The Moderating Effect of Organizational Performance

on the Relationship between Supply Chain

Management and Performance : An Empirical
Analysis of Manufacturing Industry
C. Ganesh Kumar1 and T. Nambirajan2

ABSTRACT
The purpose of this research is to explore the relationship between supply chain
management and performance of manufacturing enterprises. Data collection
instrument used in this research work is structured questionnaire which was
administrated to random sample of 255 executives working in Union Territory of
Puducherry manufacturing industries. Collected data were analyzed using cluster,
confirmatory factor and path analysis and it also involved statistical methods such as
reliability and validity tests. The finding shows that supply chain management has a
significant relationship with supply chain performance statically and supply chain
performance is a strong predictor of organizational performance of manufacturing
industries.

Keywords: Supply chain management, Organizational performance clusters,

manufacturing enterprises.

1. Department of Management Studies,

School of Management,
Pondicherry University,
Puducherry- 605014, INDIA
Mobile: +91-97861-47867
E-Mail ID: gcganeshkumar@gmail.com

2. Department of Management Studies,

School of Management,
Pondicherry University,
Puducherry- 605014, INDIA
Mobile: +91-94433-84550
E-Mail ID: rtnambirajan@gmail.com
24 SURVEY, Vol. 54, Nos. 3 & 4, 2014

1. INTRODUCTION
Supply chain has become an important focus of competitive advantage for
organization business. The management of supply chain study emphasizes how to
maximize the overall value of the firm by better using and deployment of resources
across the whole of the firm. A supply chain is the set of values adding activities
connecting the enterprise’s suppliers and its customers. The firms, which were
enjoying the protection of covens of the Indian license raj system prior to liberalization,
are now subject to cut-throat competition from both the local and global players.
The frontiers of market for the firms are far expanding and the business environment
is changing at a rapid pace. This has inculcated a spirit of competitiveness among
the Indian firms. These firms, though enjoy the privilege of operating at the global
level, are subject to various challenges, which bring in numerous problems which
are intrinsic and typical to the Indian context. Though the firms are subject to problems
which are indianised in nature, Indianised solutions to these problems are far from
being realized. One important challenge confronting the Indian firms relates to supply
chain management (SCM), and the nature, scope, problems and opportunities
associated with the SCM with an Indianised context (Shah, 2009). The nature,
scope, opportunities and challenges of SCM relevant to Indian scenario constitute
the motivation of the proposed research work.
The globalised scenario has led to the evolution of sophisticated technologies which
has led to innovative business practices. This has warranted much stronger
collaborations between the suppliers, manufacturers and the third party logistics
providers. Consequently, SCM has evolved itself into an effective tool, immensely
contributing to the perpetual success of the industries. Suppliers in the current
scenario are not merely deemed as silent vendors, catering to the needs of their
customers as and when such need arises. Instead, present day suppliers have
taken the role of being strategic partners with their client companies, having a
strategic alliance with such companies. Consequentially, the long term competencies
of such companies have witnessed a drastic enhancement. Such a prototype
change in pattern has caused a drastic modification in the mind frame of the Indian
industrialists. This has consequentially resulted in the formation of a knowledge
chasm. This phenomenon merits detailed and in depth research to derive a well
coordinated and integrated approach involving the entities of supply chain. The purpose
of this study to find out the effect of supply chain management such as concerns,
competence and practices on supply chain performance and in turn on the
organizational performance of manufacturing industries by measuring moderating
effects of organizational performance clusters. The paper is organized as follows.
Relevant literature is reviewed and synthesized first to develop a conceptual model,
followed by research methodology. The results are then presented along with debated,
conclusion and implications of this research work are discussed finally
2. LITERATURE REVIEW
Bayraktar et al (2009) have empirically study the causal effect of information systems
and SCM on operational performance through primary data collected using
questionnaire, 203 samples from manufacturing industries located in Turkey and
conceptual model tested using Structural Equation Model (SEM). Result shows
that supply chain practices have positive impact on operational performance and
The Moderating Effect of Organizational Performance on The Relationship 25

moderating relationship of SCM information systems on SCM practices and

operational performance and Chow et al(2008) have study the impact of supply
chain management components on business performance through data collected
by perceptions of middle-line executives who is working in US and Taiwan
manufacturing Industries on SC components and organizational performance
variables and proposed model was tested using SEM and the result infer that supply
chain competencies have positive impact on business performance, supply chain
practices have effect on business performance and supply chain practices and
competencies are associated in manufacturing industries located in both US and
Taiwan.
Gubi et al (2003) have reviewed the 75 doctoral theses on logistics and supply
chain management from 1990 to 2001 through classified 75 doctoral thesis based
on main themes and suggested for further research and result shows that in the
early hour’s dissertations studied on internal organizational prospective and research
trend is moves to supply chain networks and suggested to improve time frame,
scope, focus on methods and theories and outline various research approaches
and Gunasekaran et al (2004) have developed a model to enhance the understanding
of the SCM performance measurement through empirical study using questionnaire
and data were collected from the companies located in British. Result shows that
Innovative attempts are required to develop new metrics and to evaluate the
performance of the firm as a whole and also should evaluate the performance of
each of the firm’ entity in the supply chain and Huo (2012) has investigated the
effect of supply chain integration on organizational capability and performance
through the sample collected from 617 companies located in China and tested the
conceptual model using SEM. Concluded that supply chain integration having direct
and indirect effect on organizational capability and supply chain integration act as
mediating effect on organizational performance and Koh et al (2007) have studied
the effect of supply chain management practice on performance of SMEs in Turkey
by data gathered using a self-administered questionnaire from the manufacturing
sectors located in Turkey. Finding depicts that high levels of SCM practices have
an impact on functional performance and business performance.
The conceptual framework underlying this study is shown in Figure 1.

Note: * CON – supply chain concerns, COM-supply chain competence, PRA-supply chain practices,
PER-Performance, H-Hypothesis
26 SURVEY, Vol. 54, Nos. 3 & 4, 2014

Koh et al (2006) have explored the SCM and ERP systems integration to create
supply chain competitive by a case study method is adopted among paper based
industry in china and primary data collected through interview method from the
executives of the company. Finding depicts that company should avoid decentralised
policy and company should introduce supply chain integration plan for cost reduction,
improve responsiveness and efficiency of supply chain and Lin et al (2005) provide
new insight on the growth and emergence of the SCM emergence of the SCM
through survey of SCM educators. Finding depicts that SCM is a relatively novel
phenomenon with imprecise boundaries so need for more case study type research
than surveys type research. Lee et al (2011) have investigated the relationship
between supply chain innovation and organizational performance through a research
model was examined using SEM through sample of 243 hospitals in South Korea.
Result shows that organizational performance is significantly and positively
associated with SC innovation and Li et al (2006) have tested the effect of supply
chain management practices on competitive advantage and organizational
performance by instrument development and purification process of supply chain
practices and tested hypotheses using SEM framework. Finding shows that firm
with high supply chain practices has significantly impact of competitive advantage
and organizational performance.
3. RESEARCH METHODOLOGY
The research design of the proposed research work is causal in nature. The research
work has been conducted mainly based on primary data. Primary data relating to
supply chain concerns, competence, practices, performance and organizational
performance have been collected from executives of manufacturing firms. The data
collection instrument used for this research is a well structured questionnaire. The
sample population for this study consists of the manufacturing firms located in the
Union Territory of Puducherry including Pondicherry, Karaikal, Mahe and Yanam.
The list of manufacturing enterprises operating in different districts was collected
from Department of Industry and commerce and Department of statistics of
Government of Puducherry, India. This list was taken as sample frame of this study.
The total population size was 8364, Sampling technique adopted in this research
work is simple random sampling method, and the sample size for the study was
255 manufacturing firms. The sample size of the study have been determined using
this formula no = Z2ó2/e2 (Israel, G.D., 1992) where Z=1.96 that is abscissa of the
normal curve that cuts off, ó = 8.12 denotes highest variance level of an attribute in
the questionnaire, it was calculated from the pilot study data, e = 1 denotes desired
level of precision in the five point scale questionnaire. The variables needed for the
questionnaire was generated through the literature review, and pre-pilot study was
conducted to test the content validity of the questionnaire by administering it to
subject experts and necessary suggestions were incorporated. The results are
represented in tabular and figurative forms and the statistical tools used in this
research work are cluster analysis and PLS (Partial Least Square) structural equation
modeling (SEM) and software package used to estimate SEM is Smart PLS 3.0
and SPSS 16.
4. RESULTS AND DISCUSSION
The data analysis testing the proposed relationships illustrated in Fig. 1 was
The Moderating Effect of Organizational Performance on The Relationship 27

conducted at three stages. In the first stage, k-mean cluster analysis was performed
to determine the segmentation of manufacturing firms based on organizational
performance variable, Second stage involved testing of the measurement models
for each convergent, discriminate validity and reliability and in the final stage, we
measured the path model and tested the relationships between the path constructs.
These stages were discussed in more detail in the following subsections.
4.1 Segmentation of Manufacturing Units Based on Organizational
Performance
Cluster Analysis has been employed to group manufacturing units studied into
clusters based on their resemblance to the two factors of financial performance and
marketing performance. The Final cluster centers have been displayed in Table 1.

Table 1 Final Cluster Centers

Organizational Performance Cluster
1 2
Financial Performance 2.65(II) 3.74(I)
Marketing Performance 2.69(II) 3.79(I)
Average 2.67 3.77

Based on the data displayed in the above table, manufacturing enterprises have
been clustered into two groups. The first cluster may be designated as “Average
performance organization group” as the mean value of the components of this cluster
is moderately low when compared to the other cluster. The second cluster can be
labeled as “High Performance organization group” as the mean value indicating the
organisational performance of the components of this group hover around the four
mark, which is high in the five point scale.
The ANOVA values in respect of the three clusters of manufacturing enterprises
regarding the two organizational performance factors have been shown in Table 2.

Table 2 ANOVA
Organizational Cluster Error
Performance Mean Mean F Sig.
Square df Square df
Financial Performance 76.528 1 0.299 253 256.064 0.000
Marketing Performance 77.953 1 0.311 253 250.800 0.000

The ANOVA values suggest that the two organizational performance factors play a
significant role in bifurcating the manufacturing units into three clusters. The mean
values of these three groups of manufacturing enterprises in respect of organizational
performance factors differ significantly. A brief description of the two clusters of
“Average Performance Units” and “High Performance Units” have been discussed in
the forthcoming sections.
28 SURVEY, Vol. 54, Nos. 3 & 4, 2014

4.1.1 Average Performance Units

The organizational performance level of manufacturing units comprising of this group
is moderate. The mean values in respect of financial and marketing performance of
manufacturing firms comprising this group hover around the three mark in the five
point scale, which suggest that the performance level of this group of units is quite
moderate. A shade over half of the manufacturing units surveyed (128 out of 255)
constitute this group. This shows that 50% of the manufacturing units are “Average
Performance Units”.
4.1.2 High Performance Units
The mean in respect of the manufacturing units comprising this segment regarding
the two performance factors is 3.77. As the mean value hover around the four mark
in five point scale, which is quite high, this group of manufacturing firms have been
classified as “High performance group”. This group of manufacturing units exhibit
high level of financial and marketing efficiency. Almost 50 percent of the manufacturing
units constitute this group. The number of manufacturing firms constituting each
cluster is displayed in Table 3.

Table 3: Number of Cases in each Cluster

1 128 50%
Cluster
2 127 50%
Valid 255 100%

The above table displays the number of manufacturing units present in each cluster.
It is worthy to note that both the groups consist of almost identical number of
manufacturing units.
4.2 Confirmatory Factor Analysis (CFA)
The test of the measurement model includes the estimation of the internal
consistency and the convergent and discriminant validity of the instrument items.
The composite reliability of a block of indicators measuring a construct was assessed
with three measures - the composite reliability measure of internal consistency,
Cronbach’s alpha and average variance extracted (AVE). The internal consistency
measure is similar to Cronbach’s alpha as a measure of internal consistency except
the latter presumes, a priori, that each indicator of a construct contributes equally
(i.e. the loadings are set to unity). Cronbach’s alpha assumes parallel measures,
and represents a lower bound of composite reliability (Fornell and Larcker, 1981).
All reliability measures were above the recommended level of 0.60 (Table 5), thus
indicating adequate internal consistency (Nunnally et al., 1967). The AVE scores
were also above the minimum threshold of 0.5 (Chin, 1998) and ranged from 0.50 to
0.65 (see Table 5). When AVE is greater than 0.50, the variance shared with a
construct and its measures is greater than error. This level was achieved for all of
the model constructs. Convergent validity is demonstrated when items load highly
(loading .0.50) on their associated factors. Measures are also considered to have
adequate discriminant validity if the square root of the average variance extracted
The Moderating Effect of Organizational Performance on The Relationship 29

Table 4 Factor loading of high and average organizational performance

firms
Average organizational High organizational
Constructs performance firms performance
Factor Loadings firms Factor Loadings

Supply Chain Concerns 0.48-0.75 0.45-0.87

Supply Chain Competence 0.47-0.69 0.43-0.69
Supply chain Practices 0.44-0.78 0.46-0.69
Supply Chain Performance 0.57-0.71 0.51-0.68
Organizational Performance 0.48-0.74 0.48-0.73

Table 5 Reliability and Validity analysis for high and average

organizational performance Firms
Constructs Average organizational High organizational
Performance firms performance firms
AVE Composite R Cronbach’s Composite R Cronbach’s
reliability square alpha AVE reliability square alpha
Supply Chain 0.50 0.84 0.79 0.52 0.76 0.67
competence
Supply Chain 0.55 0.69 0.65 0.51 0.75 0.65
concerns
Organizational 0.53 0.70 0.34 0.67 0.51 0.73 0.22 0.61
Performance
Supply Chain 0.55 0.79 0.26 0.70 0.61 0.78 0.27 0.65
Performance
Supply Chain 0.65 0.82 0.76 0.64 0.75 0.58
Practices

(AVE) for each construct is larger than the correlation between the construct and
any other construct in the model. All constructs in the estimated model fulfilled this
condition (see Table 6). Overall, the revised measurement model results provided
support for the reliability, and convergent and discriminant validities of the measures
used in the research work.
4.3 Path Analysis
Partial Least Square (PLS) makes no distributional assumptions in its parameter
estimation procedure, traditional parameter-based techniques for significance testing
and model evaluation are considered to be inappropriate (Chin, 1998). LISREL and
other covariance structure analysis modeling approaches involve parameter estimation
procedures, which seek to reproduce as closely as possible the observed covariance
matrix. In contrast, PLS has its primary objective the minimization of error in all
endogenous constructs and the structural model was evaluated using the R-square
30 SURVEY, Vol. 54, Nos. 3 & 4, 2014

Table 6 Discriminate Validity for High and Average organizational

performance Firms
Constructs Average Supply chain High Supply chain
Concerns firms Concerns firms
AVE 1 2 3 4 5 AVE 1 2 3 4 5
Supply Chain 0.50 0.71 0.52 0.72
competence
Supply Chain 0.55 0.24 0.74 0.51 0.07 0.71
concerns
Organizational 0.53 0.24 0.42 0.73 0.51 0.32 0.21 0.71
Performance
Supply Chain 0.55 0.39 0.25 0.29 0.74 0.61 0.42 0.29 0.44 0.78
Performance
Supply Chain 0.65 0.41 0.17 0.11 0.45 0.81 0.64 0.43 0.25 0.51 0.36 0.8
Practices

for the dependent constructs and the size, t-statistics and significance level of the
structural path coefficients. The results of the structural model are summarized in
Table 6. It shows that the structural model explains 26 percent of the variance in the
supply chain performance constructs and 34 percent of the variance in the
organizational performance construct.
4.3.1 Causal Model for average organizational performance manufacturing
firms
H1, H5, H6 and H7 are not supported. From the three supply chain management
component-related variables, two are significantly related to supply chain performance
and in the hypothesized direction. The results show that supply chain concerns
exert a positive influence on the organizational performance of manufacturing
industries. Thus, H2, H3 and H4 are confirmed.
High organizational performance manufacturing industries result shows that 27
percent of the variance in the supply chain performance constructs and 32 percent
of the variance in the organizational performance construct is explained by critical
supply chain management components. Of the three supply chain management
component-related variables, one is significantly related to supply chain performance
and in the hypothesized direction. Two of the three critical components of supply
chain management have significant and positive relationship on the organizational
performance of manufacturing industries. Thus, H1, H2, and H6 are confirmed
significantly related to organizational performance and in the hypothesized direction.
The supply chain practices do not have a significant effect on the supply chain
performance of manufacturing industries. Therefore H3 cannot be supported. The
structural model results also reveal that supply chain performance has significant
and positive relationship on the organizational performance of manufacturing
industries so H7 is supported.
The Moderating Effect of Organizational Performance on The Relationship 31
4.3.2 Casual Model for High organizational performance manufacturing firms
32
SURVEY, Vol. 54, Nos. 3 & 4, 2014
The Moderating Effect of Organizational Performance on The Relationship 33

Table 6 Path analysis results of high and average organizational

performance firms
Path Average organizational High organizational
performance firm performance firm
)
Beta coefficient ( t-Value )
Beta coefficienct( t-Value

COM -> OP 0.11 0.70 0.04 0.36

COM -> PER 0.21 2.01 0.33 4.03
CON -> OP 0.36 3.24 0.03 0.23
CON -> PER 0.14 1.13 0.22 2.36
PER -> OP 0.19 1.27 0.27 2.46
PRA -> OP -0.08 0.73 0.39 4.55
PRA -> PER 0.34 4.00 0.16 1.38
*p <0.01, **p <0.05

5. CONCLUSIONS AND IMPLICATIONS

This research work has empirically tested a framework identifying the relationships
among SCM and organizational performance drawing on a sample of 255
manufacturing firms operating within Union Territory of Puducherry, India. K-mean
cluster analysis was used to segment the manufacturing firms into average and
high performance manufacturing enterprises. Using PLS method of structural equation
modeling, testing the hypotheses relationships between supply chain components
like concerns, practices and competence influence on the supply chain performance
and organizational performance of high and moderate organizational performance of
manufacturing firms. The results shows that 26 percent of the variance in the supply
chain performance constructs and 34 percent of the variance in the organizational
performance constructs are explained by supply chain management components.
These findings tend to corroborate our conceptual model and offer a number of
managerial implications. First, managers should identify critical supply chain
components affect their firm’ performance based on the overall organizational
performance level of manufacturing firms. Firms that are endowed with resources to
urgently improve SCM components could expect a much significant improvement
on their supply chain performance in return organizational performance. Hence,
manufacturing firms concentrating on improving their supply chain concerns,
competence and practices can significantly improve their performance as the former
impacts the latter indirectly through their impact on supply chain performance.

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