Академический Документы
Профессиональный Документы
Культура Документы
2, 2016
Yudi Fernando*
Graduate School of Business,
Universiti Sains Malaysia,
11800 Penang, Malaysia
Email: yudi@usm.my
*Corresponding author
Agustina Fitrianingrum
Faculty of Economics and Management,
Universitas Internasional Batam,
29442 Batam, Indonesia
Email: agustina@uib.ac.id
Christopher Richardson
Graduate School of Business,
Universiti Sains Malaysia,
11800 Penang, Malaysia
Email: christopher.richardson@usm.my
Keywords: supply chain flexibility; supply chain efficiency; exports; free trade
zone; FTZ; Indonesia.
1 Introduction
With many firms facing a highly volatile and uncertain environment, short product life
cycles, as well as frequent and unpredictable changes in demand, the ability to react
according to environmental changes is increasingly important. The goal of every
profit-based organisation is to make money by meeting enterprise demands with service
level agreements at minimised cost (Andini and Simatupang, 2014). As noted by Gereffi
and Sturgeon (2013), several current issues in international business are related to supply
chain performance (SCP). They argue that leading firms are relying on global suppliers
and intermediaries for an array of processes, specialised inputs and services, and are
246 Y. Fernando et al.
demanding that their most important suppliers have a global presence. To achieve
effective SCP, firms need to be efficient and flexible.
This flexibility, however, is not limited to a manufacturing system, as this would be
insufficient when dealing with the increasingly turbulent economic environment.
Flexibility generates firms ability to respond, in a timely and cost-effective manner, to
changing requirements in terms of volume, mix and delivery time (Tachizawa and
Thomsen, 2007). A study conducted by Aryee and Naim (2008) supports the findings of
Gereffi and Sturgeon (2013), namely that soft collaborative issues rather than hard
technological issues serve as the main drivers to improving SCP. This highlights that the
success of a business is not necessarily tied to the size of its investment, but rather that it
is the interrelationship among the factors that influences the supply chain (SC). In a
globally competitive environment, firms cannot be winners by standing alone. Instead,
they need to work hand-in-hand with suppliers and customers, integrating and
synergising export marketing strategies to support SCP. Through integration and
partnership, firms with high levels of flexibility and cost-effectiveness are believed be
better placed to penetrate new foreign markets quickly (Leonidou, 1995).
Fawcett and Clinton (1996) suggest that an effective SCP measurement should help in
understanding the system and providing information to SC members and outside
stakeholders. In many cases, quantitative performance measures fail to capture the
strategic goals of an organisation (Sezen, 2008). Financial measures, for instance, ignore
the opportunities to understand and improve supply chain management (SCM).
Operational measures, on the other hand, reflect on competencies in terms of cost,
quality, flexibility, speed and reliability, and provide a relatively direct indication of the
efforts of the various SC constructs (Chen and Paulraj, 2004). Lee et al. (2007) use
efficiency and effectiveness as key variables in measuring SCM performance.
Efficiency refers to the ability to provide a service using the least inputs, while
effectiveness concerns the ability to accommodate customers special requests (Fawcett
and Clinton, 1996).
Efficiency of the SC is the result of integration of the performance of all members,
thus implying that managing the overall SC efficiency is a challenging task (Shafiee
et al., 2014). Chen and Paulraj (2004) added time-based performance measures as a
third dimension to measuring SCM. Reflecting on the efficiency variable, SCM
is intended to reduce the number of production cycles (Jayaram et al., 1999) and
shorten manufacturing lead times (Handfield and Pannesi, 1992). Reflecting on the
effectiveness variable, flexibility in terms of responding to demand variability
(Beamon, 1998; Li et al., 2006), and the speed of new product introduction and
development (Vickery et al., 1995) are required. In a recent study, Ryoo and Kim (2015)
found that knowledge exchange has a greater impact on SCP for suppliers than for
buyers. Based on the contingency theory (CT), the theoretical model has been developed
to seek the empirical justification on the effect of legal-political factors and market
competition on SCP. This paper is organised as follows. The following section introduces
Batams free trade zone (FTZ). This is followed by a review of the related literature. We
then describe the methodological approach adopted in the study before presenting our
results. Next, we discuss the findings in light of extant literature, highlighting also the
practical implications of the study. We end the paper with some concluding remarks.
The effects of legal-political factors and market competition on supply chain 247
The island of Batam is located along the busy Malacca Straits, between Malaysia and
Singapore. The Batam islands consist of Batam, Tonton, Nipah, Setokok, Rempang,
Galang, Galang Baru and Janda Berias, all of which are connected by seven bridges
(Bahrum, 2011). One of its key and unique features is its proximity to Singapore (20 km)
and Malaysia (60 km) (Bahrum, 2003). It functions as one of the most important entry
points to the Sumatran Economic Corridor, as one of primary gateways to the Indonesian
market as well as for international trade. It is expected be able to accelerate economic
growth throughout the rest of the country. Due to its strategic location, the Indonesian
government initiated large-scale physical developments from 1970 to 1999, with Batam
being designated an FTZ. An FTZ refers to an economic zone or designated region in a
country that operates under specific rules that offer special investment incentives,
including duty free treatment for imports and for manufacturing plants that re-export their
products (Simple Shipping Solution, 2012).
The island of Batam in Kepulauan Riau Province (Kepri) is the most developed area
in Indonesia, while Kepri itself is considered as a new province of 32 provinces in
Indonesia. Kepri is located just off the coast of Singapore, which is considered to be the
most strategic location for Indonesian exports. The FTZ consists of Batam, Bintan and
Karimun, but Batam is the most developed, especially from the perspective of the
electrical and electronics (E&E) industry. The countrys top contributor of non-oil
exports is the E&E industry at 31.07% (BPS, 2013). Kepri is one of the top four export
contributors in Indonesia, with Batam being the main contributor to export activities
(Figure 1).
Figure 1 Contributors of export in Kepulauan Riau Province (see online version for colours)
Batam takes only one day, but the transhipment from Jakarta prolongs this process by
around two weeks. The regulations for importing the raw materials may lengthen and
increase the cost of the process of transhipment. Therefore, political and regulatory
factors mean that firms have less flexibility or ability to deliver products to meet
customers demands in the required time. Hence, the efficiency and flexibility of a firms
SCP needs to be highlighted from the point of view of the firms strategic management. If
E&E firms in Batam are not concerned with their level of flexibility, in the future they
will not be able to compete with E&E firms from other countries.
According to Sousa et al. (2008), external determining factors (EDFs) are uncontrollable
factors from the environment of the host country and the conditions in the destination
country. The two factors examined in this study are the legal and political environment of
the host country and market competition in the destination country. The legal and
political factors (LP) include the quality of the host countrys business (e.g. clarity of
regulations, the implementation of laws and regulations, as the soft infrastructure
provided for business) (Li et al., 2012), while market competition refers to the
intensification of business competition in a similar product market in the destination
country (Cadogan et al., 2006).
LP1 LP2 LP3 LP4 LP5 EF1 EF2 EF3 EF4 EF5
Market SCP-
Competition Flexibility
exporters domestic production costs and their transaction costs associated with crossing
the border. The legal and political situation can be a problematic issue when conducting
business overseas. Investors prefer conducting business in a country that has high quality
legal and political implementation. The clarity of rule and procedure, and the stability of
the political situation will strengthen the business environment. Therefore, the following
hypotheses are proposed:
Hypothesis 1 There is positive and significant relationship between legal and political
factors and SCP-efficiency.
Hypothesis 2 There is positive and significant relationship between legal and political
factors and SCP-flexibility.
4 Method
The population frame for this study was obtained from the Batam Badan Pusat Statistik
(BPS; Central Agency on Statistics), which reports that of the 104 E&E firms registered,
the total number involved in exporting activities in 2012 was 86 firms. As part of the
sample, the 86 E&E firms in Batam were chosen because they have contributed
significantly to the quantity of exports in Batam and Indonesia. This study utilised SPSS
21.0 for descriptive statistical analysis and structural equation model with smart-PLS 2.0
(PLS-SEM). The unit of analysis was at the firm level, so the respondents were limited,
while the model was complex. The overall complexity of a structural model has little
influence on the sample size requirement for PLS-SEM (Hair et al., 2014). The PLS-SEM
fits well with the small sample size. Chin and Newsted (1999) demonstrate that PLS can
supply suitable estimates with a minimum sample of 20 cases. However, the matter of
252 Y. Fernando et al.
sample size still needs to be acknowledged when applying PLS. Given the small
sampling frame of the study and the probability of a low response rate, purposive
sampling was used in this study. The measurement items for legal and political factors
were adapted from Li et al. (2012). Market competition items, meanwhile, were adapted
from Cadogan et al. (1999, 2006), while SCP measurement items were adapted from
Ibrahim and Ogunyemi (2012). Seven-point Likert scale (1 = strongly disagree to 7 =
strongly agree) was used to indicate the level of agreement for each statement.
5 Results
The authors checked all of the returned questionnaires, which were considered as raw
data material. This was to ensure that the data could be used for further analysis by
checking all items for omissions and their consistency in responding to the questions
(Zikmund et al., 2010). In the data checking, the researchers ensured that a minimum of
75% of total questions were considered for sampling purposes in this area. The next step
involved pre-coding techniques, in which all the items of the questionnaires were coded
with numerical values (Sekaran and Bougie, 2013). The total number of questionnaires
distributed was 86, though 27 firms did not respond to the survey. A follow-up was
conducted by giving a gentle reminder call. Most of the reasons for not being involved in
the survey were about the confidentiality issues, while others said that they had internal
problems and stated clearly they were not willing to join the survey.
The total number of returned questionnaires was 59, but one questionnaire was
incomplete. Therefore, in the next step of data analysis, this questionnaire was discarded
and not included as data for this study, leaving the total returned questionnaires for
analysis at 58. All the firms that participated in the survey have been involved in the
export of E&E products. According to the collected data, 34% of the firms have more
than 500 full-time employees. Regarding the products of E&E firms, they are classified
into six categories: semi-conductors, electronic components, printed circuit board
assembly (PCBA), electrical appliances, industrial electronics and others. Many E&E
firms are producing electronic components as 17% of their production. This means that
there are E&E firms in Batam that are not yet producing fully-assembled consumer
products. If it is only a component of electronics, the technology applied is simple to
modify in terms of technical difficulties or technology complexities.
between 0 and 5%. This means that, with more competitive price regulations, firms will
have a better opportunity to expand their markets.
Table 1 Mean score of each statement in legal and political factors (LP) variable
Std.
Items Indicators N Min Max Mean
deviation
LP1 Firms understandings of export 58 1 7 5.293 1.228
regulations that support EP
LP2 Regulation incentives on exporting 58 1 7 5.603 1.184
motivate firms to expand their market
LP3 Highquality legal institutions in host 58 1 7 5.052 1.033
country lower production costs
LP4 Firms export regulations speed up the 58 1 7 5.034 1.228
process of product delivery
LP5 Infrastructure facilities provided by the 58 1 7 5.414 1.140
government motivate firms to export
LP3 has the lowest mean score at 5.052 (SD at 1.033). The respondents are not confident
that, in the short term, Indonesia can implement high-quality legal institutions. Therefore,
respondents have little hope that production costs can be lowered to support their
competitiveness in the foreign market. LP factors are the quality of the host country from
the perspective of business (clarity of regulations, the implementation of laws and
regulations as soft infrastructure provided for business) (Li et al., 2012).
The mean score of each statement in the market competition (MCO) variable is
presented in Table 2. The MCO variable has four statements, of which statement MCO3
has the highest mean score at 5.534 (SD at 1.379), while MCO4 has the lowest mean
score at 4.931 (SD at 1.296). However, all the mean scores recorded are above four,
which means that the respondents agree with the statements categorised under the MCO
variable. MCO3 has the highest mean score at 5.534, which shows that respondents
recognise high competition in the E&E industry. Competition in the E&E industry is
higher due to the development of technology and the rapid progress of emerging
countries.
Table 2 Mean score of each statement in market competition (MCO) variable
Std.
Items Indicators N Min Max Mean
deviation
MCO1 Competitive intensity in 58 1 7 5.000 1.139
the export market is high
MCO2 Competitors new products are high 58 1 7 5.276 1.399
MCO3 Competition in the E&E 58 1 7 5.534 1.379
industry is high
MCO4 Customers requirements on the 58 1 7 4.931 1.296
product features are high
The more countries achieve the status of emerging countries reflects the incremental
market demand related to technology appliances, such as laptops, gadgets and utilities
required by people to support their performance in their daily work or life. MCO4 has the
lowest mean score at 4.931 (SD at 1.296), which means that customers requirements of
254 Y. Fernando et al.
the product features vary. This requires E&E firms to be more capable of responding to
the market demand. Unfortunately, it is not easy for an E&E firm to meet demands for a
customised product. Only minor adjustments of the product specifications can be
entertained, not specific products that require new product adaptation. MCO is the
intensification of business competition in a similar product market (Cadogan et al., 2006).
Table 3 shows the mean score of each statement in the SC efficiency (EFI) variable.
This tangible variable has five statements, among which statement EFI2 has the highest
mean score at 5.259 (SD at 1.163) while EFI5 has the lowest mean score at 4.897 (SD at
1.495). However, all the mean scores recorded are above four, which means that the
respondents agree with the statements categorised under the EFI variable. A firms
cash-to-cash cycle (EFI2) is considered as the most significant aspect that will improve
its efficiency. The lowest mean score is 4.897 for the firms level of integration (EFI5).
The firms level of integration for E&E firms has been considered less important because
the suppliers of E&E firms do not necessarily have a long contract. The nature of the
relationship between the E&E firms and their suppliers is a long-term relationship
without having a long-term contract. EFI is efficiency in using the resources in a SC
system (Ibrahim and Ogunyemi, 2012).
Std.
Items Indicators N Min Max Mean
deviation
EFI1 Firms production cycles meet the 58 1 7 5.052 1.033
firms annual target
EF12 Firms cash-to-cash cycle 58 1 7 5.259 1.163
EFI3 Suppliers efficiency to adjust 58 1 7 4.948 1.317
production capacity
EFI4 Firms level of communication and 58 1 7 5.224 1.377
coordination among all functions
EFI5 Firms level of integration 58 1 7 4.897 1.495
Table 4 shows the mean score of each statement in the FLE variable, which has five
statements. Among these five statements, statement FLE3 has the highest mean score at
5.414 (SD at 1.623) while FLE1 has the lowest mean score at 4.707 (SD at 1.271).
However, all the mean scores recorded are above four, which means that the respondents
agree with the statements categorised under the FLE variable. The respondents agree that
the suppliers flexibility to adapt to the E&E firms internal processes (FLE3) can be an
important factor in supporting firms flexibility. However, respondents also recognise
that local suppliers in Batam do not yet possess flexibility in accommodating the
variability of market demands. FLE is effectiveness of a supply chain in responding to
changes in terms of product design, delivery times, volume and mix (Ibrahim and
Ogunyemi, 2012).
The effects of legal-political factors and market competition on supply chain 255
Std.
Items Indicators N Min Max Mean
deviation
FLE1 Firms flexibility to adapt the 58 1 7 4.707 1.271
production to accommodate
variability in customer demand
FLE2 Firms capability to influence the 58 1 7 4.983 1.132
suppliers to adapt their processes
FLE3 Suppliers flexibility to 58 1 7 5.414 1.623
adapt their processes
FLE4 Firms adaptation to 58 1 7 4.948 0.981
accommodate market demand
FLE5 Firms satisfaction with 58 1 7 4.828 1.045
the supplier lead times
threshold value (Hair et al., 2014). This indicates that the measurements used in this
study are consistent in measuring the construct. In terms of convergent validity both
indicator reliability and construct reliability were assessed (Vinzi, 2010). To measure the
convergent validity of the reflective measurement an average variances extracted (AVEs)
score was given. Indicator reliability was examined by looking at the construct loadings.
All loadings are significant at the 0.01 level and above the recommended 0.7 parameter
value. Significance tests were conducted using the bootstrap routine with 500 resamples
(Chin, 1998). Within-method convergent validity is evidenced by the large AVE (> 0. 50)
and significant item loadings on their respective constructs. The quality of reflective
measures can be assessed by the individual reliability of the items as well as by the
convergent validity and the discriminant validity of the latent variables (Hair et al., 2014).
AVE includes the variance of its indicators captured by the construct relative to the total
amount of variance, including the variance due to measurement error. An AVE of less
than 0.5 is considered insufficient, as more variance is due to error variance than to
indicator variance (Vinzi, 2010).
Besides considering the indicator and construct reliability, a thorough validation
procedure also requires the evaluation of a measurement (or structural) models
discriminant validity. Discriminant validity is defined as the dissimilarity in a
measurement tools measurement of different constructs. A necessary condition for
discriminant validity is that the shared variance between the latent variable and its
indicators should be larger than the variance shared with other latent variables (Vinzi,
2010). Discriminant validity is the traditional counterpart of convergent validity. To
evaluate to what extent measures of a given construct differ from other indicators of the
latent variables, the AVE-value can be used again. Overall, the average shared variance
of a construct and its indicators should exceed the shared variance with every other
construct of the model.
Table 6 The measurement of discriminant validity
discriminant validity implies that the relationships between the constructs are
conceptually similar.
Standard errors
Hypotheses Direct effects Beta t-values
(STERR)
H1a LP EFI 0.900 0.065 13.814**
H1b LP FLE 0.316 0.214 1.746*
H2a MCO EFI 0.373 0.115 1.694*
H2b MCO FLE 0.558 0.206 2.704**
Notes: *t-value: 1.65, ** t-value: 2.33
6 Discussion
Two interesting observations can be made from the findings above, with the first
concerning the relationship between the LP and SCP. SCP has been measured by
flexibility and efficiency (Ibrahim and Ogunyemi, 2012) and their relationship to SCP
efficiency was strongly positive and significant. As Gunasekaran et al. (2004) explained,
legal or governmental regulations become the external drivers for firms to implement and
enhance their SC management practices to increase their SCP. Firms engaged in
international trade should be familiar with their home countrys policies, procedures,
laws and regulations, and tariffs. In practice, many firms involved in exporting activities
are also active importers of various materials. In order to be internationally successful, a
firms understanding of complying with home-country regulations has always been
mandatory. This understanding would have a significant impact on their effectiveness and
efficiency in the global SC (Pujawan, 2004).
The effects of legal-political factors and market competition on supply chain 259
chips/components at low cost. Other than cost, European and North American buyers
might be interested to find semiconductor firms that can supply products that are
produced with a strong emphasis on health, ethical and environmental issues in the
production process. Unfortunately for Indonesian firms, E&E firms in China have
everything that buyers request. Future studies should look at the supply chain
responsiveness, which is actually a critical basis on which to compete in the global E&E
industry.
7 Conclusions
SCM is becoming an important source of competitive edge for firms in todays highly
competitive business environment. To achieve better SCP, firms should seek close,
working, and sustained relationships with their suppliers and customers, sharing
information to resolve problems (Spekman et al., 1998; Lee and Fernando, 2015).
Furthermore, Lages and Montgomery (2004) also found that the firms that performed
better in more competitive environments could be the firms that tend to relax excessively
in markets that are easier to operate in. In this study, the E&E firms in Batam have shown
capabilities to maintain their relationships with the suppliers and customers. Thus, these
good relationships help them to manage their SCP. Gautier (2010) states that firms should
build and maintain a relationship of trust with the parent firm because mutual trust is an
essential factor of relationship quality and performance. He further emphasises that trust,
a complex and multidimensional concept, is necessary to increase SCP. Looking more
closely at the E&E firms in Batam, most of them are subsidiary firms that have parent
firms in developed countries, such as Japan, the USA, or Europe. Therefore, firms have
the benefit of learning how to manage their relationships with customers and suppliers
from abroad. E&E firms in Batam also provide best practices to maintain relationships
with the other suppliers in their domestic country of operation.
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