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A structural equation model of supply chain

management strategies and firm performance

By Wisner, Joel D

Publication: Journal of Business Logistics

Date: Wednesday, January 1 2003

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Supply Chain Management

Find out how to improve your supply chain to increase profitability
Joel D. Wisner

University of Nevada, Las Vegas

Supply chain management is the integration of key business processes among a network of
interdependent suppliers, manufacturers, distribution centers, and retailers in order to improve the
flow of goods, services, and information from original suppliers to final customers, with the
objectives of reducing system-wide costs while maintaining required service levels (Christopher
1998; New and Payne 1995; Simchi-Levi, Kaminsky, and Simchi-Levi 2000). Other terms
including integrated logistics, value chain management, JIT purchasing and logistics, quick
response, and supply chain synchronization describe subsets of, or specific initiatives within
supply chain management, and have been used in the literature to address the topic of supply
chain management (La Londe and Masters 1994; Tan, Handheld, and Krause 1998). Immediate
supplier and customer relationship activities have thus played an important role in the
development of effective supply chain management (SCM) strategies. Unfortunately, the terms
listed here in many cases have been used synonymously with supply chain management and
have clouded the issue and understanding of SCM. As a result, many practitioners view SCM
strictly from a supplier-base perspective, value chain, or customer-base perspective. This
research takes the broader view of SCM, including the focal firm and integrative activities with its
suppliers, its suppliers' suppliers, its customers, and its customers' customers (for a good
discussion of SCM and its history see Lambert, Cooper, and Pagh 1998; Lummus and Vokurka

The primary objective of SCM is to increase the value of products and services to customers in
the supply chain vis-A-vis improved customer service and quality, and lower inventory carrying
costs. The value created by a firm's SCM efforts clearly supports organizational strategy.
Successful SCM can result in lower system inventories, a network of firms that responds more
quickly to market changes, and products that more closely match customer expectations. Thus,
firms pursuing differentiation, cost leadership, or quick response strategies, or combinations of
these can all find benefits from value system or supply chain management (Porter 1985).

Today, the SCM concept and its associated activities continue to evolve as new communication
technologies and cooperative efforts emerge to facilitate system-wide process integration. The
body of supply chain-oriented research continues to grow along a number of fronts; many of
these efforts are concerned with further defining the SCM concept and its impact on
organizational characteristics and practices. Interestingly, several researchers have argued that
supply chain management is not feasible in many situations such as when the focal organization
is not in a position of power or structural dominance over its network of suppliers (Cox 2001; Cox
and Thompson 1998). Still others have brought attention to the lack of success in many supply
chain management endeavors (Handfield et al. 2000). However, to date, there has been limited
attention paid to identifying specific processes which have been successfully integrated, supply
chain-oriented issues to be concerned with, how best to design and manage supply chains,
empirically testing supply chain models, and the performance expectations of successful SCM
program implementations (Lambert, Cooper, and Pagh 1998).

This paper adds to the existing body of research by developing and analyzing a theoretical
framework for supplier and customer issues and concerns, supply chain management strategy,
and firm performance using structural equation modeling. This research contends that, like JIT
practices, all firms can benefit from some form or at least limited use of supply chain integrative
practices. As discussed in Porter's landmark book on competitive advantage, differentiation and
thus value are created by activities taking place within the value system (or supply chain) to get
products to the ultimate buyer (1985). Pitting one value system against another can be the source
of competitive advantage for the more effective value system members. Thus, each firm's value
chain (logistics system or network of suppliers, channels, and buyers) should impact the value
created by the entire supply chain, which relates to the current study. The primary research
question under study is: Are there positive linkages between supplier management strategy,
customer relationship strategy, supply chain management strategy, and firm performance? While
these linkages may seem intuitive, as alluded to above, to date there has been limited empirical
research testing these relationships.

LISREL8-SIMPLIS was employed to analyze a hypothetical model for the supplier, customer,
supply chain management, and firm performance items. The findings presented were obtained
using a comprehensive survey circulated to a wide variety of U.S. and European business
executives regarding a wide range of supply chain issues and strategies. Survey participants
were asked if their firm practiced supply chain management. Participants responding in the
affirmative were then asked questions regarding supplier management and customer relationship
strategies, supply chain management strategies, and firm performance. The objective of the
research was to test a number of hypotheses regarding the linkages between these activities and
strategies, and firm performance.

Study results supported the proposed structural equation model. Supplier management and
customer relationship strategies were found to be correlated and to impact supply chain
management strategies. Further, these practices and strategies were found to impact firm
performance. Based on these findings, a clearer picture of the practice and benefits of SCM and
its strategic implications emerges. It is interesting to note that while many respondents had
differing views of these activities and strategies, there was still considerable agreement as to the
impact of these practices on the firm.

The following sections describe the existing literature relevant to the study, the research
methodology, the demographic characteristics of the respondents, and an analysis of the
proposed model. Finally the managerial or strategic implications of the study and future research
directions are presented and discussed.


Increasing global competition, the demands of customers for higher product quality, greater
product selection, and better customer service, the desire of firms to shrink their supply bases
while striving to contain costs, and the rising costs of natural resources today have led many
organizations to adopt cooperative, mutually beneficial partnership strategies with suppliers,
distributors, retailers, and other firms within their supply chains to maintain or improve profitability
and overall firm performance.
The strategic management literature has discussed the relationship between these activities and
firm performance. For instance, Porter (1980) stressed the importance of buyers and suppliers
matching their individual needs with the relative capabilities of the other in order to maximize
product differentiation and minimize cost. Later, Porter (1985) advanced his earlier theories by
presenting discussion of the value system (today, more commonly referred to as the supply
chain) and its impact on competitive advantage. These seminal works have formed the basis for
the development of supply chain management strategies today and their ties to firm
competitiveness and performance. Further, Teece, Pisano, and Shuen (1997) provided an
explanation of how a firm's specific asset position and uniqueness shape its competitive
advantage. The practices of logistics and supply chain management along with their associated
benefits (better customer service, lower cost, higher quality, and improved competitive
advantage) are linked closely with the strategic management literature. Further, these practices
and strategies continue to evolve and the link between supply chain management and firm
performance is beginning to be realized as firms begin to understand and implement SCM.

Specifically, the relevant literature can be classified and discussed from three perspectives:
supplier management activities and strategy, customer relationship activities and strategy, and
system-wide supply chain management strategy. While there is certainly significant overlap
existing among these classifications, the purchasing and logistics literature generally is either
internally focused or spans the boundaries between the firm and its first-tier suppliers and
customers, while the supply chain management literature focuses on the integrating activities
taking place among a network of firms encompassing in many cases several tiers of suppliers
and customers. However, the term supply chain management is not used consistently within the
literature, and in many cases, the reader is left to decide how best to classify a particular piece of
research (Mabert and Venkataramanan 1998).

Supplier Management Strategy

The concept of SCM has slowly evolved. However, greater involvement is noted. For example,
manufacturers have utilized the knowledge and resources of key suppliers to support new
product development efforts (Morgan and Monczka 1995). Further, many firms have successfully
reduced their supply bases in order to form a smaller set of highly competent suppliers to achieve
improvements in purchased product quality and timing (Inman and Hubler 1992). Much of the
recent literature on SCM focuses on attempts to form alliances with suppliers to co-manage the
purchasing and supply function.
Recently, for instance, McGinnis and Vallopra (1999) found that purchasing's strategic
involvement with suppliers contributed significantly to process development and improvement in a
number of industry categories. As an example, involving suppliers early on in product design
efforts allows manufacturers to develop alternative conceptual solutions, select the best and most
affordable components, materials and technologies, and receive help in design assessment (Burt
and Soukup 1985). Future projections indicate supplier selection will increasingly be based on
strategic contributions to the supply chain and will extend beyond first-tier suppliers (Carter et al.

For a number of years, there has been significant disagreement regarding purchasing's ability to
contribute to the firm's sustainable competitive advantage. While a number of researchers have
suggested that firms cannot "purchase" competitive advantage (since freely traded assets are
available to all competitors, and all purchasing activities can be replicated), others are now
suggesting the contrary view: that purchasing functions and resources are not identical among
competing firms, and can result in proficiencies that are impossible or difficult to copy. Ramsay
(2001) provides a compelling discussion and review of this line of thinking. Several researchers
have discussed or tested for the relationship between supplier management activities and various
performance outcomes. Whipple, Frankel, and Anselmi (1999) discuss case studies in the
grocery industry to highlight inbound supply relationships and their impact on firm effectiveness
and efficiency. In a survey of 57 automotive supplier CEOs, Scannell, Vickery, and Droge (2000)
found significant positive relationships between JIT purchasing, supplier partnership, and supplier
development practices and several performance measures.

Customer Relationship Strategy

To speed the delivery process and improve customer service, manufacturers, distributors, and
retailers today are integrating their supply chain logistics functions by using transportation
partners for crossdocking and direct store deliveries without the need for incoming inspections
(Ellram, La Londe, and Weber 1989; St. Onge 1996). Transportation and other outbound logistics
functions focus on a number of strategically important supply chain management issues such as
JIT and customized delivery, warehouse and facility location, customized product/service issues,
customer relationship management, and communication/information system deployment. Supply
chain management's origins can be traced to an effort to better manage these transportation and
logistics functions (Fisher 1997; Lamb 1995; MacDonald 1991; Turner 1993; Whiteoak 1994).
Increasingly, product and service customization is performed within the distribution channel to
improve customer satisfaction (Lee and Billington 1995). This in turn, creates the need for third-
party logistics service providers. In a recent survey of European manufacturers, van Hoek (1999)
found customized transportation services, postponement, and the need for consistent, reliable,
on-time delivery to be top considerations in structuring and managing the supply chain. One of
the strategic goals of the transportation and outbound logistics functions is to reduce inventory
along the supply chain while simultaneously maintaining or improving customer service (Houlihan
1988; Jones and Riley 1987). A supply chain can accomplish this task by efficiently redistributing
stock within the supply chain using effective postponement and speculation strategies (Davis
1993; Pagh and Cooper 1998; Scott and Westbrook 1991). Inventory must be replenished quickly
and arrive when and where it is needed, in smaller lot sizes.

Indeed, a number of researchers have focused on the relationship between customer relationship
considerations or activities, and firm performance. For example, Deshpande, Farley, and Webster
(1993) found that customer orientation was positively related to firm performance. Ellinger,
Daugherty, and Keller (2000) used structural equation modeling to test among other things,
whether there was a relationship between distribution service performance and firm performance
(consisting of measures for firm profitability, sales growth, and customer satisfaction). They found
a significant positive association.

Supply Chain Management Strategy

The short-term objective of SCM is primarily to increase quality and productivity while reducing
inventory and cycle time; its long-term strategic goals are to increase customer satisfaction,
market share, and profits for all members of the supply chain network. Supply chain management
is evolving into a common body of literature, with a primary focus on key process integration
throughout the supply chain which should ultimately lead to a balance between customer
requirements and supply chain capabilities (Lummus and Alber 1997). In general, SCM seeks
improved participant performance through elimination of waste and better use of internal and
external supplier capabilities and technologies (Morgan and Monczka 1996).

The SCM philosophy expands the traditional internally-focused integrating activities of logistics
(Kahn and Mentzer 1996) by bringing trading partners along the supply chain together with the
common goals of efficiency, speed, and end-customer satisfaction (Harwick 1997). When
successful, SCM creates a virtual organization composed of several independent entities, often
linked by sophisticated enterprise resource planning (ERP) systems providing global visibility of
real-time information from any part of a company or its supply chain partners. The visibility
enables more effective forecasting, production, and inventory decisions (Chopra and Meindl
2001). To accomplish this, SCM must integrate a number of key business functions, including
purchasing, demand management, distribution planning, transportation, quality management,
production planning, and materials management throughout the supply chain.

Since the wholesaling and retailing industries incorporate a logistics focus into their strategic
decisions, use of the SCM concept would enable channel members to compete as a unified entity
instead of merely pushing inventories down the supply chain to end customers. Thus, the benefits
of vertical integration can be obtained by coordinating the logistics functions of independent firms
in the chain (Gustin, Daugherty, and Stank 1995; La Londe and Masters 1994). In this respect,
SCM involves the integration of logistics systems to control the movement of goods from original
suppliers to satisfied end-customers without waste (Ellram 1991).

Where improving customer service once meant increasing warehouse inventories along the
supply chain, today, integrated logistics systems seek to manage inventories through close
relationships with suppliers and transportation, distribution, and delivery services. A goal is to
replace inventory with frequent communication and sophisticated information systems to provide
visibility and coordination, so that merchandise can be replenished quickly and arrive where and
when it is needed in smaller lot sizes (Handheld 1994; Shapiro, Singhal, and Wagner 1993).
Firms that use advanced process technology to increase flexibility while involving manufacturing
and logistics managers in strategic decision making increase the role logistics plays in firm
success (Tracey 1998). Quick, frequent, and accurate information transfer among members of
the supply chain can counteract the distortion of information (known as the bullwhip effect) as it
passes sequentially up the supply chain (Metters 1997). When utilized effectively, communication
systems and information technology systems can replace inventory and improve organizational
performance (Lewis and Talayevsky 1997).

Recent research papers have explored linkages between supply chain management practices or
strategies and firm performance, either directly or indirectly. For instance, in a survey of North
American manufacturers, distributors, and retailers, Stank, Keller, and Daugherty (2001) found
that supply chain management practices tended to improve internal collaboration which, in turn,
positively affected logistics service performance. Brewer and Speh (2000) examined how the
balanced scorecard could be used to leverage a firm's supply chain into a source of competitive
advantage. An earlier work by Armistead and Mapes (1993) using a very small sample, found that
an increasing level of supply chain integration corresponded with increased manufacturing

Today, despite its importance, theoretical development, and popular usage in the business press,
there is little empirical research clearly defining the role of external relationship activities in the
development of supply chain management strategy, identifying the specific linkages between
supplier management and customer relationship strategies and supply chain strategy, and
perhaps more importantly, the corresponding impact these strategies have on firm performance.
This research addresses these issues, with particular attention paid to both supplier and
customer oriented activities and their roles in successful SCM.


Figure 1 presents the proposed structural equation model and associated hypotheses. Supplier--
and customer-focused activities and their value to the firm and its customers have been the
subject of a number of research efforts (examples include Innis and La Londe 1994; Morash,
Droge, and Vickery 1996; Novack, Rinehart, and Langley 1996; Stank and Lackey 1997). This
body of research has shown that inbound and outbound capabilities such as delivery speed,
reliability, and low cost distribution were significantly related to a number of firm performance
indicators and to competitive advantage. Thus, the first two hypotheses are:

H1: Inbound logistics strategy positively affects firm performance.

H2: Outbound logistics strategy positively affects firm performance.

Supply chain management strategy, as discussed earlier in the literature review, is ideally a
linkage of internally-focused, mature, and successful supplier/customer-oriented capabilities
throughout the supply chain's members. A number of recent studies have discussed this
relationship between these boundary-spanning activities and supply chain management (Cooper,
Lambert, and Pagh 1997; Stank, Keller, and Daugherty 2001). Although supplier management
and customer relationship management is considered a subset of SCM strategy, other value-
adding concepts are also included such as information system integration and top-level planning
and control activities. However, literature suggests that firms must possess a high level of supply
side and distribution effectiveness prior to initiating SCM strategies. Thus, it is hypothesized that
supplier management and customer relationship strategies are positively linked to supply chain
management strategy. These hypothesized links can be stated as:

H3: Supplier management strategy positively affects supply chain management strategy.
H4: Customer relationship strategy positively affects supply chain management strategy.

One of the primary objectives of supply chain management is to create greater levels of customer
value and competitive advantage for organizations comprising the supply chain. While the linkage
between SCM and firm performance has been theoretically argued in the literature (Carter and
Narasimhan 1996; Christopher 1998), there has been limited empirical research in the area
(Armistead and Mapes 1993; Narasimhan and Jayaram 1998; Tan, Kannan, and Handheld
1998). The fifth hypothesis thus becomes:

H5: Supply chain management strategy positively affects firm performance.

Finally, it is hypothesized that as firms implement various boundary-spanning activities, these

activities tend to impact both supplier management and customer relationship capabilities. For
instance, as firms become more accustomed to JIT deliveries from suppliers, they should find
their outbound delivery timing impacted as well, as better transportation providers and delivery
arrangements are found. Additionally, as stronger partnerships and better collaborative efforts are
realized with suppliers through use of supplier reduction strategies and more effective sourcing
decisions, the firm's distribution performance and capabilities also tend to improve (Stank, Keller,
and Daugherty 2001). The final hypothesis can be stated as:

H6: Supplier management and customer relationship strategies impact each other.


The Structural Equation Modeling Approach

Structural equation modeling is a confirmatory approach to data analysis requiring the a priori
assignment of inter-variable relationships. It tests a hypothesized model statistically to determine
the extent the proposed model is consistent with the sample data. Structural equation modeling
incorporates observed (indicator) and unobserved (latent) variables, which are separated into
measurement models and a structural equation model. Observed variables are those that can be
measured, while unobserved variables cannot be directly measured and must be inferred or
hypothesized from the observed variables. The measurement models specify how the latent
variables are measured in terms of the indicator variables as well as address the reliability and
validity of the indicator variables in measuring the latent variables or hypothetical constructs. The
structural equation model provides an assessment of predictive validity, specifies the direct and
indirect relations among the latent variables, and describes the amount of explained and
unexplained variance in the model (Byrne 1998; Schumacker and Lomax 1996).

In structural equation modeling, there is no single test of significance that can absolutely identify a
correct model given the sample data (Schumacker and Lomax 1996). Many goodnessof-fit criteria
have been established to assess an acceptable model fit. Consequently, several authors
recommend presenting a number of indices to support model fit (Bentler 1992; Garver and
Mentzer 1999). This paper presents and discusses a number of fit indices with the results and in
Figures 2 through 6.

LISREL8-SIMPLIS was used to analyze the hypothesized model. A two-step model building
approach was used, wherein the measurement models were tested prior to testing the structural
model. The rationale behind this two-step approach is discussed in Joreskog and Sorbom (1993,
p. 113) wherein they state, "The testing of the structural model, i.e., the testing of the initially
specified theory, may be meaningless unless it is first established that the measurement model
holds." (Interested readers are also directed to Anderson and Gerbing (1988) for a further
discussion of this approach). The maximum likelihood estimation method was used which has
desirable asymptotic properties (e.g., minimum variance and unbiasedness) and is scale-free.
This estimation method assumes multivariate normality of the observed variables. Recent
research has shown that the maximum likelihood method can be used for data with minor
deviations from normality (Raykov and Marcoulides 2000). As a check of normality, the P-P plots
for a number of variables were checked in the sample, and the data appeared approximately
normally distributed.

Research Constructs and Items

The existing research was reviewed to identify relevant practices comprising the supplier
management, customer relationship, and supply chain management strategies. Additionally,
feedback from 30 senior purchasing managers was used to further validate the use of these
activities in developing each of the strategies. Thus, the practices used in each of the research
constructs were based on the literature and management feedback. For this study, respondents
stating they practiced supply chain management were asked to assess 14 supplier management
practices, 16 customer relationship practices, 20 supply chain management practices, and finally,
six performance measures. For each of the questions, assessments were made using a 5-point
Likert scale. These constructs are shown in Table 1.
Data Collection

To examine the relationships described above, a survey was designed, pre-tested, and validated
using 30 senior U. S. supply and materials managers. Feedback from the pre-test was then used
to revise the questionnaire (the pre-test questionnaires were not used for further analysis). Senior
managers, identified from the American Production and Inventory Control Society (APICS) and
the National Association of Purchasing Management (NAPM) databases, were asked to complete
the survey only if they practiced some form of supply chain management, as defined in the
survey. The following definition was supplied in the survey:

"Supply chain management is the integration of key business processes from end user to original
suppliers to provide products, services, and information that add value for customers."

The survey was circulated and responses were received in three phases from senior managers in
U.S. and European manufacturing and service organizations between December 1998 and
October 1999. In each phase, three mailings were conducted, consisting of the survey with a
cover letter, a reminder post card, and a second survey with a follow-up letter. The mailings for
each phase were conducted consecutively over the ten-month period due to the relatively large
manpower requirements. In the first phase, the survey was mailed to 1,500 U.S. manufacturing
firm supply and materials managers, randomly selected from the NAPM membership database.
For the second phase of the study, 3,000 surveys were sent to senior U.S. managers, randomly
selected from the APICS membership database. This sample included 1,000 manufacturing firms
and 2,000 service firms. For the third and final phase of the study, 970 surveys were mailed to
senior European managers, also randomly selected from the APICS membership database.
Multiple databases were used to maximize the sample size. Care was taken in both databases to
delete multiple listings for firms with more than one NAPM or APICS membership listing. A total of
556 useable surveys, consisting of 411 U.S. firm responses and 145 European firm responses,
were received for a response rate of 10.2%. The response rate was considered reasonable, given
the subject matter and complexity, and the survey length. The survey respondents practicing
SCM as defined on the survey were used for this study (350 respondents).


Non-Response Bias
To investigate the possibility of non-response bias in the data, a test for statistically significant
differences in the responses of early and late waves of returned surveys was performed
(Armstrong and Overton 1977; Lambert and Harrington 1990). For each phase, the last wave of
surveys received was considered to be representative of non-respondents. Each survey sample
was split into two groups on the basis of early and late survey return times; t-tests were
performed on the responses of the two groups. The t-tests yielded no statistically significant
differences among the survey items tested. These results suggested that non-response bias did
not significantly impact the study.

Reliability Analysis

Since the data for this research was generated using scaled responses, it was deemed
necessary to test for reliability. Table 2 contains this information. Cronbach Alpha tests were
performed on the four constructs shown in Table 1. Based on the coefficient values, the items
tested were deemed reliable for this type of exploratory research (Nunnally 1978).


Respondent Firm Demographics

General demographic information of the respondent firms is presented in Table 3. Over 61 % of

the firms were either final product or raw material/component manufacturers with the remainder
classifying themselves as wholesalers, retailers, or other services (including third party logistics
providers, warehousing, healthcare, software, telecommunications, and utility companies). A
large percentage of the respondents (approximately 63%) stated they practiced some form of
supply chain management. A wide variety of firm sizes (based on number of employees and
annual sales) was also represented in the sample. Over 41 % had fewer than 500 employees,
while over 13% of the respondent firms had over 10,000 employees. Similarly, firm size based on
annual sales was also well dispersed. Eighteen percent had annual sales of less than $25 million,
while over 17% had sales in excess of $1 billion annually.

Analysis of the Measurement Models

To ensure model identification, one can separate the measurement models and the structural
model. If each measurement model is identified independently, then the structural model is
identified (Maruyama 1998).



The first measurement model tested was the Supplier Management Strategy model (SMGT). This
model was evaluated using the 14 items shown in Table 1. The model was checked to assure
that the parameter estimates exhibited the correct sign and magnitude and were consistent with
the underlying theory. Seven of the 14 items exhibited either large error variances or insignificant
parameter estimates. These items were considered unimportant to the model and thus were
deleted (Byrne 1998). The modification indices suggested Ql J (quick response time for
emergencies, problems, special requests) and Q IK (flexibility to respond to unexpected demand
changes) influenced each other. Since the firm's flexibility with respect to unexpected demand
changes is likely to influence its ability to respond quickly to emergencies or special requests, and
vice-versa, an error covariance between the two items (0.22) was included in the supplier
management strategy model (see Figure 2).

The Customer Relationship Strategy (CREL) measurement model was tested next. The 16 items
shown in Table 2 were used to evaluate this measurement model. Six of these items were found
to have large error variances and thus were dropped from the model. The modification indices
implied that a number of items were correlated, and this is shown in Figure 3. Q2B (the firm's
ability to meet customer due dates) was found to be correlated with both Q2D (successfully
resolving customer complaints) and Q2I (the firm's flexibility in meeting customers' changing
needs). This seems intuitive, since successfully meeting customer due dates implies a lower level
of customer complaints and a sustained ability to meet changing customer due dates, for
instance. It was also found that Q2J (using a customer satisfaction measurement system) and
Q2L (determining key factors for improving customer satisfaction) were correlated. This is not
surprising, since one of the primary objectives of customer satisfaction surveys is to determine
areas where the firm can concentrate additional resources to boost customer satisfaction. Finally,
Q2N (employing routine follow-up procedures for customer complaints) was correlated with both
Q2M (understanding how customers use the firm's products and services) and Q20 (interacting
with customers to set reliability, responsiveness, and other standards). Customer interaction is
likely to occur as customers communicate complaints and concerns to the firm. The outcomes
from these interactions are also likely to include the setting of customer responsiveness
standards and, in time, will result in a greater understanding of how the firm's products are used
by customers. The model was thus modified and the error covariance terms were added to link
the appropriate sets of indicator variables (see Figure 3).

Figure 4 shows the Supply Chain Management Strategy (SCM) measurement model. The 20
items shown in Table I were initially tested in the model. Examination of the error terms revealed
that eight of the items should be dropped from the model. The modification indices suggested that
improving the integration of activities across the supply chain (Q3C) was correlated with both
reducing supply chain response times (Q3B) and searching for new ways to integrate supply
chain activities (Q3D). In theory, SCM practice should support these correlations. One reason
firms integrate inter-organizational activities is to achieve reductions in response times as
products move through the supply chain. Additionally, firms practicing SCM often look for new
ways to integrate these activities, such as in the implementation of better communication
systems. The end result of these efforts should be better integration and shorter response times.
Creating a greater level of trust throughout the supply chain (Q3E) was correlated with identifying
and participating in additional supply chains (Q3H). As firms become more comfortable with their
supply chain partners, greater levels of supply chain management success can be achieved,
leading firms to seek out still other supply chain relationships. Additionally, establishing more
frequent contact with supply chain members (Q3I) was correlated with creating a compatible
supply chain communication/information system (Q3J). Again, this seems intuitive - more
frequent contact is likely to result in a more compatible communication system, and vice versa.
Also, involving all supply chain members in the firm's marketing plans (Q3N) was correlated with
communicating the firm's future strategic needs to suppliers (Q3Q). Certainly, one way to involve
suppliers in the firm's marketing plans is to communicate upcoming strategic material needs to
them in a timely fashion. The SCM measurement model was modified accordingly to reflect the
dropped items and the additional error covariance terms (see Figure 4).

Finally, the Firm Performance (PERF) measurement model was evaluated using the six observed
measures shown in Table 1. One of the performance measures exhibited a large error variance
so it was eliminated. The modification indices suggested that market share (Q4A) affected both
return on assets (Q4B) and overall competitive position (Q4E). Understandably, as market share
improves for a particular firm, asset utilization would likely increase, resulting in higher return on
assets. Also, market share is typically used as a proxy for competitive position, so this
relationship would be expected. Overall product quality (Q4D) and overall customer service levels
(Q4F) were also correlated. With respect to services in particular, service product quality and
customer service can be seen as synonymous. The final firm performance model is shown in
Figure 5 with the three error covariance terms.

When viewing the model fit indices for each of the measurement models in Figures 2-5, a good fit
is apparent regarding each of the measurement models. The x2/df statistic for each of the
measurement models was less than 3.0, suggesting that each of the measurement models fit the
sample data well. The commonly cited fit indices such as GFI, NFI, CFI, and IFI were all greater
than 0.90, suggesting excellent model fit. Finally, the critical N, or CN, was greater than 200 for
each of the measurement models, indicating the sample size of 350 was sufficient to yield
adequate model fit.

Analysis of the Structural Model and Hypotheses

The structural model was analyzed based on the modified measurement models using the
maximum likelihood estimation method. The initial model as shown in Figure 1 was tested,
resulting in two insignificant path coefficients, suggesting a lack of support in the data for this
model. Acting on the assumption that the original model was specified incorrectly, the model was
subsequently modified in stepwise fashion (see discussions of post-hoc modification in Hoyle
1995; Maruyama 1998; Raykov and Marcoulides 2000) resulting in a final model exhibiting good
fit, as shown in Figure 6. The data thus supported hypotheses H3-H6, namely, that the supplier
management and customer relationship strategies significantly impacted supply chain
management strategy, supply chain management strategy significantly influenced firm
performance, and that supplier management and customer relationship strategies significantly
impacted each other.




Figure 6 shows the modified structural equation model, standardized coefficients, and model fit
indices. All coefficients shown were significant at the die.05 level. The X2/df statistic (1.53)
indicates the modified hypothesized model fit the sample data well. The other fit indices shown in
Figure 6 also tended to confirm this. The results thus support the structural equation model and
the underlying theory.


This study endeavored to identify and empirically verify relationships between current supplier,
customer, and supply chain management practices. Firms operating in the U.S. and Europe were
examined and a structural equation model for supply chain management was derived from the
literature. In general, the data supported the proposed structural equation model. A bi-directional
relationship exists between the items used to assess supplier management and customer
relationship strategy. Additionally, both supplier management and customer relationship strategy
positively impact supply chain management strategy, which in turn, influences firm performance.

These findings have a number of managerial implications. Firms should not view or evaluate their
supplier or customer practices independently. Instead, a systems approach should be used,
wherein firms recognize for instance, that inbound delivery timing and material quality, price, and
quantity all impact the firm's outgoing product and customer services (as represented by H6 in
Figure 1). Increasing information and coordination capabilities with suppliers tends to increase
those same capabilities with customers as well. Managers should be cognizant that increasing a
firm's external relationship capabilities in one area has a synergistic impact on yet other external

The significant relationships represented by H3 and H4 in Figure 1 suggest that firms seeking to
initially develop or further refine their supply chain management capabilities should look to
improve or expand their immediate supplier and customer relationship capabilities first. For
instance, finding and developing suppliers that can deliver on time, in the right quantities with
more flexibility, and directly to the points of use in the firm, can improve the integration of these
activities in the supply chain. Building and improving interdependent and trusting relationships
and then expanding them throughout the supply chain should begin with sound logistics
practices. Managers investing resources in the implementation of various external relationship
practices will find they lead to the generation and adoption of more effective supply chain
management strategies later.
Finally, the significant relationship represented by H5 implies that immediate and second-tier
supply chain management strategies all impact firm performance either directly or indirectly.
Specifically, managers wanting to improve market share, competitiveness, product quality, and
customer service should begin a process of internal assessment whereby their firm's immediate
supplier and customer relationship capabilities are assessed and potentially modified. Following
this, firms should consider identifying highly capable supply chain partners, creating better inter-
firm cooperation and integration capabilities through information sharing and exchange, reducing
response times throughout the supply chain, and sharing future strategic plans and requirements.
These relationships between supplier and customer strategies, supply chain management
strategy, and firm performance may well be the key to sustained competitive advantage.

The research here empirically illustrates the relationships between strategies focusing on
immediate suppliers and customers, supply chain management strategy, and firm performance.
Managers can thus use this information to effectively create a general supply chain management
strategy that will lead to improved firm performance. This is particularly important as competition
and customer requirements increase, forcing firms to continually evaluate and improve their

This study attempted to increase the understanding of supply chain management, in order to
provide useful insights to managers seeking to improve firm performance. This study, like others,
has limitations. The random sample for the survey was obtained from the NAPM and APICS
membership databases; thus, the results are generalizable only to the extent that the NAPM and
APICS members resemble the population of all U.S. and European firms and were
knowledgeable about their firms' SCM efforts. The response rate was also somewhat low;
however given the length, complexity, and subject matter, this is considered reasonable. Some
potential respondents may have decided not to reply once they learned the survey was primarily
for firms practicing SCM. For this reason, the percentage of firms practicing SCM (as shown in
Table 3) may be overstated, The survey mailings and returns covered a ten-month time period,
which may have introduced a slight time lag problem. Readers should also be reminded that
much of the data reported here is based on management perceptions. Past research however,
supports the use of qualitative assessments and has found them to be a reliable alternative to
actual performance data (Dess and Robinson 1984; Venkatraman and Ramanujam 1986).
Because of the use of qualitative assessments from managers, firm performance data were not
collected. Only general overall performance assessments relative to competitors were requested.
This could be seen as a limitation. Also, the term supply chain management may be interpreted
differently across industry and academic groups alike. These varied perceptions may have played
a role in the answers provided on the survey and impacted the findings. To minimize potential
confusion, a commonly used definition of supply chain management was provided on the survey.
Finally, respondents whose firm did not practice SCM were not used in this study beyond the
general sample description provided in Table 3. Thus, the measurement models and structural
equation model were based on the set of respondent firms practicing SCM. This could be seen as
a limitation of the study, given that certain responses were omitted, however the aim of the study
was to analyze firms practicing SCM.

Future research efforts in this topic area should include further studies of the supply chain
management and firm performance relationship, such as an assessment of the type of
performance measurements used among firms practicing supply chain management, and studies
that look at the triads of suppliers-buyers-customers and their specific interactions and practices.
Additional studies of the specific processes integrated, the types of information shared, and the
linkages between second- and third-tier suppliers and customers should also be investigated.
Finally, the dynamic roles power and trust play in the success of supply chain management has
yet to be fully investigated.


This research was funded by a grant from the APICS Educational and Research Foundation, Inc.
The author would also like to thank the editor and reviewers for their many thoughtful and valued


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Joel D. Wisner, Ph.D., C.P.M., CTL is an Associate Professor of Supply Chain Management at
the University of Nevada, Las Vegas. He received his Ph.D. in Operations Management and
Logistics from Arizona State University in 1991. Dr. Wisner's research interests are in the areas of
quality assessment and improvement strategies across the supply chain. His articles have
appeared in numerous journals including the European Journal of Purchasing and Supply
Management, Journal of Business Logistics, Journal of Operations Management, Journal of
Supply Chain Management, Journal of Transportation, Production and Operations Management
and Quality Management Journal.