unreasonable to assume that the findings of this study can be identical in companies with a western culture. Future work may consider the cultural dimension (i.e., individualist culture) on the improvement of the manufacturers0 supply chain agility. The empirical evidence provided by this study is from China. It would be interesting for future research to explore how the implementation of knowledge management strategy influences a manufacturer0 s supply chain agility and performance in other economies.

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