Impact of Supply Chain Uncertainty on Business Performance and

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IMPACT OF SUPPLY CHAIN UNCERTAINTY ON BUSINESS
PERFORMANCE AND THE ROLE OF SUPPLIER AND
CUSTOMER RELATIONSHIPS: COMPARISON BETWEEN
PRODUCT AND SERVICE ORGANIZATION
Patcharee Boonyathan
Department of Management
University of Melbourne
Email: P.boonyathan@pgrad.unimelb.edu.au
Damien Power
Department of Management
University of Melbourne
Email: Damien@unimelb.edu.au
ABSTRACT
This paper investigated the relationships between supply chain uncertainty, supply chain
relationships and firm’s performance in product and service industries. The results show that
in both industries, supply uncertainty is a more significant determinant of performance than
demand uncertainty. In product industry, uncertainty can be reduced by being more closely
aligned with both suppliers and customers, while in service industry this does not appear to
be the case.
Keywords: supply chain uncertainty, supply chain relationship, product and service supply
chain
INTRODUCTION
Researchers generally agree that uncertainty is a major driving force behind the effective
establishment of supply chain relationships [1-3]. Williamson (1979) clearly stated when he
classified types of organizational relationships thus:
“the three critical dimensions for characterizing transactions are 1)
uncertainty, 2) the frequency with which transactions recur, and 3) the degree
to which durable transaction-specific investments are incurred. Of these three,
uncertainty is widely conceded to be a critical attribute” [2 page 239]
Haunschild (1994) added that uncertainty prompts firms to search for information from
others. Interorganizational relationships are recognized as a prime source of such
information, establishing connections that will allow better information accessibility to
facilitate decision making under uncertain conditions. The literature employs the term
adaptability or stability to explain relationships that are caused by uncertainty [4]. This is
because under uncertainty, firms establish interorganizational relationships to be able to
adaptable to the environment and to be able to predict environmental change and promote
stability in changing environments [3, 5].
While uncertainty is claimed to be a major driving force for the management of supply chain
relationships, there has been limited amount of work that investigates the relationship
between them particularly in relation to firm’s performance. Recently, Donk and Vaart
(2003), in a review of supply chain integration literature, state;
“While these authors contribute to our knowledge of integration and integrative
practices, little has been done by them or others to better understand the prevailing
business conditions for certain integrative practices.” [6 page 97]
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There has been some work done exploring the impact of the nature of supply chain
relationships on firm’s performance, but outside the context uncertainty level [7-10]. The
results from these studies have also been substantially different, and have so far not been
sufficient to assist decision making in supply chain management.
Accordingly, this research will examine the relationship between supply chain uncertainty,
nature of supply chain relationships and firm’s performance. By examining supply chain
relationships in relation to supply chain strategy, the study seeks to advance the
understanding of supply chain relationships in a broader context by covering both supplier
relationship and customer relationship alignment. While existing studies mostly focused on
product related industry, this study covers
LITERATURE REVIEW
A common theme in the literature is that internal demand fluctuations are the dominant
source of uncertainty in supply chains [11-15]. Forrester developed the notion of
amplification of behaviour from his feedback theory study in 1961. Feedback theory explains
that information influences decision-making under systemic conditions, while simultaneously
generating the actions intended to modify those system conditions [16].
Internal demand uncertainty occurs when information signals observed by supply chain
members vary from the actual consumer demand. The major cause of variation is the
overreaction of each decision maker in response to demand information [12, 15, 17]. For
example, upstream members receive an order placed by a downstream member when that
order has been continually adjusted and varied from the consumer’s demand based on the
amount of safety stock added due to ordering policies. Higher numbers of decision makers
and longer lead-times will result in higher demand fluctuations [15].
Demand uncertainty is also partially affected by trade deals that create forward buying, order
batching that usually leads to a flood of product at one time in a period, and shortage gaming
(e.g. retailer places extra orders based on their anticipation that suppliers will be in short
supply [11, 12]).
On the supply side, Wilding (1997b) has demonstrated that internal supply uncertainty can be
generated from parallel interactions when members at the same tier interact because of supply
disruption. Others have also found that supply is uncertain because of the supplier
performance. Hau L. Lee et al., 1997; Sterman, 1989; D. R. Towill et al., 1992.
In 1980, Buffa proposed that uncertain supply would be one of the issues for future research
due to the scarcity of resources [18]. Many researches since then have been dealing with
price, delivery time and quality variability on the supply side [e.g. 19, 20]. The use of
partnerships, trust and alliances has been promoted in several studies [8, 21-25].
To explain the characteristics of different supply chain relationship patterns, the literature has
defined the supply chain as a network of suppliers, manufacturers, distributors and customers.
Thorelli (1986) noted that a supply chain network is formed when
“two or more organizations are involved in a long term relationship” (p. 37).
According to Batt (2004), a supply chain network structure can be a complex set of systems,
subsystems, operations, activities and interrelationships belonging to its various members.
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These could include suppliers, carriers, manufacturing plants, distribution centres, retailers,
and consumers. The networks of supply chain form inter-functional and inter-organizational
relationships referred to as “Supply Chain Partnerships” [9, 26-28] “Supply Chain Value
Networks” [29] “Strategic Alliances” [30], and “Value-added partnerships” [22, 31].
The importance of supply chain relationships has been identified by Handfield (1999) when
they state that
“without a foundation of effective supply chain organizational relationships,
any efforts to management the flow of information or materials across the
supply chain are likely to be unsuccessful” [32 p.9-10].
Supply chain relationships are a structural supply chain integration approach with the aim of
maximising outcomes and performance for trading partners [33]. Supply chain benefits from
managing inter-organizational relationships have been extensively documented. General
benefits include cost reduction, product development improvement, cycle time reduction, and
quality improvement [10, 28].
Although many researchers propose that partnership based relationships are superior to arm’s
length [34, 35], an empirical study by Groves and Valsamakis (1998) on the performance
comparison between different types of supply chain relationship (partnership, semiadversarial, adversarial) found no link between tightened relationships and increased
performance. That is, the study provides no evidence that partnerships ensure better
performance than semi-adversarial and adversarial arrangements.
Thus, the aims of this study was to
1. investigate the impact of demand and supply uncertainty on business performance
2. observe whether level of supplier relationship and customer relationship have an
impact on business performance
3. investigate whether the extent of supplier and customer relationship influence the
level of demand and supply uncertainty
DATA COLLECTION AND ANALYSIS
1923 members of the Chartered Institute of Purchasing and Supply Australia (CIPSA) were
surveyed between April and June 2006. Results are based on the responses of 207 purchasing
and procurement professionals. The completed questionnaires were separated into two
groups: product based organizations and service based organizations -- 138 being from
product related organizations, 68 from service related organizations (1 unclassified was
removed from the analysis). The response rate is estimated at 11% (74 surveys were
“returned to sender”). Figure 1 shows the breakdown of survey response. This study used
SPSS version 13.0 for Windows to facilitate data analysis.
CIPSA
1923 m em bers
Return to Sender
74
Service related
Organizations:
68
No reply
Replied
(11.2%)
1579
207
Unclassified
1
Product related
Organizations 138
Figure 1: Breakdown of survey response
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The Impact of Demand and Supply Uncertainty on Business Performances
The first question of interest relates to the nature of the impact of demand and supply
uncertainty on business performance. The results for both product and service based
organizations are reported below.
Comparative Assessment of Business Performance under Different Level of Demand and
Supply Uncertainty -- Products
Product based organizations (see Figures 2 & 3 below) indicated that business performance
was significantly better when supply uncertainty was low in the areas of delivery, flexibility
and customer focus. Interestingly this did not appear to necessarily translate into better
financial performance. When demand uncertainty was low, only delivery performance was
reported to be significantly better, with all other areas of performance measured reported to
be effectively unchanged.
Exceptional
Business Performa nce under Different Level of Demand Uncertainty (Products)
5
4.5
3.89
4
3.80
3.32
3.5
3.69
Average
3.49
3.47
3.49
3.44
3.32
Low demand uncertainty
3.13
3
High demand uncertainty
2.5
2
Poor
1.5
1
PerformanceDeliv ery
PerformanceTime
PerformanceCustomer
PerformanceFlex ibility
PerformanceFinancial
Figure 2: Comparative Assessment of Business Performances: mean score for organizations
under low demand uncertainty VS. high demand uncertainty (Products)
Exceptional
Business Pe rformance under Different Leve l of Supply Uncertainty (Products)
5
4.5
3.95
3.91
4
3.56
3.49
Average
3.57
3.32
3.5
3.50
3.28
3.39
Low supply uncertainty
3.17
3
High supply uncertainty
2.5
2
Poor
1.5
1
PerformanceDeliv ery
PerformanceTime
PerformanceCustomer
PerformanceFlex ibility
PerformanceFinancial
Figure 3: Comparative Assessment of Business Performances: mean score for organizations
under low supply uncertainty VS. high supply uncertainty (Products)
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Comparative Assessment of Business Performance under Different Level of Demand and
Supply Uncertainty – Services
The results were similar for service based organizations (see Figures 4 & 5 below) with
demand uncertainty playing even less of a role in affecting performance. In this case there
was no significant change in performance recorded based on levels of demand uncertainty.
On the other hand, supply uncertainty did appear to affect performance significantly in the
areas of delivery and cycle time, as well as having some financial impact.
Exceptional
Business Performance under Different Level of Demand Uncertainty (Services)
5
4.5
4
3.78
3.56
3.5
3.71
3.39
3.49
3.25
Average
3.41
3.35
3.32
3.18
3
Low demand uncertainty
High demand uncertainty
2.5
2
Poor
1.5
1
PerformanceDeliv ery
PerformanceTime
PerformanceCustomer
PerformanceFlex ibility
PerformanceFinancial
Figure 4: Comparative Assessment of Business Performances: mean score for organizations
under low demand uncertainty VS. high demand uncertainty (Services)
Exceptional
Business Performance under Different Level of Supply Uncertainty (Services)
5
4.5
4
3.85
3.57
3.5
3.62
3.41
3.46
3.28
3.19
3.31
Average
3.43
3
3.04
Low supply uncertainty
High supply uncertainty
2.5
2
Poor
1.5
1
PerformanceDeliv ery
PerformanceTime
PerformanceCustomer
PerformanceFlex ibility
PerformanceFinancial
Figure 5: Comparative Assessment of Business Performances: mean score for organizations
under low supply uncertainty VS. high supply uncertainty (Services)
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The results from both sectors indicate that supply uncertainty is a more significant
determinant of performance than demand uncertainty in both product and service related
organizations. The implications are important for organizations developing supply chain
management strategies, particularly in terms of where to focus attention in managing
uncertainty levels. Managing supplier uncertainty would appear to be a more significant
source of leverage in both sectors. It is particularly interesting to note that this is as much the
case in services, given that in this sector the customer is often a participant in the supply
process.
The Impact of Supplier Partnership and Customer Relationship on Business
Performance
The second question of interest relates to whether the nature of relationships with suppliers
and customers have an impact on business performance. The results for both product and
service based organizations are reported below.
Comparative Assessment of Business Performance under Different Level of Supplier
Partnership and Customer Relationship – Products
The data reported in Figures 6 & 7 below indicates that closer relationships with both
customers and suppliers are related to higher levels of performance in all the areas measured.
There is also some evidence suggesting that the gap in performance is greater when
relationships with customers are poor.
Exceptional
Business Performance under Different Level of Supplier Relationship (Products)
5
4.5
4
4.05
3.97
3.64
3.55
3.43
3.5
Average
3.59
3.45
3.26
3.08
3
3.32
High supplier relationship
Low supplier relationship
2.5
2
Poor
1.5
1
PerformanceDeliv ery
PerformanceTime
PerformanceCustomer
PerformanceFlex ibility
PerformanceFinancial
Figure 6: Comparative Assessment of Business Performances: mean score for organizations
under low supplier relationship vs. high supplier relationship (Products)
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Exceptional
Business Performance under Different Level of Customer Relationship (Products)
5
4.5
3.87
4
3.89
3.56
Average
3.5
3.49
3.30
3.22
3
3.21
3.19
High customer relationship
Low customer relationship
3.09
2.89
2.5
2
Poor
1.5
1
PerformanceDeliv ery
PerformanceTime
PerformanceCustomer
PerformanceFlex ibility
PerformanceFinancial
Figure 7: Comparative Assessment of Business Performances: mean score for organizations
under low customer relationship vs. high customer relationship (Services)
Comparative Assessment of Business Performance under Different Level of Customer
Closeness and Supplier Partnership – Services
In the services sector (see Figures 8 & 9 below) similar results were recorded as for the
product based organizations. Again, relationships with both types of trading partner were
found to be important in determining performance levels. At the same time, there was also
evidence showing that poor relationships with customers yield significantly lower levels of
performance in the service sector.
Exceptional
Business Performance under Different Level of Supplier Relationship (Services)
5
4.5
4
4.04
3.86
3.58
3.77
3.41
3.5
3.59
Average
3.30
3
3.22
3.09
3.08
High supplier relationship
Low supplier relationship
2.5
2
Poor
1.5
1
PerformanceDeliv ery
PerformanceTime
PerformanceCustomer
PerformanceFlex ibility
PerformanceFinancial
Figure 8: Comparative Assessment of Business Performances: mean score for organizations
under low supplier relationship VS. high supplier relationship (Services)
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Exceptional
Business Performance under Different Level of Customer Relationship (Services)
5
4.5
4
3.82
3.65
3.48
3.49
3.5
Average
3.52
3.28
High customer relationship
3
Low customer relationship
2.96
2.87
2.81
2.79
2.5
2
Poor
1.5
1
PerformanceDeliv ery
PerformanceTime
PerformanceCustomer
PerformanceFlex ibility
PerformanceFinancial
Figure 9: Comparative Assessment of Business Performances: mean score for organizations
under low customer relationship VS. high customer relationship (Services)
Overall these results indicate that closer relationships with trading partners are associated
with higher levels of performance in both product and service based organizations. This is
highlighted by the results reported in Table 1 below. This table shows the proportion of
variance in each of the performance categories explained by the nature of trading partner
relationships. In summary, these results indicate that: (a) both types of relationship are
important in both sectors; (b) in product based organizations the effect is greater in
operational areas of performance; and (c) in service based organizations the impact is more
directly related to the bottom line through improved financial performance. Interestingly, this
third effect is more strongly influenced in services by the supplier relationship than that with
customers.
Products
Performance
Delivery
Performance Time
Performance
Customer
Responsiveness
Performance
Flexibility
Performance
Financial
Services
Supplier
Partnership
Customer
Partnership
Supplier
Partnership
Customer
Partnership
13% ***
21.7% ***
6.3% *
7.7% *
7.9% ***
3.5%*
7.9%*
4.3% *
16.2% ***
20.8% ***
13.4% ***
12.4% **
14.6% ***
17.5% ***
6.7% *
9.2% **
2.4% *
-0.2%
14.4% ***
5% *
*** % of variance explained is (statistically) extremely significant at P < 0.001 level,
** % of variance explained is (statistically) very significant at P < 0.01 level,
* % of variance explained is significant at P < 0.05 level
Table 1: Percentage of variance of business performance which can be explained by level of
supplier relationship and customer relationship
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The association between supplier partnership AND customer closeness and level of
demand and supply uncertainty
The third question of interest in this study is to understand the extent to which supplier and
customer relationships influence the level of demand and supply uncertainty. Table 2 below
shows the correlation between trading partner relationships and levels of uncertainty for
product based organizations. The results indicate that both supply and demand uncertainty are
negatively correlated with close trading partner relationships. In other words, uncertainty can
be reduced by being more closely aligned with both suppliers and customers. It is also
interesting to note that closer ties with both customers and suppliers have a significantly
stronger impact on reducing supply rather than demand uncertainty.
Pearson Correlation Value
(Product Organizations)
Supply
Supplier
Uncertainty
Partnership
.221(**)
-.173(*)
Demand Uncertainty
Demand
Uncertainty
1
Customer
Partnership
-.169(*)
Supply Uncertainty
.221(**)
1
-.375(***)
-.441(***)
Supplier Partnership
Customer
Partnership
-.173(*)
-.375(***)
1
.444(***)
-.169(*)
-.441(***)
.444(***)
1
*** Correlation is significant at the 0.001 level (2-tailed)
** Correlation is significant at the 0.01 level (2-tailed).
* Correlation is significant at the 0.05 level (2-tailed).
Table 2: Correlation of Supplier Relationship and Customer Relationship with Demand
andSupply Uncertainty – Product Organizations
Table 3 below shows the correlation between trading partner relationships and levels of
uncertainty for service based organizations. In this case the results bear a sharp contrast to
those for the product based organizations reported above. Only one significant relationship
was found, in this case a positive one between closer ties with customers and demand
uncertainty. The overall result in this sector indicates that closer ties with customers and
suppliers will not reduce levels of uncertainty on either the supply or demand side.
Pearson Correlation Value
(Service Organizations)
Supply
Supplier
Uncertainty
Partnership
-.014
.180
Demand Uncertainty
Demand
Uncertainty
1
Customer
Partnership
.281(*)
Supply Uncertainty
-.014
1
-.097
-.011
Supplier Partnership
Customer
Partnership
.180
-.097
1
.430(***)
.281(*)
-.011
.430(***)
1
*** Correlation is significant at the 0.001 level (2-tailed)
** Correlation is significant at the 0.01 level (2-tailed).
* Correlation is significant at the 0.05 level (2-tailed).
Table 3: Correlation of Supplier Relationship and Customer Relationship to Demand
andSupply Uncertainty – Service Organizations
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MANAGERIAL IMPLICATIONS
The implications for managers are important. The results provide substantial evidence for the
benefits of closer relations with trading partners whether an organization is making products
or providing services. The evidence indicates that the nature of relationships with trading
partners is closely associated with higher levels of both operational and financial
performance. Uncertainty is something that all organizations must deal with, and in a supply
chain the results indicate that uncertainty of supply is a stronger determinant of performance
than uncertainty of demand. This was found to be the case even in services, an interesting
result given the extent of involvement with customers typically found in this sector. The
counterintuitive implication of the results overall is that managers (in product based
organizations) wishing to reduce levels of uncertainty in supply will best be served by
developing closer ties with both customers and suppliers. In this case higher levels of
performance are more likely as a result of both the nature of the relationship and reductions in
supply uncertainty. In service based organizations, managers also will be well served by
doing the same, but for different reasons. In these organizations closer relationships with
trading partners can lead to improved performance, but not through reductions in supply
uncertainty.
CONCLUSION
In this paper, the relationships between supply chain uncertainty, supply chain relationships
and firm’s performance were investigated in both product and service related organizations.
The study surveyed 1923 purchasing and procurement professionals who are members of
CIPS Australia. The results were reported based on 206 responses. The results indicate that:
(a) supply uncertainty is a more significant determinant of performance than demand
uncertainty in both product and service related organizations; (b) closer relationships with
trading partners are associated with higher levels of performance in both product and service
based organizations; and (c) uncertainty can be reduced by being more closely aligned with
both suppliers and customers in product based organizations, while in service based
organizations, closer relationship with suppliers and customers does not reduce the level of
uncertainty.
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