International Journal of Logistics Research and

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Competitive advantage impacts of direct

procurement management capabilities and Web-
based direct procurement system

Yi-Ming Tai

To cite this article: Yi-Ming Tai (2013) Competitive advantage impacts of direct procurement
management capabilities and Web-based direct procurement system, International Journal of
Logistics Research and Applications, 16:3, 193-208, DOI: 10.1080/13675567.2013.811481

To link to this article: https://doi.org/10.1080/13675567.2013.811481

Published online: 25 Jun 2013.

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International Journal of Logistics: Research and Applications, 2013
Vol. 16, No. 3, 193–208, http://dx.doi.org/10.1080/13675567.2013.811481

Competitive advantage impacts of direct procurement

management capabilities and Web-based direct
procurement system
Yi-Ming Tai*
Department of Information Management, National Pingtung Institute of Commerce, Pingtung,
Taiwan, ROC

(Received 15 June 2011; final version received 30 May 2013)

This study adopts a resource-based view to investigate the impact of direct procurement management
capabilities and information technology (IT) capabilities derived from Web-based direct procurement
systems on competitive advantage. A sample of 128 manufacturing firms in Taiwan with an experience
of participating in government-subsidised e-business development projects is surveyed, with resulting
data subject to partial least squares analysis to investigate main and interaction effects. The results show
that, as hypothesised, process efficiency capability and coordination capability contribute significantly to
competitive advantage, but IT capabilities derived from Web-based direct procurement systems per se
are not significantly associated with competitive advantage. However, IT capabilities are found to play
important roles in reinforcing direct procurement management capabilities.

Keywords: direct procurement management capabilities; IT capabilities derived from Web-based direct
procurement systems; competitive advantage

1. Introduction

Procurement is an essential function of any manufacturing firm encompassing all activities

involved in obtaining goods and services (Davila, Gupta, and Palmer 2003; Moon 2005). In
the broadest sense, the enterprise-level procurement can be subdivided into indirect procurement
and direct procurement (Presutti 2003; Chaffey 2004; Subramaniam and Shaw 2004). Indirect
procurement addresses goods that are not part of a manufacturing firm’s finished product, but
rather support the firm’s internal business activities. This study is concerned with direct procure-
ment, which addresses the raw materials, components and sub-assemblies (i.e. production inputs
or direct goods) that are used in the manufacturing process of a finished product. Previous studies
have argued that a firm’s ability to effectively manage its direct procurement plays a critical role
in determining its competitive advantage (Ordanini and Rubera 2008; Tai, Ho, and Wu 2010).
To create competitive advantage, previous studies have suggested a wide range of goals for
managing direct procurement (Subramaniam and Shaw 2004; Fearon and Philip 2005; Saeed,
Malhortra, and Grover 2005; Craighead et al. 2006; Wagner and Essig 2006; Harrigan et al. 2008;
Lawson et al. 2009). While these previous studies have suggested appropriate goals for direct

*Email: ymtai@npic.edu.tw

© 2013 Taylor & Francis

194 Y.-M. Tai

procurement management, less attention has been placed on understanding which capabilities
should be developed to ensure the effective management of direct procurement and the ways
through which such direct procurement management capabilities affect competitive advantage
(Tai, Ho, and Wu 2010). Hence, the first research objective of this study is to investigate which
capabilities are required for the successful direct procurement management and how such direct
procurement management capabilities impact competitive advantage.
With the development of lower cost public network infrastructures, a number of Web-based
information technologies (ITs) solutions have emerged to allow firms to conduct business-to-
business (B2B) transactions more effectively (Kim and Segev 2005; Li et al. 2006; Chen, Zhang,
and Zhou 2007). Web-based IT solutions have been applied in direct procurement with high expec-
tations (Croom 2005; Ash and Burn 2006; Tai, Ho, and Wu 2010). While previous studies have
engaged in developing Web-based IT solutions to improve firms’ competitive advantage through
supporting direct procurement management, less attention have been placed on understanding how
IT capabilities of Web-based direct procurement systems shape the role of a firm’s direct procure-
ment management capabilities in improving its competitive advantage. Hence, this study’s second
research objective is to investigate how IT capabilities of Web-based direct procurement systems
increases the impact of direct procurement management capabilities on competitive advantage.
Accomplishing these research objects requires a theoretical framework capable of providing
insight into the relationships between a firm’s direct procurement management capabilities, com-
petitive advantage and IT capabilities of Web-based direct procurement systems. Consequently,
we have developed a conceptual model, grounded in the resource-based view (RBV), to investi-
gate the impact of direct procurement management capabilities on competitive advantage while
considering the complementary effects of IT capabilities of Web-based direct procurement sys-
tems. The RBV has been employed by researchers to investigate the effects of IT capabilities
and management capabilities in specific processes (e.g. marketing, production and finance) on
competitive advantage (Park, Mezias, and Song 2004; Ravichandran and Lertwongsatien 2005;
Ray, Muhanna, and Barney 2005; Ordanini and Rubera 2008). Hence, this study suggests that the
RBV may help to explain the roles of direct procurement management capabilities and Web-based
direct procurement systems in improving competitive advantage.
The rest of the paper is organised as follows. We begin by discussing the rationale of the RBV
and capabilities required for effectively managing direct procurement. We then discuss Web-
enabled direct procurement management capabilities. Next, we present the research model and
hypotheses, followed by methodology and results of hypothesis testing. The paper concludes by
discussing the theoretical and practical implications of this study and offering suggestions for
future research.

2. Theoretical background

2.1. Rationale of the RBV

This study is grounded in the RBV, a basic framework for understanding the conditions under
which firms are able to gain sustained competitive advantage and for explaining why different firms
in the same industry have different levels of performance over time (Wernerfelt 1984; Leonard-
Barton 1992). The fundamental principle of the RBV is that the basis for a firm’s competitive
advantage lies primarily in the application of the unique combination of valuable resources at the
firm’s disposal (Robins and Wiersema 1995; Miller and Shamsie 1996). A firm’s resources consist
of all assets, both tangible and intangible, that permit the firm to devise and apply value-enhancing
strategies. The RBV is based on two underlying assertions, that of resource heterogeneity and
of resource immobility, which are connected to sustained competitive advantage through the
 International Journal of Logistics: Research and Applications 195

proposition that, if a firm possesses a resource that is valuable and otherwise unavailable to other
competing firms, that resource can be a source of competitive advantage.
While resources serve as the basic unit for analysing firms’ competitive advantage, previous
studies tend to employ business capability to analyse a firm’s competitive advantage (Park, Mezias,
and Song 2004; Ravichandran and Lertwongsatien 2005; Ray, Muhanna, and Barney 2005).
Business capabilities are rooted in business processes and can be regarded as complex bundles
of skills and accumulated knowledge which enable the activities in a business process to be
carried out (Espino-Rodríguez and Padrón-Robaina 2006; Ordanini and Rubera 2008; Moon
2010). Moreover, in considering the complementarity between different business capabilities,
previous studies in RBV also suggested that a business capability can sometimes be much more
valuable when combined with other business capabilities (Zhu 2004). The results of combining
different capabilities allow firms to exploit their resources more effectively and enable them to
develop sustained competitive advantage with an increased protection from imitation.
Researchers in the field of information management have suggested that information sys-
tems are, by themselves, typically imitable (Park, Mezias, and Song 2004; Ravichandran and
Lertwongsatien 2005). If one firm can adopt an information system to support its business pro-
cesses, then other firms should also be able to implement a similar information system and
thus, such an information system would not be a source of competitive advantage (Carr 2003).
However, even though firms may possess identical information systems, they can obtain com-
petitive advantages from exploiting that information system differently from their competitors
(Zhu 2004; Ray, Muhanna, and Barney 2005; Espino-Rodríguez and Padrón-Robaina 2006).
Information systems rarely contribute directly to competitive advantage. Rather, information sys-
tems can be employed as complementary assets in enhancing management capabilities that may
lead to increased competitive advantage (Melville, Kraemer, and Gurbaxani 2004; Ordanini and
Rubera 2008).

2.2. Capabilities for effectively managing direct procurement

Following the RBV principles, previous studies have suggested that the starting point for
identifying capabilities required for conducting a business process is to understand the pur-
pose the process is expected to achieve (Ray, Muhanna, and Barney 2005; Espino-Rodríguez
and Padrón-Robaina 2006; Ordanini and Rubera 2008). Direct procurement addresses com-
ponents that are used in the manufacturing process of a finished product, which tend to be
firm-specific (Fearon and Philip 2005; Craighead et al. 2006; Gulati and Sytch 2007). Manu-
facturing inputs include critical components that directly contribute to the product performance
or differentiation. In conducting direct procurement, firms tend to seek out qualified, estab-
lished and reliable suppliers to meet their requirements for specialised logistics and fulfilment
mechanisms.
Firms can increase the market competitiveness of their manufactured products by combining the
resources and capabilities of their direct material suppliers through embedding inter-organisational
cooperation in their direct procurement operations (Akemi and Philp 2000; Chen and Meixell
2003; Craighead et al. 2006). To obtain the benefits of direct procurement, firms not only have
to streamline their procurement processes, but also have to strengthen the governance of their
complicated interactions with their direct material suppliers (Handfield and Nichols 2008; Chopra
and Meindl 2010). For example, a purchasing firm must coordinate the activities of direct material
suppliers to ensure interoperability and seamless process synchronisation. Direct procurement
requires intensive communication and interaction between trading firms to ensure the alignment
of activities between trading firms (Gulati and Sytch 2007; Tai, Ho, and Wu 2010). Hence, this
study suggests that success in managing direct procurement requires two key capabilities: process
efficiency capability and coordination capability.
196 Y.-M. Tai

A firm’s process efficiency capability in managing direct procurement means that the firm has
the ability to reduce errors and costs and increase efficiencies while conducting direct procure-
ment cycle activities (Ordanini and Rubera 2008; Tai, Ho, and Wu 2010). The process efficiency
capability takes into account how a firm can effectively address issues of streamlining direct pro-
curement processes. For example, if a firm can effectively reduce the error rate of direct material
orders, shorten the time required to purchase direct materials and/or improve overall planning for
direct procurement, inventory and production management, we can argue that the firm is likely
to have process efficiency capability. In contrast with the process efficiency capability, a firm’s
coordination capability in managing direct procurement implies that the firm has the ability to
coordinate the activities of direct materials suppliers to meet the firm’s needs (Gulati and Sytch
2007; Chopra and Meindl 2010; Tai, Ho, and Wu 2010). Coordination capability demonstrates
how a firm can effectively address issues of governing interactions with its direct materials suppli-
ers. For example, if a firm can effectively encourage direct material suppliers to share information,
collaborate on problem solving and/or adjust order fulfilment work to meet the firm’s needs, we
can argue that the firm is likely to have coordination capability.

2.3. Web-enabled direct procurement management capabilities

In the pre-Internet era, the most common method for information exchange in direct procurement
was by electronic data interchange (EDI). However, the widespread use of EDI was limited by
high implementation costs, high technology lock-in costs and the inability to process unstructured
information (Presutti 2003; Subramaniam and Shaw 2004). With the development of lower cost
public network infrastructures and standards (e.g. Web services), a number of Web-based inter-
organisational systems (IOSs) have emerged to allow firms to conduct B2B transactions (Zhu et al.
2006; Nurmilaakso 2008). Web-based IOS refers to a kind of IOS built on Web platforms using
open standards (including communication protocols and data standards) for B2B information
exchange (Croom 2005; Fredriksson 2006). The Web-based platform provides a vast hypermedia
computer network environment which substantially reduces the information exchange constraints
found in traditional EDI. Web-based IOS capitalises on rich-media interfaces and hypermedia
architecture, enabling firms to simplify and enhance the two fundamental aspects of procure-
ment management: communication and transaction (Presutti 2003; Moon 2005; Dooley and
Purchase 2006).
The defining feature of Web-based IOS is the use of Extensible Markup Language (XML) to
form the content platform (Zhu et al. 2006; Nurmilaakso 2008). A Web-based IOS using XML-
based protocols contains platform-agnostic interpretable metadata about the interface (Vinoski
2003; Van Engelen 2008). This platform-agnostic interface allows enterprises to build a cost-
effective system integration infrastructure and to create a universal computing environment in
which the enterprise systems of all trading firms can share data (Kim and Segev 2005; Chen,
Zhang, and Zhou 2007). The platform nature of a Web-based direct procurement system allows
firms and their trading partners to more easily exchange data on inventory, production status and
delivery schedules, thus improving inter-organisational coordination in a way not possible with
traditional EDI (Tai, Ho, and Wu 2010).
Web-based direct procurement systems offer advantages over traditional EDI, including sav-
ings in communication, search and negotiation costs, speed and ease of integration of different
enterprise systems and the provision of real-time information about procurement transactions
(Subramaniam and Shaw 2004; Wagner and Essig 2006; Son and Benbasat 2007). While EDI
reduces procurement processing costs and errors, Web-based direct procurement systems have
the additional potential to further reduce costs while improving the quality and advancing the con-
tent of inter-organisational coordination. Unlike proprietary EDI systems, the open architecture
of Web-based direct procurement systems can access and control not only transactions, but also
 International Journal of Logistics: Research and Applications 197

the internal supply and planning processes of trading parties without requiring those parties to
adopt common systems (Chopra and Meindl 2010; Tai, Ho, and Wu 2010). The use of Web-based
direct procurement systems enables the electronic processing of direct procurement transactions,
improving firms’ capabilities in supplier portfolio management, order processing and monitoring
and coordinating activities of suppliers.

3. Research model and hypotheses

Figure 1 details our research model. It posits relationships between capabilities of managing
direct procurement and firms’ competitive advantages. When considering capabilities required for
success in direct procurement management, our model focuses on process efficiency capability and
coordination capability. Additionally, IT capabilities derived from Web-based direct procurement
systems is regarded as a complement to increasing the impact of direct procurement management
capabilities on competitive advantage.

3.1. Direct procurement management capabilities and competitive advantage

Previous studies have suggested that one of the major goals of managing direct procurement is
to improve direct procurement efficiency (Fearon and Philip 2005; Craighead et al. 2006). To
achieve this improvement, firms not only refine their internal procurement processes, but also
streamline procurement transactions with their direct material suppliers (Saeed, Malhortra, and
Grover 2005; Ordanini and Rubera 2008). In refining internal procurement processes, firms focus
on developing capacity to improve the alignment between procurement and business requirements.
For example, firms develop capacity to reduce mistakes in direct procurement, systematically
integrate the procurement requirements of direct materials and improve overall planning for direct
procurement, inventory and production management (Handfield and Nichols 2008; Chopra and
Meindl 2010). In streamlining procurement transactions, firms focus on developing the capacity
to minimise transaction times and costs. For example, firms develop the capacity to shorten direct
materials purchasing times and reduce transaction errors, sourcing costs and administrative tasks
associated with monitoring and controlling procurement transactions (Chopra and Meindl 2010;
Tai, Ho, and Wu 2010).
We argue that a firm can improve direct procurement efficiency through superior process effi-
ciency capability consisting of increased capacity to streamline procurement transactions with
direct material suppliers coupled with increased capacity to refine internal procurement processes.

Figure 1. Research model.

198 Y.-M. Tai

According to the RBV, process efficiency capability may be employed as a strategic asset in cre-
ating competitive advantage, since it satisfies the conditions of value, heterogeneity, inimitability
and immobility. The ability to refine internal procurement processes and streamline procurement
transactions allows the firm to take advantage of time and cost savings (i.e. value), while the abil-
ity to manage internal procurement processes and transaction processes is certainly not equally
distributed in the market (i.e. heterogeneity). At the same time, process efficiency capability is
complex and accumulated over time (i.e. inimitability) and this capability can be regarded as a
firm’s business knowledge, deeply embedded in the firm’s organisational management practices
(i.e. immobility). Thus, Hypothesis 1 (H1) is proposed:
H1. A firm’s superior process efficiency capability in managing direct procurement positively influences the firm’s
competitive advantage.

Improving coordination with direct material suppliers is another major goal in managing direct
procurement (Fredriksson 2006; Wagner and Essig 2006). To improve effectiveness in coordinat-
ing activities of direct material suppliers, firms not only build inter-organisational information
sharing mechanisms, but also build inter-organisational coordination mechanisms with their direct
material suppliers (Tai, Ho, and Wu 2010; Hung et al. 2011). In building information sharing mech-
anisms, firms focus on developing capacity to improve the efficiency of information sharing with
their direct material suppliers. For example, firms and their direct material suppliers can keep
each other informed in advance of changing needs and work together to solve problems (Li and
Lin 2006; Chan and Chan 2009). In building coordination mechanisms, firms focus on developing
capacity to increase the alignment of their direct materials suppliers’ order fulfilment processes to
their business requirements. For example, firms can synchronise with the output of direct material
suppliers’ order fulfilment work, thus ensuring that the right supplies are delivered at the right
time (Chopra and Meindl 2010; Tai, Ho, and Wu 2010).
We argue that a firm can improve coordination with direct material suppliers through superior
coordination capability, consisting of a capacity to build better coordination mechanisms with
direct material suppliers, coupled with a capacity to build better information sharing mechanisms.
According to the RBV, coordination capability may be employed as a strategic asset in creating
competitive advantage, since it satisfies the conditions of value, heterogeneity, inimitability and
immobility. Being able to build effective information sharing mechanisms and coordination mech-
anisms in managing direct procurement makes it possible to cope with market changes (i.e. value),
while the ability to implement information sharing and coordination mechanisms to coordinate
the activities of direct material suppliers is certainly not equally distributed in the market (i.e.
heterogeneity). At the same time, coordination capability is complex and accumulated over time
(i.e. inimitability) and it is developed based on the development of trust and commitment between
trading firms (i.e. immobility). Thus, Hypothesis 2 (H2) is proposed:
H2. A firm’s superior coordination capability in managing direct procurement positively influences the firm’s
competitive advantage.

3.2. Complementary role of IT capability derived from Web-based direct procurement

systems

Through Web-based direct procurement systems, firms can conduct direct procurement activities
electronically. The electronic processing of inter-organisational trading data improves the time-
liness and accuracy of the information, leading to greater efficiency in procurement processes
(Sriram, Arunachalam, and Ivancevich 2000; Craighead et al. 2006; Akyuz and Rehan 2009). IT
capabilities derived from Web-based direct procurement systems alone might satisfy the hetero-
geneity condition, but only in the short-term since Web-based direct procurement systems are not
difficult to imitate (Tai, Ho, and Wu 2010). If one firm can adopt an information system to support
 International Journal of Logistics: Research and Applications 199

its business processes, then other firms should also be able to implement similar information
systems and thus, such an information system would not be a source of competitive advantage
(Carr 2003). Hence, the Web-based direct procurement system as a stand-alone resource in con-
ducting direct procurement management may, at best, sustain conditions of competitive parity or
temporary advantage, and it is consequently a necessary but insufficient condition for competitive
advantage. Thus, Hypothesis 3 (H3) is proposed:
H3. IT capabilities derived from Web-based direct procurement systems are not able, on their own, to directly
influence a firm’s competitive advantage.

Previous studies have suggested that companies derive many benefits from implementing
Web-based direct procurement systems, including reduced transaction costs, improved inter-
nal procurement process efficiency and improved coordination with suppliers (Subramaniam
and Shaw 2004; Puschmann and Alt 2005; Ash and Burn 2006). Conducting direct procurement
management via Web-based direct procurement systems enables firms to refine internal direct pro-
curement processes, streamline direct procurement transactions and strengthen the mechanisms
for information sharing and coordination with their direct material suppliers (Chaffey 2004; Tai,
Ho, and Wu 2010). Thus, this study suggests that IT capabilities derived from implementing
Web-based direct procurement systems can be employed to expand the magnitude of pre-existing
process efficiency capability and coordination capability through complementary effects.
Web-enabled direct procurement can help firms to improve the timeliness and accuracy of their
transaction information, allowing them to better plan and manage their production operations and
inventory levels (Fearon and Philip 2005; Harrigan et al. 2008; Smart 2010). These process-level
improvements will result in lower costs, higher productivity and streamlined processes and extend
to both purchasing firms and their suppliers. On the purchasing side, Web-based direct procurement
systems enable buyers to electronically manage their direct procurement processes and to re-
engineer their internal processes, resulting in benefits such as reduced transaction errors, sourcing
costs and administrative tasks associated with monitoring and controlling direct procurement
processes (Moon 2005; Saeed, Malhortra, and Grover 2005). The benefits of implementation also
accrue to the supplier. For example, implementing Web-based direct procurement systems can
assist a supplier to reduce order fulfilment errors, shorten order fulfilment lead-time and improve
inventory management efficiency (Ramamurthy, Premkumar, and Crum 1999; Mukhopadhyay
and Kekre 2002). This study thus suggests that IT capabilities derived from implementing Web-
based direct procurement systems can be employed to increase the existing process efficiency
capability through complementary effects. Thus, Hypothesis 4a (H4a) is proposed:
H4a. IT capabilities derived from implementing Web-based direct procurement systems moderate the impact of
process efficiency capability on competitive advantage.

Increased outsourcing of manufacturing operations makes it more important for firms to actively
coordinate their direct material suppliers (Gulati and Sytch 2007; Chopra and Meindl 2010).
To achieve effective inter-organisational coordination, companies have to move their exchange
of information beyond just annual contracts and periodic progress reporting to the large-scale
exchange of internal planning information (Hung et al. 2011). In direct procurement through
EDI, the information that trading parties can exchange is limited by the text-based communication
interface (Davila, Gupta, and Palmer 2003; Croom 2005; Zhaoa and Cheng 2005). Web-based
direct procurement systems capitalise on rich-media interfaces and hypermedia architectures,
enabling the sharing of more complex information. The information exchange platform provided
by Web-based direct procurement systems allows firms and their trading partners to communicate
intensively, thus increasing the efficiency of inter-organisational coordination, improving mutual
understanding and creating further opportunities for cooperation (Wagner and Essig 2006; Chiang
and Feng 2007).
200 Y.-M. Tai

This study suggests that Web-based direct procurement systems can enable firms to exchange
information with their direct material suppliers at many levels within their respective organisa-
tional hierarchies, from strategy to operations. Implementing inter-organisational coordination
on a Web-enabled IT platform allows for the sharing of strategic and operational information,
and allows for all shared functions to be brought together as a cohesive whole, providing the
visibility required for quick and accurate decision-making and timely adjustments (Van Engelen
2008; Tai, Ho, and Wu 2010). Implementing Web-based direct procurement systems can enable
firms to build a better information-sharing environment and facilitate any required changes and
adjustments. According to the above arguments, this study suggests that IT capabilities derived
from implementing Web-based direct procurement systems can be used to expand the magnitude
of existing coordination capability through complementary effects. Thus, Hypothesis 4b (H4b) is
proposed:
H4b. IT capabilities derived from implementing Web-based direct procurement systems moderate the impact of
coordination capability on competitive advantage.

4. Research methodology

4.1. Measurement development

The four constructs of interest in this study are: process efficiency capability, coordination
capability, IT capabilities derived from Web-based direct procurement systems and competi-
tive advantage. To construct a pool of items for measuring these four constructs, several tests
were administered in stages. This study began by reviewing and collecting items from a variety
of previous studies. On the basis of previous studies (Subramaniam and Shaw 2004; Fearon and
Philip 2005; Moon 2005; Saeed, Malhortra, and Grover 2005; Harrigan et al. 2008; Ordanini and
Rubera 2008; Chopra and Meindl 2010; Tai, Ho, and Wu 2010), the construct of process efficiency
capability is conceptualised as the extent to which a firm has the ability to effectively streamline
internal direct procurement processes and procurement transactions with direct material suppli-
ers, and items reflecting the conceptualisation of process efficiency capability are proposed. On
the basis of previous studies (Subramani 2004; Croom 2005; Zhaoa and Cheng 2005; Fredriks-
son 2006; Wagner and Essig 2006; Chiang and Feng 2007; Gulati and Sytch 2007; Hung et al.
2011), the construct of coordination capability is conceptualised as the extent to which a firm has
the ability to effectively build mechanisms to enable information sharing and coordination with
direct material suppliers, and items reflecting the conceptualisation of coordination capability are
proposed.
On the basis of previous studies (Subramaniam and Shaw 2004; Croom 2005; Kim and Segev
2005; Dooley and Purchase 2006; Fredriksson 2006; Zhu et al. 2006; Chen, Zhang, and Zhou 2007;
Nurmilaakso 2008; Tai, Ho, and Wu 2010), the construct of IT capabilities derived from Web-
based direct procurement systems is conceptualised as the extent to which a firm can effectively
utilise the Web-based direct procurement system to manage direct procurement, and items reflect-
ing the conceptualisation of IT capabilities derived from Web-based direct procurement systems
are proposed. On the basis of previous studies (Park, Mezias, and Song 2004; Ravichandran and
Lertwongsatien 2005; Ray, Muhanna, and Barney 2005; Espino-Rodríguez and Padrón-Robaina
2006; Ordanini and Rubera 2008; Moon 2010), the construct of competitive advantage is con-
ceptualised as the extent to which a firm can create strategic advantage over its industry rivals
through effectively managing direct procurement, and items reflecting the conceptualisation of
competitive advantage are proposed.
A content validity panel was convened to consider the items collected from the literature review
to determine the applicability and semantics of each item. The panel members in this study
 International Journal of Logistics: Research and Applications 201

Table 1. Item content, factor loadings and reliability estimates.

Factor Cronbach’s
Constructs/measured variables loading alpha CR

(WP) IT capabilities derived from Web-based direct procurement systems 0.921 0.943
WP1 Our direct material suppliers receive all our orders electronically 0.880
through the Web-based direct procurement system
WP2 We can inquire about the progress of direct procurement through 0.906
the Web-based direct procurement system
WP3 We can confirm the order with our direct material suppliers through 0.886
the Web-based direct procurement system
WP4 We can negotiate with our direct material suppliers through the 0.918
Web-based direct procurement system
(PC) Process efficiency capability 0.926 0.945
PC1 We can effectively reduce the error rate of direct materials orders 0.880
PC2 We can systematically integrate the procurement requirements of 0.892
direct materials
PC3 We can effectively shorten the time of purchasing direct materials 0.902
PC4 We can effectively make overall planning for direct procurement, 0.909
inventory and production management
(CC) Coordination capability 0.935 0.954
CC1 We and our direct material suppliers inform each other in advance 0.878
of changing needs
CC2 We and our direct material suppliers can collaborate on problem 0.882
solving.
CC3 The work tasks between our company and our direct material 0.917
suppliers can fit together well
CC4 The output of our direct material suppliers’ order fulfilment works 0.902
is synchronised with our needs
(CA) Competitive advantage 0.912 0.939
CA1 Our production lead time is shorter than industry rivals 0.840
CA2 Our ability in dealing with demand uncertainties is better than 0.881
industry rivals
CA3 Our ability in responding to market demands is better than industry 0.868
rivals
CA4 Our inventory cost of direct materials is lower than industry rivals 0.910

consisted of six managers from manufacturing firms in Taiwan and two researchers focused on
information management, supply chain management and procurement management. The adoption
criterion depended on the content validity ratio (CVR).1 This study followed the suggestion by
Lawshe (1975) that the CVR of each item must equal or exceed 0.75.2 Useful comments from
the validity panel members were incorporated to assess the four constructs (i.e. process efficiency
capability, coordination capability, IT capabilities derived from Web-based direct procurement
systems and competitive advantage). These items were then modified to create instruments for the
full-scale study (Table 1). Items associated with these constructs used a seven-point Likert-type
scale.

4.2. Data collection and the method of data analysis

A survey was conducted to test the research model. The empirical data were collected from 128
manufacturers in Taiwan with experience of participating in government-subsidised e-business
development projects. Focusing on direct procurement, these e-business development projects
were aimed to promote the domestic development of industrial ITs and applications and to raise
the competitiveness of domestic industries in Taiwan. Hence, the sample companies are qualified
by having implemented Web-based direct procurement systems for conducting direct procurement
management.
202 Y.-M. Tai

Purchasing managers were contacted through a directory of participating companies compiled

by Taiwan’s Ministry of Economic Affairs. The key factor in respondent selection was the respon-
dent’s position within his or her organisation, with preference given to respondents’ knowledge
about direct procurement management and interaction with suppliers. The questionnaire was
mailed to 251 purchasing executives. In responding to questions about the various constructs,
respondents were asked to identify their organisation’s primary direct material supplier(s). Pri-
mary direct material supplier(s) were defined as those that supply a significant proportion of
the respondents’ direct material needs. In total, 128 valid questionnaires were returned, giving a
50.9% valid response rate.
Partial least squares (PLS) were used to evaluate the proposed research model (shown in
Figure 1) and the relevant hypotheses. PLS is generally recommended for predictive research
models where the emphasis is on theory development, whereas LISREL is recommended for con-
firmatory analysis and requires a more stringent adherence to distributional assumptions (Jöreskog
and Wold 1982). Given the relative lack of empirical studies and theoretical development on Web-
enabled direct procurement management, the PLS method of structural equation modeling is more
suitable for testing the research model. The PLS method can be used to simultaneously estimate
both the measurement model and the structural model (Chin, Marcolin, and Newsted 2003). We
divided the analysis of the research model proceeds into two steps: an assessment of the measure-
ment model’s properties and an assessment of the structural model (testing of the hypotheses).
Data analysis by PLS was performed with SmartPLS 2.0 (M3) software (Ringle, Wende, and Will
2005).

5. Analysis of results

5.1. Results of assessing the properties of the measurement model

The measurement model was assessed via the PLS method to assess individual item reliability,
internal consistency reliability and convergent and discriminant validity. Individual item reliability
was assessed by examining the loading of each item to their respective constructs. Table 1 shows
that all item loadings are above 0.707 (critical threshold value), indicating that more than half of
the variance is captured by the constructs. The internal consistency reliability of each construct
was assessed using Cronbach’s alpha and computing the composite reliability (CR). A score of
0.70 or above is an acceptable value of internal consistency for exploratory research (Barclay,
Higgins, and Thompson 1995). Table 1 shows the Cronbach’s alpha (ranging from 0.912 to 0.935)
and CR values (ranging from 0.939 to 0.954) of each construct. All were above the recommended
level of 0.70, indicating adequate internal consistency.
Table 2 shows the average variance extracted (AVE) and the square root of the AVE, as well
as the correlations between the constructs. The percentage of variance captured by a construct is
given by its AVE. Convergent validity is demonstrated as the AVE values for all constructs were

Table 2. Convergent and discriminant validity.

Construct AVE 1 2 3 4

(1) WP 0.799 0.893

(2) PC 0.802 0.397 0.895
(3) CC 0.807 0.451 0.361 0.898
(4) CA 0.774 0.291 0.452 0.448 0.879

Note: Diagonal elements (bold) are the square roots of AVE.

 International Journal of Logistics: Research and Applications 203

higher than the suggested threshold value of 0.50 (ranging from 0.774 to 0.807). A construct is
considered to be distinct from other constructs if the square root of its AVE is greater than its
correlations with other latent constructs (Barclay, Higgins, and Thompson 1995). Comparing the
square root of the AVE (bold figures on the diagonal) with the correlations among the constructs
indicates that each construct is more closely related to its own measures than to those of other
constructs, and discriminant validity is, therefore, supported.

5.2. Results of testing the structural model

The PLS structural model and hypotheses were assessed by examining the path coefficients
and their significance levels. The PLS method does not directly provide significance tests and
confidence interval estimates of path coefficients in the research model (Lohmöller 1989). To
estimate the significance of path coefficients, we followed Chin, Marcolin and Newsted (2003),
in performing a bootstrapping analysis with 200 resamples of the same size (n = 128). Hypotheses
are either confirmed or not confirmed, based on whether the t-value associated with each path
exceeded the criterion of practical significance for the 0.05 significance level (t-value > 1.96).
We built two structural models to estimate our hypotheses involving moderating effects. The
first model contains only main effects and allows for the testing of H1–H3. The second model
adds the interactive effects of IT capabilities derived from Web-based direct procurement systems
with the two direct procurement management capabilities (i.e. process efficiency capability and
coordination capability) which allows for the testing of H4a and H4b. The PLS results are given
in Table 3.
The first model (Model 1) tests for the impact of process efficiency capability, coordination
capability and IT capabilities are derived from Web-based direct procurement systems on com-
petitive advantage. The results shown in Model 1 of Table 3 provide strong evidence for H1–H3.
In our sample, the availability of process efficiency capability and coordination capability in
conducting direct procurement management has a significantly positive effect on competitive
advantage (H1 is significantly supported r = 0.365, t − value = 3.663 and H2 is significantly
supported, r = 0.287, t − value = 2.735). Hence, in terms of the RBV, the process efficiency
capability and coordination capability can be considered to be distinctive capability which is
able to explain performance heterogeneity, thus representing two important sources of competi-
tive advantage driven by superior direct procurement management. Moreover, from Model 1, we
find that IT capabilities derived from Web-based direct procurement systems cannot significantly
influence competitive advantage (r = 0.216 and t − value = 1.708 < 1.96). This means that IT
capabilities derived from Web-based direct procurement systems are not able to directly influence
a firm’s competitive advantage. This finding confirms the results of previous research which indi-
cated information systems are, by themselves, typically imitable (Park, Mezias, and Song 2004;

Table 3. Results of PLS models.

Hypothesis Exogenous variables Model 1 Model 2

H1 PC 0.365 (3.663)∗∗ 0.374 (3.691)∗∗

H2 CC 0.287 (2.735)∗∗ 0.299 (2.933)∗∗
H3 WP 0.216 (1.708) 0.203 (1.601)
H4a WP ∗ PC 0.235 (1.994)∗
H4b WP ∗ CC 0.228 (1.987)∗
R2 0.536 0.592
R2 0.056
F values 0.137∗
∗
p < .05.
∗∗
p < .01.
204 Y.-M. Tai

Ravichandran and Lertwongsatien 2005) and IT capabilities derived from Web-based direct pro-
curement systems alone cannot satisfy the long-term performance heterogeneity condition (i.e.
competitive advantage) since Web-based direct procurement systems are not difficult to imitate
(Tai, Ho, and Wu 2010). Hence, in terms of the RBV, we argue that IT capabilities derived from
Web-based direct procurement systems cannot be considered to be a distinctive capability able to
explain competitive advantage (i.e. H3 is supported).
The second model (Model 2) contains interaction effects between IT capabilities derived from
Web-based direct procurement systems and the two direct procurement management capabilities
(process efficiency and coordination capability). In PLS, the magnitude of interaction effects can
be evaluated through a hierarchical procedure similar to that employed for ordinary least squares
regression, where the explained variance R2 (i.e. explanatory power) of the model with the main
effects is compared to that of the full model (considering both main effects and interactions)
(Chin, Marcolin, and Newsted 2003). Model 2 confirms H4a, which assumed a moderating effect
of the IT capabilities derived from Web-based direct procurement systems on the relationship
between process efficiency capability and competitive advantage (H4a is significantly supported,
r = 0.235, t − value = 1.994). H4b is also confirmed by our analysis, since the interactive term
between coordination capability and IT capabilities derived from Web-based direct procure-
ment systems has a significantly positive effect on competitive advantage (H4b is significantly
supported, r = 0.228, t − value = 1.987).
Furthermore, the effect size of interaction in Model 2, calculated as f = (RFull
2
− Rmain
2
)/(1 −
RFull ), is f = 0.137, and can be considered as a medium to large effect (Cohen et al. 2003). We
2

find that the F-test for the increase in R2 from 0.536 to 0.592 when interactive terms (IT capa-
bilities derived from Web-based direct procurement systems ∗ process efficiency capability and
IT capabilities derived from Web-based direct procurement systems ∗ coordination capability)
were added to the model is statistically different from zero (p − value < .05). Hence, the IT
capabilities derived from Web-based direct procurement systems can be considered as a comple-
mentary resource enhancing a firm’s process efficiency capability and coordination capability in
conducting direct procurement management.

6. Conclusion

Rooted in RBV, this study investigates the impact of direct procurement management capabilities
on competitive advantage and how IT capabilities derived from implementing Web-based direct
procurement systems contribute to increasing the impact of direct procurement management
capabilities on competitive advantage. The results from our empirical study provide substantial
support for the research model depicted in Figure 1. This empirical study of 128 manufacturing
firms found that firms improve their competitive advantage if they have superior process efficiency
capability and coordination capability in managing direct procurement. Moreover, the empirical
results also showed that IT capabilities derived from Web-based direct procurement systems play
a complementary role in process efficiency capability and coordination capability in managing
direct procurement.

6.1. Implications for researchers and practitioners

This study raises several important implications for both research and practice. In terms of research,
this study identifies two important capabilities in conducting direct procurement management –
process efficiency capability and coordination capability. Previous studies have tended to adopt a
goal-oriented perspective in investigating direct procurement management, with results centered
 International Journal of Logistics: Research and Applications 205

on what the goals of direct procurement management should be, without consideration of what
capabilities should be developed to achieve effective direct procurement management. Based on
the goals of direct procurement management proposed by previous studies, this study investigates
what capabilities are required to succeed in managing direct procurement and then evaluates how
such direct procurement management capabilities impact competitive advantage. By investigating
the impact of direct procurement management capabilities on competitive advantage, this study
provides insight into how a firm can achieve competitive advantage through effectively managing
direct procurement.
Another implication of this study is related to the role of IT capabilities derived from Web-based
direct procurement systems in shaping the relationships between direct procurement management
capabilities and competitive advantage. A conceptual model for assessing the moderating effects
of IT capabilities derived from Web-based direct procurement systems on the impact of direct
procurement management capabilities (based on a firm’s RBV) was developed and tested on 128
manufacturing firms from different sectors. The results obtained in the present study suggest that
(1) IT capabilities derived from Web-based direct procurement systems are not able, on their own,
to directly influence a firm’s competitive advantage and (2) although IT capabilities derived from
Web-based direct procurement systems are not significantly positively associated with competitive
advantage, IT capabilities play important complementary roles in reinforcing direct procurement
management capabilities.
This study also provides practical implications for managers. By identifying direct procurement
management capabilities based on the goals of direct procurement and by investigating the impact
of such direct procurement management capabilities on competitive advantage based on RBV,
we are able to better understand what capabilities should be developed in conducting direct
procurement. By clearly understanding what direct procurement management capabilities are
important in achieving competitive advantage, managers are better able to plan and to align
resources to the competitive potential of direct procurement management activities.
Moreover, this study’s findings confirm that firms should be aware that direct procurement
management capabilities (i.e. process efficiency and coordination capability) can be reinforced
by IT capabilities derived from Web-based direct procurement systems. Synergies can be obtained
by combining direct procurement management capabilities and IT capabilities derived from Web-
based direct procurement systems to create IT-driven direct procurement management capabilities.
To create robust direct procurement management capabilities through implementing Web-based
direct procurement systems, firms need to develop integrated direct procurement management
plans and seamless inter-organisational cooperation based on the advantages of Web-based direct
procurement systems. The former (i.e. integrated direct procurement management plans) refers
to increasing process efficiency capability by using IT capabilities to streamline order processing,
integrate procurement processes with the firm’s other business processes and support suppliers in
improving their order fulfilment operations. The latter (i.e. seamless inter-organisational cooper-
ation) involves increasing coordination capability by using IT capabilities to build mechanisms
of inter-organisational information sharing and coordination.

6.2. Suggestions for future research

While it can be argued that the results of this study are valid and representative, certain aspects
can be addressed in future research. First, the competitive advantage measure is subjective in
the sense that it was based on Likert-scale responses provided by purchasing managers. Thus, it
would be more objective to obtain and analyse actual performance data (such as financial and
other quantitative performance data) to measure competitive advantage. Second, the key informant
method was used for data collection. This method, while having its advantages, also suffers from
206 Y.-M. Tai

the limitation that the data reflect the opinions of one person. Future studies could consider
research designs that allow data collection from multiple respondents within an organisation.
Third, previous studies have suggested that contextual factors play an important role in IT
business value generation (Devaraj and Kohli 2003; Jorgenson, Ho, and Stiroh 2003; Melville,
Kraemer, and Gurbaxani 2004). For example, Melville, Kraemer and Gurbaxani (2004) argues
that industry characteristics shape the way in which IT is applied within a firm to generate business
value. Hence, this study suggests that further research might consider the influence of contextual
factors (such as industry characteristics) on the moderating effects of IT capability derived from
Web-based direct procurement systems. A final limitation concerns the static nature of the study.
Since this study takes a static (cross-sectional) view of direct procurement management capabili-
ties, it makes difficult to address the issues of how direct procurement management capabilities are
developed over time and how the impact of direct procurement management capabilities on com-
petitive advantage might change over time. Thus, a longitudinal study could enrich our research
findings.

Notes

1. CVR = [n − N/2]/[N/2], n: the sum of frequency for scoring 2 or 3 and N: total number of members in the panel.
2. Lawshe (1975) proposed that if the number of members in the panel was eight, the CVR must be greater than 0.75.

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