Thesis On Supply Chain Management Management Essay

INTRODUCTION

This opening chapter seeks to bring into the light on the subject and the purpose of this thesis. In particular, it aims to introduce, justify and position the research effort. It embarks by providing an overview of the research topic, to be followed by the research problem, objectives of the study, research questions, scope of study, as well as potential contributions of the research towards the existing body of knowledge and to the practitioners. At the end of this chapter, the organisation of the entire thesis is presented.

1.2 Background of the Study

Supply chain (SC) can be viewed as a network of firms engaged in complex activities and multi processes (Arshinder, Kanda, & Deshmukh, 2006). With such complexities, this management of interdependencies requires coordination to improve the performance of SC, which is on the flow of information, services, activities, money and materials (Arshinder, Kanda, & Deshmukh, 2008). As stated by Zimmer (2002), coordinating producer and supplier is one of the key issues of supply chain management (SCM). Apart from that, pressures from the external environment such as intense competition, ever increasing customer demands, and technology enabling, have forced many firms turning to SCM as a central part of strategic competence (Sheth & Sharma, 1997). On the same line of thought, firms are increasingly exploring ways to leverage their supply chain and systematically evaluating the role of suppliers in their activities. As reported by Kannan & Tan (2006), leveraging supply chain allows the firms to exploit the capabilities, expertise, technologies and efficiencies of their suppliers. This is enhanced by the claim made by Cousins, Lawson, & Squire (2008) that close links between buyers and suppliers are increasingly cited as a decisive differentiation of high and low performers in global supply chains.

Wisner (2003), in his study on structural equation model of SCM strategies and firm performance, comprehensively described SCM as the integration of key business processes among a network of interdependent suppliers, manufacturers, distribution centres and retailers in order to improve the flow of goods, services, and information from original suppliers to final customers with the aims of reducing system wide costs while maintaining required service level. Based on the above description, several important characteristics of SCM can be explored further. Along with are: (1) SCM itself involves integration of business processes and activities; (2) the coverage is from the initial supplier to the end user; (3) it constitutes of several interdependent players and (4) the objectives are to improve the firms performance and customer satisfaction. Due to that, from the theoretical point of view, the supply chain which comprises of network of firms that engaged in complex activities and multi processes is seen to be too complex (Arshinder etal., 2006) to attain a full integration of all business performance within it (Tan, 2001). Consequently, this leads to a narrower perspective of SCM which is the integration of various functional areas within an organisation to enhance the flow of goods from immediate strategic suppliers through manufacturing and distribution chain to the end user (Houlihan, 1987). With such point of view on SCM, it is not surprised that diverse related areas of studies have been investigated by the researchers in SCM. Among those progressively studied are: managing supplier, managing process and activities in the SC, integration and coordination of key actors and processes, coverage in form of end-user to initial supplier and value creation (Harland, 1996; Tan, 2001)

The above statement by Harland (1996) and Tan (2001) underlined coordination as one of the critical elements in the study of SCM. Supply chain coordination (SCC) has become a critical success factor for the supply chain management (SCM) with the movement from the independent operations strategies to integrated supply chain strategies (da Silveira & Arkader, 2007). This integrated approach is in line with the call made by Dyer & Singh (1998) where a firm needs to develop effective coordination within and beyond its boundaries in order to exploit the potential for converting competitive advantage into profitability. Moreover, as highlighted by Simatupang, Wright & Sridharan (2002), coordination among independent firms, such as raw materials suppliers, manufacturers, distributors and other related parties, is the key to attaining the flexibility necessary to enable them to gradually improve SC processes in response to the rapidly changing market conditions. Additionally, as mentioned by Arshinder, Kanda, & Deshmukh (2006), such coordination may help to improve performance of various supply chain processes and one of the critical processes in the SC is procurement.

The above arguments demonstrate the essentiality of coordination in the SC processes. With such claims, it draws attention to the need for further diagnosis in this area. Issues on: (1) key supply chain members with whom to link processes; (2) processes that should be linked with each of these key SC members; and (3) level of coordination which should be applied for each process link, are among essential areas to be explored (Lambert & Cooper, 2000).

One could argue that the application of SCM concept to sectors such as retailing and manufacturing is no longer novel, where previous studies in these areas have shown that SCM leads to improving a firm’s competitiveness and profitability (Mentzer, 2001; Stank, Scott, & Patricia, 2001; Wisner, 2003). On the other hand, adopting this concept into the construction industry is seen to be fresh and challenging due to the nature of the industry which is widely known as fragmented and highly specialised. As usual, there are debates on these unique characteristics of the construction industry. Some claimed that such characteristics serve as barriers and restrict the industry players and activities to be coordinated (Cox & Thompson, 1997; Dubois & Gadde, 2002). Conversely, there are arguments on the necessity of having good coordination due to the complexity of the industry and the interdependencies among channel members (Davis, 2008; Errasti, Beach, Oyarbide, & Santos, 2007). The latter perspective is highly supported with the issues raised by previous reports in construction (Egan Report and Latham Report) which called for industry improvement via ‘Rethinking Construction’ (Egan, 1998; Latham, 1994). Both reports stressed on innovation in various areas such as procurement and construction managements projects in which partnering and SCM is seen as critical issues in the industry reformation (Pryke, 1999). Such arguments underline the relevancy of SCM concept to the construction industry notably with the issue of coordination in key business processes such as procurement.

In comparing with other industries, the construction industry has been known to be a leader of outsourcing particularly in materials and services (Dubois & Gadde, 2000). The essential of materials procurement mainly stems from the fact that the cost of materials forms a significant part of project costs (Manavazhi & Adhikari, 2002; O’Brien & Zilly, 1991). Specifically, it accounts for almost 75% of the total costs (Dubois & Gadde, 2000). Figure 1.1 for instance, highlighted the importance of building and construction materials as supportive factors in the construction value chain. In particular, it draws attention to different stages of value chain and key sectors including building and construction materials which could be leveraged in the construction industry. This is paralleled with what had been mentioned by Dubois & Gadde (2000) on the huge interdependency of contractors on subcontractors and suppliers of building materials in accomplishing their tasks. As stated by Arshinder, Kanda, & Deshmukh (2008), supply chain members, like for example the suppliers of materials, if managed effectively, can offer benefits such as reduced cost, accelerating flexibility, lower inventory level, reduced cycle time in order fulfilment and reduction in time it requires to deliver finished goods to the customers. This phenomenon demonstrates the importance of suppliers and subcontractors as catalysts in influencing a firm’s (contractor’s) capabilities and efficiencies.

PRIMARY

SUPPORT

Inception

Design

Tender

Construct

CLIENTS

Manage Facilities

Building & Construction Materials

Tooling, Heavy Equipment & Machinery

Finance & Insurance

Utilities & Transport

Human Resources

Information, Communication & Technology

Regulation & Enforcement

R & D

Figure 1.1: Construction Industry Value Chain

(Source: Construction Research Institute of Malaysia, 2008 )

Having the fact that procuring building materials is critical, particularly in the building construction industry, effort should be made to apply ‘best practices’ such as the concept of SC coordination in supply chain process to this industry. Although not all coordination efforts establish success, the possible benefit is considerable (Stank, Crum, & Arango, 1999) and thus has encouraged a number of researchers from various fields to explore this topic (Agan, 2005; Arshinder et.al, 2008; Cachon & Lariviere, 2005; Chen, 2007; Hossain, 2009; Marlon & Crowston 1994; Stank et.al., 1999; Xue, Li, Shen, & Wang, 2005). Among the intriguing questions to the researchers as well as the practitioners are: Does supply chain coordination process or specifically procurement process coordination really work in the construction industry? Which activities in the process are most important and relevant? What are the enablers to the successful procurement process coordination?

The present study attempts to answer these three crucial questions apart from other questions and to relate it to the building construction industry. The focus is given to the procurement process of building materials between the contractors and their main suppliers. Although the term procurement encompasses a wide range of activities which comprises procuring of equipment, materials, labour and services required for construction and the implementation of project, the present study applies the term in the limited context of building materials. The following sub-topics will justify and position this research effort in accordance to the needs of a scientific research.

Problem Statement

As been discussed in the background of the study, previous efforts have been made to further explore on the area of supply chain coordination (SCC). One of the issues which require attention is with regards to the enabler of SCC. From the theoretical aspect, it demonstrates that most studies related to SCC adopt technical or information technology (IT) approach as the enabler to SCC (Hossain, 2009; Li & Wang, 2007; Vickery, Jayaram, Droge, & Calantone, 2003; Zhao, Xie, & J, 2002). In many cases, SCC is perceived as a technological challenge rather than managerial challenge (Arshinder, Kanda, & Deshmukh, 2008). Consequently this might limit the understanding on the concept of SCC and ultimately would restrict the linkage between SCC and potential variables or enablers such as marketing resources. As pointed out by Power (2008), knowledge transfer between firms in the supply chain is mainly effective when enabled by collaboration practice rather than just technological capability.

This limitation however, not to include study carried out by Agan (2005) who employed a combination of IT and marketing resources constructs as the enablers in his study of supply chain process integration. Unfortunately, his study has limit marketing resources to market orientation alone. Similar case applies to a study that was carried out by Chen (2007) in which customer orientation was the only enabler employed for supply chain process integration. Thus, such action curbs the true picture of marketing resources as prescribed by Hooley, Greenley, Cadogan, & Fahy (2005); Srivastava & Fahey (1999) and Srivastava, Fahey, & Christnsen (2001). To fill the gap, the present study extended the model used by (Hooley et. al. 2005) in portraying the concept and component of marketing resources, which it is perceived to be more holistic and pragmatic. Hence better result to the enhancement of body of knowledge is expected.

Perhaps another way to express the above point is by looking at the linkage between marketing resources and performance. Although research on marketing resources has devoted on examining the impact of this construct on firm performance (Hooley, Greenley, Cadogan, & Fahy, 2005; Luo, Sivakumar, & Liu, 2005; Milfelner, Gabrijan, & Snoj, 2008), there is still room for improvement to the enhancement of this effect. Previous literature revealed that there is lack of studies on marketing resources that strived to link this construct to SCM particularly in relation to procurement process coordination. Most studies used direct approach by linking these resources with firm performance (Hooley et. al., 2005; Milfelner et. al., 2008) and neglecting the potential mediating impact of PPC. A review of related empirical studies shows that there is a need to examine the mediating of marketing resources – performance link. This will provide some explanations of the mixed results of the correlation between performance and key resources variables. For instance, in the case of market orientation, the association between market orientation and performance was found to be mixed. It was found to be positive in Deshpande, Farley, & Webster (2000) and Lin & Germain (2003), negative result in other studies (Narver & Slater, 1990; Voss & Voss, 2000) and no significant result in a few additional studies (Han, Kim, & Srivastava, 1998; Kohli & Jaworski, 1990; Matear, Garrett, & Gray, 2004).

As for other variables of marketing resources such as entrepreneurial orientation, innovative capability and market sensing capabilities appear inconclusive and show mixed results on their impact on the performance (Dess, Lumpkin, & Covin, 1997; Li & Atuahene-Gima, 2001; Luo et. al., 2005; Murray, Kotabe, & Wildt, 1995). Hence, the overall mixed results of the influence of individual variables in marketing resources on firm performance propose the need for a contingency perspective to advance the marketing resources framework and Resource Based View (RBV) (Luo et. al., 2005). In other words, this suggests that the individual effect of marketing resources variables on firm performance might not be direct and universal. Rather, it might depend by the way in which business processes are conducted such as the procurement process. Moreover, this present study argued that superior firm performance is likely to be attained through the capability of procurement process coordination. In this sense, procurement process coordination plays the role as a mediating factor in the link between marketing resources and firm performance.

The above argument is further strengthened by the fact that resources such as marketing assets and capabilities must be absorbed, transformed and leveraged as part of organisational process in order to be converted to solution that customers’ want and eventually generate value for the organisation (Srivastava & Fahey 1999; Srivastava et. al., 2001). For instance, in this study, procurement process is an example of an organisational process and in fact marketing resources play significant roles within this process (Lehman, 1997). Therefore, failure to link supply chain processes into corporate strategic goals has been recognised as one of the main weaknesses in marketing management and the execution of corporate strategies (Tamas, 2000).

Though the percept that marketing resources facilitate the furtherance of firm performance has already gained recognition, the manner in which to go about implementing this process remains fuzzy. Thus, this study offers a fresh insight to this problem by looking at the multiple mediator effects of procurement process coordination (PPC) on marketing resources – firm performance link. It contributes to the development of knowledge by detailing the activities involved in the procurement process instead of to test it in general setting. Additionally, factors that could mediate the relationships were also taken into account in this present investigation. Questions whether procurement process coordination (PPC) mediates the relationship between marketing resources and firm performance, which part of PPC affects performance, which is more important, require to be answered. Hence, this will help to bridge the knowledge gap. On top of that, from the perspective of construction scholars, interdisciplinary research agenda and the adoption of multiple theoretical approaches for integration effort such as the RBV and Coordination Theory could offer comprehensive understanding of the construction industry supply chain (Vrijhoef, Koskela, & Voordijk, 2003; O’ Brien, London, & Vrijhoef, 2002). Therefore, the current study that stresses on organisational relation approach is carried out in order to address the gap.

From the point view of the industry, areas such as administration procedure, procurement methods and contracting approaches are examples of those areas that are considered critical (Construction Industry Master Plan Malaysia 2006-2015, 2007). In order to address such key concerns, seven strategic thrusts have been developed by CIDB Malaysia where the first and main thrust is to integrate the construction industry value chain. The idea is to inject greater dynamism into the construction industry and enable it to enhance productivity. “Best practices” has been cited as the key elements for success with cooperation and coordination play a critical role (Construction Industry Master Plan Malaysia 2006-2015, 2007).

In other related studies, Vrijhoef, Koskela, & Howell (2001) and Vrijhoef & Lauri (1999) draw attention to the waste and problems in the construction supply chain due to the interdependency largely interrelated with causes in other stages of supply chain. Such problems normally lead to construction delays which eventually incur additional cost (Sambasivan & Soon 2007). This scenario is depicted in Figure 1.2. It can be seen that problems in the construction supply chain take place in various stages of the supply chain processes which involves various participants of channel members particularly the constructor and the suppliers. Problem 5, 6 & 8 for instance warrant for effective supply chain organisational relationship between the materials suppliers and the contractors in order to cope with inaccurate and insufficient inputs needed at various stages of supply chain.

Client

Design

Engineering

Occupation

Completion of Building

Site

Purchasing & Preparation

Subcontractors

Suppliers

1

2

3

4

5

6

7

8

9

10

11

Problem 1: Difficulties finding out client’s wishes; Changes of client wishes; Long procedure to discuss changes

Problem 2: Incorrect documents; Design changes; Extended wait for architect’s approval of design changes

Problem 3: Inaccurate data; Engineering drawings not fit for use

Problem 4 & 5: Inaccurate data; Information needs are not met; Adversarial bargaining; Order changes

Problem 6 & 7: Deliveries not according to planning; Wrong and defective deliveries; long storage period; Awkward packing; Large shipments

Problem 8: Inaccurate data; Information needs are not met; Unrealistic planning

Problem 9: Subcontracted work not delivered to main design, contract & planning

Problem 10: Problematic completion due to quality problems

Problem 11: Unresolved quality problems; Delayed occupation due to late completion

Figure 1.2 Generic Problems in the Construction Process

(Source: Vrijhoef et al., 2001)

To complement the above description, a comparative study with other industries, conducted by (Daneshgari & Harbin, 2003) revealed that advances in non-construction industries in the area of procurement and business management have improved the national productivity by 3.9% per year from 1996-2000. Adversely, the construction industry indicates a negative sign of 1% and this scenario takes place arguably due to inefficient practices in the procurement chain management system. In line with this, a study carried out by Dainty & Brooke (2004) had shown that the most effective measures for minimising waste in the construction sector are those which seek to develop alliances with suppliers. These arguments grant some indications that those players in this industry, such as the contractor and the building materials supplier particularly, require a collective know-how of coordination efforts in synchronising the interdependence processes which may lead to organisational learning.

Although several empirical studies in other industries such as manufacturing and retailing have shown that there is a positive relationship between procurement collaboration and coordination with performance (Power, 2008; Arshinder, Kanda, & Deshmukh, 2006; Agan, 2005), research into this body of knowledge in the construction industry is found to be dearth. As mentioned by Fisher (2009), in his working paper, there is a wide agreement over the benefits of partnering or collaboration as a useful project procurement strategy, but this perspective is somewhat weakened by a lack of rigorous, verifiable evidence to support the claims that are made. Thus it is essential to carry out studies in this area of procurement coordination mainly in the context of construction industry.

In view of the fact that this current study investigates the procurement process coordination between the contractor and his building materials suppliers, it is crucial to understand the cost involved in a project building. The cost of building materials account for 50% – 60% of the total building costs while other costs such as labour contribute 30%, heavy equipment – 5% and construction management and supervision accounts for 15% (Bertelsen & Nielsen, 1997). Thus, there is a need to focus on the subject of building materials procurement since it appears to have significant cost cutting opportunities. Ironically, some studies in the construction industry explained that these resources (building materials) are not sufficiently managed as compared to what have been practiced in the manufacturing sector for instance (Bertelsen & Nielsen, 1997; Bertelsen S., 1993). This insufficiency leads to waste of bad material management with time and cost overrun. Hence, in order to deal with this problem it has been suggested that there should be a close cooperation between the supply chain members (e.g. contractor, building materials supplier, designer, etc.) in managing the chain (Bertelsen & Nielsen, 1997; Bertelsen S., 1993; Manavazhi & Adhikari, 2002; Sambasivan & Soon, 2007). Thus, the present study that looks into the coordination aspect between the contractor and his main building materials suppliers allows greater room for understanding in this field of supply chain management. Furthermore, that it lends a hand to the enhancement of the integration of SCM with marketing as well construction management fields. By linking the three critical constructs (marketing resources, PPC and firm performance), the current study will help to explain the potential implication of the linkage in a more coherent and integrated approach particularly in the context of construction supply chain.

Research Objectives

The research aims to establish a linkage between marketing resources, procurement process coordination (PPC) and firm performance dimensions in the context of the building construction industry.

Aligned with the general aim of the research, the following objectives of the research were underlined:

To confirm the relationship between marketing resources and firm performance

To examine the relationship between marketing resources and procurement process coordination

To ascertain the relationship between procurement process coordination and firm performance

To test the mediation effect of procurement process coordination on marketing resources and firm performance

To investigate the extent of procurement process coordination dimensions mediate the relationship between marketing resources and firm performance

To propose a structural model on related constructs (marketing resources, supply chain coordination and performance), that based on Resource Based Theory and Coordination Theory, from the context of Malaysian construction industry.

Research Questions

Do marketing resources influence firm performance?

Do marketing resources influence procurement process coordination?

Does procurement process coordination influence firm performance?

Does procurement process coordination mediate the effect of marketing resources on firm performance?

What are the extent of the mediation effect of procurement process coordination dimensions on the relationship between marketing resources and firm performance?

Scope of Study

The purpose of this study is to ascertain the link between marketing resources, procurement process coordination (PPC) and firm performance in the building construction industry.

Although the scope of supply chain management (SCM) process is considered wide as it encompasses the entire process of supply chain (SC) such as distribution, production and procurement, this study will only concentrate on the procurement process alone. Even so, this approach is taken because it consists of several activities that require in-depth treatment. Thus, emphasising on a particular process of SCM would help to generate better understanding on an important area and serve to the development of the entire SCM process.

Apart from that, this particular study will only take into account the relationship between two main players in the construction supply chain, which is the contractor and his building materials suppliers. Further, the research will only look from the perspective of the contractor from the G7 group with value of project worth RM10 million and above (CIDB-Local Contractors, 2009). As of the conceptual point of view, there are debates on data collection about buyer-seller relationship from the standpoint of supplier, buyer or both. Nevertheless, it is usually the customer or buyer (contractor) that eventually makes the choice of whether to purchase from the suppliers. Hence, even if the suppliers and buyer have different views regarding relationships, it is the customer’s view that is likely to be determinant (Cannon & Perreault JR, 1999).

With regard to the industry coverage, this particular study focus on a specific industry, that is construction. This industry is crucial as it plays a significant role in generating wealth and improving the quality of life for the nation through its largest multiplier effects (1.62) to the economy and provides room for other industries (Construction Industry Master Plan Malaysia 2006-2015). Furthermore, with a lion of share went to this industry through the injection of (RM7 billion and RM16 billion – first and second stimulus rescue package) by the government in resuscitating the recent economic turmoil, this signifies the noteworthiness of this industry to the development of gross domestic product (GDP) for the nation (Malaysian Economic Stimulus Package 2009-2010). Therefore, it permits for further treatment.

Significance of the Study

The conceptualisation of a new construct (procurement process coordination) that leads to an empirical study.

The current study contributes to the new knowledge by detailing the activities involved in procurement process of building construction industry instead of testing it in a general setting. Thus, it allows greater understanding of the effect of each activity in the PPC particularly in building construction industry.

As mentioned in the problem statement, most studies that focus on supply chain coordination mainly relate this construct to the information system approach in addressing the link. This study contributes to new body of knowledge by linking marketing resources to a new construct namely procurement process coordination (PPC) with firm performance

This study moves into a new direction rather than applying the SCC to the conventional setting such as in the manufacturing context. The application of SCC in the construction industry serves another input for greater generalization of the concept. Apart from that, the result from the study would provide some response to the challenges face the construction industry supply chain.

From the theory perspective, this study lends a hand to the integration of two theories, specifically the Resource Based View Theory and Coordination Theory in the area of supplier relationship management.

The proposed model from this study which has been tested and validated will have significant implications for business practitioners, mainly the contractors. It helps the practitioners to identify several capabilities that could be adopted and invested more through PPC and marketing resources variables in enhancing a firm’s operational and customer performance.

Organisation of the Thesis

This thesis is organised into six chapters, with the initial flow by the introductory chapter, followed by the chapter of construction industry, literature review, and subsequently a chapter on research design and methodology. Next chapter is on data analysis and discussion of research result, and last but not least chapter on conclusion and implications. Below are the brief discussions of each chapter.

Chapter one introduces this thesis by first highlighting the background. Apart from that, it provides inputs on the problem of research motivation, research objectives, research questions, scope of study as well as the significance of the study.

Chapter two highlights the background of the industry. The discussion on this topic begins with a general approach by looking into the worldwide construction industry performance and problems. From here, the discussion was narrowing into the Malaysian construction scenario. Further discussion is on the nature of the construction industry, followed by the sub-topic on construction supply chain which apparently leads to the central issue in this study.

The third chapter examines past studies on several pertinent areas. These include discussion on related theories and those constructs used in this study: Resources Based View and Coordination Theory, marketing resources, procurement process coordination and firm performance. Additionally, it shed some light on the relationships among these constructs which eventually lead to the generation of the research framework and propositions of the study.

Chapter four lays down the research design and methodology used in this study. It embraces topics such as: the research design, measurement of constructs, sampling and data collection techniques as well as data analysis approach. Apart from that, the hypotheses of the study are presented in this chapter in addition to the research framework.

Chapter five presents the analysis and interpretation of data. This chapter is segregated into several essential sub-topics which initially looking into the goodness fit of the data and eventually interpreting the results. Along with are: the response rate, normality and linearity test, factor analysis, reliability and validity test, the analysis of the structural model and h