Abstract
This is a review of “The Effect of Supply Chain Integration on Supply Chain Risk Management Capability and Firm Performance in the Ppuri Industry” (Jung et al, 2022). The background concepts as well as the relevant concepts from supply chain management necessary to explain this research are defined. The research model they study is described, a research model they are unable to verify. Some of the reasons the authors give for this failure are listed. The managerial applications (or lack thereof) are described. We conclude with comments about the follow-up research they expect to conduct.
Authors’ Purpose
The ppuri industry is a niche industry in South Korea (Dongki, 2021) involved in creating or finishing metal parts used in the making of automobiles, industrial machinery, household appliances, etc. The ppuri industry is also in trouble: ppuri companies have not expanded in any significant manner in recent times, and in fact many of the companies investigated by the authors in this paper went out of business during their research. The authors attempt to explain this by looking at the operation of the supply chain of ppuri companies. They examine the relationship between supply chain integration, supply chain risk management capability, and firm performance. The expected relationships do not hold, and the authors interpret why this happens.
Summary of the Article and its Context
This paper is a study of the ppuri industry in South Korea, an industry that produces or finishes metal parts for large manufacturers. The industry has been struggling in recent years, and the authors attempt to understand the cause of this in terms of supply chain operation. In their study, they find that the relation between supply chain integration and firm performance is not what the authors expected.
They admit that their study suffered from some problems (it used a small sample size and was conducted during COVID-19) but are unable to explain this counterintuitive situation. They make some observations about the conditions in the ppuri industry that may explain this, the most striking one involves the significant difference in size between ppuri companies and the manufacturers they supply. They leave this investigation for future research.
Background of the Issue
The ppuri industry, also called the "root industry," in South Korea is the industry of making metal parts using casting, molding, plastic working, and welding, or finishing those parts using heat or surface treatment (Jung et al, 2022, p. 32-33). These parts are then assembled by manufacturers into automobiles, appliances, industrial or restaurant equipment, etc. (Dongki, 2021). It is called "root" because those parts are of fundamental importance to the manufacturers, and that the parts find their way into many industrial and consumer products.
The ppuri industry has been struggling as illustrated by the facts that ppuri companies are small companies that remain small, that companies have difficulties in finding employees, and that the companies are unable to be competitive due to lack of R&D activities. A South Korea-Japan trade dispute in July 2019 only intensified these problems (Yung et al, 2022, p. 33).
Attempts have been made to strengthen the competitiveness of this industry using strategies that involve increasing supply chain integration. It is expected that tightening SC integration would improve the performance of ppuri companies. But does it?
The authors attempt to investigate the relationship between supply chain integration, the capacity to manage supply chain risk, and overall firm performance. They do this by surveying managers working in ppuri companies and arrive at some counterintuitive observations.
Application of Relevant Supply Chain Management Theory
Modern supply chain management (SCM) has long recognized the fundamental importance of supply chains in company operation, and SC managers understand how well-run supply chains can add value to the products that customers purchase. Because of this, risks to the supply chain must be well understood.
A supply chain risk (Son, 2018, p. 2296-2297) is any event that diminishes the operation of the supply chain. These risks can include buyer-related risks (distortion of demand information or demand volatility), supplier-related risks (poor raw material quality or supplier bankruptcy). Finally, there are internal-process risks such as change in production costs. Supply chain risk management (SCRM) (Son, 2018, p. 2297-2300) are the steps needed to reduce risks or vulnerabilities to the supply chain.
Supply chain integration, one of the holy grails of contemporary supply chain management (Quigg, 2022, p. 24-52), is the degree of cooperation within and between participating organizations. The authors classify integration as being internal or external, and external integration is further broken down into supplier integration and buyer integration.
Supplier integration is an organization’s ability to develop, maintain, and manage long-term relationships with suppliers (Jung, 2022, p. 35). Buyer integration is the practice of managing customer relationships and improving overall customer satisfaction.
External integration allows for cost reduction, productivity and agility improvements, and ease of obtaining resources (Quigg, 2022, p. 373). It also improves operational performance measured by quality, cost, delivery, and flexibility. This improved operational performance should eventually lead to increased company performance (Jung, 2022, p. 35).
In contrast, internal integration are organizational practices that encourage various departments to share knowledge (Jung, 2022, p. 35-36). This knowledge supports external integration and allows the company to achieve company goals. It also allows sharing and cooperation among departments thereby reducing conflict and promoting corporate stability.
Managerial Implications of Article Findings
Based off all this, the authors propose the following hypotheses about the relationships between the above types of integration and overall company performance:
H1a: Supplier integration improves firm performance.
H1b: Buyer integration improves firm performance.
H1c: Internal integration improves firm performance.
Internal integration also makes the supply chain more agile, enabling faster and more effective responses to environmental changes. Further, it also improves the company’s ability to identify internal risks in the supply chain. Integration is thus expected to improve SCRM capability, and the following hypotheses are posited by the authors:
H2a: Supplier integration improves SCRM capability.
H2b: Buyer integration improves SCRM capability.
H2c: Internal integration improves SCRM capability.
Finally, improvement of SCRM capability should have a positive impact on corporate performance, so the authors propose one final hypothesis:
H3: SCRM capability improves firm performance.
Combining these hypotheses together generates a research model where each of the three types of integration (supplier, buyer, and internal) positively bolster firm performance and SCRM capability, and that SCRM capability improves firm performance.
The authors are unable to verify this research model, however common-sensical it may seem. In particular, supply chain integration does not improve firm performance, at least when it comes to supplier and buyer integration. Supplier and internal supply chain integration were shown to have a positive impact on SCRM capability, but buyer integration was not. Finally, SCRM capability was shown to positively impact firm performance.
The authors were thus unable to verify three of the seven hypotheses stipulated above. In summary:
H1a: Supplier integration → firm performance – not supported.
H1b: Buyer integration → firm performance – not supported.
H1c: Internal integration → firm performance – supported.
H2a: Supplier integration → SCRM capability – supported.
H2b: Buyer integration → SCRM capability – not supported.
H2c: Internal integration → SCRM capability – supported.
H3: SCRM capability → firm performance – supported.
How can this be explained? The authors specifically note that their study may suffer from a small sample size: surveys were sent to 928 ppuri companies, seventy-five responded, but one was rejected because it was incomplete. The authors used the remaining seventy-four responses as the base of this study. They also state that many of the unreturned responses were caused by the ppuri companies going out of business.
Another flaw in their study noted by the authors is that it was conducted during the COVID-19 plague. They did not investigate how the plague specifically hampered their investigation.
The authors do propose an explanation for the unexpected relationships between supply chain integration, firm performance, and SCRM capability:
Firms in the Ppuri industry play a role as suppliers of large companies in the supply chain, and most of them perform simple manufacturing and processing tasks at the request of buying companies. Therefore, even if the level of buyer integration increases, firms in the Ppuri industry might not fully achieve the advantages of buyer integration, including cost reduction, productivity improvement, and ease of securing resources, due to the power imbalance between supply chain partners. (Jung et al, 2022, p. 43)
In other words, the great difference in size between ppuri companies and the manufacturers they supply somehow explains the lack of expected relationships. They do not investigate this explanation, either statistically or through deductive logic. If they do investigate it in a future paper, they should check to see if a similar phenomenon occurs in other situations where this “power imbalance” is in effect.
The authors recommend that ppuri companies do take steps needed to integrate suppliers and buyers into their supply chain, and they expect that this will improve SCRM capability and firm performance. These recommendations are not borne out in this paper, and verifying their recommendations would require A/B testing.
Because of the quality of the research and the very niche nature of the ppuri industry, implementing their unproven recommendations in another industry is justified only because having an integrated supply chain makes sense.
Conclusion
The authors have established that supply chain integration doesn’t necessarily improve supply chain risk management capabilities nor firm performance. Because of the counterintuitive nature of that statement – as well as problems executing this study – further research is certainly needed.
References
Bax, J. & Ruel, S. (2021). “Can supply chain risk management practices mitigate the disruption impacts on supply chains’ resilience and robustness? Evidence from an empirical survey in a COVID-19 outbreak era.” International journal of production economics, 233, 107972. https://doi.org/10.1016/j.ijpe.2020.107972
Dongki, L. (2021). “What is PPURI industry?” Korea National PPURI Industry Center. Retrieved 8 October 2021 from https://www.techconnect.kr/html/?pmode=UserAddon&smode=ajax&fn=ViewFile&fileSeq=6724
Jung, J., Shin, J., & Yang, H. (2022). “The effect of supply chain integration on supply chain risk management capability and firm performance in the ppuri industry.” Seoul Journal of Business, 28 (2), 31-48. https://doi.org/10.35152/snusjb.2022.28.2.002
Quigg, B. (2022). Supply Chain Management (1st ed). McGraw-Hill Create. https://bookshelf.vitalsource.com/books/9781307866025
Son, C. (2018). “Supply chain risk management: A review of thirteen years of research.” American Journal of Industrial and Business Management, 8 (12), 2294-2320. https://10.4236/ajibm.2018.812154
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