The impact of supplier integration on customer integration and new product performance: The mediating role of manufacturing flexibility under trust theory

Int. J. Production Economics 147 (2014) 260–270

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The impact of supplier integration on customer integration and new product performance: The mediating role of manufacturing flexibility under trust theory Yuanqiong He a,n, Kin Keung Lai b, Hongyi Sun c, Yun Chen d a

School of Management, Huazhong University of Science and Technology, Luoyu Road 1037, Wuhan 430074, PR China College of Business, City University of Hong Kong, Tat Chee Avenue, Kowloon, Hong Kong c Department of Systems Engineering and Engineering Management, City University of Hong Kong, Tat Chee Avenue, Kowloon, Hong Kong d School of Business Administration, Hubei University of Economics, PR China b

art ic l e i nf o

a b s t r a c t

Article history: Received 31 May 2012 Accepted 28 April 2013 Available online 4 May 2013

The impact of supply chain integration on new product development has been very well studied in literature. However, little literature examines the relationship between supplier integration and customer integration when they influence new product performance. This study aims to explore the complicated relationships among supplier integration, customer integration and new product performance via the mediating roles of manufacturing flexibility and service capability under the trust theory. The research is based on the data from International Manufacturing Strategy Survey (IMSS). It is found that both supplier integration and customer integration had positive direct effects on new product performance. It is also found that supplier integration has a positive impact on customer integration through the mediating role of manufacturing flexibility. The study contributes to supply chain integration by exploring the complicated relationship between supplier integration and customer integration based on the trust theory. It bears implications for both practice and future research. & 2013 Elsevier B.V. All rights reserved.

Keywords: Supplier integration Customer integration New product performance Manufacturing flexibility Service capability

1. Introduction New product development (NPD) is one of the critical processes by which companies sustain or even increase their competitive advantage (Tessarolo, 2007). Research in NPD field has shown that a number of factors are important to the creation of successful new products, and integration is recognized as one of critical enablers. Integration in NPD takes complex and mixed forms, such as cross-functional team integration, intra-process or concurrent integration, resource integration, supply chain or external integration (Hong et al., 2004). As the benefits of internal integration become more widely acknowledged, the literature is increasingly focusing on the relationship between external supply chain integration and new product development. Previous literature suggested that a company’s ability to integrate its supplier and customer can improve new product performance and business performance (Koufteros et al., 2005; Petersen et al., 2003, 2005; Flynn et al., 2010). However, the following questions are still needed to be answered in this field. n

Corresponding author. Mobile: +86 013697358896. E-mail addresses: [email protected] (Y. He), [email protected] (K. Keung Lai), [email protected] (H. Sun), [email protected] (Y. Chen). 0925-5273/$ - see front matter & 2013 Elsevier B.V. All rights reserved. http://dx.doi.org/10.1016/j.ijpe.2013.04.044

First, recent literature has addressed the importance of customer integration in product development (e.g. Bonner, 2005; Enkel et al., 2005; Fang, 2008; Lam and Chin, 2005). However, it was observed that many companies did not integrate customers successfully in their product development process (Tollin, 2002; Enkel et al., 2005). One of the important reasons is that customers will consider the inherent risks in integration with manufacturers, such as the loss of know-how to the outsiders, dependence on manufacturers, increased costs of coordination and inflexibility (Das and Narasimhan, 2006; Enkel et al., 2005). The existing literature suggested the design of technological tools (such as information system, Internet based communication) and internal integration (such as cross-functional integration) to decrease the risks perceived by customers so as to improve customer integration (Fuller et al., 2010; Piller and Walcher, 2006; Devaraj et al., 2007; Tollin, 2002; Frohlich and Westbrook, 2002; Vickery et al., 2003). Nevertheless, the nature of customer integration is fundamentally a social process so that technological tools cannot solve all of the problems in customer integration (Ragatz et al., 2002). Therefore, it needs to consider other factors besides technologies to improve customer integration in further research. Second, a great deal of effort have been spent on showing how companies that incorporate a customer’s perspective in new product technology decisions developed more successful products

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(e.g. Bonner, 2005; Fang, 2008; Lam and Chin, 2005). Supplier integration is the most common form of supply chain integration, while it is until the past years when supplier integration has received significant attention in new product development efforts (Petersen et al., 2005; Lin and Chen, 2008; Primo and Amundson, 2002). Evidence supporting supplier integration is less clear than evidence on the positive contribution of customer integration, and the influential mechanism of supplier integration in new product development is still largely a “black box” (Ragatz et al., 2002; Primo and Amundson, 2002). Therefore, future research will identify and examine how supplier integration affect new product performance (Fawcett and Magnan, 2002; Swink et al., 2007; Petersen et al., 2005; Jain et al., 2009). Third, researchers considered supplier integration and customer integration as two distinct concepts and have limited their analyses to integration with customers (Bonner, 2005; Fang, 2008; Lam and Chin, 2005) or suppliers (Das and Narasimhan, 2006; Handfield et al., 2009; Jain et al., 2009; Vachon et al., 2009) in order to ascertain their distinct contribution to performance. A few recent studies have begun to take a broader perspective and consider both the supplier integration and customer integration simultaneously (Tracey and Tan, 2001; Tan and Tracey, 2007; Lee et al., 2007; Flynn et al., 2010; Danese and Romano, 2011). In fact, customer integration was significantly correlated with supplier integration and the interaction of them had positive impact on firm performance (Lau et al., 2010; Frohlich and Westbrook, 2001; Devaraj et al., 2007). For instance, it is well known that the benefits due to bullwhip-effect reduction are maximized when a high level of customer integration is accompanied by a high level of supplier integration. However, the report on the connection between supplier integration and customer integration in new product development is still very limited. Therefore, an interesting opportunity to improve our understanding of the mechanism of supply chain integration lies in the empirical exploration of relationship between supplier integration and customer integration. To address these gaps, this study explores the relationship between supplier integration and customer integration and their effects on new product performance from the theoretical perspective of trust theory. The nature of customer integration is fundamentally a social process so that technological tools cannot solve all of the problems in customer integration (Ragatz et al., 2002). A partnership in essence is characterized by a long-term commitment and mutual trust between the collaborators (Morgan and Hunt, 1994). Trust is defined as “the belief that one’s partner will act in a predictable manner, will keep his word, and will behave in a way that will not negatively affect the other” (Spekman et al., 2002). When a firm believes the other party is reliable, it is willing to cooperate with them (Morgan and Hunt, 1994). The absence of trust among supply chain members might hinder the activities related to it, and cause problems of free riding, hold-ups, and leakages, which lead to less satisfactory supply chain performance or even supply chain defection (McCarter and Northcraft, 2007). Competence trust and goodwill trust were regarded as two types in buyer–supplier relationships (Sako, 1992). Competence trust reflects confidence in a partner’s ability to fulfill an agreed upon obligation and goodwill trust refers to the expectation that a partner intends to fulfill their role and responsibilities (Das and Teng, 2001). We argue that manufacturing flexibility is one effective way of enhancing competence trust since it is a core competence against uncertain environment for a manufacturer (Narasimhan et al., 2004), and service capability is one effective way of improving goodwill trust because of the social and interaction nature of service (Vargo and Lusch, 2008). Therefore, there may be two potential contributions to the literature on supply chain integration and new product development. First, we

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combine supplier integration and customer integration in one study and examine their impacts on new product performance. Second, we explore the relationship between supplier integration and customer integration through the mediating roles of manufacturing flexibility and service capability from the theoretical perspective of trust. The rest of the paper is structured as follows. The next section develops the hypotheses. Thereafter the method and the results of the study are presented. The paper ends with a discussion of its theoretical contribution, limitations and future directions, the managerial implications, and a conclusion.

2. Hypotheses development Our conceptual framework is presented as in Fig. 1. The relationships among various constructs will be developed as follows. 2.1. The direct impact of external supply chain integration on new product performance As being information intensive and resource requirements, new product development process was not merely a chain of intra-firm activities, but a network of inter-firm processes (Mele et al., 2010). External integration is related to the ability to gain further information by involving external entities in the development process through network relationships (Tessarolo, 2007). Through integration, a firm can partner with its external entities to structure their inter-organizational strategies, procedures and behaviors into collaborative, synchronized and manageable processes in order to create values (Das and Narasimhan, 2006; Jayaram and Tan, 2010; Zhao et al., 2008). Customers and suppliers are the major sources of innovative ideas for stimulating new products. For example, Procter & Gamble (P&G) aimed to source 50% of all innovation outside the company from suppliers and customers (Chesbrough, 2003). We argue that supplier integration and customer integration have both similar and different mechanisms in new product development. We elaborated the impacts of customer integration and supplier integration on new product performance separately as follows. Customer integration is the extent to which customers and manufacturers coordinate decisions related to inventory level, production planning, demand forecasting, order tracking, and products delivery (Wong et al., 2011). The positive effect of customer integration on new product performance could be explained from the following aspects. First, customers’ wants and needs, as well as their acquired knowledge through the actual use of products, make them an essential external resource for new product development (Thomke and von Hippel, 2002). Customers can provide innovative ideas when they specify their requirements and articulate their unmet needs (Chesbrough, 2003). In addition, H2

H4

Manufacturing flexibility

H3

H1 Supplier integration

H6

Customer integration Service capability

H5

Fig. 1. The conceptual framework in this study.

New product performance

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customers can provide the firm with strategic insights into market expectations and future opportunities, ultimately enabling a more efficient and effective response to customer needs (Wong et al., 2011). Second, as the voice of the customer is embedded in the product development effort, a firm can provide personalized customization products to customers. Customer integration involves determining customer requirements and tailoring internal activities to meet these requirements. Customers could provide the producer with feedbacks on quality and delivery performance so that manufacturers can solve product problems efficiently (Frohlich and Westbrook, 2001). Through customer integration, firms will penetrate deep into the customer organization to understand its product, culture, market and organization in such a way that they can respond precisely to the customer’s needs and requirements. Third, involving customers from the beginning of product development can help clarify what products should be developed, which can cut the need for reworks caused by requirement misunderstandings and ultimately better time performance in the design phase (Bajaj et al., 2004). A close relationship between customers and the manufacturer offers opportunities for improving the accuracy of demand information, which reduces manufacturer’s product design and production planning time and inventory obsolescence, allowing it to be more responsive to customer needs. Gupta and Souder (1998) discovered that shortcycle-time companies, when compared to long-cycle-time companies, were characterized by extensive user involvement at the very early stages of new product development. As one of the reasons for the delay of product development, Dyer et al. (1999) identified difficulties in product and market definition, which can be greatly reduced by involving customers early on in the development process. Hence, we propose the following hypothesis: H1. Customer integration has a positive impact on a firm's new product performance. Supplier integration is the extent to which suppliers and manufacturers coordinate decisions related to inventory management, collaborative planning, forecasting, replenishment, and the flows of physical resources (Wong et al., 2011). Supplier talent and capabilities can bring a significant advantage to the product development process. The positive effect of supplier integration on new product performance could be explained from the following aspects. First, a new generation innovation model was to balance the market needs and technology development (Zedtwitz and Gassmann, 2002). The product innovativeness locates not only at final product functions (how customer use a product) but also at raw materials and process technologies. Suppliers may provide emerging technology change, and reduce potential risks of manufacturing pitfalls (Ragatz et al., 2002). Suppliers can generate innovative ideas when they develop new materials for manufacturers and co-design new products with the manufacturers to demonstrate these new materials (Lau et al., 2010). For instance, a car manufacturer plans to innovate the engine of a car so as to reduce gasoline consumption and create value for customers. Raw material innovation is beneficial for realizing this goal. The suppliers often have better information or greater expertise regarding raw material technologies than the car manufacturer’s design personnel. It is suggested that car manufacturer can use new types of raw material (such as aluminum) to substitute the iron engine which has much gasoline consumption because of heavy weight, or improve the iron technology and use new iron engine to use less fuel. Suppliers participating early in the product-design process can offer more cost-effective design

choices, help select the best components and technologies, and help in design assessment (Narasimhan and Das, 1999). Second, early and extensive supplier involvement results in a faster development process (Petersen et al., 2003, 2005; Handfield et al., 1999). Based on the data from a study of the world auto industry to investigate lead-time differentials between Japanese and American automobile companies, Clark (1989) found that supplier involvement (and strong supplier relationships) contributes four to five months of the lead-time advantage (of Japanese auto producers). Supplier involvement tends to reduce the team workload since carrying out of certain steps is delegated to those who have the competences and information to perform them more quickly (Kessler and Chakrabarti, 1996; Hartley et al., 1997). Droge et al. (2000) found in a study of NPD in the automotive industry that supplier closeness provides ways to share understanding about the different tasks underlying product development and launch efforts so as to reduce NPD time and improve NPD performance. At the same time, supplier integration provides outsourcing and external acquisitions possibilities which reduce the internal complexity of NPD or permits the manufacturer to focus on the subset of development tasks in which they can take advantage of their key competences, skills, and information, thus shortening the critical path and further speeding up the process (Tessarolo, 2007; Richey et al., 2010). In addition, supplier and manufacturing engineers whose firms have collaborated closely are less likely to misread blueprints or misinterpret information which could reduce the re-work time (Leonard-Barton et al., 1994; Rosenzweig et al., 2003). Third, supplier integration is beneficial for product quality and reliability. In the internal value chain, the starting point for firms to produce quality products is the acquisition of quality incoming materials and parts from suppliers. Effective supplier management can reduce variances in incoming materials and parts and make sure that the suppliers meet quality specifications and standards, which reduces process variability and can have a positive effect on delivery time and product reliability (Das and Narasimhan, 2006). Bonaccorsi and Lipparini (1994) found that higher quality with fewer defects was one of benefits of early supplier involvement. Hence, we propose the following hypothesis: H2. Supplier integration has a positive impact on a firm’s new product performance. 2.2. The mediating role of manufacturing flexibility between supplier integration and customer integration The concept of external supply chain integration as a set of practices to support business processes across firms is closely related with the effort to overcome inter-organizational distrust (Das and Narasimhan, 2006). Trust is simply a calculated risk assessment in an economic exchange (Williamson, 1993). In other words, when you trust your partners, you calculate a certain probability of them acting positively toward you and reach a decision that you would take the risk of their opportunism based on this probability. The trust between supplier and customer will reduce the risk perceptions of customers and motivate customers to invest more in integration (Mithas et al., 2005). Three types of trust in buyer–supplier relationships were proposed (Sako, 1992): contractual trust (Will the other party carry out its contractual agreements?), competence trust (Is the other party capable of doing what it says it will do?), and goodwill trust (Will the other party make an open-ended commitment to take initiatives for mutual benefit while refraining from unfair advantage taking?). A contract can never stipulate every potential contingency. When a contract becomes excessively detailed, it will be inflexible and monitoring compliance becomes impossible

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(Poppo and Zenger, 2002). In a legal society, every member will obey the rules and carry out the contracts with other parties. Therefore, we focused on the perspective of competence trust and goodwill trust, rather than contractual trust, to explain the indirect relationship between supplier integration and customer integration in our study. We proposed that manufacturing flexibility and service capability are the mediators between supplier integration and customer integration based on the theoretical perspective of competence trust and goodwill trust. Our argument can be illustrated as follows. Competence trust reflects confidence in a partner’s ability to fulfill an agreed upon obligation, and it reduces the perceived risk of inadequate performance by a partner (Das and Teng, 2001). New product development is an uncertain process so that it requires firms to equip with enough flexibility. Manufacturing flexibility, being the most important capability against uncertainty in new product development, refers to the quickness and ease with which plants can respond to changes in market conditions. Being concerned with NPD as a strategic issue, there are three basic types of manufacturing flexibility to consider in our study: mix, volume, and delivery time flexibility. These types of flexibility are firstorder flexibility types and will directly affect the competitive position of a firm in a market (Koste and Malhotra, 1999). Mix flexibility has typically been measured by the number of products that a system produces at any point in time. A highly flexible mix has been equated with a broad product line (which has been associated with larger market share and profitability). Volume flexibility refers to the capacity to quickly expand the quantities of a given product mix produced, and it concerns not only with vendor response time but also with the ability to expand order sizes without extending lead times for delivery. The manufacturer with strong manufacturing flexibility can adjust its operations to satisfy customer needs quickly and effectively. As a consequence, manufacturing flexibility could enhance the competence trust between a manufacturer and its customers and competence trust may facilitate both the extent and the efficiency of interorganizational learning (Lui, 2009). Customers without enough competence trust on suppliers can lose faith in the supplier's ability and commitment to supply them with new products according to their needs. This seems to be the case with some of the customers who say the supplier’s competence is not strong enough to make them continue the cooperation deeply in the supply chain management. Therefore, we propose the following hypothesis: H3. Manufacturing flexibility has a positive impact on a firm's level of customer integration. Manufacturing flexibility of a firm will depend on the responsiveness and flexibility of its key suppliers (Narasimhan et al., 2004). That is to say, supplier responsiveness, as one of the firm’s flexible manufacturing resources, may significantly affect how quickly the firm can react to new market conditions. For instance, Rho et al.’s (1994) study of 39 machinery and electronics firms in South Korea reported significant association between supplier relationships and manufacturing flexibility. Effective supplier partnership is a key determinant for delivery and flexibility by providing more accurate and up-to-date demand and supply information, more detailed production plans and forecasts, and clearer future trends and directions (Narasimhan et al., 2004). With seamless information channels connected to suppliers, and thus a high level of supply-chain visibility, manufacturers can more easily track variations in production, product quality, inventory levels, and delivery capability of suppliers. By receiving such information in a more timely way, manufacturers can plan and adjust their own operations more rapidly, and thereby achieve

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greater adaptability to any unexpected events caused by suppliers. In addition, by providing suppliers with timely information regarding their own changes of plan, manufacturers also allow their suppliers to adjust themselves to such changes more rapidly, which in return could enhance manufacturer’s flexibility (Wang et al., 2006). Consequently, we believe that supplier integration should have beneficial effects on a firm's manufacturing flexibility. We propose the following hypothesis: H4. Supplier integration has a positive impact on a firm’s level of manufacturing flexibility. 2.3. The mediating role of service capability between supplier integration on customer integration Goodwill trust refers to the expectation that a partner intends to fulfill their role and responsibilities, which is often based on the previous positive experience in the relationship (Das and Teng, 2001). As confidence in a partner’s good intention increases, there is closer cooperation, a more open information exchange, and a deeper commitment between the partners (Fryxell et al., 2002). Lambert et al. (1998) suggest that customer service management is a key process for successfully implementing supply chain integration. We argue that providing service could be beneficial for enhancing trust relationship with customers. Our argument could be explained from the following aspects. First, providing service by a manufacturer leads to an interactive dialog with the customers. The interaction between partners is the antecedent of mutual trust. Through their direct interactions, rather than depending on the second hand experience or superficial insight of particular functional personnel, a firm can learn more about customers and improve the information quality and knowledge content of customers. That is, intensity and richness of the interaction enables the deep understanding between a manufacturer and its customers so as to improve the goodwill trust between them. Second, service, being integrated with tangible product as an offering for customer, is often beyond the expectation of customers and it will provide competitive advantage. The services, such as maintenance and upgrading activities, contribute very much to how the final outcome is perceived by the customer (Davies et al., 2007). During the service providing, customer may feel that a manufacturer will consider its need first and make efforts to satisfy them, which could enhance the goodwill trust of customers. The more practices which are beyond a customer’s expectation, the more goodwill trust produces between partners. Therefore, we propose the following hypothesis: H5. Service capability has a positive effect on a firm’s level of customer integration. A firm needs to attempt alignment or integration with suppliers having special resources and technological knowledge to implement service strategy. Industrial product is complicated and a firm often cannot produce all of components included in the product. If it will provide a spare-parts service to its customers, it may need the help from its suppliers. In supplier integration, suppliers can learn more about the operations of firms. By developing a good understanding of the firm’s operations, a supplier can help improve the firm’s service capability. In addition, supplier integration can provide a firm the opportunity to focus on its core competencies and particular areas of expertise (Stevens, 1989; Cagliano et al., 2006). By developing a high level of strategic integration with suppliers, firms are able to identify and eliminate non-value-added activities and subsequently strengthen product quality and delivery reliability capabilities (Rosenzweig et al., 2003). Strategic integration synchronizes core competencies and

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capabilities of suppliers to jointly achieve improved service capabilities at lower total supply chain cost (Stank et al., 2001). Hence, we propose the following hypothesis: H6. Supplier integration has a positive impact on a firm’s service capability. 3. Methodology 3.1. Data and sample The data used in this study were drawn from the fifth round of International Manufacturing Strategy Survey (IMSS), a worldwide research project using a standard questionnaire which gathers information about practices and performance associated with manufacturing strategy in a global context. It has been carried out since 1992 by an international network of operations strategy researchers. In IMSS-V (starting in 2009), there are 726 valid samples, which locate across twenty countries of Europe, Asia and America. In countries where English was not a primary or common language, the surveys were translated by the research coordinator, typically a full-time university professor in the operations management area, who would have been familiar with concepts of manufacturing strategy in both the national language and English. Questionnaire were mailed or emailed to the Director of Operations/Manufacturing or the General Manager in the company. An attached letter explained the purpose of the survey, the structure of the questionnaire, and assurances of confidentiality. Questionnaires were returned by mail or fax to the country office. The surveys were administered separately by research coordinators in each of the countries, and data were pooled in a common database. The survey focused on the ISIC Division 38: Manufacture of Fabricated Metal Products, Machinery and Equipment. The final set included 320 samples which had usable responses for the purposes of this study. Table 1 shows the distribution of 320 manufacturers by industry and country. ANOVA test found no significant differences between this subset and the total sample regarding size, or production process (Table 2). Thus, usable responses might be viewed as a random sample of the complete population of respondents; using the complete response subset did not bias the conclusions from statistical analyses to follow. 3.2. Measure development Structural equation modeling (SEM) employing Amos was utilized. The measures used in our study were adapted from established scales (Cagliano et al., 2006; Kim, 2009; He and Lai, 2012; Mathieu, 2001; Gebauer, 2007; Moorman and Rust, 1999; Hutchison and Das, 2007; Chang et al., 2003). The measurement items, factor loadings, and reliabilities are reported in Table 3. Supplier integration and customer integration were measured by six items which focused on the degree of information sharing with suppliers and customers, according to Cagliano et al. (2006) and Kim (2009). 1 means “none”, and 5 means “high”. The values of Cronbach alpha of supplier integration and customer integration are both 0.85. Various ways were used to measure manufacturing flexibility in literature (Boyle and Scherrer-Rathje, 2009). The common approach is to evaluate flexibility based on the following dimensions such as mix, volume, delivery (Hutchison and Das, 2007; Chang et al., 2003). These dimensions are long-term flexibility and associated with strategic decisions. Respondents were asked to assess various manufacturing flexibility compared to three years ago. 1 means “deteriorated more than 10% compared to three years ago” and 5 means “improved more than 50% compared to three years ago”. The Cronbach alpha of this construct

was 0.83. Service capability is defined as the extent of offering services in manufacturers. We focused on product-based services in our study, such as maintenance of products sold to customers, product upgrades, repair, spare-parts and training. Five items, adapted from He and Lai (2012), Mathieu (2001) and Gebauer (2007), were used to measure the service capability of a manufacturer. The Cronbach alpha of this construct was 0.83. New product performance was assessed by mostly judgmental measures. Judgmental measures of performance are more appropriate than objective performance measures for cross-sectional research (Moorman and Rust, 1999). In our study, new product performance was measured by three items tapping the extent to which the new product achieved its expected quality and reliability, time to market and innovativeness. Respondents were to ask to assess indicators of new product performance compared to their main competitors. 1 means “much worse” and 5 means “much better”. The Cronbach alpha of this construct was 0.76. 3.3. Validation of measures We follow Anderson and Gerbings (1988) who recommended two-step approach to test our hypotheses. In step 1 we test the measurement model to establish validity and reliability of the scales used in our analysis and followed by the test of structural relationships in step 2. The reliability of scales was measured by Cronbach’s alpha. In our study, all values of Cronbach’s alpha ranged from 0.76 to 0.85 (see Table 3). Usually, Cronbach of 0.7 or above was considered to be the criteria for demonstrating internal consistency of new scales and established scales respectively (Bagozzi and Yi, 1988). Confirmatory factor analyses were used to assess the convergent and discriminant validity of the measures with structural equation modeling in AMOS 20.0. The measurement model fit the data satisfactorily (χ2/df¼ 1.57, NFI ¼ 0.89, RMSEA¼ 0.04, TLI ¼0.95, CFI¼ 0.96), and all factor loadings were highly significant (p o0.001), which indicated the unidimensionality of the measures (Anderson and Gerbing, 1988). Convergent validity was assessed using standardized parameter loadings of the measurement items on their respective constructs. All standardized parameter loadings were significant (p-value o0.01) and ranged from 0.58 to 0.81 (see Table 3), providing strong support for convergent validity. The composite reliabilities, which ranged from 0.77 to 0.86, exceeded 0.70, implying the variance captured by the factor is significantly more than the variance indicated by the error components. Then we assessed the discriminant validity of all five latent constructs. According to the test suggested by Fornell and Larcker (1981), discriminant validity was evaluated by comparing the AVE (Average Variance Extracted) to the squared correlation between the constructs. And Fornell and Larcker argued that the square root of AVE for the latent variables should be greater than the correlation among the latent variables. Table 4 shows the means, standard deviations, correlations between constructs, composite reliability and AVE. Taken together, the results indicated that the measures in this study possessed reasonably adequate reliability and validity.

4. Data analysis and results SEM is used to analyze the data and its relationships. SEM procedures permit modeling of a set of relations among constructs, simultaneous estimation of all hypothesized paths, and estimation of indirect or mediating effects. The final structural equation model with standardized regression weights is shown in Fig. 2. Overall, the model has a very good fit with the data (χ2/df ¼1.61, NFI ¼0.88, RMSEA ¼0.04, TLI ¼0.94, CFI¼0.95) and all of the

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Table 1 Sample composition (n ¼320). Country of origin

N

%

Belgium Brazil Canada China Denmark Estonia Germany Hungary Ireland Italy Japan Korea Mexico Netherland Portugal Romania Spain Switzerland Taiwan UK USA ISIC code Manufacture Manufacture Manufacture Manufacture Manufacture Manufacture Manufacture Manufacture

8 9 5 44 4 13 14 28 2 24 14 28 7 17 4 14 16 13 23 13 20

2.5 2.81 1.56 13.75 1.25 4.06 4.38 8.75 0.63 7.5 4.38 8.75 2.18 5.31 1.25 4.38 5.00 4.06 7.19 4.06 6.25

98 85 10 46 22 21 21 17

30.63 26.56 3.13 14.38 6.87 6.56 6.56 5.31

of of of of of of of of

fabricated metal products, except machinery and equipment machinery and equipment not elsewhere classified office, accounting and computing machinery electrical machinery and apparatus not elsewhere classified radio, television and communication equipment and apparatus medical, precision and optical instruments, watches and clocks motor vehicles, trailers and semi-trailers other transport equipment

Table 2 Differences between used and unused sample. Variables

Unused sample Used sample p-Value

Size (total sales of the business unit) 7.7 billion Production process (% of value added) Fabrication 22.73 Assembly 20.94

17.7 billion

0.25

20.46 23.35

0.27 0.52

paths are significant at the level of 0.1 at least, except for the path from service capability to customer integration. Fig. 2 showed that supplier integration and customer integration had positive effects on new product performance (its standard coefficients were 0.12 and 0.13, with the significance level of 0.1, separately), which supported H1 and H2. Supplier integration had positive effect on manufacturing flexibility (its standard coefficient was 0.23, with the significance level of 0.01), and manufacturing flexibility had positive effect on customer integration (its standard coefficient was 0.17, with the significance level of 0.05), which supported H3 and H4. Supplier integration had positive effect on service capability (its standard coefficient was 0.52, with the significance level of 0.01, which supported H6), while service capability had positive effect on customer integration insignificantly (its standard coefficient was 0.03, which refused H5).

5. Discussion Supply chain integration has received increasing attention among academicians and practitioners alike in recent years (Frohlich and Westbrook, 2001; Vickery et al., 2003; Das and Narasimhan, 2006; Swink et al., 2007; Zhao et al., 2008;

Braunscheidel and Suresh, 2009; Flynn et al., 2010). The nature of supply chain integration is complex and more knowledge is needed on its relation to new product performance (Ragatz et al., 2002). This paper extends the previous work by empirically exploring the impacts of supplier integration and customer integration on new product performance, and the indirect relationship between supplier integration and customer integration through the mediating roles of manufacturing flexibility and service capability based on the theoretical perspective of trust. In a highly competitive and uncertain environment, flexibility and service become two critical factors for obtaining competitive advantages (He and Lai, 2012; Koste and Malhotra, 1999; Braunscheidel and Suresh, 2009). The benefits of external integration must first be translated into internal operational capabilities (Rosenzweig et al., 2003). First, the results showed that supplier integration and customer integration had positively direct effects on new product performance. Customer integration was positively related with new product performance, with a coefficient of 0.13 and significant level of 0.1, which provided global manufacturing empirical evidence to support the positive role of customer integration (Bonner, 2005; Fang, 2008; Hartley et al., 1997; Petersen et al., 2003). There are inconsistent findings about role of customer integration in literature. The positive aspects of sharing information with customers are widely acknowledged, but the negative sides are still discussed (Enkel et al., 2005; Tang, 2006). Too much investment in sharing information with customers may limit strategic choice in product development and lead to poorer profits and declining overall market share (Swink et al., 2007). We argue the inconsistency may attribute to not distinguishing the difference between current and new customers. Firms may fail to develop innovative products because they are attentive to the needs of current customers (Enkel et al., 2005). Customers sometimes ask for familiar products and encourage the

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Table 3 The measurement of all constructs. Supplier integration: Cronbach α ¼0.85

SFL

How do you coordinate planning decisions and flow of goods with your key/strategic suppliers? Share inventory level information 0.62 Share production planning and demand forecast information 0.62 Dedicated capacity 0.65 Vendor managed inventory or consignment stock 0.75 Plan, forecast and replenish collaboratively 0.81 Just-in-time replenishment (e.g. kanban) 0.78 Customer integration: Cronbach α¼ 0.85 How do you coordinate planning decisions and flow of goods with your key/strategic customers? Share inventory level information 0.63 Share production planning and demand forecast information 0.64 Dedicated capacity 0.77 Vendor managed inventory or consignment stock 0.73 Plan, forecast and replenish collaboratively 0.77 Just-in-time replenishment (e.g. kanban) 0.69 Manufacturing flexibility: Cronbach α ¼0.83 How has your flexibility changed over the last three years? Product customization ability 0.58 Volume flexibility 0.70 Mix flexibility 0.73 Delivery speed 0.81 Delivery reliability 0.71 Service capability: Cronbach α ¼0.83 To what extent does your business unit offer the following services alongside with the products? Maintenance of products sold to customers 0.71 Product upgrades (software, product modifications) 0.65 Training in using the products 0.68 Repairs 0.78 Spare-parts 0.71 New product performance: Cronbach α¼ 0.76 How does your current new product performance compare with main competitors? Product quality and reliability Time to market Product innovativeness

0.73 0.68 0.77

Model Fit: χ2/df ¼ 1.57, NFI¼ 0.89, TLI¼ 0.95, CFI¼ 0.96, RMSEA ¼0.04 Note: SFL means standardized factor loading.

Table 4 Discriminate validity test. Variables

Mean

S.D.

Composite reliability

1

1 2 3 4 5

2.91 2.99 3.24 3.19 3.43

0.78 0.73 0.71 0.94 0.59

0.86 0.86 0.83 0.83 0.77

0.71 0.53 0.33 0.28 0.20

supplier integration customer integration flexibility service capability new product performance

2

nnn nnn nnn nnn

0.71 0.31 0.24 0.23

3

nnn nnn nnn

0.71 0.28 0.27

nn nnn

4

5

0.71 0.29nnn

0.73

The number in the cells of diagonal line are the square root of AVE. nn

p ¼0.05. p ¼0.01

nnn

manufacturer not to innovate, as new products usually require the customer to put in new supporting resources for the product, which would lead to a waste of some customers’ existing resources (Lau et al., 2010). By limiting themselves to information acquired from current customers, firms might restrict their capability of developing highly innovative products. The results showed that supplier integration was positively related with new product performance, with a coefficient of 0.12 and a significant level of 0.1, which provided empirical evidence to support the positive role of supplier integration (Tracey and Tan, 2001; Petersen et al., 2005; Koufteros et al., 2005; Ragatz et al., 2002; Petersen et al., 2003). Our study combined supplier integration and customer integration in one study and highlighted that

while the gathering of intelligence about customers’ expressed needs and wants is one of useful ways in new product development, supplier integration is also another important way for manufacturing firms, which was consistent with the previous literature (Lee et al., 2007). Second, our results indicated that supplier integration had positive indirect effect on customer integration through the mediating role of manufacturing flexibility. The nature of relationship between supplier integration and customer integration is complex, and they are significantly correlated (Lau et al., 2010; Frohlich and Westbrook, 2001; Devaraj et al., 2007). For instance, Barua et al. (2004) posit that the supplier-side “digitization” (such as the online transactions and information exchanges) serves as a

Y. He et al. / Int. J. Production Economics 147 (2014) 260–270

0.12*

0.23***

Manufacturing Flexibility

0.17**

0.13* Supplier integration

Customer integration

0.52***

***p=0.01

**p=0.05

Service capability

New product performance

0.03

*p=0.1 Fig. 2. Structural model results.

prerequisite for digitization on the customer-side. Without increasing supplier-side digitization, a firm may over-promise customers and then fail to deliver. Most of the previous literature regarded them as independent constructs and investigated the main impact of each integration on firm performance (Lee et al., 2007), while a few explored the interaction effect of supplier integration and customer integration (Flynn et al., 2010; Danese and Romano, 2011). Current theoretical arguments for the expected direct and interacting effects of external and internal integration efforts included: the resource-based views of the firm, transaction cost theory, market power, monopoly profit and information exchange (Osegowitsch and Madhok, 2003; Grossman and Helpman, 2002; Yeung et al., 2009; Tan and Tracey, 2007). Our results introduced the theoretical perspective of trust and explained that manufacturing flexibility was a core competence against uncertainty in NPD so as to build competence trust between a manufacturer and its customers. Our argument that supply chain integration can enhance internal operational capability is consistent with other authors. For example, Lau et al. (2010) found that supplier integration improved performance, mediated by capability of product innovation. Other empirical studies validate the direct and positive impacts of supply chain integration on productivity, flexibility, and quality (Rosenzweig et al., 2003; Swink et al., 2007). What is more important, our study not only supported the theoretical perspective of trust in supply chain integration which being consistent with Yeung et al. (2009) but also made a further step by separating and discussing the role of competence trust and goodwill trust. Our results about the indirect relationship between supplier integration and customer integration can support and extend the evolutionary argument of supply chain integration. At a strategic level, there could be a common set of steps that organizations pass through to improve their supply chain integration maturity. A four stage integration model was proposed in literature (Stevens, 1989; Poirier and Quinn, 2003), where a focal organization matures from baseline to external integration. Our empirical evidence showed that at the fourth stage of Stevens’s (1989) model, the first substep may be supplier integration, and then is customer integration because of the positive effect of supplier integration on customer integration. Our results did not support the mediating role of service capability in the relationship between supplier integration and customer integration, although supplier integration had positive effect on service capability. On one hand, the positive effect of supplier integration on service capability is consistent with previous literature (He and Lai, 2012). The service offering provided by manufacturing industries is often complicated and technology intensive, which needs the cooperation with suppliers. On the other hand, we did not find the positive effect of service capability on customer integration. We insist on the theoretical development

267

of relationship between service capability and customer integration from the perspective of goodwill trust. The rejection of this hypothesis may attribute to measurement of service capability which was emphasized as capability providing product-based service in our study. Mathieu (2001) argued that product-based service such as maintenance and repair no longer lead to a sustainable competitive advantage within many industries. As product-based service offerings spread throughout the manufacturing industries, their distinctiveness erodes and they become minimum requirements. He and Lai (2012) proposed that customer action-based service has more positive direct effect on firm performance than product-based service has. Therefore, productbased service is not enough to enhance the trust with customers so as to improve customer integration in our study. In an effort to probe into the relationship between supplier integration and customer integration and their effects on new product performance, this paper has made several theoretical and empirical contributions as follows. First, most of literature regarded supplier integration and customer integration as independent constructs and a few explored the interaction effect of these two constructs (Lee et al., 2007; Flynn et al., 2010; Danese and Romano, 2011). Our findings contribute to this field by exploring the indirect relationship between supplier integration and customer integration through the mediating roles of manufacturing flexibility and service capability. At the same time, the positive effect of supplier integration on customer integration could support and extend the evolutionary argument of supply chain integration in this field (Stevens, 1989; Poirier and Quinn, 2003; Frohlich and Westbrook, 2001). Second, our study proposed the manufacturing flexibility as a mediator between supplier integration and customer integration from the theoretical perspective of trust, which can contribute to the understanding of mechanism of supply chain integration. Previous literature explain the mechanism of supply chain integration using transaction cost theory, market power, monopoly profit and information exchange (e.g. Tan and Tracey, 2007; Osegowitsch and Madhok, 2003; Grossman and Helpman, 2002; Yeung et al., 2009). These theoretical perspectives are mainly located in the field of economics, which cannot completely explain the social aspect of supply chain integration. The perspective of trust could complement the theories of economics and add insights to supply chain integration. Third, customer integration is mostly emphasized in new product development and the impact of supplier integration is neglected in literature (Ragatz et al., 2002; Primo and Amundson, 2002). There are a few research studies in the product development arena where both supplier and customer integration variables are included in the same study (Lee et al., 2007; Flynn et al., 2010; Danese and Romano, 2011). Our study contributed to this field by simultaneously examining the effects of customer integration and supplier integration on new product performance in global manufacturing industries. Fourth, many research studies found that supplier and customer integration can directly improve company performance but contain little discussion about the indirect effects of this integration on performance (Rosenzweig et al., 2003; Vickery et al., 2003). We provide answers to the important question of how supplier integration and customer integration affect new product performance. Finally, we make empirical contribution by providing global evidence of supply chain integration by IMSS data, and by introducing the method of structural equation modeling. 5.1. Managerial implications In product development, it is difficult for manufacturers to manage the entire product development process without involvement from suppliers and customers. Our results provide

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managerial insights about specific practices that work in product development projects. First, managers are suggested to emphasize the positive role of supplier integration in new product development, besides customer integration. Collaborative new product development environment has a positive effect (Tan and Tracey, 2007) so that firms should provide incentives for suppliers to offer suggestions regarding product design and component simplification to improve new product performance. Both supplier and customer integration are valuable assets for a company to improve innovation performance. Second, it has been proposed that implementing integration both upstream and downstream is better than concentrating the firm’s efforts on integrating customers or suppliers only. The fragmented supply chains have some dangers of misunderstanding and distrust. Third, supply chain integration is not easy to realize and needs much investment (such as development of IT infrastructure). Understanding how to manage relationships through trust is important in the discourse of supply chain integration. It is suggested that a manufacturer may integrate suppliers first, and then customers. On one hand, supplier integration is relatively easier to realize than customer integration. On the other hand, supplier integration could improve customer integration through enhancing manufacturing flexibility. Fourth, managers are suggested to develop customer action oriented service (not only emphasizing product based service) which is more difficult to imitate and can add value to their products and satisfy more complex customer demands, which is beneficial for enhancing the trust with customers.

5.2. Limitations and future directions The theoretical and methodological limitations suggest a variety of future research directions. First, we have emphasized the product-based service which was one type of industrial services. It may be useful for future research to explore the role of customer action oriented service in the mechanism of supply chain integration. Second, there are different approaches to defining integration in literature, besides information sharing. Future studies are suggested to explore other mechanisms of integration, such as co-development product, system integration, and process coordination (Rosenzweig et al., 2003; Vickery et al., 2003; Stevens, 1989). In addition, it needs to identify different types of information sharing with customers and suppliers and examine their effects in new product development. For instance, Enkel et al. (2005) argue that sharing technological and marketing information with customers may be detrimental to a firm if the customer takes this knowledge to a competitor for product development, which leads to a reduction in the comparative advantage of a firm’s new products in the marketplace. Third, future direction should pursue to compare the integration mechanism with different customers (such as current and potential customers). Information shared by customers may be restricted to what is familiar to the customers. Firms may fail to develop innovative products because they are attentive to the needs of current customers (Enkel et al., 2005). Katz (2003) also argues that customers sometimes ask for familiar products and encourage the firm not to innovate, as new products usually require the customer to put in new supporting resources for the product, which would lead to a waste of some customers’ existing resources. Fourth, future study is suggested to compare the effects of supplier integration and customer integration in different stages of new product development, such as concept development, design and new product testing. Fifth, we focused on the ISIC Divison 38 and our remarks are limited to these sectors. We recommend applying our findings to other branches which are confronted with similar problems.

6. Conclusion This article has explored the relationships between supplier integration and customer integration and their impacts on new product performance in global manufacturing industries. With reliable and robust IMSS-V data, we find that supplier integration and customer integration have positive effects on new product performance. And supplier integration has positive impact on customer integration through the mediating role of manufacturing flexibility. From an academic perspective, this paper is an important empirical step in research of supply chain integration and new product performance in global manufacturing industries. Furthermore, the method of structural equation modeling is introduced, which may examine the dynamic and complicated relationship between supplier integration, customer integration and new product performance. From a practitioner perspective, our findings suggest supplier integration and customer integration should be emphasized simultaneously in new product development. Managers may also adopt practices of supplier integration first because these practices will enhance customer integration so as to improve new product performance.

Acknowledgment This paper is financial supported by National Natural Science Foundation of China (No. 71172088) and Innovation Research Fund of Huazhong University of Science and Technology (2011WA004) and a General Research Fund (CityU 148808) offered by the Hong Kong SAR Government.

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