The Implementation of Supply Chain Management at Microfirms

David A. Parmenter

West Texas A&M University

2501 4th Avenue, Canyon, TX 79016
Ph: (806) 651-2503 Fax: (806) 651-2488
dparmenter@wtamu.edu

Terry Pearson

West Texas A&M University

2501 4th Avenue, Canyon, TX 79016
Ph: (806) 651-2496 Fax: (806) 651-2488
tpearson@wtamu.edu

ABSTRACT
Microfirms (firms with less than ten employees), which represent an increasingly important
portion of the economy, have been somewhat hesitant to implement supply chain management.
This study utilizes a survey questionnaire to investigate the extent to which microfirms have
implemented supply chain management, the factors that encourage implementation, the factors
that discourage implementation, and the impact of supply chain implementation on firm
performance.

For the last decade many large firms and, to a somewhat lesser extent, medium-sized and small
firms have been putting great effort into implementing supply chain management, a philosophy
and set of methods that allow firms to more closely coordinate their activities with those of
suppliers and customers. However, very small microfirms, defined as firms having fewer than
ten employees (European Commission, 1996), have been more hesitant to adopt this paradigm.
Many studies have been conducted on the use of supply chain management by large firms.
Small and medium-sized enterprises (SME’s), defined most frequently (but not always) as firms
with less than 500 employees, have also been studied in this context. Few studies, however,
have focused attention on microfirm use of supply chain management. Because supply chain
management is becoming more and more crucial to success in today’s ultra-competitive global
economy and because microfirms make up an increasingly important part of the economy, it is
important to investigate microfirm use (or nonuse) of supply chain management more closely.
The hesitancy shown by microfirms concerning supply chain management practices may be
hurting not only the microfirms but also the larger firms with which they do business as well as
the economy as a whole.

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This study utilizes a survey questionnaire to investigate the extent to which microfirms have
implemented supply chain management methods, the factors that encourage implementation as
well as those that discourage implementation, and the impact of supply chain implementation on
firm performance. In recognition of the fact that microfirms are likely to be somewhat lacking in
supply chain expertise, the survey will also determine the areas of supply chain management in
which microfirms most desire additional training,

THE COMPONENTS OF SUPPLY CHAIN MANAGEMENT

Supply chain management is an outgrowth of a pair of previous perspectives, the upstream-
focused procurement and supply management orientation of the manufacturer and supplier and
the downstream-focused transportation and logistics perspective of the distributor and retailer
(Mentzer et al., 2001; Tan, 2001). Because it is a fairly new concept there are a variety of
models with no one standard definition having yet emerged (Gibson, Mentzer & Cook, 2005;
Quayle, 2002; Tan, 2001). The various models run from the fairly narrow to the very broad.
Gibson, Mentzer and Cook provided a fairly narrow definition that emphasizes the importance of
collaboration and of aligning activities with strategy. The Supply Chain Operations Reference-
model (SCOR) spans the entire supply chain from supplier’s supplier to customer’s customer,
but omits activities such as product design and some elements of after-the-sale service. It also
fails to explicitly consider quality and information technology (Schultz, 2003, Summer; Supply
Chain Council, 2005). The Council of Supply Chain Management Professionals defines supply
chain management very broadly in its Supply Chain Management Process Standards
(2004abcdef), including all of the activities involved in planning for supply chain management,
sourcing the necessary inputs, producing the product, delivering the product and even processing
returns. The model also includes supply chain facilitators such as quality, information
technology and security.

This paper takes a moderately broad perspective, including the following components of supply
chain management in its survey instrument.
• development of a well-defined strategy based on customer needs that is used to determine
what it is that suppliers must do well
• installation of the necessary computer and telecommunication technology
• rationalization of internal processes in preparation for external integration
• joint problem solving with customers and/or suppliers
• joint planning of future activities with customers and/or suppliers
• sharing of sensitive demand-related information
• relationship building with customers and/or suppliers
• use of the internet for order placement
• revision of processes, procedures and/or technology to increase coordination with
customers and/or suppliers
Note that this study is focused outwardly on interactions between the microfirm and its suppliers
and customers and does not consider the internal activities required for the firm to produce its
product.

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 IMPLEMENTATION OF SUPPLY CHAIN MANAGEMENT AT
MICROFIRMS
Although there are certainly examples of supply chain failures, many large firms have achieved
significant success through the implementation of supply chain methods (Chapman, Ettkin &
Helms, August 2000). Kopczak and Johnson (2003) noted that supply chain management’s
ability to leverage the skills and resources of partner firms allows the increased differentiation
that can build customer loyalty. The knowledge of each partner’s abilities coupled with an
increased understanding of end user needs allows firms to add features and services in such a
way that the value to the end user increases more than the cost to the chain (Brewer & Speh,
2000). Sharing both demand- and supply-related information with partner firms allows those
firms to plan more effectively which ultimately allows better asset utilization, lower inventory,
reduced costs and improved customer service.

There are many factors acting to encourage greater implementation of supply chain management.
Global competition causes intense pressure to reduce costs and to develop value-added features
and services to maintain customer loyalty. Global sales and sourcing, coupled with the dramatic
cost-cutting-oriented transfer of jobs to foreign nations with lower wage rates, leads to longer
supply lines and distribution channels that must be coordinated. The current focus on core
competencies encourages increased outsourcing, meaning that there are more suppliers and more
supplier relationships to be managed. The increasing coverage of the internet also calls for
supply chain management, as the ability to manage information flows becomes more and more
important. Shorter product life cycles and the resulting fears of obsolescence in many industries
cause manufacturers to maintain smaller finished goods and parts inventories, meaning that
suppliers must be more reactive in response to orders from the manufacturers (Ericksen, Suri, El-
Jawhari & Armstrong, 2005, February). For smaller firms, pressure from larger customers may
also be a spur to implementing various supply chain practices.

SME’s became an increasingly important part of the U.S. economy in the 1990’s as more and
more employees at larger firms suffered layoffs and the growing focus on core competencies
among many firms led to increased outsourcing by larger firms to smaller suppliers (Park &
Krishnan, 2001). SME’s not only make up the bulk of U.S. manufacturing facilities and
workers, but also account for much of the innovation (Committee on Supply Chain Integration,
2000). Thus it is important that SME’s develop the ability to succeed in a supply chain
management world.

In theory, SME’s may have some advantages that should help them to thrive in supply chain
management. For example, they tend to be less bureaucratic, more agile and more
entrepreneurial and are generally able to get their products to market more quickly. Despite
these potential advantages, SME implementation of supply chain management has been
somewhat problematic. For example, Songini (2001, February 12) reported that many large
enterprises were frustrated by the lack of information technology expertise demonstrated by
many of their smaller suppliers, a lack that prevented the implementation of features that end
users wanted such as the ability to track orders online. Quayle (2002) noted that many large
firms were developing strategies to leverage their skills in alignment with those of their suppliers
but that those strategies were undermined by the smaller firms’ inability or unwillingness to fully

582
integrate. In some cases the failure was largely the fault of the larger firms, which were unable
to resist the urge to bully their SME suppliers, reducing the incentive for the SME’s to fully
integrate and reducing the benefits of integration (Molini & Benton, 2000). This tendency
toward bullying was seen to increase as the competitive pressures on the larger firms increased.
Simatupang and Sridharan (2004) noted the importance of having an incentive system designed
in such a way that SME’s will receive a fair share of the rewards if they perform the roles
assigned to them by the chain in an effective and efficient manner. Another problem – a key
omission – is that many smaller firms fail to develop a supply chain strategy that will act to
support the firm’s overall strategy.

A study by Arend & Wismer (2004) was particularly discouraging. It showed that the successful
SME’s were more likely to implement supply chain management methods than less successful
firms but that, perversely, supply chain implementation tended to hurt these strong firms.
Several alternative explanations are proposed for this, however, including the proposition that the
SME’s didn’t select partners based on strategic alignment but rather chose partners with which
the integration would be least difficult, for example partners with compatible computer systems.

Quayle (2002) found that SME’s tended to resist supply chain implementation for a variety of
reasons. In decreasing order of importance, these reasons are an inability to overcome traditional
practices, a lack of knowledge about supply chain management, insufficient capital, insufficient
management time, insufficient resources, and an inability to proceed without external support.
The issue of time deserves further discussion. Managers at smaller firms tend to be more caught
up in the hour-to-hour rush of operational details and thus have less time to stop and perform the
planning and strategizing needed for supply chain management.

Smaller firms are also more likely to be lacking some of the skills and resources required for
supply chain management. Gammelgaard and Larson (2001) discussed the broader set of
managerial skills and knowledge required to function in a cross-functional supply chain
environment requiring boundary spanning team-building and negotiation. This set of skills is in
short supply at large firms and would generally be even less available at SME’s. In a study of
human resource practices in SME’s and microfirms, Pearson, Summers and Mills (2004) found
that smaller firms tended to perform much of their training in-house rather than outsourcing it,
with many of the human resource personnel having had to in essence train themselves. This
mindset concerning training may tend to exacerbate the difficulty that these firms will have in
acquiring the necessary supply chain skills quickly.

Smaller firms may simply choose not to implement closer ties with suppliers or customers, even
if the needed resources and skill are present. This may be due to the fact that SME leaders
recognize the potential for being bullied by larger partners. It might also be the case that smaller
firms fear that they will lose some of their agility if linked to closely to other firms.

METHODOLOGY
This study involves a survey that is being conducted with the assistance of the Small Business
Development Center connected to the authors’ university. A mass mailing was recently sent to

583
500 firms selected from a list of small regional firms provided by the SBDC. In an attempt to
increase the response rate, graduate research assistants contacted each firm on the mailing list
prior to the mailing in order to determine the appropriate contact person, generally an employee
involved in purchasing, inventory management or shipping. Most of the firms to which
questionnaires were sent have fewer than ten employees and thus qualify as microfirms. The
region in question is largely rural but contains one MSA of approximately 170,000 people.

In addition to the firms contacted by mail, other area small businesses have been prompted to fill
out the survey online via the SBDC’s monthly newsletter. At this time, approximately sixty
respondents have submitted completed questionnaires, either through the mail or via the website.
In an attempt to obtain additional responses, graduate research assistants are currently making in-
person visits to nonrespondent firms. Because of the delay required to obtain additional
responses, data analysis has not yet begun and thus this paper will not be able to report the
results of the study. It is expected that the number of observations will soon be sufficient to
begin the analysis, which will be complete by the time of the conference in March 2006.

The Survey Instrument

The survey has eight sections. Section 1 is designed to gather basic data such as the number of
employees at the respondent’s firm and the respondent’s job function. The remaining seven
sections of the survey are all focused on the topic of supply chain management.

Section 2 focuses on the environment in which the firm operates. This section attempts to
capture the degree to which the firm’s environment might encourage it to implement supply
chain management. For example, a firm with particularly demanding customers might be forced
to implement various supply chain management methods in order to improve its ability to meet
those stringent customer demands. And note that having to meet stringent demands from
customers would be likely to increase the firm’s demands on its own suppliers as well, calling
for better coordination with both upstream and downstream partners. As another example, a firm
selling a near commodity item may have greater incentive to implement supply chain methods,
either for the cost-cutting benefits if it intends to compete on price or for the potential
differentiation benefits that might allow its product to avoid commodity status. The section
contains seven statements, each of which calls for a response of “Agree Strongly,” “Agree,”
“Neutral,” “Disagree,” or “Disagree Strongly.” The information that each statement attempts to
capture can be seen in Table 1.

Section 3, which contains four statements, focuses on the nature of the firm’s leaders, with the
underlying assumption that the decision to implement supply chain management is partially
driven by the characteristics of the decision maker and not just by the position and strategy of the
firm. For example, a leader with more formal education would generally be more likely to be
familiar with supply chain management and therefore more likely to seriously consider its use.
A leader possessing significant computer expertise would generally be less likely to resist supply
chain management because of its call for increased information technology use. Information on
these statements can be seen in Table 2.

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 The statements attempt to capture the degree to which:
1. inputs and outputs are tangible goods rather than services
2. demand varies dramatically and unpredictably
3. customers are demanding and difficult to serve
4. subpar supplier performance would seriously hurt the firm’s performance
5. the firm’s products or services qualify as commodities
6. global sourcing and/or distribution is utilized
7. sales are made to end users rather than to other organizations

Table 1: Section 2 Statements - The Firm’s Business Environment

The statements attempt to capture the degree to which:

1. the leader has received a significant amount of formal education
2. the leader is proactive rather than reactive
3. the leader embraces rather than resists change
4. the leader is proficient with information technology and can recognize its benefits

Table 2: Section 3 Statements – The Firm’s Key Leaders

The fourth section is the centerpiece of the survey and focuses on the firm’s implementation of
various supply chain management methods. It is broken into three sections – preparation for
supply chain management, supplier relations and customer relations. The fourteen questions in
this section attempt to capture the information seen in Table 3.

The fifth section focuses on the benefits obtained from utilizing the supply chain activities the
firm might have implemented as specified in the previous section. It calls for the respondent’s
opinion concerning the extent to which supply chain activities might have reduced costs,
improved service to customers, allowed the firm to grow, increased firm profits, and allowed
increase trust and collaboration with suppliers and/or customers. Note that this section again
utilizes statements calling for responses of “Agree strongly,” “Agree,” and so forth, even though
two items, cost reduction and profit increase, might seem to call for quantitative responses.

The sixth section requests the respondents to specify the factor or factors that encouraged the
firm to implement supply chain management by checking all that apply from a list provided. It is
expected that a fairly large proportion of the microfirms that have implemented supply chain
management will have done so due to pressure from customers. Section seven requests the
respondents to specify the factor or factors that discouraged the firm from implementing supply
chain management to a greater extent than is has so far done. The topics included in both
sections can be seen in Table 4 (noting that the wording used in the survey instrument is
generally more detailed).

The final section asks the respondents to note any supply chain methods about which the firm
would like to learn more. This survey is being conducted with some assistance from the local
office of the Small Business Development Center and therefore one of its goals is to determine
the education and counseling needs of area microfirms. Many studies (Committee on Supply
Chain Integration, 2000; Gammelgaard & Larson, 2001; Quayle, 2002; Songini, 2001) have

585
The degree to which the firm is prepared for supply chain management
1. the firm has a well-defined strategy and knows what its suppliers must do to
support that strategy
2. the firm possesses the necessary information and telecommunication technology
3. the firm has rationalized its internal processes

The strength of the firm’s relationships with suppliers

1. the firm works regularly with key suppliers to jointly solve problems
2. the firm works with key suppliers to jointly plan future activities
3. the firm shares demand-related information with suppliers
4. the firm reduces its supply base, retaining the best suppliers
5. the firm puts serious effort into building trust and commitment
6. the firm utilizes the internet to place most supplier orders
7. the firm has improved its processes and technology to improve coordination

The strength of the firm’s relationships with customers

1. the firm works regularly with key customers to jointly solve problems
2. the firm works regularly with key customers to jointly plan future activities
3. key customers share demand-related information with the firm
4. most customers utilize the internet to place orders with the firm

Table 3: Section 4 Statements – Supply Chain Management Implementation

Factors Encouraging Implementation

1. pressured to do so by an important customer or customers
2. pressured to do so by an important supplier or suppliers
3. the need to keep up with competitors who had done so
4. the firm recognized the potential benefits and competitive advantages
5. the necessary technology became available at reasonable cost
6. the necessary skills became available (e.g. via new hires, training)
7. other (please explain)

Section 7 - Factors Discouraging Implementation

1. belief that supply chain management would provide little if any benefits
2. competitors are not yet utilizing supply chain management
3. belief that it’s not good business practice to link too closely with other firms
4. lack of willingness to share sensitive information with other firms
5. the firm is small and used to operating without formal processes and procedures
6. the firm cannot afford either the expense or the time required
7. the firm does not possess the necessary technology
8. the firm does not possess the necessary expertise
9. other (please explain)

Table 4: Section 6 and 7 Statements – Factors Encouraging/Discouraging Implementation

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noted the need for increased supply chain knowledge among smaller firms, for the sake of the
small firms themselves as well as for the benefit of their supply chain partners. This need is
expected to be particularly critical for microfirms.

Statistical Analysis and Hypotheses

This study is interested in answering six major questions:

• Which supply chain methods are being utilized by microfirms?
• Is that use correlated with the firm’s business environment or leadership characteristics?
• Which factors have encouraged microfirms to implement supply chain management?
• Which factors have discouraged supply chain management?
• Which supply chain methods are microfirms most interested in learning?
• What benefits have microfirms gained from utilizing supply chain management and
which supply chain management methods are related to those benefits?

The determination of the methods being utilized will involve an analysis of the data in Section 4
to generate a relative frequency distribution for each statement. A high proportion of “Agree
strongly” and/or “Agree” responses to a particular statement would suggest that the method
covered in that statement is being highly utilized. The determination of the factors encouraging
supply chain implementation will be based on the data in Section 6 and will also involve a report
of the proportion of firms selecting each response. The factors discouraging supply chain
implementation and the methods about which microfirms most desire training will be similarly
determined utilizing the data from Section 7 and Section 8 respectively.

Correlation analysis will be performed in an attempt to discover relationships that might exist
between the use of the various supply chain methods and the firm’s environment and/or
leadership characteristics. The expected correlations are intuitive, for example positive
correlations between the implementation of various methods and a leader who embraces change,
and thus no formal predictions will be made here. The resulting correlations, whether intuitive,
counterintuitive, or insignificant, will complement the analysis of the encouraging/discouraging
factors from Sections 6 and Section 7 to develop a more complete understanding of the forces
driving supply chain implementation among microfirms.

The last question is actually five questions – one for each of the five performance measures of
cost, service, growth, profit and relationship strength found in Section 5. The analysis will
involve five regression models, each using a single performance measure as the dependent
variable, with the independent variables being the supply chain methods from Section 4. With
fourteen independent variables in Section 4, each regression model would involve fourteen
hypothesis tests of the slope. Because we are hypothesizing that increased utilization of supply
chain methods will enable increased performance, all of our hypothesis tests will be upper tail
tests. The results of these hypothesis tests will help to answer the following questions:
• Are supply chain methods correlated with increased levels of microfirm performance?
• If so, which methods are most closely associated with that increased performance?
• Are there any methods that appear to be associated with decreased performance?

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 CONCLUSION
This study will provide practitioners and academics with important information concerning
supply chain management implementation in microfirms, information that should allow
microfirms to make future supply chain decisions in a more informed way. Future research
efforts will be guided by the results found in this study, but might be expected to include some
more detailed study of the supply chain practices that are found to promote increased microfirm
performance as well as the development of methods to overcome microfirm resistance to supply
chain management.

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