The Relationship Between Supply Chain and Firm Performance

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The current issue and full text archive of this journal is available at www.emeraldinsight.com/0960-0035.htm

IJPDLM 41,2

The relationships between supply chain and firm performance The development and testing of a unified proxy
Mark Johnson and Simon Templar
Cranfield School of Management, Cranfield, UK
Abstract
Purpose – Supply chains directly influence the differentiation and cost of a firm’s products and services and its exposure to risk. The purpose of this paper is to use secondary financial data to explore the relationship between supply chain and firm performance by developing a unified proxy for supply chain performance. Design/methodology/approach – Established econometric techniques were used to validate the proxy using a sample frame comprising the annual reports of 117 publicly traded UK manufacturing firms from the period 1995 to 2004. Findings – Increases in change in the proxy lead to an increase in change in the rate of return on capital employed and a change in the rate of cash-to-cash cycle length, both of which are traditional measures of improved supply chain management. Moreover, as the rate of change of the proxy increases, so does enterprise value at a level that is statistically significant, indicating that improving supply chain management practices has a positive impact upon improved firm performance. Research limitations/implications – As annual financial results were used the analysis is at a high level so there is a lack of resolution in identifying discrete causes. The use of annual financial results also means that the research can only take yearly snapshots of firm performance. Practical implications – The paper indicates that the supply chain is an enabler, not an impediment, to superior organisational performance. Originality/value – The originality and value of this paper is that it develops a proxy to explain the relationships between supply chain and an organisation’s financial performance taking into account the three imperatives of profitability, liquidity, and productivity. Keywords United Kingdom, Supply chain management, Financial performance, Manufacturing industries Paper type Research paper

88
Received December 2007 Revised October 2009 Accepted November 2009

1. Introduction LaLonde (2000, p. 11) argued that the supply chain management community needed to address an important disconnect between supply chain decisions and financial investment outcomes. Moreover, Ellram and Liu (2002, p. 30) stress that: [. . .] supply chain managers need to be able to quantify that broader impact; and then convey that message upward so that top management better understands how purchasing and supply management can contribute to company success. International Journal of Physical Distribution & Logistics Management Vol. 41 No. 2, 2011 pp. 88-103 q Emerald Group Publishing Limited 0960-0035 DOI 10.1108/09600031111118512

The authors would like to thank the Editors and the two anonymous referees for providing clear guidance to us in strengthening this paper. The authors would also like to thank PA Consulting Group for funding the research and especially to Graham Stevens and Sanjay Chawla for their intellectual input.

While the links between supply chain and firm performance are logical, it has proven difficult to determine them empirically (Frohlich and Westbrook, 2001). This paper aims to contribute to the debate by determining the financial impacts of the supply chain on firm performance by developing a proxy to assess the consequences of improved supply chain management on firm performance. The remainder of the paper is structured as follows. In the next section, we review the literature related to supply chain management and its financial imperatives, we then discuss corporate and supply chain strategy and its links to financial performance. Following this, we discuss prior research that has attempted to link supply chain and firm performance. We then go on to construct the proxy, empirically test...
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