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Abstract
Purpose The purpose of this paper is to identify the success factors for supply chain in Indian small-
and medium-scale enterprises (SMEs) and establish a causal relationship among them. In the present
scenario, the SMEs are under huge pressure to achieve the supply chain competitive advantage and to
improve operation and logistic effectiveness and, at the same time, remain tractable to the demand
uncertainty and volatility in the market. To enhance the performance of supply chain in SMEs, the
managers need to identify the internal as well as the external factors that affect the supply chain
performance of SMEs in India. They need to understand the causal relationship of these factors.
Design/methodology/approach There may be a number of factors that are critical for achieving
acceptable supply chain performance, and these factors have been identified by principal component
analysis (PCA). In all, 29 factors have been identified by using PCA and the dominating 29 factors are
categorized into 6 constructs, and finally, the structural equation modelling (SEM) methodology using
the AMOS 4.0 program has been adopted as the primary methodology for this paper to assess the causal
relationship among six constructs.
Findings In this paper, the authors analyzed the structural relations among information technology
(IT), logistic effectiveness, operational effectiveness, customer relationship, supplier relationship and
SCM competitive advantage. Results indicate that IT holds the key to achieve the SCM competitive
advantage in SCM practices of SMEs in India. Journal of Modelling in
Management
Vol. 11 No. 1, 2016
We are very much thankful to the managers of Indian SMEs those are participated in our survey. pp. 269-287
We are also thankful to Das Ranjit Das of C.E.T, Bhubaneswar for his constant guidance. Finally Emerald Group Publishing Limited
1746-5664
are grateful to our reviewers for their valuable suggestions. DOI 10.1108/JM2-01-2014-0004
JM2 Research limitations/implications The proposed models for enabling factors are tested in firms
with a limited numbers of factors in highly competitive environment. More factors may be incorporated,
11,1 which will help for a clear understanding and establishing the causal relationship among the various
enabling factors.
Practical implications Although managers of Indian SMEs are aware of various enabling factors,
a systematic approach is required for identifying enabling factors, and as these factors may have
complex interrelation between them for analyzing supply chain performance in SMEs, it is essential that
270 such an approach is in place. The paper presented here will help the SMEs managers in identifying the
areas in which they need to focus their attention to improve SCM practices. A structural equation
modelling is developed to show the complex relationship between the factors that affect the
performance. In addition to that, the proposed structural equation model acts as a good guideline to
improve the performance of the supply chain in India.
Originality/value The paper provides a structural equation model to develop a map of the causal
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1. Introduction
In todays world, small- and medium-scale enterprises (SMEs) push the development of
the economy by creating employment opportunities. These opportunities account for
more than 60 per cent of the employment for the Economic Co-operation and
Development (OECD) in a country. In the present scenario, the SMEs are under huge
pressure to achieve the supply chain competitive advantage and to improve the
operation and logistic effectiveness. At the same time, they must also remain tractable to
the demand uncertainty and volatility of the market so as to sustain in this market.
These SMEs need to adopt information technology (IT) to support the supply chain
function as well as increase their efficiency by accomplishing tighter cooperation
relationship all over the supply chain.
The definition of SMEs varies from country to country. In the Indian context under
MSMED Act, the criterion for defining SMEs for manufacturing enterprises is the
investment in plants and machineries. For small scale, it must be from Rs 25 lakhs to
Rs 5 crores, and for the medium scale, it should be between Rs 5 and Rs 10 crores. The
SME sector contributes about 35 per cent to the industrial production and around the
same portion to the total exports of the Indian economy (Singh et al., 2005). There is
immense potential for cost savings in India, if the cost of logistics can be reduced from
the current level of 14 per cent of gross domestic product (GDP) to a level similar to those
in North America, where 8.7 per cent of GDP is the norm. The savings in India would be
around $20 billion, resulting in a potential 4.3 per cent drop in the price of Indian goods
globally, making Indian goods more competitive (Mitra, 2007). The money blocked in
the form of inventory raw materials, work-in-process and finished goods are the
measures of responsiveness for the supply chain to market demand. On an average, an
Indian organization carries a total of 33.41 days of inventory raw materials, 14.25 days
of WIP and 16.09 days of finished goods, which reflect the poor state of logistics
infrastructure within the country (Sahay et al., 2001).
Different authors define supply chain management (SCM) in various ways. SCM
is a band of approach that intends to put together the manufacturers, suppliers,
stores and warehouses under a single idea, so that the product is manufactured at
the right time and distributed in appropriate quantities to the correct locations to Supply chain
satisfy the service level requirements and simultaneously minimize the system wide performance
costs(Simchi-Levi et al., 2008). For achieving sustained growth and developing
competitiveness, good SCM is very important. The intense competition in the
in Indian
present scenario calls for the enterprises to be more aware of their supply chains, SMEs
especially in the case of SMEs. (Singh, 2011). The long-term sustainability of SMEs
needs to adopt IT to support the supply chain functions effectively and efficiently 271
(Hsin and Papazafeiropoulou, 2008). The commercialization of IT is widespread
throughout the world, so that IT can create new business opportunities. Nowadays,
SMEs are searching the paths to enhance their productivity and make their
competitive place stronger (Premkumar, 2003). IT tools significantly add to the
infrastructural stability, which ensure that the appropriate information is delivered
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at the right time. IT also enhances the competitiveness by integrating the supply
chain partners with the inter-organizational functions. Hence, an increased
consciousness of deriving profit making through IT is seen within the SMEs
(Bhagwat and Sharma, 2007). Previous IT studies have visualized that only a few
SMEs have concentrated on the IT implementation (Grandon and Pearson, 2004). It
has also been discovered that regardless of the proportionate development of IT
within the SMEs, the implementation rate of IT by them is comparatively low
(MacGregor and Vrazalic, 2005), and large enterprises have benefited much more
than SMEs in saving their costs due to their IT-based selling concept (Riquelme,
2002). While answering for the causes behind the differential adoption of IT in
SMEs, some unique characteristics of these businesses can be highlighted. SMEs
suffer globalization constraints due to limited access to market information
(Madrid-Guijarro et al., 2009)
The aim of this study is to attain a clear picture of the supply chain implementation
in SMEs in India by exploring and discovering factors affecting SCM process within
SMEs, both in the context developing and developed countries, existing in the studies
with maximum focus on related issues of some SMEs. The suggested model-based
framework represents the dominating factors of SCM process in SMEs through critical
review of some studies from past based on SCM among SMEs. In this study, prime
importance has been given to the integration of IT to support the supply chain functions.
The study examines and entails the different factors which strengthens and influences
the SMEs to adopt IT solutions. Using the suggested model, the authors classify the
critical factors which directly and positively affect the performance of supply chain in
Indian SMEs.
The framework for affecting SCM practices in Indian SMEs is shown in Figure 1. The
structure of the paper is as follows: Section 2 in a tabular form summarizes the factors
affecting SCM practices of SMEs organizations in global scenario. Section 3 presents a
model of IT, supplier relationship, customer relationship, operational effectiveness,
logistic effectiveness and SCM competitive advantage. Section 4 presents the
questionnaire survey, and then, principal component analysis (PCA) has been used to
analyze the survey questionnaire of the respondents. This results in the different broad
constructs derived from critical success factors. Section 5 entails the application of SEM
to determine the causal relationship among the broad constructs and testing the
hypothesis. Section 6 focuses on the results and discussion of the SEM. Section 7
discusses the conclusions derived from results.
JM2 Factors affecting SCM practices in SMEs
11,1
Questionnaire survey
272
Performance of SCM practices in
SME using PCA
Structural equation
Determination of causal relationship between the factors
Modelling
2. Literature review
The objectives of this research were projected to look into the essence of SCM practices
in terms of supplier relationship, customer relationship, IT, operational effectiveness
and logistic effectiveness, and to determine whether supply chain practices have an
impact on SCM competitive advantage of the firm.
Considerable amount of research in the area of critical success factors of SCM in
SMEs has been reported. The details are shown in Table I.
Ulusoy (2003) Logistics, supplier relations, customer This paper aimed at evaluating the SCM practices
relations and production in the manufacturing industries in terms of
logistics, supplier relations, customer relations
and production
Li et al. (2005) Supplier partnership, information This paper attempts to develop the SCM practices
sharing, customer relationship and (supplier partnership, customer relationship,
Lean practices information sharing, etc.) to assess the
performance of the overall supply chain
Tan et al. (1998) Customer relations, quality and This paper concludes that a firms customer
purchasing relations and purchasing practices has an impact
on its SCM strategy
Chen and Paulraj (2004) Supplier base reduction, long-term This paper discovers and merges various supply
relationship and supplier involvement chain initiatives and factors (supplier
involvement, supplier buyer relationship, etc.) to
develop SCM constructs and measuring those
constructs for building a suitable theory of SCM
Morrissey and pittaway (2004) Customer relationship and supplier This paper explores the customer relationship
relationship and supplier relationship on the perspective of
SME
Chien-Liang et al. (2005) IT This paper focused on how the small- and
medium-sized enterprises align the SCM in
reception to the information sharing
Hong and Jeong (2006) Roles of SMEs Explores the roles of SMEs as suppliers,
customers, etc., and their supply chain
relationships
Sharma and Bhagwat (2006) IT Focused on information-sharing practices going
on SME
Battistoni et al. (2013) Operation management practices Importance of OM practices on SME
Gunasekaran et al. (2004) Operational performance Focused on the various dimensions of operational
performance applicable to SME
(continued)
SCM in SMEs
Table I.
273
SMEs
in Indian
Factors affecting
performance
Supply chain
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11,1
JM2
274
Table I
Author Focus Findings
Chinomona (2013) Logistic integration, IT, strategic Focused on the influence of IT on strategic
purchasing purchasing and logistic integration in the context
of SME
Sukati et al. (2011) Supplier relationship, customer Focused on the relationship of supply chain
relationship, information sharing and management practices with competitive
competitive advantage advantage
Jabbour et al. (2011) Supplier relationship, customer Focused on the key factors such as supplier
relationship and information sharing relationship, customer relationship and
information sharing toward the adoption of SCM
practices
Fawcett (1992) Logistic responsiveness Focused on the impact of logistic responsiveness
on SCM strategy
Thatte (2007) Competitive advantage Focused on the relationship between SCM
practices and competitive advantage
Ghobakhloo et al. (2011) IT Focused on the reasons that support SMEs to
adopt IT
Gilaninia et al. (2012) IT The use of IT towards the performance of SMEs
Zulkiffli (2009) Supply chain operation capabilities Explores on the key factors affecting the SCOC of
(SCOC) SMEs
Jharkharia and Shankar (2004) Buyersupplier relationship and Concludes that information sharing has important
information sharing role toward the effectiveness of supply chain
the benefits from the technologies by reaching to the new customers and suppliers in the Supply chain
competitive market. IT helps to improve the supply chain competencies without performance
changing the business practices and manufacturing operations (Thakkar et al., 2008). in Indian
Information and communication technology (ICT) plays a key role in transforming the
SMEs to achieve the competitive advantage (Kushwaha, 2011). These findings lead to
SMEs
the following hypothesis:
H1. IT positively influences SCM competitive advantage. 275
The adoption of IT helps the SMEs to remain competitive in the global market and
achieve the operational performance. The drivers that support adoption of IT are
customer satisfaction and time- and cost-saving. (Apulu and Latham, 2011). The
advancement of IT in the form of ERP system helps to improve operational performance
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of the SMEs in terms of cost reduction, better utilization of resources and enhanced
business performance (Bharathi and Rakesh, 2012). IT helps the firms to perform better
in operational performances in terms of customer responsiveness and cost efficiency.
(Ye and Wang, 2013). These findings lead to the following hypothesis:
H2. IT positively influences operational effectiveness.
IT helps to share the forward and reverse logistics information with the suppliers (Louw
and Venter, 2006). The integration of IT with logistics helps to achieve the competitive
advantage. The integration helps to get the information in each stage of the supply chain
and accordingly optimize the logistic cost or transportation cost (Reddy, 2012). High
level of logistic integration with suppliers and customers leads to superior business
performances (Chinomona, 2013). These findings lead to the following hypothesis:
H3. IT positively influences logistic effectiveness.
Operational performances of SMEs are measured in terms of reduction in lead time,
reduction of inventory level, forecasting and reduction of cost. These measures help to
gain in supply chain competitive advantage (Gunasekaran et al., 2004). The operational
competence in terms of supply chain integration, supply chain flexibility and supply
chain learning orientation fulfils the criteria of supply chain strategic advantage. (Ngai
et al., 2011). SCM implementation has a positive relationship with the operational
performance of the firm in terms of flexibility, cost, quality and delivery (Miguel and
Brito, 2013). These findings lead to the following hypothesis:
H4. Operational effectiveness positively influences SCM competitive advantage.
Logistic performance of a firm has a high impact on the supply chain performance
because logistic service has to integrate information flow, money flow and business flow
in the supply chain (Lin, 2006). Logistic performance has a positive relationship with
supply chain performance which helps to improve organizational performance (Green
et al., 2008). Logistic effectiveness can provide benefits in terms of customer satisfaction,
reduction in cost, operating profit and growth in sale. These results in competitive
advantage of the organization (Sakchutchawan et al., 2011). Logistic integration of
SMEs with suppliers have a high impact on the business performance (Chinomona,
2013). These findings lead to the following hypothesis:
H5. Logistic effectiveness positively influences SCM competitive advantage.
JM2 A strategic relationship with supplier can be a key parameter to achieve competitive
11,1 advantage of a firm (Noble, 1997). A good relationship with supplier will increase the
performance of the firm throughout the supply chain (Benton and Maloni, 2005). Sharing
information and technology with the supplier gives supply chain agility to a firm
(El-Tawy and Gallear, 2010). These findings lead to the following hypothesis:
H6. SCM competitive advantage positively influences supplier relationship.
276
SCM practices consider customer relationship management as a key parameter (Noble,
1997; Tan et al., 1998). The success of an organizations supply chain depends on the
relationship with the business partners that include the customers (Moberg et al., 2002;
Thatte, 2007). Customer relationship management has a positive impact on SCM, and its
power helps to improve the quality of the product and satisfy the customers of the
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manufacturing companies (Agus and Hassan, 2012). These findings lead to the
following hypothesis:
H7. SCM competitive advantage positively influences customer relationship.
4. Questionnaire survey
In all, 605 personnel of managers and assistant managers of 200 SMEs from the different
states of India were requested to participate in the survey. Only 123 responses were
received from SMEs that had SCM divisions. Out of 123 responses, 105 questionnaires
were properly filled.
There are two methods to determine sample size in structural equation modelling
(SEM), that is, as a function of the ratio of indicator variables to latent variables and as
a function of minimum effect, power and significance (Westland, 2010, Barclay et al.,
1995; Chin, 1998; Chin and Newsted, 1999; Kahai and Cooper, 2003, Nunnally, 1967;
Boomsma, 1982). Boomsmas simulations suggested that a ratio r of indicators to latent
variables of r 4 would require a sample size of at least 100 for adequate analysis and,
for r 2, would require a sample size of at least 400. Marsh et al. (1988, 1996, 1998) ran
35,000 Monte Carlo simulations on a sample size of at least 200; r 12 would require a
sample size of at least 50. Consolidation and summarization of these results suggest
sample sizes:
In the above equation, r is the ratio of indicators to latent variables. There are 29
indicators, and 6 latent variables have been used in this paper:
r 29/6 4.43 5.
5 and 50 crore and 14.3 per cent of the firms had revenue exceeding 50 crore.
SPSS-14 package has been used for factor analysis based on the responses of the
questionnaires. In all, 29 factors have been extracted from 35 factors mentioned in the
questionnaire, which captured 89 per cent of the total variance of the data set. A varimax
factor rotation has been used in PCA to group the factors and the category of factors
(constructs). Six constructs were formed. Table VII gives the constructs and the factors
associated in each construct. Table VII indicates various statistics (such as mean, factor
Steel 30 28.6
Machinery and equipment 57 54.3
Chemical and fertilizer 12 11.4 Table II.
Electronic equipments 6 5.7 Respondents based
Total 105 100 on industry type
0-20 12 11.4
20-50 36 34.3
50-100 27 25.7
100-150 12 11.4
150-200 6 5.7 Table III.
Above 200 12 11.5 Workforce size of the
Total 105 100 respondents
5. SEM approach
SEM is used to test complex relationships between observed (measured) and
278 unobserved (latent) variables and also relationships between two or more latent
variables. It is a combination of multiple regression and factor analysis. SEM is an
useful way to transact with multicollinearity, and is an effective method for considering
the unreliability of survey response data (Tripathy et al., 2011, 2012).
SEM is a useful tool when one dependent variable needs to be treated as an
independent variable in a subsequent analysis (Hafeez et al., 2006). For instance,
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0-3 12 11.4
3-6 9 8.6
6-9 6 5.7
9-12 12 11.4
12-15 24 22.9
Table V. 15-18 15 14.3
Industrial experience Above 18 27 25.7
of the respondents Total 105 100
0-1 9 8.6
1-2 9 8.6
2-3 6 5.7
3-5 12 11.4
5-10 39 37.1
10-25 6 5.7
Table VI. 25-50 9 8.6
Annual turnover of 50-100 9 8.6
the manufacturing Above 100 6 5.7
firm of respondents Total 105 100
Standardized
Supply chain
Factor Cronbachs regression performance
Constructs and constituent factors Mean SD loading alpha weight in Indian
Supplier relationship 0.869 SMEs
Actively involvement of suppliers in
NPD 4.3 0.7 0.853 0.821*
Suppliers involvement for planning and
279
goal-setting activities 4.2 0.7 0.849 0.828*
Suppliers involvement for quality
improvement of the product 4.3 0.8 0.869 0.841*
Solution of the problem jointly with our
suppliers 4.3 0.7 0.823 0.863*
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(2005), Hung and Lu (2008) and Lattin et al. (2009), goodness of fit index (GFI),
normalized fit index (NFI) and root mean square error approximation (RMSEA),
chi-square statistics and degree of freedom (DF) estimates were computed to validate the
model. Table VIII gives the computed values of various indices. Columns 1, 2 and 3 give
the chi-square (2), DF and their ratio, respectively. Column 4, 5 and 6 give the value of
GFI, NFI and RMSEA of the model. Here, GFI and NFI values are more than 0.9 and
RMSEA value is less than 0.05, which justify the fitness of the model. The parameters
indicate that the model is reliable (Arbuckle, 1997; Hafeez et al., 2006), and we can use
this model to predict the relationships among the constructs.
The path analysis presented in Figure 3 is based on the empirical data collected of
SCM from various SMEs in India. The standardized regression weight indicated on the
branches in the path diagram was used to accept or reject the hypothesis.
model
Figure 2.
281
SMEs
in Indian
0.913
0. 5 21
13 0.7
0.511
0.519
refuted. All the seven hypotheses were supported at the 1 per cent level of
significance (Table IX).
The survey provides valuable insights into the factors affecting SCM practices in
Indian SME sectors. The specific findings of the survey and the interpretation of the
results obtained in the context of objectives as set are summarized below:
Table IX shows that the standardized regression weight takes the highest value
(0.913) for the positive effect of IT on SCM competitive advantage.
From an analysis of the supported hypotheses (Table IX), we conclude that IT helps to
achieve the logistic effectiveness and encourages the SCM competitive advantage.
Standardized
Hypothesis Description regression weight Inference drawn
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Further reading
European Union (2003), Commission recommendation of 6 May 2003 concerning the definition of
micro, small and medium-sized, Official Journal of the European Commission, L 124/35- L
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124/41.
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