Linking Supply Chain Management Superiority to Multifaceted Firm Financial Performance

By Greer, Bertie M.; Theuri, Peter | Journal of Supply Chain Management, July 2012 | Go to article overview
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Linking Supply Chain Management Superiority to Multifaceted Firm Financial Performance


Greer, Bertie M., Theuri, Peter, Journal of Supply Chain Management


INTRODUCTION

Existing research indicates that supply chain (SC) effectiveness can lead to increased firm financial performance (Craighead, Huh and Ketchen 2009). AMR Research (2010), a Boston-based research firm that conducts independent research on supply chains, has shown that organizations with superior supply chain performance outperform their competitors in earnings per share, return on assets and profit margins (Caruso 2004). When firms choose to manage their supply chains and focus on enhancing overall capabilities, the results have yielded increased performance because of enhanced business strategies and practices. Indeed, research indicates that firm financial performance can be increased due to effective supply chain management (SCM). Firms that have invested in improved IT-based SCM systems (Dehning, Richardson and Zmud 2007) became more capital efficient (Hartley-Urquhart 2006), became more customer and supplier oriented (Tan, Kannan and Handfield 1998; Tracey, Lim and Vonderembse 2005), implemented effective quality management practices (Kaynak and Hartley 2008; Lo, Yeung and Cheng 2009), improved logistics performance (Green, Whitten and Inman 2008; Joong-Kun Cho, Ozment and Sink 2008; Toyli, Hakkinen, Ojala and Naula 2008) and leveraged innovation, cost, and knowledge among members in the supply chain.

Even though existing research indicates that supply chain superiority can lead to an increase in firm financial performance, the results are puzzling. Current research studies each define firm performance in their own way. For example, firm performance has been defined as cost reduction, increase in revenues and higher prices (Kaynak and Hartley 2008), return on assets and Altman's Z (Craighead et al. 2009), profitability, productivity and growth (Toyli et al. 2008), and gross margins, return on sales, inventory turnover, market share, and reduction in general, sales and administrative expenses (Dehning et al. 2007). The most comprehensive definition was found in Kim (2009) in which firm performance was defined as market share growth, total cost reduction, return on investment, return on assets, financial liquidity, and net profit. This study builds on present research by investigating supply chain effectiveness and its relationship to a broader definition of firm financial performance indicators by including other financial variables such as maturing obligations and cost ratios.

In analyzing financial data, analysts use various devices to bring out the comparative and relative significance of the financial information presented. Among others, ratio analysis is a common device. Ratios can be classified into four major types: profitability ratios, activity ratios (also called turnover or efficiency ratios), liquidity ratios, and coverage ratios (also called leverage or capital structure ratios). Profitability ratios measure the degree of success or failure (in profits) of a given firm. Activity ratios measure how effectively the firm is using the assets it has invested in. Both liquidity ratios and coverage ratios provide a measure for leverage (credit risk), with liquidity ratios measuring the company's short-run ability to service (pay) its short-term debts (maturing obligations).

Current research also fails to comprehensively identify supply chain leader firms. For example, existing studies use self-report survey data from SCM professionals (Craighead et al. 2009), American Society for Quality members (Kaynak and Hartley 2008), a Lexis/Nexus and Factiva newswire search for firms that use IT-based SCM systems (Dehning et al. 2007), firms that are members of the Finnish Association of Logistics and the Federation of Finnish Enterprises (Toyli et al. 2008), and firms selected from Korea's listed and registered corporations and member firms from Japan's national logistics professional association (Kim 2009). Although these studies contribute to our understanding of SCM effectives and firm financial performance, they are not comprehensive in their analyses of financial performance and they do not identify firms as supply chain leaders.

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