Int. J. Production Economics 135 (2012) 514–522

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Int. J. Production Economics

0925-52

doi:10.1

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jan.olha

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Supply chain integration and performance: The effects of long-termrelationships, information technology and sharing, and logistics integration

Daniel Prajogo a,n, Jan Olhager b

a Department of Management, Monash University, PO Box 197, VIC 3141, Australiab Department of Management and Engineering, Linkoping University, Sweden

a r t i c l e i n f o

Article history:

Received 6 July 2010

Accepted 1 September 2011Available online 10 September 2011

Keywords:

Supply chain integration

Logistics integration

Information integration

Performance

73/$ - see front matter & 2011 Elsevier B.V. A

016/j.ijpe.2011.09.001

esponding author. Tel.: þ61 3 9903 2030; fax

ail addresses: daniel.prajogo@buseco.monash

ger@liu.se (J. Olhager).

a b s t r a c t

Supply chain integration is widely considered by both practitioners and researchers a vital contributor

to supply chain performance. The two key flows in such relationships are material and information.

Previous studies have addressed information integration and material (logistics) integration in separate

studies. In this paper, we investigate the integrations of both information and material flows between

supply chain partners and their effect on operational performance. Specifically, we examine the role of

long-term supplier relationship as the driver of the integration. Using data from 232 Australian firms,

we find that logistics integration has a significant effect on operations performance. Information

technology capabilities and information sharing both have significant effects on logistics integration.

Furthermore, long-term supplier relationships have both direct and indirect significant effects on

performance; the indirect effect via the effect on information integration and logistics integration.

& 2011 Elsevier B.V. All rights reserved.

1. Introduction

Most concepts of supply chain integration explicitly recognizethe existence of two flows through the chain; there is a flow ofgoods and an equally important flow of information (Fisher, 1997;Huang et al., 2002; Pagell, 2004; Power, 2005). Supply chainintegration must comprise both information and material, andcannot restrict itself to only one. Higher levels of integration arecharacterized by increased logistics-related communication, greatercoordination of the firm’s logistics activities with those of itssuppliers and customers, and more blurred organizational distinc-tions between the logistics activities of the firm and those of itssuppliers and customers (Stock et al., 2000). Coordination, collabora-tion, and cooperation are often used more of less interchangeably fordescribing integrative efforts among partners to improve the overallefficiency of the supply chain (Holweg et al., 2005; Matopoulos et al.,2007; Singh and Power, 2009), such as collaborative planning,forecasting and replenishment, CPFR (Danese, 2006).

Logistics integration refers to specific logistics practices andoperational activities that coordinate the flow of materials fromsuppliers to customers throughout the value stream (Stock et al.,2000). Logistics provides industrial firms with time and spaceutilities, by providing the necessary quantity of goods in the right

ll rights reserved.

: þ61 3 9903 2718.

.edu.au (D. Prajogo),

place at the right time (La Londe, 1983; Caputo and Mininno,1998). Grounded on earlier research, the theoretical construct oflogistic integration is derived to include the seamless integrationof the logistics function of the various supply chain partners(Stock et al., 1998, 2000; Childerhouse and Towill, 2003).

Information integration refers to the sharing of key informa-tion along the supply chain network which is enabled byinformation technology (IT). One of the main purposes of infor-mation integration is to achieve real-time transmission andprocessing of information required for supply chain decisionmaking. Lee et al. (2000) show that information sharing can leadto lower cost through reductions in inventories and shortages.However, in order to realize this value, changes in the logisticssystem are required, such as Vendor-Managed Inventory (VMI)programs, lead time reductions, order quantity reductions, andmore frequent deliveries (see for example, Selldin and Olhager,2007; Claassen et al., 2008).

In the light of supply chain integration concept, logistics andinformation integration originally reflect two interrelated forms ofintegration which flow in opposite directions (i.e. forward andbackward, respectively). Forward integration is concerned with thephysical flows of materials from suppliers to manufacturers whichwe refer to logistics integration. On the other hand, backwardintegration is concerned with the coordination of informationtechnologies and the flows of information from manufacturers tosuppliers.

Frohlich and Westbrook (2001) modeled supply chain integrationin terms of both information and material using eight items

D. Prajogo, J. Olhager / Int. J. Production Economics 135 (2012) 514–522 515

concerning IT, information sharing as well as logistics integration.They found that wider scope of integration had a positive associationwith performance improvement. However, since the items werecombined into a single construct, they were unable to identify anyrelationship between information integration and logistics integra-tion. Based on a study of five pairs of suppliers and retailers inTaiwan, Sheu et al. (2006) proposed a conceptual relationship model,including long-term relationship, supply chain architecture (includinge.g. information sharing and IT capabilities), supplier–retailer colla-boration, and performance. They concluded that better IT capabilitiesas well as better communication contribute to a better platform forboth parties to engage in supply chain coordination, participation, andproblem-solving activities. Zhou and Benton (2007), studied the effectof information sharing on supply chain practice; the latter captured asa construct including elements of planning, production, and deliverypractice. They found that information sharing significantly impactssupply chain practice, and a significant effect of delivery practices ondelivery performance. The study by Li et al. (2009) found that ITcapabilities and information sharing had a significant effect on supplychain integration of logistics systems, and indirectly on performance.No direct effect on performance by IT implementation was noted.

In this paper we investigate the relationships among informa-tion integration, logistics integration, long term relationships, andthe effects on performance. We use constructs developed andverified by Chen and Paulraj (2004). We review the relationshipsand present the hypotheses. Then, the survey methodology andresults are presented. Finally, the implications for managers andresearchers are discussed. The novel aspect of this research is thatthe variables have not been studied in this context before. To thebest of our knowledge, this is the first study to include all of thesevariables.

2. Theoretical background and hypotheses

In this section, we first explain the notion of logistics integrationand its impact on competitive performance. We then discuss therole of supply chain information integration – both IT and informa-tion sharing – in supporting the material flow integration. Thirdly,the long term relationship with suppliers is discussed as an ante-cedent of supply chain information management and its potentialdirect impact on performance. Subsequently, we develop ourresearch hypotheses linking long term relationship with suppliers,information integration, logistics integration, and performance.

2.1. Logistics integration

The increasing competition has driven firms to not onlyimprove their internal operations (such as process control andinventory management), but also focus on integrating theirsuppliers and customers into the overall value chain processes.The contribution of suppliers in delivering values to customers,hence, building competitive capabilities (quality, delivery, flex-ibility, and cost) has been well recognized. The essence of logisticsintegration is well-coordinated flow of materials from supplierswhich allow firms to have a smooth production process (Frohlichand Westbrook, 2001). Such coordination produces a seamlessconnection between firms and suppliers in such a way that theboundary of activities between the two parties is getting blurred(Stock et al., 1998, 2000). It has been well argued that having solidlogistics integration will reduce various problems, such as thebullwhip effect (Lee et al., 1997; Geary et al., 2006). Integratedlogistics also allow firms to adopt lean production systems whichare characterized by reliable order cycles and inventory reduction(Cagliano et al., 2006; Schonberger, 2007). By and large, logisticsintegration allows companies and their supply chain partners to

act as a single entity which would result in improved perfor-mance throughout the chain (Tan et al., 1998). In other words,through logistics integration, firms can have the potential benefitsof vertical integration (quality, dependability, planning and con-trol, and lower costs) without having it in the physical sense (LaLonde and Masters, 1994). Improved logistics integration betweensupply chain partners yields a number of operational benefits,including reduction in costs (Nooteboom, 1992), lead time (Liuet al., 2005), and risks (Clemons et al., 1993) as well as improve-ment in sales, distribution, customer services, and service levels(Seidmann and Sundararajan, 1997) and customer satisfaction(Kim, 2009).

The majority of empirical surveys on supply chain integrationreport a positive relationship between integration and performance(Van der Vaart and van Donk, 2008). De Toni and Nassimbeni (1999)found that better performing plants exhibit a higher level oflogistical interactions, Frohlich and Westbrook (2001) found thatthe widest arcs of integration had the strongest association withperformance improvement, Sheu et al. (2006) found that higherlevels of collaboration result in operational efficiency in the supplychain system, and finally Li et al. (2009) found that supply chainintegration is significantly related to supply chain performance.Thus, we can formulate our first hypotheses:

H1. Logistics integration has a positive relationship with opera-tional performance.

2.2. Supply chain information integration

As Frohlich and Westbrook (2001) suggested, the material flowfrom upstream to the downstream supply chain entities must besupported by the information flow from downstream toupstream. Based on five case studies of dyads (supplier–retailer),Sheu et al. (2006) found that better IT capabilities as well as bettercommunication contribute to a better platform for both parties toengage in coordination, participation, and problem-solving activ-ities. Thus, both information technology and information sharingcan be viewed as antecedents to material flow integration.

Our review of the literature concerning the topics related tosupply chain information integration suggest two major aspects:the technical aspects (information technology connection), andthe social aspects (information sharing and trust). For example, anumber of studies (Narasimhan and Kim, 2001; Frohlich, 2002;Gunasekaran and Ngai, 2004; Devaraj et al., 2007; Sanders, 2007)focused on the importance of adopting e-business technologies asa means for information integration. The other group of studies(Yu et al., 2001; Narasimhan and Nair, 2005; Carr and Kaynak,2007; Zhou and Benton, 2007; Li and Zhang, 2008; Sezen, 2008)focused on the importance of information sharing and commu-nication between firms and suppliers. It is the notion of this paperthat both aspects of information integration are important. Overreliance on technology without willingness to share the criticalinformation pertaining to supply chain will not make the firmsmeaningfully connected; thus, failing to produce logistics inte-gration. Only firms that are capable of building both the technicaland social aspects of information integration will see the max-imum benefits of logistics integration (Chae et al., 2005; Fiala,2005; Fawcett et al., 2007). Each of the two aspects of informationintegration is discussed below.

2.2.1. Information technology

Information (and communication) technology plays a central rolein supply chain management in the following aspects. First, IT allowsfirms to increase the volume and complexity of information whichneeds to be communicated with their trading partners. Second, ITallows firms to provide real-time supply chain information, including

D. Prajogo, J. Olhager / Int. J. Production Economics 135 (2012) 514–522516

inventory level, delivery status, and production planning and sche-duling which enables firms to manage and control its supply chainactivities. Third, IT also facilitates the alignment of forecasting andscheduling of operations between firms and suppliers, allowingbetter inter-firms coordination. As such, the problems in coordinatingsupply chain activities which often are hindered by time and spatialdistance can be reduced (Paulraj and Chen, 2007). The use of IT insupply chain has received considerable attention with varioustechnologies being introduced for Business-To-Business (B2B) com-munication, including web internet, B2B private (Ethernet), and EPOS(Electronic Point of Sale). Studies have shown that effective ITconnection improves the integration between supply chain partnersin terms of material flows (Soliman and Youssef, 2001). In this regard,IT supports key processes in supply chains, including sourcing,procurement, and order fulfillment (Kehoe and Boughton, 2001;Swaminathan and Tayur, 2003). Accordingly, we hypothesize:

H2. The intensity of information technology connection betweenfirms and their suppliers has a positive relationship with logisticsintegration.

2.2.2. Information sharing

While the technological aspect of information integration isimportant, it is the frequency, the quantity and the quality ofinformation that is shared that really matters. According toFawcett et al. (2007), large investments in IT could fail to produceexpected benefits if it is not supported by willingness to shareneeded information. Information sharing requires firms toexchange strategic supply chain information and not only trans-actional data, such as materials or product orders. The strategicsupply chain information provides leverages to the supply chainpartner for making strategic decision in their operations (Li et al.,2006). For example, point of sale history helps suppliers tosuccessfully forecast demand which subsequently improves ser-vice level and efficiency to their customers. Similarly, real-timeinventory position helps suppliers to plan their replenishmentand delivery schedules; thus, improving service levels and redu-cing inventory costs (Seidmann and Sundararajan, 1997). Suchlevel of information sharing requires frequent and intense com-munication between firms and suppliers. The intensity of com-munication constitutes high levels of cooperative behaviorbetween supply chain partners which leads to high degree andsymmetry of strategic-information flows between them (Kleinet al., 2007). A number of studies have demonstrated variouslogistics benefits of having information sharing with supply chainpartners concerning inventory management (Cachon and Fisher,2000; Lee et al., 2000; Yu et al., 2001; Zhao et al., 2002), agilityand flexibility (Swafford et al., 2008), and the bullwhip effect(Dejonckheere et al., 2004). For example, Vendor-Managed Inven-tory (VMI) integration with suppliers has been shown to reducethe bullwhip effect (Disney and Towill, 2003). As such, wehypothesize:

H3. The intensity of information sharing between firms and theirsuppliers has a positive relationship with logistics integration.

2.3. Long term relationships

The ways firms relate with suppliers have changed considerably.Given that manufacturing firms are getting more and more focusedon their core competence, their reliance on strategic supplierincreases (Prahalad and Hamel, 1990). Among the changes, threekey aspects of supplier relationships are highlighted here. First, thetrend now is to build a long-term relationship with suppliers ratherthan short-term contracts (Helper, 1991; Ogden, 2006). Second, inconjunction with the first point, firms now use fewer suppliers overa longer period of time rather than keeping a large base of suppliers

which allow them to change suppliers for almost every contract. Thebenefits of having low price resulted from creating competitionamong suppliers are now changed into low total cost of ownershipdue to long-term and large volume of purchases (Helper, 1991).Third, the relationship with suppliers has been enhanced intostrategic level where suppliers are now considered as the integralpart of the firm’s operations (Choi and Hartley, 1996; Kotabe et al.,2003; Chen and Paulraj, 2004). This change has led to variousavenues of collaboration, including joint improvement program,early supplier integration in product design, and profit and risksharing. One aspect of strategic supplier relationship is extendedlongevity. Long-term relationships have several implications, andone of them is that firms may be ready for putting large investmentsin building the relationship, including IT and information sharing(De Toni and Nassimbeni, 1999). Klein et al. (2007) found that thegreater the mutual trust, the greater the IT customization, and thegreater the strategic information flows. Sheu et al. (2006) found thatlong-term orientation affects supply chain architecture, whichincludes IT capabilities and information sharing. Paulraj et al.(2008) found a significant relationship between long term relation-ship with suppliers and information sharing. We can thus formulatethe following two related hypotheses:

H4. Long term relationship with suppliers has a positive relation-ship with information technology connection between firms andtheir suppliers.

H5. Long term relationship with suppliers has a positive relation-ship with information sharing between firms and their suppliers.

Chen and Paulraj (2004) modeled a long-term relationship as apotential antecedent of buyer performance. Vickery et al. (2003)suggested that long-term relationships can result in improvedfirm performance, and De Toni and Nassimbeni (1999) found thatbetter performing plants exhibit a better use of long-term supplyagreements with sources. Similarly, Singh and Power (2009)found that effective supplier collaboration has a direct effect onfirms’ competitive performance. With this, we arrive at our finalhypothesis:

H6. The long term relationship with suppliers has a positiverelationship with performance.

3. Research framework

The research model is shown in Fig. 1. The six hypothesesbuild up the model, linking long term relationships, informationintegration, logistics integration, and performance. Overall, themodel captures the three principal elements of an integratedsupply chain suggested by Handfield and Nichols (1999), namelyinformation flow, product and material flows, and long termrelationships between supply chain partners.

Our model is different from those in previous studies withseveral respects. Sheu et al. (2006) studied five pairs of suppliersand retailers in Taiwan. Based on their main findings, theydeveloped a conceptual relationship model. The model includeslong-term relationship, supply chain architecture (incl. e.g. infor-mation sharing and IT capabilities), supplier–retailer collabora-tion, and performance. Thus, their proposed theoretical modelcontains similar elements as our research model. There are twokey differences, though, in that we differentiate between IT andinformation sharing (while they consider them jointly to be part of asupply chain architecture construct), and we allow for a direct effectof long term supplier relationships on performance. Different toFawcett et al. (2007), we propose that IT connection and informationsharing are antecedents of logistics integration, and not directlyrelated to operational performance. In order to achieve higher levels

Long term relationship

Information technology

Information sharing

Logistics integration Performance

H6

Information integration

H5

H4

H3

H2

H1

Fig. 1. Research framework.

D. Prajogo, J. Olhager / Int. J. Production Economics 135 (2012) 514–522 517

of performance, the information dimension of integration must betransferred to the physical materials integration. In other words,both information and materials flow must be integrated in order toreach higher levels of performance. Using data drawn from 182Chinese companies, Li et al. (2009) investigated the relationshipamong IT implementation, supply chain integration, and supplychain performance. Our study expands their model by incorporatingstrategic relationships with suppliers as a potential antecedent of ITimplementation as well as adding the social aspects of informationintegration (i.e. information sharing) to provide a more comprehen-sive framework.

In summary, our research framework provides contribution tothe knowledge in three ways. First, it tests the link betweeninformation flow and material flow in supply chain. Second, ittests the technological and social aspects of information integra-tion. Third, it integrates previous studies on the topic andprovides a comprehensive framework on the driver (long-termrelationship) and enabler (information integration) of logisticsintegration and its effect on performance.

4. Methods

4.1. Sample and procedures

The data for this study was drawn from managers of Australianmanufacturing firms via a mail survey that was conductedbetween end of 2008 and early 2009. The list of the respondentswas randomly selected and purchased from a mailing list com-pany. In total, 1800 surveys were mailed out, and 232 usableresponses were received; hence, the response rate is 13.1%. Thedata were checked for bias using correlations of responsesbetween early respondents and late respondents based on indus-try sectors and organizational size. The chi-square tests on bothcategories did not indicate any significant difference between thetwo groups of respondents.

The dataset used in this study has also been used in two otherstudies (Olhager and Prajogo, 2012; Prajogo et al., 2011). Olhagerand Prajogo (2012) analyse differences between two productionsystems (Make-To-Stock versus Make-To-Order) with regard tothe role of supply chain management practices in enhancingbusiness performance. Prajogo et al. (2011) examine the uniqueeffects of different supplier management practices on differentaspects of operational performance. Each paper includes logisticsintegration as a key variable but considers it in a differentresearch framework, accompanied by different variables relevantto the specific purpose of the study.

In terms of industry sectors, 16% of the respondents came fromelectronic/electrical, 25% from machinery, 8% from automotive,11% from chemical, 4% from food processing, 7% from construc-tion, and 12% from other manufacturing sectors. The remainingsectors identified as ‘‘others’’ included medical equipment, wood,

printing and paper, defense. In terms of organizational size (basedon the number of employees), 46% of the respondents came fromfirms with less than 100 employees, 35% of the firms havebetween 100 and 500 employees, and the remainder 19% of therespondents came from large manufacturing with over 500employees. We also identified the process type of the sampledfirms following Hayes and Wheelwright’s (1979) classification.32% of the firms used assembly line, 27% batch, 3% cellular, 20%job shop, and the rest 18% project.

In terms of the position of the respondents, nearly half of therespondents (45%) held a position as operations managers, 27%supply chain/logistics managers, 18% procurement/purchasing,and 3% customer services managers.

4.2. Measures

Most items used to build the scales in this study were adaptedfrom the study by Chen and Paulraj (2004) to ensure their contentvalidity. A 7-point Likert scale was used to provide responses. Forlong term relationship, information technology, information shar-ing, and logistics integration, the scales ranged from 1 (stronglydisagree) to 7 (strongly agree). We retained the original constructnames, except for information sharing which Chen and Paulraj(2004) originally labeled as communication. We excluded oneitem from the original scale of Logistics Integration (i.e. ‘‘Informa-tion and materials flow smoothly between our suppliers and us’’)for the reason that the item includes both information andmaterials flow which contrasts to our framework which not onlydistinguishes them but also examines their relationships. Themeasure for operational performance comprises four key compe-titive dimensions in operations, namely quality, delivery, flex-ibility, and cost. In this regard, the respondents were asked toassess their performance relative to the best competitor in themarket with the scale ranging from 1 (weakest in the industry) to7 (strongest in the industry). The items used in this study can befound in Table 1.

5. Data analysis

5.1. Scale validity and reliability

We used confirmatory factor analysis to simultaneously validatethe measures of all variables used in this study. The results of theconfirmatory factor analysis and the Cronbach’s alpha are presentedin Table 1. The items loaded significantly on their respectiveconstructs. The item loadings and the overall model fit resultssuggest acceptable unidimensionality and convergent validity forthe measures (Carmines and McIver, 1981; Bollen, 1989; Bagozziet al., 1991; Hoskisson et al., 1993). Cronbach’s alphas suggestsatisfactory reliability of the five constructs (Nunnally, 1978).

Table 1Scale validity and reliability.

Scales Items LoadingPaths

Cronbach’salpha

Long term relationship We expect our relationship with key suppliers to last a long time 0.71 0.88

We collaborate with key suppliers to improve their quality in the long run 0.79

The suppliers see our relationship as a long-term alliance 0.87

We view our suppliers as an extension of our company 0.86

Information technology There are direct computer-to-computer links with key suppliers 0.76 0.87

Inter-organizational coordination is achieved using electronic links 0.91

We use information technology-enabled transaction processing 0.85

We have electronic mailing capabilities with our key suppliers 0.50

We use electronic transfer of purchase orders, invoices, and/or funds 0.55

We use advanced information systems to track and/or expedite shipments 0.62

Information sharing

(communication)

We share sensitive information (financial, production, design, research, and/or

competition)

0.64 0.84

Suppliers are provided with any information that might help them 0.75

Exchange of information takes place frequently, informally, and/or timely 0.84

We keep each other informed about events or changes that may affect the other party 0.77

We have frequent face-to-face planning/communication with our suppliers 0.60

Logistics integration Inter-organizational logistic activities are closely coordinated. 0.76 0.93

Our logistics activities are well integrated with suppliers’ logistics activities 0.89

We have a seamless integration of logistics activities with our key suppliers 0.89

Our logistics integration is characterized by excellent distribution, transportation,

and/or warehousing facilities

0.85

The inbound and outbound distribution of goods with our suppliers is well integrated 0.77

Performance Performance of our final products 0.48 0.64

Speed of deliveries 0.52

Volume or capacity flexibility 0.62

Degree of product variety 0.54

Production costs 0.47

w2¼397.26, df¼260, RMSEA¼0.048, NFI¼0.936, NNFI¼0.970, CFI¼0.974.

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The slightly lower than standard acceptable value of Cron-bach’s alpha for performance (o0.7) is interpreted such thatperformance is indeed composed of multiple dimensions orelements. Such disparate measures as quality, delivery, flexibility,and cost performance contributed to this construct, and this couldsuggest that some firms (often) specialize or focus to excel in onlya subset of these performance dimensions.

5.2. Common method variance and discriminant validity

We used Harman’s single-factor test to check for commonmethod variance (Podsakoff and Organ, 1986). This test wasconducted using principal component analysis and loading all26 items on one factor. The test checks if one single factor wouldemerge from factor analysis, which would point towards thepresence of common method bias. The factor analysis indicatedthat less than 25% variance was extracted and that half of theitems suffered from poor factor loadings, well below 0.5. Theseresults suggest that common method variance was not a sig-nificant problem in the data set.

As an additional check, we conducted discriminant validityanalysis to examine if the explanatory and the dependent constructssignificantly overlap each other. As suggested by Venkatraman(1989), discriminant validity was established by conducting Con-firmatory Factor Analysis (CFA) on each pair of the constructs in thisstudy. For each pair, CFA was conducted twice. The first CFA allowedthe correlation between the two constructs to be freely estimated.The chi-square value of this model was estimated. In the second CFAthe correlation between the two constructs was fixed to 1.0, and thechi-square value of this model was estimated. If the differencebetween the chi-squares obtained from the first and second CFA (i.e.Dw2) is greater than the chi-square value at the degree of freedom of1 and significance level of po0.01 (i.e. 6.64), this provides a

reasonable evidence of discriminant validity of the constructs(Ahire et al. 1996). With five constructs incorporated in this study,we conducted ten chi-square tests. The values of Dw2 for all testsconfirm the discriminant validity of the constructs and lend furtherevidence towards the lack of common method variance.

5.3. Structural model

We present the results of the structural equation model (SEM)in Fig. 2. The ratio of w2 (497.14) to degrees of freedom (309) isless than the recommended value of 3.0 for satisfactory fit of amodel to data (Carmines and McIver, 1981; Bollen, 1989; Hairet al., 1998). In line with the prescriptions (Mulaik et al., 1989),the fit indices (NFI¼0.923; NNFI¼0.963; CFI¼0.967) and theRoot Mean Square Error of Approximation (RMSEA¼0.051 with90% confidence interval 0.043–0.060) are deemed acceptable. Weincluded organizational size (in terms of number of employees)and process type (ranging from assembly line to project) ascontrol variables for operational performance and found nosignificant effect on operational performance (�0.00 and �0.08,respectively, both with p40.05).

The results of the six hypotheses are outlined below.

H1: Logistics integration has a positive relationship withperformance. This hypothesis is supported, as the parameterestimate (0.26) is significant.H2: The intensity of information technology connectionbetween firms and their suppliers has a positive relationshipwith logistics integration. This hypothesis is supported, as theparameter estimate (0.38) is significant.H3: The intensity of communication between firms and theirsuppliers has a positive relationship with logistics integration.

χ2 = 497.14 df = 309 RMSEA = 0.052 NFI = 0.923 NNFI = 0.963 CFI = 0.967

0.26*

Information integration

0.53*

0.25*

0.39*

0.38*0.26*Long term

relationship

Informationtechnology

Informationsharing

Logisticsintegration

Performance

* The path is significant at the 0.01 level.

Fig. 2. Results of path analysis.

D. Prajogo, J. Olhager / Int. J. Production Economics 135 (2012) 514–522 519

This hypothesis is supported, as the parameter estimate (0.39)is significant.H4: Long term relationship with suppliers has a positiverelationship with information technology connection betweenfirms and their suppliers. This hypothesis is supported, as theparameter estimate (0.25) is significant.H5: Long term relationship with suppliers has a positiverelationship with communication between firms and theirsuppliers. This hypothesis is supported, as the parameterestimate (0.53) is significant.H6: Long term relationship with suppliers has a positiverelationship with performance. This hypothesis is supported,as the parameter estimate (0.26) is significant.

5.4. Competing structural model

For a confirmatory purpose, we tested a competing model byadding three paths which were not estimated in the tested model;namely long term relationship-logistics integration, informationtechnology-performance, and information sharing-performance.The fitness indices (w2

¼492.63, df¼306; NFI¼0.923; NNFI¼0.963;CFI¼0.968 and the RMSEA¼0.052) suggests that there is nosignificant improvement on the original model. This is indicatedby the increasing ratio between the chi-square and degree offreedom. Moreover, the three added paths in the competing modelwere found to be non-significant at 5% level, confirming our a priori

model which did not include them.

6. Discussion of the findings and their implications

This study contributes to the research stream on logisticsintegration by investigating the relationships between long termrelationships, information integration, logistics integration, andcompetitive performance. In general, the results of this researchprovide empirical evidence that effective external logistics inte-gration is engendered by long term relationships and informationintegration. Specifically, this study contributes to supply chainstudies with the following respects.

First, it demonstrates that the integration of material flowneeds to be underpinned by information integration. In this way,the supply chain (material flows from suppliers) will be neatlyguided by the demand chain (information flows from customers).This finding is consistent with previous studies which suggestedthat the key to building a seamless supply chain is by establishingdata and information connection at the supply chain interface. Byintegrating the supply chain information, supply chain partners

can virtually work as a single entity which will enable themtogether to respond to market’s demands and to create best valuefor customers. The importance of having material and informationintegration has provided both opportunities and challenges forbusiness firms today. The increasing rate of competition, custo-mer expectations, and market’s dynamic has increased the supplychain uncertainty which poses greater risks for companies. Inaddition, operational activities have become more fragmented asfirms get more focused on the core competence and relinquish thenon-core activities to their suppliers whose locations could begeographically dispersed. This trend calls for the need for buildinga solid integration mechanism between business entities ofthe supply chain members underpinned by accurate and timelyinformation.

Second, this study also highlights the need for observing thetwo aspects of information integration which have beenaddressed separately in previous studies on supply chain. Ourfindings indicate that both IT capabilities and information sharinghave a relatively similar effect on logistics integration, signifyingtheir equal importance. The balance between technical andattitudinal aspects of supply chain information managementhighlights the integration between hard and soft aspects ofmanagement. This issue is important since many firms areprimarily attracted by the hard factors which are relatively easyto acquire (as long as the firm has funds) and feel confident thathard technologies will deliver the expected results. Studies onsupply chain integration, however, have shown that the softaspects (i.e. building good communication and trust for informa-tion sharing) of information integration are the areas where manyfirms still struggle (Arshinder and Deshmukh, 2008). Furtheranalysis from our data indicate a low correlation (r¼0.17 atpo0.05) between IT and information sharing, suggesting thatthe improvement of one will not automatically and significantlyimprove the other. This result suggests that firms cannot assumethat because they are technically connected, they are also sociallyconnected. Management need to build both aspects before theycan see the real benefits derived from supply chain informationintegration.

Third, this study demonstrates that long term supply chainrelationships help foster collaborative behaviors which are trans-lated into various forms, including information integration. Asmentioned earlier, information integration cannot be achievedunless the relationship between supply chain partners goesbeyond trading (transactional) relationships. The risk of puttinghuge investment in IT and sharing sensitive information is aserious hindrance which can only be taken when firms have astrategic and long-term relationship. At the same time, the

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effective use of information integration is also determined by howwell firms understand the exchanged information, and this canonly be achieved through a learning process over a long period oftime. Cagliano et al. (2005) found that the level of the use ofinformation technologies and sharing information in supplychains was determined by the level of strategic relationshipbetween supply chain partners. This relationship determineswhether the information connection (e.g. e-business) is usedsimply for tactical (contingent) or strategic purpose. The otherissue related to supplier relationship is that establishing long-term partnership indicates that both supply chain parties havedeveloped mutual trust aiming for achieving mutual benefitsfrom their relationships. Such mutual benefits have been instru-mental in determining the effects of information integration asshown in a number of studies (see for example, Ballou et al., 2000;Lambert and Cooper, 2000).

Fourth, the study also demonstrates the direct effect of longterm relationships on competitive performance which is notmediated by information integration and logistics integration.Such practice as joint quality improvement program is one of theexamples which contribute to supply chain performance. Thisfinding reinforces the importance of network capability in addi-tion to internal capability of firms. According to the relationalview theory (Dyer and Singh, 1998), firms need to complementtheir internal capabilities with other capabilities which theycannot build internally in order to achieve competitive advantage.The effective way to access and exploit such capabilities is bybuilding strong and long-term relationships with their supplypartners who own them. This finding therefore suggests thatwhile supply chain integration in terms of both information andmaterials are important parts of the overall relationship withsuppliers, they alone will not maximize the benefits which firmscan derive from the suppliers.

7. Limitations and further research

A number of limitations of the current study can be noted, aswell as some directions for future research. Any study is limitedto the factors that are included. We included factors identified inthe literature on supply chain integration, capturing informationflow, product and material flows, and long term relationshipsbetween supply chain partners as suggested by Handfield andNichols (1999). While studying the integration of information andmaterial flows between supply chain partners and noting sig-nificant effects on performance, other factors not included in thisstudy may exist that may have a positive impact on performance.We controlled for firm size and industry, which had no significanteffect in this study. However, future research may want to controlfor other effects that may be present in other situations, e.g.between manufacturers of consumer goods and industrial goods.

In the light of supply chain integration concept, logistics andinformation integration originally reflect two interrelated forms ofintegration which flow in opposite directions (i.e. forward andbackward, respectively). Forward integration is concerned with thephysical flows of materials from suppliers to manufacturers whichwe refer to logistics integration. On the other hand, backwardintegration is concerned with the coordination of informationtechnologies and the flows of information from manufacturers tosuppliers.

As clarified from the beginning, this study assumes thatinformation and material flow in opposite directions withinsupply chain pipeline with material having forward flow whileinformation having backward flow. However, today the flows ofboth information and material have expanded into both direc-tions. The development of the concept of reverse logistics denotes

that the material flow is now going back backward as usedfinished goods are delivered from the point of consumption tothe point of origin for possible recycling, remanufacturing, ordisposal (Sarkis, 2003). In supporting the reverse logistics, theflow of information also needs to go forward as manufacturersneed to provide clear product information to make recyclingprocesses easier when the product’ s life ends (Ferguson andBrowne, 2001). Future studies can explore the bi-directional flowsof material and information which may need a different model ofsupply chain integration.

A limitation of this study is the sample population, which isrestricted to Australian firms. Although we expect these results tohold for supply chains in general, we cannot claim that this is thecase. Therefore, future research may extend this study to a broaderpopulation of firms, including other countries, for generalizability ofthe results and to detect potential country effects. Also, in this studywe rely on the perception of the focal firm on the relationships. Itwould be beneficial to investigate multiple parties of supply chainrelationships to hear ‘‘both sides of the story’’ concerning issues ofreciprocity and mutual effects.

8. Conclusions

This study shows that both information and material flowintegration are important for supply chain integration, havingsignificant effects on performance. At the same time, supply chainintegration is a difficult task as it involves many managementaspects in terms of both ‘‘hard’’ and ‘‘soft’’ information exchangemechanisms in support of the logistics integration activities con-cerning the physical material flow between the two parties. Suchcomplex issues can only be managed where there is a long termrelationship between supply chain partners. This study, therefore,reinforces the importance of building long term relationships withsuppliers which have been promoted since the emergence of thequality management era. All in all, competitive performance ispositively affected by all constructs included in this study; eitherdirectly or indirectly. This suggests that the integration of supplychain partners is multi-faceted, and that many competencies actcomplementary to achieve a higher level of performance.

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