Int. J.

Production Economics 136 (2012) 123–130

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Int. J. Production Economics

journal homepage: www.elsevier.com/locate/ijpe

The relationship between supplier management and firm’s operational

performance: A multi-dimensional perspective
Daniel Prajogo a,n, Mesbahuddin Chowdhury a, Andy C.L. Yeung b, T.C.E. Cheng b
a
Department of Management, Monash University, Australia
b
Department of Logistics and Maritime Studies, The Hong Kong Polytechnic University, PR China

a r t i c l e i n f o abstract

Article history: This paper presents an empirical study on the multidimensional relationships between supplier
Received 22 March 2011 management practices and firm operational performance. Specifically, we focus on three supplier
Accepted 27 September 2011 management practices, namely strategic long-term relationship, supplier assessment, and logistics
Available online 4 October 2011
integration, and test their effects on four operations performance measures, namely quality, delivery,
Keywords: flexibility, and cost. We use data collected from 232 manufacturing firms in Australia to conduct the
Supplier management study. Ten hypotheses were tested simultaneously using Structural Equation Modeling (SEM)
Long-term relationship technique. The results show that different supplier management practices have different unique effects
Supplier assessment on different operations performance measures. Supplier assessment has a positive relationship with
Logistics integration
quality performance. Both strategic long-term relationship and logistics integration have positive
Operations performance
relationships with delivery, flexibility, and cost performance. From a theoretical perspective, this study
demonstrates the relative contributions of different kinds of resources (i.e., supplier management
practices in our case) to different performance measures. Our research findings provide practical
insights for managers to understand the effectiveness, as well as the limitations, of different supplier
management practices in enhancing different operations performance measures of firms.
& 2011 Elsevier B.V. All rights reserved.

1. Introduction practices has become essential to sustaining profitable in today’s

The importance of managing suppliers to firms’ operations is
widely acknowledged in the supply chain management (SCM)
literature. SCM has been recognized as one of the most important
management functions for achieving long-term competitive
advantage. As competition intensifies in global markets, firms
face more formidable challenges in improving their performance,
from getting quality right to serving disparate and fluctuating
markets. As such, many firms have come to realize that it is not
sufficient just to focus on improving internal processes—the
lesson that they learned in the previous decade through such
concepts as total quality management (TQM) and lean produc-
tion. Competition is now viewed at the supply chain level rather
than at the individual firm level. At the same time, firms are now
more focused on their core competence and operations, thus
relinquishing their non-core activities to their supply chain
partners. As a result, acquiring a good understanding of SCM
n
Correspondence to: Department of Management, Monash University, P.O. Box
197, VIC 3141, Australia. Tel.: þ61 3 9903 2030; fax: þ 61 3 9903 2718.
E-mail addresses: Daniel.Prajogo@monash.edu (D. Prajogo),
Mesbahuddin.Chowdhury@monash.edu (M. Chowdhury),
Andy.Yeung@inet.polyu.edu.hk (A.C.L. Yeung),
Edwin.Cheng@inet.polyu.edu.hk (T.C.E. Cheng).
highly complex and competitive business world.
SCM requires firms to undertake a set of activities conducive to
the effective management of their supply chains (Li et al., 2006).
A number of researchers (Donlon, 1996; Tan et al., 2002; Chen
and Paulraj, 2004a; Min and Mentzer, 2004; Kannan and Tan,
2006b; Li et al., 2006; Koh et al., 2007; Chow et al., 2008) have
identified the key activities of SCM. In this study we focus on the
supply chain’s upstream side, which is concerned with supplier
management practices. The fact that suppliers play a key role in
affecting firms’ performance has been well recognized in the
literature. One of the possible reasons is the high costs of
purchased goods and services, which typically account for around
70% of the total cost (Ford, 2003). Forging and maintaining
congenial relationships with suppliers has become crucial to
firms to remain competitive in the market. The growing depen-
dence of firms on their suppliers has highlighted the need for
effective supplier management (Kannan and Tan, 2002).
Many studies have examined the relationships between SCM
practices, including supplier relationship management, and firm
performance, they commonly show that SCM practices have
positive and significant effects on firm performance at the opera-
tions level, as well as at the business level. However, most of
these studies assume that firms need to implement a broad range
of SCM practices in order to do well on an array of performance

0925-5273/$ - see front matter & 2011 Elsevier B.V. All rights reserved.
doi:10.1016/j.ijpe.2011.09.022
124 D. Prajogo et al. / Int. J. Production Economics 136 (2012) 123–130
measures. Chen and Paulraj (2004a) are pioneers that develop a
research framework and measures for SCM practices. Their find-
ings show that twelve SCM practices (including strategic purchas-
ing, long-term relationship, supply base reduction, logistics
integration, etc.) have significant correlations with supply chain
performance, which spans several dimensions (embracing quality,
cost, delivery, flexibility, responsiveness, and customer satisfac-
tion). Li et al. (2006) bundle five practices (i.e., strategic supplier
relationship, customer relationship, level of information sharing,
quality of information sharing, and postponement) into a holistic
measure of SCM practices. They show that it has a positive
relationship with a set of performance measures, which include
quality, delivery, costs, innovation, and time to market. Taking a
similar approach, Min and Mentzer (2004) combine seven prac-
tices (i.e., vision, leadership, long-term relationship, information
sharing, risk and reward sharing, process integration, and coop-
eration) to form a bundle of SCM practices and show that it has
a positive relationship with a set of business performance
measures, which include product offering, availability, timeliness,
profitability, and growth.
While the above studies ascertain the competitive value of
SCM practices, they fail to consider three issues. First, it is
important to consider that not every firm needs or has the ability
or resources to implement a broad range of SCM practices, so it is
not reasonable to consider SCM practices as a ‘‘full package’’.
Second, not every firm needs to pursue all the measures of
performance at the same level simultaneously. Indeed, firms
often need to focus on one key performance measure over the
others as part of their strategic choice (Corbett and Van
Wassenhove, 1993). Third, by combining different performance
measures into one compound measure, these previous studies
assume that SCM practices have positive effects on different
performance measures at more or less equal levels. This assump-
tion is questionable as the literature has shown that different
performance measures have different characteristics, so different
resources are required to achieve them. This is the area where the
past studies on SCM have yet to address by investigating the
unique effects of different SCM practices on different performance
measures. Compounding different SCM practices and different
performance measures does not help firms to identify the indivi-
dual contribution of an SCM practice to a specific type of
performance. We aim to fill this research gap by demonstrating
the unique effects of different SCM practices on different opera-
tions performance measures. Specifically, we focus on examining
the relationships between three supplier management practices
(i.e., strategic long-term relationship, supplier assessment, and
logistics integration) and four operations performance measures
(i.e., quality, delivery, flexibility, and cost).
This study contributes to the literature in two ways. First, from
a theoretical perspective, different performance measures require
different configurations of resources. In this regard, we demon-
strate the relative effects of different kinds of resources (i.e.,
different supplier management practices in our case) on different
operations performance measures. As mentioned earlier, not all
SCM practices are considered important, so it is necessary to
understand the effectiveness of each supplier management prac-
tice in helping firms to pursue their different strategic goals in
operations. Second, from a practical perspective, it is important
for managers to understand the fit between resources and
performance. Failing to do so will result in poor firm performance
due to either a lack of effective resources or investment in
redundant resources that do not match firms’ competitive stra-
tegies, thus undermining the efficiency of their operations. This
study, therefore, provides insights for managers in selecting the
specific resources they need to achieve the strategic goals of their
firms’ operations.
2. Literature review and hypotheses
In this study we focus on examining the effects of three
supplier management practices, namely strategic long-term rela-
tionship, supplier assessment, and logistics integration, on firms’
operations performance. We acknowledge that we do not address
supplier management practices in the most comprehensive way.
Nevertheless, we consider that the three selected supplier man-
agement practices are key elements of SCM that have been widely
recognized in the SCM literature (e.g. Tan et al., 2002; Chen and
Paulraj, 2004b; Li et al., 2005). In addition, three major points lead
us to focus on these three supplier management practices as
outlined below.
First, it is our understanding that these three supplier manage-
ment practices capture two important aspects of SCM, namely
selecting the right supplier (who) and building the right relation-
ship (how). The ‘‘who’’ aspect is represented by supplier assess-
ment, and the ‘‘how’’ aspect is represented by strategic long-term
relationship (a social construct) and logistics integration
(a technical construct). Second, these three practices reflect the
evolution of supplier management over the past three decades,
beginning with supplier assessment, followed by long-term
relationship, which was very popular during the TQC/TQM era.
Long-term relationship with supplier has since been expanded
into integration with supplier in the past decade, primarily with
the emergence of Information and Communications Technology
(ICT). Third, our literature review suggests that these three
practices represent the key aspects of SCM practices. Over the
past decade, the importance of buyers developing long-term
relationships between with their suppliers has been well docu-
mented in the SCM literature. In order to strengthen the relation-
ships, buyers need to continuously monitor their supplier
performance across multiple dimensions and provide feedback
for improvement (La Londe and Cooper, 1989; Talluri and Sarkis,
2002). In addition, firms now expect their suppliers to attain and
maintain established standards of product quality, service,
distribution, promotion, and partnering (Lai et al., 2005). Without
carefully monitoring supplier performance, firms will be unable
to assess whether their key suppliers can meet the current
demand and will be able to continue business in the future. That
is why supplier assessment and monitoring has been considered
as a key aspect of SCM that helps buyer firms sustain long-term
relationships with supplier firms. As SCM is an integrative func-
tion (Freeman and Cavinato, 1990; Ellram and Krause, 1994;
Håkansson and Gadde, 1994), integration could occur with others
firms along the supply chain (upstream and downstream) in
terms of material and information (Perona and Saccani, 2004).
The above three points justify our decision to include in our
framework logistics integration that embraces the integration of
information and materials along the supply chain as a supplier
management practice. The next section will elaborate on the
specific relationships between the three supplier management
practices and the four dimensions of operational performance.
2.1. Long-term relationship with supplier
Strategic long-term relationship with supplier can be defined
as long-term relationships between a firm and its suppliers
(Li et al., 2006). It plays an important role in enabling the firm
to respond to dynamic and unpredictable changes occurring in
the business environment (Hoyt and Huq, 2000). It focuses on
initiatives that enhance superior relational characteristics
between supply chain members and create a win–win situation
for the buyer and its suppliers instead of adversarial relationships
(Paulraj and Chen, 2005). Through close relationships with
suppliers, buyers are more willing to share risk and reward,
 D. Prajogo et al. / Int. J. Production Economics 136 (2012) 123–130
encourage mutual planning and problem-solving efforts, and
maintain the relationships over a longer period of time (Cooper
and Ellram, 1993; Stuart, 1993; Chen et al., 2004; Li et al., 2007).
In the context of supply chain management, effective supplier
relationships are an important element of a cutting-edge supply
chain, which have a lasting effect on the competitiveness of the
entire supply chain (Choi and Hartley, 1996; Kotabe et al., 2003).
Specifically, forging long-term relationships with key suppliers in
a competitive business environment helps firms achieve superior
performance by reducing cost, improving quality, and enhancing
customer responsiveness or flexibility (De Toni et al., 1994).
Strategically, strategic supplier management includes activities
that represent an investment in transaction specific assets that
may yield the benefits of vertical integration (e.g., lower costs,
better communication, coordination, and quality) without incur-
ring the costs of actual ownership (Carr and Pearson, 1999). This
is because strategic relationship under the conditions of a
‘‘regular’’ long-term contract with suppliers involves more than
just transactional activities (i.e., selling–buying), but also high-
level coordination of suppliers’ systems and capabilities, which
has positive effects on cost, quality, and cycle time (Monczka
et al., 1998). The above discussion suggests that strategic long-
term relationships with suppliers bring potential benefits that
span the four major operational aspects, namely quality, delivery,
cost, and flexibility. Accordingly, we hypothesize that
Hypothesis 1a. Strategic long-term relationship with supplier is
positively related to firm’s quality performance.
Hypothesis 1b. Strategic long-term relationship with supplier is
positively related to firm’s delivery performance.
Hypothesis 1c. Strategic long-term relationship with supplier is
positively related to firm’s flexibility performance.
Hypothesis 1d. Strategic long-term relationship with supplier is
positively related to firm’s cost performance.
2.2. Supplier assessment
Supplier assessment is defined as the assessment of supplier
capability and performance as compared with other similar
companies for the purpose of providing the necessary input to
the buyer firm in the long run and to improve the buyer firm’s
performance (Talluri and Sarkis, 2002). In this definition supplier
performance means a supplier’s demonstrated ability to meet the
buyer’s requirements and supplier capability refers to a supplier’s
potential that can be leveraged to the buyer’s advantage in the
long run (Sarkar and Mohapatra, 2006). In today’s business
environment where competition has shifted from firm level to
supply chain level, suppliers play a key role in affecting the
overall performance of the supply chain. In this regard, monitor-
ing supplier performance and capability is critically important to
the buyer firm (Huang and Keskar, 2007). An important part of
this assessment process is to provide evaluation feedback to
suppliers since this feedback clarifies the buyer’s expectation
and direct suppliers for further improvement (Krause et al.,
2000). Monczka et al. (1993) point out that evaluating supplier
performance is necessary to develop critical product and process
categories with key suppliers. Peterson et al. (2005) also stress
the importance of detailed supplier assessment for integrating
suppliers into new product development. In addition, firms are
also keen to seek suppliers who are capable in engineering,
design, testing, manufacturing, tooling, delivery, and responsive-
ness (Narasimhan et al., 2001). Therefore it becomes a critical
responsibility of purchasing managers to monitor and evaluate
supplier performance and capability with respect to their
125
strategic needs (Hahn et al., 1990; Narasimhan et al., 2001;
Talluri and Sarkis, 2002).
Several studies (Giunipero, 1990; Billesbach et al., 1991; Van
Der Rhee et al., 2009) have empirically examined the criteria for
supplier assessment and suggest that, other than cost, quality,
delivery, and service are the most important assessment criteria.
Krause et al. (2000) show that supplier assessment strategy has a
direct and positive impact on performance improvement of the
buyer firm. Specifically, supplier assessment is important in
ensuring that a supplier has demonstrated the ability to meet a
buyer’s requirements in terms of cost, quality, delivery, or service
(Sarkar and Mohapatra, 2006). Consequently, studies have shown
a positive correlation between the assessment of a supplier’s
delivery and quality performance and the buying firm’s product
quality and competitive position (Kannan and Tan, 2002). In
general, the literature suggests that supplier assessment has
positive effects on three major dimensions of operational perfor-
mance, namely quality, delivery, and cost. Accordingly, we
hypothesize that
Hypothesis 2a. Supplier assessment is positively related to firm’s
quality performance.
Hypothesis 2b. Supplier assessment is positively related to firm’s
delivery performance.
Hypothesis 2c. Supplier assessment is positively related to firm’s
cost performance.
2.3. Logistics integration
Logistics integration is a relatively new notion, which reflects
transformation of manufacturing enterprises to encompass the
entire supply chain, not an individual company, as a competitive
unit (Greis and Kasarda, 1997). Increasing competition has driven
firms to not only improve their internal operations (such as
process control and inventory management), but also focus on
integrating their suppliers into the overall value chain process
(Yeung et al., 2009). The essence of logistics integration is well-
coordinated flow of materials from suppliers, which allow firms
to have a smooth (seamless) production process (Frohlich and
Westbrook, 2001). Higher levels of integration are characterized
by increased logistics-related communication, greater coordina-
tion of the firm’s logistics activities with those of its suppliers and
customers, and more blurred organizational distinctions between
the firm’s logistics activities and those of its suppliers and
customers (Stock et al., 1998; Stock et al., 2000). Such coordina-
tion produces seamless connections between firms and suppliers
in such a way that the boundaries of the activities between the
two parties are blurred. As a result, logistics integration allows
companies and their suppliers to act as a single entity, which
would result in improved performance throughout the chain
(Tan et al., 2002).
Past research has suggested that logistics integration delivers
operational benefits (Van Der Vaart and Van Donk, 2008).
Successful integrated logistics management ties all the logistics
activities together in a system that simultaneously works to
minimize the total distribution cost and attain the desired
customer level (Daugherty et al., 1996). Indeed, logistics support
has been recognized as a critical element in just-in-time and
other time-based competitive strategies (Mcgrath and Hoole,
1992; Fawcett et al., 1997). This focus clearly reflects the
importance of logistics as a source of customer value and
competitive advantage (Vonderembse et al., 1995; Stock et al.,
2000). Previous empirical evidence suggests a positive link
between logistics integration and increased efficiency and pro-
ductivity (Larson, 1994; Frohlich and Westbrook, 2001; Kim,
126 D. Prajogo et al. / Int. J. Production Economics 136 (2012) 123–130
2009). Logistics integration provides firms with a way to improve
performance on multiple competitive dimensions, most particu-
larly cost, flexibility, and delivery performance (Stock et al., 1998).
Using a stochastic cost model, Wei and Krajewski (2000) show
that cost penalties are reduced substantially if firms adopt a
particular level of supply chain integration. In the context of
international operations, logistics integration plays an even more
important role where firms need to coordinate geographically
dispersed global operations, especially when they pursue time-
based strategies (Fawcett et al., 1997). The above arguments and
studies suggest that logistics integration has a positive effect on
operational performance in terms of delivery, flexibility (or
responsiveness), and cost (or efficiency). Accordingly, we
hypothesize that
Hypothesis 3a. Logistics integration is positively related to firm’s
delivery performance.
Hypothesis 3b. Logistics integration is positively related to firm’s
flexibility performance.
Hypothesis 3c. Logistics integration is positively related to firm’s
cost performance.
3. Method
3.1. Sample and procedures
We collected the data for this study from managers of
Australian manufacturing firms via mail survey between end of
2008 and early 2009. We randomly selected the respondents from
a list of manufacturing firms purchased from a mailing list
company. We mailed out a total of 1800 survey questionnaires
and received 232 usable responses, attaining a 13.1% response
rate. We checked the data for bias using correlations of responses
between early respondents and late respondents based on indus-
try sector and organizational size. The chi-square tests on both
categories did not indicate any significant differences between
the two groups of respondents.
The dataset used in this study has been used in two other
studies (Prajogo and Olhager, 2011; Olhager and Prajogo, 2012).
Olhager and Prajogo (2012) analyze differences between two
production systems (Make-To-Stock versus Make-To-Order) with
regard to the role that supply chain management practices play in
enhancing business performance. Prajogo and Olhager (2011)
examine the integration of information (technical and social
dimensions) and the integration of material (logistics) between
focal firms and their suppliers. While each paper includes logistics
integration as a key variable, it considers logistics integration in a
different research framework and incorporates a different set of
variables of interest according to the specific purpose of the study.
In terms of industry sector, 16% of the respondents came from
electronic/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 remaining
sectors identified as ‘‘others’’ included medical equipment, wood,
printing and paper, and defense. In terms of organizational size
(based on number of employees), 46% of the respondents came
from firms with fewer than 100 employees, 35% of the firms have
between 100 and 500 employees, and the remainder 19% of the
respondents came from large manufacturing firms with over 500
employees. Nearly half of the respondents (45%) held a position as
operations managers, 27% supply chain/logistics managers, 18%
procurement/purchasing, and 3% customer services managers.
3.2. Non-response bias
Non-response bias was tested in two ways. First, random
follow-up phone calls were made to identify the firms that
declined to participate in the survey. Reasons for non-participa-
tion stated by non-respondent companies (30 such companies
were identified in this process) included lack of time, lack of
resources, and not interested. None of these reasons alluded to
the possibility that there were systematic reasons for not parti-
cipating in the study. Second, the correlation of responses
between early respondents and late respondents in this study
were analyzed (Armstrong and Overton, 1977; Lambert and
Harrington, 1990). The chi-square test did not indicate any
significant difference between early and late responses. These
results suggest that non-response bias was not a substantive
problem in this data set.
3.3. Measures
To measure strategic long-term relationship and logistics
integration, we adopt the scales of Chen and Paulraj (2004a).
For supplier assessment, we adapt items from previous empirical
studies, including Kannan and Tan (2006a) and Krause et al.
(2000). We use a Likert-scale ranging from 1 (strongly disagree)
to 7 (strongly agree) to measure the degree of implementation of
the three supplier management practices. In responding to this
section, we asked the respondents to focus on the key suppliers
with whom the firms conduct maximum business value in
dollar terms.
We adapt from the scales of Naor et al. (2008) to evaluate the
four operations performance (quality, delivery, flexibility, and
cost) measures. We invited the respondent to assess their firm’s
operations performance relative to the best competitor in the
market with the scale ranging from 1 (weakest in the industry) to
7 (strongest in the industry). Table 1 presents all the items used in
this study.
4. Results
4.1. Scale validity and reliability
We performed a confirmatory factor analysis (CFA) to simul-
taneously validate the measures for all the variables (constructs)
considered in this study. Table 1 presents the results of the
confirmatory factor analysis and the Cronbach’s alphas. All
the items loaded significantly on their corresponding constructs.
The item loadings and the overall model fit results suggest acceptable
unidimensionality and convergent validity of the measures as the
loading paths were above 0.5 (Carmines and Mciver, 1981; Bollen,
1989; Bagozzi et al., 1991; Hoskisson et al., 1993).
The Cronbach’s alphas suggest satisfactory reliability of the
three supplier management constructs (Nunnally, 1978). Since
the four operational performance scales only comprise two items,
we used the Pearson r correlation between the two items within
the scale (instead of Cronbach’s alpha) to assess the reliability. All
the correlations were significant at po0.01 and the Pearson r
coefficients fell within or above the optimal range between
0.2 and 0.4 for inter-item correlation suggested by Briggs and
Cheek (1986).
4.2. Common method variance
We used Harman’s single-factor test to check for common
method variance (Podsakoff and Organ, 1986). We conducted the
test using the principal component analysis and loading all 21
 D. Prajogo et al. / Int. J. Production Economics 136 (2012) 123–130 127

Table 1
Scale validity and reliability for supplier management practices and performance.

Scale Item Loading Cronbach’s

alpha

Strategic long-term We expect our relationships with key suppliers to last a long time 0.71 0.88
relationship We collaborate with key suppliers to improve their quality in the long run 0.80
The suppliers see our relationships as a long-term alliance 0.87
We view our suppliers as an extension of our company 0.85

Logistics integration Inter-organizational logistic activities are closely coordinated 0.72 0.90
Our logistics activities are well integrated with suppliers’ logistics activities 0.83
We have a seamless integration of logistics activities with our key suppliers 0.90
Our logistics integration is characterized by excellent distribution, transportation and/or warehousing 0.87
facilities
The inbound and outbound distribution of goods with our suppliers is well integrated 0.72

Supplier assessment We have a formal supplier assessment system to determine their capabilities 0.81 0.90
We set a clear metric for measuring performance of our suppliers 0.89
We monitor closely the performance of our suppliers 0.87
We compare our supplier performance with other similar companies 0.70

Quality Conformance to specification 0.87 0.70a

Product quality performance 0.85

Delivery On-time delivery 0.82 0.71a

Speed of delivery 0.93

Flexibility Volume or capacity flexibility 0.58 0.37a

Degree of product variety 0.66

Cost Overall operations costs 0.74 0.59a

Competitive prices of our products 0.85

w2 ¼232.64, df¼168, RMSEA ¼ 0.06, NFI ¼0.93, CFI¼0.97, GFI¼ 0.88

a
Since the scale only comprises two items, Pearson r correlation, instead of Cronbach’s alpha, is used to assess reliability. The correlation is significant at p o 0.01.

items onto one common factor. The test checks if one single factor
Supplier 0.22**
would emerge from factor analysis, which would point towards Quality
the presence of common method bias. The procedure involved Assessment
testing a one-factor measurement model where all 21 items were 0.02
loaded onto a single latent construct. The results of this test show
that the one-factor model produced was a poor fit with the data 0.15a Delivery
(w2 ¼1933.20; df ¼188; RMSEA¼0.20; NFI¼ 0.67; CFI¼ 0.69;
Strategic Long- 0.17*
GFI ¼0.55) and many of the items suffered from poor path 0.01
term Relationship 0.25**
loadings ( o0.3). We therefore conclude that common methods
bias was unlikely to be present in our data set. 0.21** Flexibility
0.19*

4.3. Discriminant validity 0.26**

As an additional check, we conducted a discriminant validity
analysis to examine if the explanatory and dependent constructs
significantly overlap one another. Following Venkatraman (1989),
we established discriminant validity by conducting a CFA on each
pair of the constructs in this study. For each pair, we performed
the CFA twice. In the first CFA, we allowed the two constructs to
be freely correlated and estimated the chi-square value of the
model. In the second CFA, we fixed the correlation between
the two constructs at 1.0 and estimated the chi-square value of
the model. If the difference between the chi-squares obtained
from the first and the second CFA (i.e., Dw2) is greater than the
chi-square value at the degree of freedom of 1 and significance
level of p o0.01 (i.e., 6.64), there is reasonable evidence of
discriminant validity of the constructs (Ahire et al., 1996). With
seven constructs incorporated in this study, we conducted 21
chi-square tests. The Dw2 values for all the tests confirm dis-
criminant validity of the constructs and provide further evidence
on the absence of common method variance.
4.4. Structural relationships
We present the results of the structural equation model (SEM)
in Fig. 1. Overall, the model showed a good fit with all the fit
Logistics
0.18* Cost
Integration
a
p < 0.1 * p < 0.05, ** p < 0.01
χ2 = 439.09 df = 204 RMSEA = 0.07 NFI = 0.91 CFI = 0.95 GFI = 0.86
Fig. 1. Path diagram of structural equation modeling.
indices (NFI¼0.91; CFI¼ 0.95; GFI ¼0.87; RMSEA¼ 0.07) deemed
acceptable. We included organizational size (in terms of number
of employees) and process type (ranging from (1) assembly line to
(5) project) as control variables and found no significant effect on
any of the operations performance measure, except for one
negative path between process type and delivery performance.
The findings support seven of the ten hypotheses posed in this
study. Strategic long-term relationship has a positive effect on all
the performance measures, except quality, thus Hypotheses
1b–1d were supported, but Hypothesis 1a was rejected. Supplier
assessment has a positive relationship with quality, supporting
Hypothesis 2a, but not with delivery and cost, rejecting
Hypotheses 2b and 2c. Logistics integration has a positive rela-
tionship with delivery, flexibility, and cost, so Hypotheses 3a–3c
were supported. Table 2 summarizes the results of the hypothesis
testing.
128 D. Prajogo et al. / Int. J. Production Economics 136 (2012) 123–130

Table 2
Summary of the results of hypothesis testing.

Hypotheses Results

Hypothesis 1a: Strategic long-term relationship with supplier is positively related to firm’s quality performance. Rejected
Hypothesis1b: Strategic long-term relationship with supplier is positively related to firm’s delivery performance. Supported
Hypothesis 1c: Strategic long-term relationship with supplier is positively related to firm’s flexibility performance. Supported
Hypothesis 1d: Strategic long-term relationship with supplier is positively related to firm’s cost performance. Supported
Hypothesis 2a: Supplier assessment is positively related to firm’s quality performance. Supported
Hypothesis 2b: Supplier assessment is positively related to firm’s delivery performance. Rejected
Hypothesis 2c: Supplier assessment is positively related to firm’s cost performance. Rejected
Hypothesis 3a: Logistics integration is positively related to firm’s delivery performance. Supported
Hypothesis 3b: Logistics integration is positively related to firm’s flexibility performance. Supported
Hypothesis 3c: Logistics integration is positively related to firm’s cost performance. Supported

For confirmatory purposes, we ran a competing model to
examine if the tested model is the best model by adding two
additional paths that were not estimated in the tested model (i.e.,
assessment-flexibility and integration-quality). The competing
model did not show any improvement in fit and did not produce a
significant reduction in chi-square value. Neither of the two
additional paths was found to be statistically significant. This
result confirms the validity of the tested model.
5. Discussion of the findings
The findings provide a number of insights on the relationships
between supplier management practices and firm performance.
First, the findings reveal different supplier management practices
differ in their effectiveness in enhancing different dimensions of
operational performance. In particular, this study demonstrates
the uniqueness of supplier assessment and logistics integration
with the former showing a positive relationship only with quality,
while the latter showing a positive relationship with delivery,
flexibility, and cost. Strategic long-term relationship shows a
positive relationship with all the operations performance mea-
sures, except quality.
The non-supported hypotheses, although somewhat surpris-
ing, provide important lessons. Supplier assessment does not
show a significant relationship with delivery and cost. From the
cost perspective, this result is somewhat unexpected because
supplier assessment aims to prevent poor quality of incoming
materials, which would minimize the cost of defects. However,
this result could be understood from the perspective that cost is
not the major criterion for selecting suppliers, particularly for
non-commodity (specialty) components or materials. The non-
significant relationship between supplier assessment and delivery
is also surprising given that dependability is normally included in
the criteria for selecting suppliers. However, this finding suggests
that while choosing the right suppliers is important, it is not
sufficient to achieve high performance in delivery and cost
efficiency. As the results show, good performance in delivery
and cost requires partnership and integration with suppliers.
The non-significant relationship between strategic long-term
relationship and quality is unexpected. On scrutinizing the result,
we see that the result is in the right direction as the path
coefficient was positive and significant at p o0.1. This finding
suggests that in order to ensure high quality materials or
components, strict supplier assessment and continuous monitor-
ing of suppliers’ performance is the key factor, rather than simply
building relationships with suppliers. For example, firms require
their suppliers to be certified to ISO 9001 or they conduct quality
audits of their suppliers. However, the finding suggests that
supplier assessment needs to be conducted in the context of
building strategic long-term relationships with suppliers, instead
of being taken as a once-off transaction (or arm’s length
relationship).
Logistics integration, on the other hand, shows a positive effect
on delivery, flexibility, and cost. First, as suggested in the
literature, logistics integration reflects a broader view of opera-
tions from intra-firm level to inter-firm level, where well-coordi-
nated flows of materials from suppliers allow firms to run
seamless production processes. Such coordination allows compa-
nies and their suppliers to operate as a single entity, which would
result in the potential benefits of vertical integration (quality,
dependability, planning and control, and lower costs) without
having it in the physical sense. Logistics integration is also an
essential requisite for improving swiftness and even flow in the
production system, which has a positive effect on delivery time
(speed), flexibility, and cost.
Second, the results provide insights on the key aspects in
managing supply chains, particularly on the upstream side. In this
regard, the results suggest that building overall good relation-
ships and integration with suppliers are no less important than
choosing the right suppliers. Indeed, our findings show that
choosing the right suppliers only affects quality while jointly
establishing relationships and integration with suppliers have
significant effects on delivery, flexibility, and cost. The non-
significant effect of supplier assessment on delivery, flexibility,
and cost provides an important message that firms will not be
able to capitalize on the capability of their (chosen) suppliers
unless they are able to develop strategic long-term relationship
and building logistics integration with them.
Third, this study identifies the key supplier management
practices that contribute to the improvement of firms’ operations
performance. As different supplier management practices lead to
different performance outcomes, firms need to focus on specific
supplier management practices that reflect the best configuration
to achieve their targeted performance. This means that firms do
not necessarily need to implement a broad range of supplier
management practices in their operations, rather, they need
to understand first their operations’ objectives and select the
specific supplier management practices that best enable them to
attain their desired performance outcomes.
Finally, from a broader perspective, the unique effects of the
three supplier management practices demonstrate the need for
integrating two major concepts of operations, namely TQM and
just-in-time (JIT), from the supply chain perspective. TQM empha-
sizes supplier assessment and strategic long-term relationship
(Willborn and Cheng 1994), while JIT is focused on logistics
integration to improve incoming scheduling and minimize inven-
tory (Cheng and Podolsky, 1996). This link is further confirmed
with the positive correlation between the three supplier manage-
ment practices, suggesting the need for implementing the three
practices simultaneously to achieve multiple dimensions of
performance as sources of competitive advantage. This study
 D. Prajogo et al. / Int. J. Production Economics 136 (2012) 123–130
therefore corroborates the literature that suggests that TQM and
JIT should be employed in tandem in order to maximize their
impacts on enhancing broader dimensions of operational perfor-
mance (Flynn et al., 1995; Withers et al., 1997; Vokurka et al.,
2007). Furthermore, the findings show that strategic long-term
relationship can be considered as an overarching supplier man-
agement practice as it has a positive relationship with four major
operations performance measures. This indicates that this prac-
tice is required regardless of the kind of performance under
pursuit. In other words, it lays the foundation for other supplier
management practices, which have more specific effects on
certain operations performance measures.
From a theoretical perspective, our results provide support for
both resource-based view (RBV) and relational view (RV) theories.
RBV suggests firms are successful because they own specific
resources that are heterogeneous across firms (Wernerfelt,
1984). Furthermore, RBV argues that such resources should be
valuable, immobile, and inimitable before they can produce
competitive advantage (Barney, 1991). In this regard, suppliers
have been considered as an integral asset of a firm’s operations
apart from the firm’s internal processes. In recent years, firms
have increased their level of outsourcing in the face of increasing
competition as they are focusing on their core competence. The
increased outsourcing has increased dependence on suppliers;
hence, changing the paradigm of considering suppliers as simply
trading partners into resources. Consequently, firms must be
more careful in selecting their suppliers in the expectation that
they would be able to develop these suppliers’ capabilities to be
part of their competitive resources through building long-term
relationship and integration (Krause et al., 2000; Lai et al., 2005).
At the same time, according to relational view theory (Dyer and
Singh, 1998), firms build their competitive advantage in an
exchange relationship with their partners in order to gain access
to and exploit the complementary resources owned by their
partners. Such relationships are necessary because firms do not
have the specific capabilities that their partners have (because
such capabilities are difficult to imitate). The inter-firm relation-
ships (collaboration, cooperation, or integration) allow firms to
access competitive resources and overcome their internal defi-
ciencies (Ahuja, 2000). In the context of supply chains, relational
view theory explains why firms collaborate with their suppliers
as they may not have the requisite resources and capabilities to
make the components or materials that are produced by these
suppliers.
6. Conclusion and limitations
As with any study, our research is subject to a number of
limitations. We address these issues and offer recommendations
for future research on them. As mentioned earlier, this study does
not comprehensively capture all SCM practices, rather it seeks to
demonstrate the unique effects of different supplier management
practices on operations performance measures. Consequently,
future studies can perform similar tests with other practices that
are no less important than those tested in this study, such as
supplier involvement and information sharing. Also, we limit our
analysis to the combinatorial or additive effects of different
supplier management practices. Future studies can test the
interactive effects between different supplier management prac-
tices to investigate the synergistic or antagonistic effects among
them in predicting various measures of operations performance.
From a methodological perspective, while we believe that the use
of 2-item scales is permissible, we recommend the use of more
than two items in the scale in future studies to improve the
reliability and robustness of the scales.
129
In terms of generalizability of the findings, this study captures
cross-sectoral manufacturing data and therefore has both advan-
tages and disadvantages. On the positive side, the findings could
represent what happens in most manufacturing sectors. On the
downside, the findings suffer from the limitation of addressing
industry-specific issues that could affect the tested relationships.
We have sought to minimize this problem by controlling the
performance by firm size and process type. As such, we recom-
mend that future studies seek to perform comparative analyses
between sectors with different characteristics (e.g., mass produc-
tion versus customization) and test if specific SCM practices can
be employed for achieving different outcomes in different indus-
try sectors. In conjunction with the above point, this study is
focused on Australian manufacturing firms, which could be
considered as representing developed countries. The level of
knowledge on SCM practices among Australian managers could
be considered as relatively advanced that they can capitalize on
the benefits of building supply chain networks with their supply
chain partners as reflected in the findings. The question is
whether these findings would be as applicable in other less
developed countries where firms are still primarily focused on
internal capabilities and lack of international exposures in build-
ing their competitive advantage.
Finally, by testing the direct effects of SCM practices on
performance, our study considers the firm’s internal operations
as a ‘‘black box’’. While internal operations management is not
part of our study, future research can extend our findings by
testing the mediating variables (inside the manufacturing firm),
which helps unravel the value chain links from inbound to
outbound performance.
Acknowledgments
We thank the anonymous referees for their many helpful
comments on earlier versions of our paper. A.C.L. Yeung and
T.C.E. Cheng were supported in part by the Research Grants
Council of Hong Kong under grant number PolyU 5518/10H.
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