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 TRACK: OPERATIONS MANAGEMENT

Item Title Page

THE ROLES OF GRADUATE QUANTITY SURVEYORS IN THE

MALAYSIAN CONSTRUCTION INDUSTRY
1 3
B. L. Chong & W. P. Lee

TIME MOTION STUDY IN WORK PROCESS USING

PROMODEL APPROACH
2 9
Abdul Talib Bon & Aliza Ariffin

THE PERCEIVED IMPACT OF SUPPLIER-MANUFACTURER

RELATIONSHIPS AND SUPPLIER MANAGEMENT
STRATEGY (THE LEAN APPROACH) ON OUTSOURCING
3 SUCCESS 18

Mohammed Ashril Ahmad Noordin, Mohamad Ghozali Hassan & Abdul

Wahid Mohd Kassim

IMPROVING PROJECT MANAGEMENT MONITORING AND

CONTROL: A SIMULATION APPROACH
4 31
Mohamad K. Omar & F. C. Lim

THE IMPACT OF LEAN MANUFACTURING PRACTICES ON

OPERATIONS PERFORMANCE: A STUDY ON INDONESIAN
5 MANUFACTURING COMPANIES 39

Gusman Nawanir, Siti Norezam Othman & Lim Kong Teong

SUSTAINING COST PERFORMANCE THROUGH TPM

APPROACH: A STUDY OF MANUFACTURING
6 ORGANIZATIONS IN MALAYSIA 52

Halim Mad Lazim & T. Ramayah

MANAGING SEASONAL DRY INVENTORY AT PT. DE LIONS

7 62
Radix Prasetya & Mursyid Hasanbasri

1 

 
Item Title Page

CONTRIBUTION OF COLLABORATIVE PROJECT

PERFORMANCE TO CORPORATE PERFORMANCE IN
ENGINEERING, PROCUREMENT, AND CONSTRUCTION
8 71
(EPC) COMPANIES

Ichsan Syarifudin & Dermawan Wibisono

FRAMEWORK OF BUSINESS PROCESS RE-ENGINEERING

SUCCESS AND FAILURE FACTORS
9 81
Kabiru Jinjiri Ringim, Mohd Rizal Razalli & Norlena Hasnan

THE RELATIONSHIP OF BUDGETARY PROCESS IN

MANAGEMENT ACCOUNTING TECHNIQUES AND JOB
10 PERFORMANCE 93

Masnawaty Sangkala & Mansyur Sain

THE ANALYSIS OF THE RELATIONSHIP BETWEEN

MANAGEMENT CONTROL SYSTEM AND FINANCIAL
11 PERFORMANCE OF SMALL FIRMS 109

Mansyur Sain & Agus Bandang

COMPETITIVE BARRIERS IN ACQUIRING BUSINESS

INTERNATIONALLY: A CASE ON MALAYSIAN FIRMS
12 122
Shahimi Mohtar & Fawad Hussain

THE INTERNATIONALIZATION PROCESS OF MALAYSIAN

SMES: A CASE ON CONCERNED AND TENDENCY TOWARDS
13 UNCERTAINTY AVOIDANCE 130
Shahimi Mohtar & Fawad Hussain

2 

 
 THE ROLES OF GRADUATE QUANTITY SURVEYORS IN THE
MALAYSIAN CONSTRUCTION INDUSTRY
B. L. CHONG AND W. P. LEE
Department of Built Environment, Faculty of Engineering and Science,
Universiti Tunku Abdul Rahman

ABSTRACT

The quantity surveying profession has evolved since changing of clients’ need and market
requirements. Today, clients not only request the traditional services but also ask for the
additional services such as project management, feasibility study, construction financial
practice, arbitration, quality management, conflict management and risk management in
the innovative and changing construction industry. The scope of works for graduate
quantity surveyors is no longer limit on measurement and the regular practices but is some
things beyond this boundary. Hence, the objective of this paper is to present a critical
review on the traditional and contemporary roles of graduate quantity surveyors, the
threats to graduate quantity surveyors and also the methods to improve graduate quantity
surveyors’ practice. In summary, this critical review would provide insight knowledge to
construction industry players for better understanding of graduate quantity surveyors’
roles.

Keywords: Graduate Quantity Surveyors; Malaysian construction industry; traditional and

contemporary roles; threats; methods to improve.

INTRODUCTION

Seeley (1997) defined a quantity surveyor (QS) as a professionally trained, qualified and
experienced in dealing with these problems on behalf of the employer. He is essentially a cost
expert whose prime task to ensure that the project is kept within the agreed budget and that the
employer obtains value for money.

The quantity surveying profession in the Malaysia has largely developed since building work
increased in volume and complexity over the last century. As described by Seeley (1997), QS is
a profession who would prepare an accurate bill of quantities to be priced by tendering
contractors and who would measure and value any variations that might occur during the
progress of the works. However, the environments for quantity surveying practice today have
changed along with the country’s rapid economic development. In recent years, many authors
have reported on the roles of quantity surveying profession in the construction industry have
evolved along with the changes (Page et al., 1999; Page et al., 2001; Boon, 2001; Fellows et al.,
2003; Hardie et al., 2005; Fadhlin and Ismail, 2006).

The objective of this paper is to present the critical review on the traditional and contemporary
roles of graduate quantity surveyors (QSs), the threats to graduate QSs and also the methods to
improve graduate QSs’ practice.

LITERATURE REVIEW

There are many authors reported the future roles of the QSs in last thirty years. Hence, this
section will present and discuss the general quantity surveying profession in the Malaysian
construction industry, traditional and contemporary roles of graduate QSs, threats to graduate
QSs, and methods to improve their practice.

The Quantity Surveying Profession in Malaysia

In Malaysia the quantity surveying profession is governed by the Quantity Surveyors Act 1967
(incorporating all amendments up to 28 February 2002) (LJBM, 2002) and Regulations
3 

 
promulgated in terms of the Act. Only persons registered with the Board of Quantity Surveyors
(BQSM) and The Institution of Surveyors, Malaysia (ISM), the Statutory Body, are permitted to
call themselves “Registered Quantity Surveyors” (Reg. QS) and perform work reserved for
registered quantity surveyors. The requirements for registration generally consist of the holding
of a degree in quantity surveying, two-year’s practical experience under the mentorship of a
Reg. QS, and must have passed the test of Professional Competence conducted jointly by the
BQSM and ISM.

At the same time, a registered graduate QS must hold a qualification in quantity surveying
recognized by the Board (Section 10(1)(a) of the Act). This is open for those who are fresh
graduates from the institute of higher learning which recognized by BQSM. As at July 2009,
873 registered QSs and 883 registered graduate QSs were registered with the BQSM.

The Roles of Graduate Quantity Sureveyors

It has been suggested that with the growth of comprehensive user-friendly estimating software
for instance, the QS is dead, or “re-engineered” as a Construction Economist (Stacey and Wood,
1996).

Moss (2004) described quantity surveyors is a person skilled in all aspects of the construction
process and building life cycle. He or she able to manage cost efficiently, equating quality and
value with individual client needs. Besides, must also have strong financial analytical,
interpretive and teamwork skills. In his report, the roles of quantity surveyors are divided to
three stages: historic, contemporary and future roles of quantity surveyors.

Traditional and Contemporary Roles of Graduate Quantity Surveyors

The changing role of the quantity surveyor has come about due to the demands of both the
construction industry and the construction client. The changing role of the quantity surveyor
includes, fast track procurement which necessitates faster bills of quantities production as well
as cost planning; value management, risk management, commercial, etc (Cartlidge, 2006).

Zakaria et al (2006) agreed that the roles of quantity surveyors have been diversified in areas
such as oil and gas, taxation, insurance valuation and several other areas. Thus quantity
surveyors need to expand and include an ever-widening scope of services.

Smith (2004) pointed out the quantity surveying profession has experienced significant changes
over the past decade in terms of scope and type of services provided within and outside the
construction sector. As a result, quantity surveying firms expand and adapt their scope of
services to meet changing industry demands. According to him, one of the largest Quantity
Surveying firms in Australia provides a good example of these changes; in 1980 Bills of
Quantities accounted for approximately 80% of their total workload whereas in 2003 this had
declined to less than 10%. Nevertheless, rather than leading to the firm’s demise, the firm has
adapted accordingly and now provides a greater volume and wider range of services. The scopes
of services provided by firms are summarized; Traditional Services (e.g. Contract
administration, Specification preparation, Builders Quantities, Bills of Quantities and
Estimating/Cost Planning), Non-Traditional Building Services (e.g. Cost benefit analysis, Due
diligence reports, Premises Audits, Post Occupancy Evaluation, Facility management, Quality
management, Value management, Project management, Risk management, Insurance valuation,
Expert witness, Arbitration/mediation, Tax advice, Construction Planning, Life Costs,
Feasibility study and other), Non-Building services (e.g. Research/Publishing, Civil works,
Infrastructure works, Marine works, Transport, Ship Building, Aeronautical, Mining,
Manufacturing, Petrochemical and other).

4 

 
Threats to Graduate Quantity Surveyors’ Practice

There are a lot of major factors inducing the change in quantity surveying profession. Many
authors have identified intensive or severe fee competition is the significant factor that
influences current market (Bowen and Rwelamila, 1995; Boon, 1996; Smith, 2004; Hasmawati,
2006; Davies, 2006). Smith (2004) explained that insurance premiums have increased anywhere
from 100% to 800% for QS firms in the last few years despite QS is relatively low risk
compared to other professions in the industry.

Besides, Frei (2009) expounded that the Computer Aided Design (CAD) is a potential threat to
the quantity surveyors particularly in terms of the technical role of quantity surveyor (Smith,
2004). The attitude of conservatism or inability to change for graduate quantity surveyors
toward application Information Technology also is one of the potential threats in current
quantity surveying profession (Shen et al., 2003; Smith, 2004). Smith (2004) and Frei (2009)
also found that competition from others professions which provide similar services and “one-
stop shop” package is a potential threat to graduate quantity surveyors. Smith (2004) explained
that poor marketing also considered as a threats to quantity surveyors since it is important in
quantity surveying profession. However, Low and Kok (1997) expressed that quantity surveyors
aware of the need to improve the way their services ought to be promoted, yet many QSs still do
not seem to pay enough attention to marketing.

In addition, Lay (1998) also indicated that the graduate quality is declining in surveying
profession. The core competencies and skills in the profession were declining generally (Smith,
2004). “QSs are still hard to find, so we snap up good candidates whenever we can find them,”
says Morgan Est HR director Andrea Walton (Mann, 2008). Apparently, the quantity surveying
profession attracts fewer graduates (Lay, 1998). Obviously, it is lack of interest from school
leavers. Additionally, QSs still do not function well in their traditional services. As pointed out
by Hiew and Ng (2007), chief architect is not satisfied toward the services of QS. Lastly,
another threats be identified is the clients today began looking for new ways of managing
contracts (Davies, 2006).

Methods to Improve Graduate Quantity Surveyors’s Practice

QS must aware that their success not only depends to their abilities, but also need to adapt to
changes in many areas and repackaging in order to maintain and enhance competitive advantage
and profitability. According to Smith (2004), first and foremost firms need to ensure that their
quantity surveyor (QSs) have sufficient professional expertise in the core competencies and
skills of the profession and continue to develop this expertise. Practitioners need to be far more
adaptable and willing to change their standard work practices than in the past.

Furthermore, Smith (2004; 2006) mentioned that all construction professionals need to utilize
and gain expertise in CAD sooner rather than later. CAD systems such as AutoCAD, Micro
station, ArchiCAD, etc will be at the centre of future information management system and
virtual projects and, consequently, professionals will need CAD capabilities and expertise just to
be a player.

Today, there are many commercially developed software packages targeted at aiding the
performance of quantity surveying duties (Odeyinka, 2008). Therefore, it is vital investment in
information technology (IT) and information communication technology (ICT) to improving
productivity and performance (Frei, 2009).

Diversification or specialization of services also is a method which identified as necessary to

profession quantity surveying. Grant (2004) proposed that quantity surveyors requires a
continuous income stream enabling the professional to become more independent and less

5 

 
dependent on the rise and fall of traditional income areas. Diversification may therefore be part
of further strategies.

Verster et al. (2008), the quantity surveying profession in South Africa is experiencing change
with a strong emphasis on improving education, research and training. It is proposed that to be
seen as a learned society, a profession must ensure that the five pillars of a learned society are
developed to its highest levels and on par with world-class professions. The five pillars of a
learned profession (education, research, training, mentorship and continuing professional
development (CPD)) may assist the quantity surveying profession to develop its position as a
learned society. The quantity surveyor also may promote the multi-procurement method to
enable the client to control the effects of time and cost, continuing to allow space for sustained
design, development, effective professional service and contractor involvement (Verster, 2004).
Thus, procurement options are very important to fulfill clients’ need. As mentioned by Frei
(2009), quantity surveyors shall increase the involvement in alternative procurement methods
such as managed and cost plus contract, package deals, turnkey offers and design and build
contracts.

Additionally, knowledge management also is an important method to improve graduate QSs’

practice. Davis et al. (2007) explained that clients have an increased expectation of the service
offered by quantity surveyors and this coupled with greater competition both internally (from
the profession) and externally has resulted in a challenge to their professional status. To meet
these challenges quantity surveyors need to enhance their professionalism and status that can
maintain a competitive advantage. Knowledge is a key feature of the quantity surveyor’s
portfolio and therefore effective knowledge management skills can help to improve their
expertise.

To achieve a successful marketing strategy, the quantity surveying firm has to focus not only a
target market but also creating a marketing programme. This programme plans how each of the
seven marketing mix variables (i.e. the seven Ps) can be used as a guide to arrive at the
competitive position that the firm wants to occupy in the target market. The seven Ps can be
adopted by professional QS are product, price, place, promotion, people, physical evidence and
process (Low and Kok, 1997).

Moreover, a competency-based review of professional quantity surveying is important for

service excellence (Nkado and Mayer, 2001). Refer to Simpson (1996), there are some practical
methods to gain competencies, such as through Practical Work Experience, Foster Firm
schemes, Work Shadow, Year Out Period, Simulated Exercises, Role Play and Problem Based
Learning.

Lastly, it is essential to implement strategies for developing and cultivating the quantity
surveyor’s attribute for meeting the client’s expectation. Quantity surveyors shall place
significant emphasis on assignments and activities that have real-life relevance or that are
authentic in some way like group-work, site visit and guest lecturers (Zou et al., 2005).

CONCLUSION

In essence, this paper has presented a critical review on the traditional and contemporary roles
of graduate quantity surveyors, the threats to graduate quantity surveyors and also the methods
to improve graduate quantity surveyors’ practice. The quantity surveying profession has evolved
due to changing of clients’ need and market requirements. Today, clients not only request the
traditional services but also ask for the additional services such as project management, value
management, facilities management, knowledge management and other services in the
innovative and changing construction industry. The critical review presented in this paper could
be used by the graduate quantity surveyors to prepare them for the demands of this profession.

6 

 
 REFERENCES

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1996.RICS Research.
Boon, J. (2001). New Zealand quantity surveying practices – continuing to adapt in a changing
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Bowen, P. and Rwelamila, P. (1995). Marketing of professional service by quantity surveying
consultancy practices in South Africa, COBRA 1995. RICS Research.
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Elsevier, Butterworth, Heinemann.
Davies, R. (2006). The QS Transformation. RICS Business, March.
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profession. Strategic Integration of Surveying Services, FIG Working week 2007, Hong
Kong SAR, China, 13-17 May.
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Shen, Q., Li, H., Shen, L. Derek, D., and Jacky, C. (2003). Benchmarking the use of
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 TIME MOTION STUDY IN WORK PROCESS USING PROMODEL APPROACH

ABDUL TALIB BON, ALIZA ARIFFIN

Faculty of Technology Management, Business and Entrepreneurship
Universiti Tun Hussein Onn Malaysia

ABSTRACT

The purpose of this research is to improve production capabilities for Small Medium
Enterprise (SME) industry. Research focused on SME, which produce chili sauce. This
research used Time and Motion technique to improve work process at SME, and the
research objectives towards accomplished this study is to identify problems in the
production work process and improved it in terms of production time, number of process
and production layout by proposing an efficient work process to SME. This research used
systematic observation; process chart and stopwatch time study as research methodology.
Stat Fit and Pro Model Software are used for data testing and develop new work process.
The improvement of work process was executed by eliminating and combining of work
process, which reduces production time, number of process and space utilization.

Keywords: Production Time; Production Layout; Time and Motion Study; Work Process

INTRODUCTION

Background of Study
Small Medium Enterprise or SME Industry consists of small numbers of employees and annual
turnover. There can categorize into three criteria – primary agriculture, manufacturing and
services. One of the SME Industry was SME that produces sauce. The small of its enterprise
caused difficult for them to competing with other firmed companies such as Jalen, Kimball,
Maggie and Life. Thus, this research takes initiative to used Time and Motion technique to
improve the work process in order to permit them to compete with international rivalry. The
Time and Motion study will examine the work process and eliminate nonproductive process,
which can reduce number of process, space utilization and production and operation time. Time
is important in production industry because according Fred (1992) time is money and time tells
us exactly how much money was used. Besides that, this research was conducted based on
Small Medium Industry Development (SMIDP) strategies and encouragement.

Problem Statement
SME use semi automatic machines in producing their products, where most of their work
process was done manually by their workers. Sometimes, the production takes extra time in
producing their products. Moreover, the production department does not have any fixed or
standard time for each process. They just decide and estimate the time for each process.
Because of that, they often take longer than the time estimated. Thus, it might be difficult for
them to increase productivity and competes with other rivals.

Research Question
The research question that emerged on this research is: How time and motion study effect in
improving the work process?’

Objective of Study
The objective towards accomplishing the study are :
(i) Using the time and motion study to identify problems in the production work process.
(ii) Improving the work process in terms of production time, number of process and
production layout by proposing the new work process to SME.

Scope of Study
The scopes of this research are:
9 

 
(i) This study concentrates on Small Medium Enterprise (SME) Industry, SME, which is
the company produced SME sauce.
(ii) The scope of study is the work process in producing chili sauce that contains 5kg for
each bottle.
(iii) The research is focused on time and the flow of work process in production department
from the start until it produces finish products, which it will concentrate on production
time and number of work process.
(iv) The data that needs to be carried out in this study is flow chart of the work process, the
details for each process, the required time for specific process, number of employees,
distance and number of products that they produced in specific time.

Benefits from this study

This study was chosen because it will give many benefits to production and operation
management. Among the advantages for SME in producing their sauce are:
(i) Eliminate the Unnecessary. Knowing what is unnecessary is important as knowing what
is the most important in production and operation. Based on those, we can eliminate
insignificant tasks and nonproductive activities. Preoccupation, layout of production,
errors, too much motion and travel during performing the tasks are examples of
nonproductive activities and it wasted the production time.
(ii) Change the Sequence of Operations. Changing the sequence of operations based on the
process chart and flow diagram to affect a smooth flow of work through plant, which
can reduce production time. Besides that, changing the sequence of operation also
involve layout of production, where it can reduce space utilization.
(iii) Simplify the Necessary Operations. Simplify the necessary operations to make the job
easier by analyzing the process in order to improve it through elimination, combine or
rearrange the sequence and layout of operations. By simplifying the operations, it can
also effect for the production time.

LITERATURE REVIEW

Motion Study
According to Ralpha M. Barnes (2001) Frank and Lillian M. Gilbreth are known as the parents
of motion study. Gilbreth begin investigation to find the “best way” of performing a given task
trough analyzing the motions used by his workmen and he easily saw how to make
improvements. He also possessed for analyzing work motion situations to enhance their ability
for shorter or less fatiguing motions to improve the work environment. The research included
the elimination of all useless motions and the reduction of those remaining motions. The
elimination of this unwanted waste known as work simplification. According Fred (1992), Elton
Mayo started their research known as the human relations movement and he discovered that
people work better when their attitude is better. He undertook a research project to study what
factors affected productivity in the Hawthrone plant. Their studied took place between 1924 and
1933.

Time Study
According to Fred E. Mayers (1992), time study was developed by Frederick W. Taylor in about
1880 which he is the first person to use a stopwatch to study and measure work content with his
purpose to define “a fair day’s work.” He called as Father of Time Study. Among his study is
‘Taylor Shoveling Experiment’ which he studied between 400 and 600 men that using his own
shovel from home to moving material from mountains of coal, coke and iron ore in around two
mile-long yards. Taylor identify that there have different size of shovels and he wondered which
shovel was the most efficient. Thus, he used a stopwatch and measured everything that workers
did. He recorded the data for every work in various ways with varied of shovels size, durations
to done their work, number of breaks and work hours. The results were fantastic which it
reduced time, saving numbers of workers and budgeting for every year.

10 

 
Time and Motion Study Technique
Taylor's theory was given practical application by Frank Gilbreth who invented time and motion
studies when he devised a method of working that cut the number of motions when laying a
brick from 18 to 5. In a method study there is accurate observation and recording of existing
work methods, from which a new method might emerge. Work measurement is the use of
accurate observation and recording to determine the time it would take for a qualified worker to
complete a specific job to a required level of performance. These are also time studies. Times
can be measured by:
a. Synthetic timing - the time for each component of a job is measured
b. Pre-determined motion time study - the times for different human motions required
for the job are added up to arrive at an overall time
c. Analytical estimating - used when there are non-repetitive one-off jobs, the time is
calculated from the knowledge of the operations and skills required

Relationship and Utilization of Motion and Time Study

Motion and time study helps management determine how much is produced by workers in a
specific period of time, therefore making it easier to predict work schedules and output. Motion
and Time Study is a scientific method designed by two different people for the same purpose, to
increase productivity and reduce time. The two methods evaluate work and try to find ways to
improve processes. Frank B. Gilbreth invented motion study designed to determine the best
way to complete a job. Frederick W. Taylor designed Time Study; it measures how long it
takes a worker to complete a task. Time and Motion Study has become a necessary tool for
businesses to be successful today. Time and Motion Study is very important in production
control. Now, Offices, Banks, Department Stores, and Hospitals use Motion and Time Study.
Offices use it to measure and simplify work in order to reduce costs. Banks use it to help team
members reach their sales goals (Foster, 2003).

RESEARCH METHODOLOGY

Methodology Framework
There are several methods that will be use to achieve research objectives. After the literature
review, observation and collecting data is needed. The complete field data collection will be
tested before it will be used for data analysis. The problems and nonproductive in the work
process can be identified based on the data collection and their analysis. Then, the result from
the data testing will be determined whether the result can be used or not and if there are any
incomplete data, the data collection will be executed again until it fulfills the objective
requirement. After all the data and analysis are complete, proposal and opinion will be issued to
SME

Research Design
This research was conducted through field study. Field study is all the methods of research are
made from direct observations towards the live study situations. Researcher collected data by
observing and recorded the research subject during the observation. According to Tunnell, 1977,
the event from the field study is a matter of real situation in the live condition continuously.
The matter is not invent, on design or pause for the research purpose.

Variables
The variables in this study can be classified into two types, which are independent (time and
motion technique and dependent variable (an impact in the work process for producing sauce).
This research used time and motion technique to study on improving the work process.
Meaning, the increasing of work process efficiency is depending on the time and motion
technique.

Basic Procedure for Research

There are four steps to complete this study. There are given below according to their sequence :
11 

 
(i) Select: select the process or job to be studied.
(ii) Record: observe and record all the relevant facts related to the work process.
(iii) Examine: examine each recorded fact critically
(iv) Develop: develop the most efficient work process.

Data Collection
This research requires to collect data that are related to the time during the work process occurs,
the movement or distance for each process and number of products that they can produces in
specific time, which was collect based on several methods :
(i) Systematic Observation
(ii) Stopwatch Time Study
(iii) Process Chart

Systematic Observation
Systematic observation means researcher are required to observe the whole work process in that
industry, then select and focusing on which process or job that want to study. Based on the
observation, is needs to record everything happens in each process from the start to finish the
work process.

Stopwatch Time Study

Stopwatch time study is the work measurement to determine the baseline for future
improvement. It is also used to analyze a specific process by qualified workers in an effort to
find the most efficient ways in terms of time. Moreover, this method measures the time
necessary for a work process to be completed using the best ways. The time was measured
using snapback stopwatch equipment because it is easier and faster in data recording.
Moreover, this type of stopwatch is suitable for this research because it can develop accurate
data. This allows the element times to be entered directly on the time study sheet without the
need for subtractions.

Process Chart
Process chart is used to show facts as handling, inspection, operations, storage and delays that
occur in the work process, where it was happened when the process moves from one process to
another process until it finished. Each fact can be represented by symbols, where it is used to
describe the process steps.

Data Analysis
After all data was collected, the next step is analyzing the data thoroughly for each work
process. Analyzing data based on systematic observation and the process chart, which recorded
all the relevant facts about the work process. Examine each recorded fact critically using chart
and graph that was produced by Stat Fit and ProModel software. Then, we can detect which
part are nonproductive and take a long time in the work process.

Introduction to Pro Model software

Pro Model (Production Modeler) software is a simulation tools for modeling various
manufacturing and service system. It is a powerful tool to test various alternative design, ideas
and process before actual implementation. Improvement in existing system or design of new
process can be modeled and tested. Besides that, various operating process and it alternatives
can be compared and analyzed. Typically, most users use simulation tools to accurately predict
and improve system performance by modeling the actual location, such as machine or
equipment arrangements. Through testing various alternative process or system, we can
determine the best way to conduct operations.

DATA ANALYSIS AND OUTCOMES

Data Collection
12 

 
Data collection is done to determine the data required for building the process design. The data
collected can explain how the process operates, when, where and how the activities takes place.
The data was included :
ƒ flow chart for the process
ƒ the detail operation for each process
ƒ production time
ƒ layout
ƒ the motion from one process to another process

Work Process
Based on systematic observation, we know that there are seven main work processes in
producing chili sauce. Each work process included minor process. The process started with
cleaning the raw material, mixture, cooking, filling, labelling and the end process is packaging
the sauce into four bottles for each.

Work Process Operations

Overall process takes as much as twenty five processes and each process can be summarized as
operation, transport, inspection, delay or storages. Table 1 shows the numbers and percentages
of each process. Numbers of operation in producing chili sauce is fifteen processes or 60%
from the entire processes. Among the operations process are cleaning the raw material, blend,
mixture, cooking and packaging. While, transport process consist of seven processes or 28%
from the entire processes that involve transportation of raw material from one process to another
processes, such as transport the raw material from blender machine to cooking machine.
Table 1: The Numbers and Percentages of Each Process
Process Symbol Process Chart Number of process Details of Process
Operation 15 60
Transport 7 28
Inspection 3 12
Delay 0 0
Storages 0 0
Besides that, this process also included three part of inspection, which is performed during the
cooking and packaging operations. These processes did not have delay and storages process
because it is a continuous process, where the whole processes takes at least four hours. These
analyses are important for future improvement because it can be as a baseline in developing the
new work process.

Production Time
Production department is the functional area responsible for turning inputs into finished outputs
through a series of production processes. There are seven workers in production department
and they produce four tons chili sauce per process into 800 bottles, each bottle contains 5kg
chili sauce. In production department, the production time was taken during collecting data.
The purpose is to study the required time in order to accomplish the whole process, from the
start until it finish. The data was taken by using stopwatch time study and recorded in the
Process Chart form. The data collected in the previous stage are required for the future
improvements. From the observation, we can detect that the work must be carried out smoothly
based on its process and production layout for making work more efficient.

Based on its owner, the whole process will be completed in the period of four hours. But, based
on data collected, it is more than four hours with the total time is 4.10 hours and it indicates that
they are not punctual in producing their products. Thus, these analyses are important in order to
identify improvement opportunities in the production department. From the delay in 10
minutes, the processes can be improved by modifying the arrangements of equipment at the
production layout. The histogram at figure 4.3 explained the required time in minutes to
complete each process in which cooking activity takes longest time from the overall process.
13 

 
Cooking activities takes a long time in operation because it includes mixture activities, where
the total time is 87 minutes. While, labeling activity takes a few times in producing chili sauce,
the time is 0.43 minutes for stick the label in the front bottle for each product and packaging
takes 1.18 minutes to package the chili sauce bottle into bundles. Besides that, there are two
filling tanks location that caused different times to complete their process. The filling tank 1
takes 16.03 minutes and the filling tank 2 takes 14.53 minutes to complete their work. The time
differences between the same processes occur because of the differences of filling tank location.
Filling 2 was takes shorter time rather than filling 1 because it is nearly to the labeling table.
The differences between these locations cause wasted time in production.

Statistical Analysis of Data

In a simulation model, raw data that has been collected must be analyzed and interpreted, so the
system operation is correctly represented in the model. Prior to developing a representation of
model, the data should be analyzed to ascertain their suitability for use in the simulation model.
Irrelevant or insignificant data need to discard. Data characteristics should be determined by
using data analysis software such as Stat::Fit.

Stat: Fit Software

Besides that, the data were also tested with Kolmogorov – Smirnov as normality test to decide
whether the data will be accepted or rejected. If the value greater than 0.05, means the data will
suitable to run the simulation. Table 2 shows the data testing for each process using Stat::Fit.

Table 2: The Data Testing for Each Process

Process Distribution Rank Acceptance
Cooking Exponential 98.7 Do not reject
To steam area Lognormal 100 Do not reject
Steam the material Triangular 86.5 Do not reject
To filling tank 1 Exponential 100 Do not reject
To filling tank 2 Lognormal 100 Do not reject
To labeling (F1) Triangular 100 Do not reject
To labeling (F2) Lognormal 100 Do not reject

Actual Production Layout

An effective layout facilitates the flow of materials, people and information within and between
areas. Actual production layout takes 54m² space utilization and the production layout must be
analyzed because layout is one of the key that determine the long-run efficiency of work
process. Based on observation and data collection, there are find that layout is one of the factors
that contributes to the delay in production. Based on current production layout, we can see that
the layout lacks in the arrangement of machine and equipments especially at filling tank 1 and
filling tank 2, where it involves packaging processing. The arrangement of packaging
equipments is not suitable because it utilizes more space in the production. In addition, the
length of distance will cause utilization of a lot of times. Thus, as a consequence, these
situations caused the excessive in the production time in producing the products.

DISCUSSION AND CONCLUSION

Recommendation to Enterprise
It can be conclude that the problem occurs in the work process are related to production time,
where it takes extra time in producing its products and from the analysis, we know that the
problems may occur in the packaging activities because of the arrangement of its filling tank
machine. Thus, the fact that related in this identified problems are :
ƒ Number of process
ƒ Production time
ƒ Production layout

14 

 
From the observation, data collection and data analysis, then, researcher develops the actual
simulation to identify the problems. Then, based on the current model, researcher proposes two
new models that included the new work process which combines some process and changes the
arrangement of equipments in production department to reduce the total production time. The
new process was simulated to view the flow of work process. The researcher develops two new
work processes in order to make comparisons which obtain the best work process at the
production department. These new work processes will reduce number of process, total
production time and space utilization. The comparison between the current work process and
new work process explained in Table 3.

Table 3: The comparison between the current work process and new work process
Current layout Proposal I Proposal II
Number of Process 7 5 5
Time utilization (hour) 4.10 3.41 3.45
Space utilization (m2) 54 44.4 46.8

Number of Process
By motion study, it can be used to make improvement in the work process through changes,
combining or eliminating some unnecessary processes. According to Frank and Lillian M.
Gibreth, the goal of motion study is to search the best way of doing jobs. Figure 1 shows the
flow chart for the new work process.

Cleaning  Steam and Bland   Mixture and Cooking 

Labelling and Packaging Filling

Figure 1: the flow chart for the new work process

Based on the chart, the number of work process was decreased two processes because it was the
process of combining the mixture and cooking activities. Other combinations are between
labeling and packaging activities.

Production Time
Based on time study using stopwatch, it helps to uncover non-value added areas of waste,
inconsistency and non-standardization that exist in the production department. Time studies
uncover ways to make work easier and to produces products more quickly rather than the
previous processes. Table 3 indicates that the current work process takes extra 10 minutes.
While, the improvement for the work process was decrease the total time to 3.41 hours for
Proposal 1 and 3.45 hours for Proposal 2. The time decrement was executed by eliminating the
wasted and ineffective time from the current work process, which the new improvement success
to achieve production department goals and objectives.

Layout
An effective layout facilitates the flow of materials, people and utilizes the minimal area. An
effective layout can also help and support an enterprise to achieve some improvement. A good
layout results in a streamlined flow with minimal movement thus minimizing material handling.
The new work process can benefit from a layout analysis, while the simulation helps to identify
inefficient flow patterns and to create better layouts to economize the flow of resources. The
changes of equipment arrangement will help to solve the current work process problem. The
machine and equipments are arranged according to the sequence of operations because it is a
continuous work process. Table 3 shows the proposed layout to the enterprise with the
decrement of 17.78% and 13.33% space utilization.

15 

 
Recommendation for Future Research
There are several affairs that must be attended during collecting data. The data collections are
the important part for analyzing and obtain accurate outcomes. Among the recommendations
are :
ƒ All the machines or equipments that are found in the production layout needs to
measure their dimension in order to develop accurate actual layout.
ƒ All matters that are related to distance between processes needs to record to obtain
useful comparison.
ƒ Collection of operating time must be recorded in more systematically to prevent error or
mistake during data analysis.

Besides that, for future and advanced research, researcher recommends that this research will
execute with more details towards all research parameters. Researcher also suggests that the
research performed in other industry with a wide scope, which is the other researcher can
calculate the cost of the work process in order to improve it because time is very important in
production. Moreover, the quality of product can also be one of the parameter in future
research.

Limitation
The limitation in performing the proposed work process is the new work process only can
reduce the total production time and space utilization, which cannot enhance the number of
products.

Conclusion
From the discussion of the three parameters, it can be concluded that this process can be
improved based on the three parameters that cause the problems. With combination of work
process and time measurement and the changes of production layout, it will improve the current
work process. These modifications are made by eliminating the wasted time and reduction of
the work contents. From the comparison between current and new work process in Table 3, it
indicates that the best alternative towards this problem by choosing proposal 1. These
improvements was successful to achieve the project goals and objectives, which the
improvements was included the processes, production layout, economy in human effort and the
reduction of unnecessary fatigue.

Pro Model Software

Pro Model software works as simulation tools for developing a system design. The developed
model acts as a surrogate for the actual or real-world system. Knowledge gained from
experimenting on the model can be transferred to the real system. In this respect, simulation can
be though of as a virtual prototyping tool for demonstrating proof of concept. According to
Shannon (1998) developing the simulation model is the process of designing a model of a real
system and conducting experiments with this model, which conducting experiment on a model
reduces the time, cost and disruption of experimenting on the actual system.

Contribution to Enterprise
The contribution of ProModel software to the enterprise is, it can develop a new system design
and stimulate the model in order to find their flow. The concept is much easier rather than the
traditional approach because a new design of work process can be developed much easier and it
can actually show how it will operate. Then, the design can be adjusted to follow the
production fitting. The development of new work process does not disrupt the current process
during production. Besides

REFERENCES

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Ann Hendrich, Marilyn Chow, Boguslaw A. Skierczynski, Zhenqiang Lu (2008). A 36 –
Hospital Time and Motion
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B. Kumar (1999). Industrial Engineering. Khanna Publishers, Delhi
Brian Price (1989). Frank and Lillian Gibreth and the Manufacture and Marketing of Motion
Study, 1908 – 1924. Business and Economic History, Second Series, Volume Eighteen,
1989 Business History Conference ISSN 0849 – 6825
Eok Su Sim, Hyoung Gon Lee, Jung Chul Lee, Jin Woo Park (2004). Efficient Work
Measurement System of Manufacturing Cells Using Speech Recognition and Digital
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(2006) Pages 772 – 785
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Based Analysis to the Layout Problem. International Journal of Production Economic
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The Yankee Group Inc (2001). Western Juniper Harvest System Trial. Final Report for
REACH Inc, Klamath Falls, Oregon

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 THE PERCEIVED IMPACT OF SUPPLIER-MANUFACTURER RELATIONSHIPS
AND SUPPLIER MANAGEMENT STRATEGY (THE LEAN APPROACH) ON
OUTSOURCING SUCCESS

MOHAMMED ASHRIL AHMAD NOORDIN, MOHAMAD GHOZALI HASSAN, ABDUL WAHID

MOHD KASSIM
UUM College of Business Universiti Utara Malaysia

ABSTRACT

This paper is a conceptual paper on outsourcing otherwise known as

subcontracting is the strategic use of resources outside the company to perform
tasks that are usually handled internally by the company itself. In today’s
competitive world, successful outsourcing is a powerful tool for companies to
generate value and gain competitive edge over rivals. Companies can focus on
their core competencies and rely on their outsourcing partners for non-critical
processes and operations. The formed strategic alliance can normally create
synergy amongst companies that can lead to short and long term benefits. Some
benefits are monetary and some are non-monetary. One factor of successful
outsourcing is having a smooth supplier-manufacturer relationship. The positive
impacts of outsourcing towards business performance & organization performance
which both are representing monetary benefits had been studied extensively but
evident in many academic literatures and texts, empirical findings particularly in
countries like Malaysia are scarce especially outsourcing in non monetary benefits
Kong (2005). This paper attempts to examine the effectiveness of successful
outsourcing on the aspects of supplier-manufacturer relationship and in addition to
recognizing the contribution of lean approach as a management strategy to
substantiate outsourcing success.

Keywords: Supplier relationships, supply chain management, lean, outsourcing

INTRODUCTION

It must be highlighted that the effectiveness of outsourcing is measured using perceived

measures which is non monetary as described by Elmuti (2003). So far Kong (2005) has used
Elmuti’s Outsourcing Success Model to establish relationship on Customer Service
Management where the study has been conducted on 1000 companies across Malaysia.

The antecedent of relational exchange theory will also be applied to support the theoretical
framework and shall also be tested. The antecedent of relational exchange shall include the role
of trust and dependence which will add more synergy to the independent variables impact to the
creation variables. On the other hand, a dependent variable can be expanded by introducing
monetary benefit such as firm performance theory that will include elements of profit, ROI,
sales per employee and stock value as an addition to the outsourcing success which is non
monetary benefit. This will likely provide more meaningful results where the bottom line for
any firms’ survival is always about financial stability. On top of that the appearance of monetary
benefits is expected to reduce bias.

The supplier manufacturer relationship has been used widely to assess organization performance
therefore the same variable should be applied and tested to the outsourcing success which is
now the gap to be studied in this research. To make it interesting a lean approach in perspective
of supply chain management (Cox, 1999) to be introduce as a moderator in order to observe if
there any catalyst effect on the relationship between supplier manufacturer relationship and
outsourcing success

Problem Statement
18 

 
Most organization study relies so much on monetary element such as profit and ROI to assess
the organization or firm performance. ROI is not directly understood by the non finance
respondent unless the respondent involved in finance work. ROI also depends on how an
organization restructured their CAPEX payment therefore in certain situation ROI does not
reflect the true perception of the respondent. This is one of weaknesses of organization
performance theory. Elmuti (2003) has introduced non monetary model to assess outsourcing
performance which is more relevant to non financial respondents. The problem statement can
be summarized as follows:
• How does the Supplier-Manufactures Relationships influence the success of outsourcing?
• How does Lean influence the strength of the above relationship?

Research Objectives
The objective is to study the relationship of Supplier-Manufacturer Relationship towards
outsourcing success and the impact of Supplier Management Strategy (The Lean Approach) as a
moderator to substantiate the success of outsourcing. In a perspective of a supplier that received
a product transfer from the principal through outsourcing event. Therefore 3 main objectives for
this study have been established:
• To observe whether there exist significant Supplier-Manufacturer Relationship with the
Outsourcing Success.
• To observe the antecedent factors of Supplier-Manufacturer Relationship with the
Outsourcing Success.
• To study the impact of Lean Approach Supplier Management Strategy as a moderator on
the relationship between Supplier-Manufacturer Relationship with Outsourcing Success.

Research Questions
There are two research questions concerning here:-
• In an organization, can the Supplier-Manufacturer Relationships be a factor to the success
of an outsourcing?
• Can the antecedent of Supplier-Manufacturer Relationships support the success of an
outsourcing?
• Can a Lean Approach Supplier Management Strategy adopted by an organization
substantiate the success of an outsourcing?

LITERATURE REVIEW

Outsourcing Success
The significant level of outsourcing programs used across all business sectors is well
documented in the literature Dun & Bradstreet, 2000; Klaas, McClendon & Gainey, 2001;
Quinn, 2000). Past research has progressed along several paths. First, some researchers have
focused on motivations and reasons for outsourcing activities (Barthelemy & Dominique,
(2004); Conner & Prahalad, 1996; Frayer, Scannell & Thomas, 2000; Grant 1996; Greer et al.,
1999; Mullin, 1996; Sinderman, 1995). According to this perspective, the global imperative for
outsourcing accelerates as firms evolve from sellers of products and services abroad to setting
up operations in foreign countries and staffing those operations with host countries or third party
nationals (Greer et al., 1999). Most corporations believe that in order to compete globally, they
have to look at efficiency and cost containment rather than relying strictly on revenue increases
(Conner & Prahalad, 1996). As companies seek to enhance their competitive positions in an
increasingly global marketplace, they are discovering that they can cut costs and maintain
quality by relying more on outside service providers for activities viewed as supplementary to
their core businesses (Grant, 1996; Mullin, 1996; Ravichandran & Lertwongsatien, 2005).

Other researchers have identified several outsourcing issues, trends and strategies that
companies take in establishing and effectively managing their outsourcing activities (Carney,
19 

 
1997; Cullen & Willcocks (2003); Sinderman, 1995). The trend is for outsourcing relationships
to function more as partnerships. Outsourcing providers are taking increasing responsibility in
realms that have traditionally remained in-house, such as corporate strategy, information
management, business investment, and internal quality initiatives (Carney, 1997; Sinderman,
1995).

On the other hand some researchers argue that there could be negative long-term consequences
of outsourcing resulting from a company's dependence on independent suppliers and eroding its
core competencies (Kotabe, 1998; Hoecht & Trott, 2006). Such reliance on outsourcing may
make it inherently difficult for the company to sustain its long-term competitive advantages
without engaging in the developmental activities of the constantly evolving design and
engineering technologies (Kotabe, 1998). Other researchers have examined the outcomes of
technology-sourcing partnerships from the sourcing firms' point of view (Mowery, Oxley &
Silverman, 1996; Steensma & Corley, 2000) found that, in general, equity-based alliances were
more effective than contract-based outsourcing. Steensma and Corley (2000) suggest that the
outcomes from technology partnerships for sourcing firms depend on the interaction between
technology attributes and the interdependence between source and sourcing firms.

Other researchers have focused on outsourcing strategy effectiveness and its impact on
organizational characteristics (Frayer et al., 2000; Klaas, McGlendon & Gainey, 2001). Frayer
et al. (2000) suggest that in order for an outsourcing strategy to work effectively, companies
must proactively manage their outsourcing strategies by establishing top management
commitment, global sourcing structures and processes, and global sourcing business
capabilities. In addition, they suggest that companies that have not raised their sourcing
approach to global, strategic level may already be behind in terms of quality, cost, delivery,
technology, performance, and customer service. Klaas et al. (2001), suggest that the influence of
organizational characteristics was highly contingent, suggesting that organizational
characteristics have different effects on various types of outsourcing activities outsourced. As
such, it appears that many factors such as pay level, promotional opportunities and demand
uncertainty should be considered when deciding to outsource functions or activities.

Other researchers have focused on outsourcing performance measures (Carney, 1997; Goldstein,
1999; Kotabe, Murray & Javalagi, 1998; Malhorta, 1997). For example Kotabe et al. (1998)
identifies three types of performance measures as necessary components in any outsourcing
performance measurement system: strategic measures; financial measures; and quality
measures. Other studies use additional dimensions of market performance such as costs savings,
cycle time, customer satisfaction, and productivity to measure the effectiveness of outsourcing
strategy (Carney, 1997; Goldstein, 1999; Malhorta, 1997).

From a different perspective, obstacles such as poor choices of sourcing partners, inadequate
planning and training/skills needed to manage outsourcing activities and poor organizational
communication have also been identified as impacting the success of outsourcing projects
(Foster, 1999; Guterl, 1996; Laabs, 1998; Lau & Hurley, 1997).

Outsourcing is essential to companies. Successful companies share the same success factors;
they have clear understanding of their core-activities (Barthelemy, 2003); have done adequate
research and planning; and most importantly have developed clear objectives, goals and
expectations of outsourcing activities (Elmuti, 2003). Another important ingredient for success
is a good partner. Essentially in outsourcing agreements, the relationship between the companies
and their partners are based on trust and contracts. So it is essential that the right partners are
selected based on criteria like credibility, expertise, and reliability (Click & Duening, 2005;
Elmuti, 2003 ;). This will eventually lead to closer ties and relationships (Barthelemy, 2003). It
is also important to get the right people involved in managing outsourcing efforts (Elmuti,
2003). Therefore adequate training, infrastructure and facilities are essential (Elmuti, 2003).

20 

 
Two of the most serious problems a company can face when outsourcing are resistance from its
employees and its effect on theirs morale (Belcourt, 2006). To make outsourcing work, there
has to be effective and well coordinated communication among cross-functional areas, support,
commitment, and involvement from the top management (Elmuti, 2003). Employees must be
treated appropriately by providing adequate support and reasonable remuneration deals
(Barthelemy, 2003). At the same time the management needs to keep high morale and
performance among remaining employees (Barthelemy, 2003). Other factors affecting
outsourcing in successful organizations are emphasis on short- and long-term benefits, adequate
and objective performance criteria, feedback and control mechanism, effective use of
performance incentives and penalties, and flexibility in anticipating change (Elmuti, 2003).

Table I depicts the sources where the variables manifesting successful outsourcing were found.
Although the variables were derived by Elmuti (2003), Khong (2005) believes that these
variables can succinctly describe the key success factors of successful outsourcing.

Table I: The sources deriving the variables of successful outsourcing

Variables manifesting successful outsourcing Sources
A1 Clear objectives and expectations of outsourcing activities Elmuti (2003); Corbett (1999)
A2 Choice of right outsourcing partners Elmuti (2003)
A3 Adequate skills to negotiate a sound contract Elmuti (2003); Sinderman (1995)
A4 Adequate planning during all various phases of outsourcing Elmuti (2003); Guterl (1999)
A5 Effective organisational communication Elmuti (2003)
A6 Well coordinated effort among cross-functional areas Elmuti (2003)
A7 High and effective support and involvement by top management Elmuti (2003); Foster (1999); Jones (1997)
A8 Effective use of performance incentives and penalties Elmuti (2003); Foster (1999); Jones (1997)
A9 Getting the right people involved Elmuti (2003)
A10 Adequate supporting infrastructures Elmuti (2003)
A11 High morale and performance of the remaining employees Elmuti (2003)
A12 Emphasis on short- and long-term benefits Elmuti (2003)
A13 Adequate and objective performance criteria and feedback Elmuti (2003); Ramarapu et al. (1997)
A14 Flexibility in anticipating change Elmuti (2003)

Source Elmuti (2003) & Khong (2005)

Elmuti (2003) also suggested one of a measurable and objectively outcome such as financial
performance to measure the success outsourcing strategy where this is in line by several authors
(Quinn, 1999) as the primary goals of outsourcing efforts.

Supplier-Manufacturer Relationships: - The relational–oriented exchange model

The traditional model of confrontation between buyer and seller which relied on arm’s-length
exchanges and on market competition (Humphreys et al., 2001) has now been replaced by a new
philosophy advocating the establishment of close and long-term relationships based on high
levels of cooperation and joint action for the attainment of mutual benefits and satisfaction
(Han, Lee, & Seo, 2008). This concept of closeness in commercial relationships has also been
applied to supplier-manufacturer relationships. New management practices have emerged based
on maintaining strategic relationships with a limited number of suppliers and the planning of
conjoint objectives as a means of securing competitive advantage. Great advances have been
made in this area in recent years and marketing researchers have provided new insights into
relational-oriented exchanges: determinant factors (Heide & John, 1990; Heide & Stump, 1995;
Kumar et al., 1995; Joshi & Stump, 1999; dimensions (Dwyer et al., 1987) and performance
outcomes (Noordewier et al., 1990).

In business markets the term “relational-oriented exchanges” is used to denote durable

relationships governed primarily by relational norms and ethical principles as a means of control
and coordination. The main difference with respect to other types of relationships, such as
21 

 
vertical integration, power hegemony or a market relationship is the co-existence of explicit or
tacit continuity agreements, cooperative norms and action procedures. In order to achieve the
flexibility required in complex exchanges characterized by unforeseen circumstances, relational
exchange provides high levels of cooperation, joint planning, and mutual adaptation to the
partner’s needs (Lambe et al.,2000).

The concept of relational exchange is essentially derived from relational contracting theory
(Macneil, 1980) which describes relationships in terms of principles and norms (solidarity,
mutuality, integrity of functions, flexibility, etc.) which govern the behaviour of two parties.
However, Stern and Reve (1980) and Fichman and Goodman (1996), prefer to define these
relationships by separating the two basic macro-dimensions of any long-term bilateral
relationship between buyer and seller: structure and process

The “structural dimension” refers to the respective positions of the members within the
relationship (the distribution of functions) and temporal orientation (Fichman & Goodman,
1996). Following Dwyer et al. (1987) and Ganesan (1994) it can be said that the more important
characteristic of a close buyer-seller relationship is its projection through time and the desire for
continuity in the long-term. Its principal feature is not the duration stipulated in the contract
currently in force, but rather its anticipated prolongation to future periods.

The “processal dimension” reflects the dynamic aspects of the exchange: actions and behaviour
within the relationship. In a close, long-term relationship process can be recognized by the
degree of joint action, the tendency to closeness, co-operation and the coordination of activities.
Thus relational process can be measured by the degree of cooperation between the members and
the level of communication (Andaleeb, 1995; Anderson & Narus, 1984, 1990; Morgan & Hunt,
1994).

Antecedents of a relational-oriented exchange

In studying the variables which determine the relational orientation of an exchange, Oliver
(1990) identifies six critical motivations, or underlying causes, which lead to the development
of inter-organizational relationships. Oliver states that an inter-organizational relationship could
be established:
• Because a law or regulation requires firms to purchase certain goods and services
(necessity);
• Because the firm may enhance its reputation (legitimacy);
• Because firms seek links to exercise power or control over another organization or its
resources (asymmetry);
• Because firms want to manage environmental uncertainty (stability);
• Because firms have the objective of pursuing common goals or interests (reciprocity) ;or
• Because a firm can obtain lower costs and higher benefits (efficiency).

Although each of the above-mentioned determinants may be a separate and sufficient cause of
relationship formation in itself, the decision to initiate a relationship with another organization is
commonly based on multiple contingencies. Thus, Izquierdo and Cillan (2004) suggest that
close and relational-oriented exchanges are mainly based on the interaction of efficiency,
stability and reciprocity motivations. For the purposes of improving efficiency and obtaining
stability, an organization may attempt to secure a stable relationship with another. Moreover, if
the organization anticipates that greater internal efficiency will result from the relationship, its
desire to pursue mutually beneficial goals and interests may increase.

Although these general motivations provide a theoretical basis for explaining relationship-
formation, Oliver (1990) notes that these determinants have to be linked to the internal and
external conditions which facilitate or impede the establishment of relationships. These
conditions are the antecedents or determinant factors which allow a relationship to take place. In
order to explain relational-oriented exchanges, (Izquierdo & Cillan, 2004) group these
22 

 
antecedent factors into two categories: economic factors, linked to efficiency and stability
motivations; and social factors, linked to motivations of reciprocity.

Efficiency and stability motivations: economic factors.

Efficiency and stability motivations refer to the desire to ameliorate economic outcomes and to
adapt the firm to environmental uncertainty. Yet when do firms look for efficiency and stability
through relational exchanges? Essentially, when they are depend on each other. Dependence is
defined as a firm’s need to maintain the relationship in order to achieve desired goals (Frazier,
1983). Resource dependence theory and transaction cost analysis theory point to dependence as
a determinant factor of the form of governance (Holcomb & Hitt, 2007; Pfeffer & Salancik,
1978; Williamson, 1985). The resource dependence theory states that inter-organizational
relationships are structured by means of formal and informal bonds in order to control
dependence (Pfeffer & Salancik, 1978). Transaction cost analysis sees economic exchange as a
question of designing efficient relationships and mechanisms of adaptation to regulate that
exchange. The choice of a hybrid structure as relational-oriented exchange derives from the
investment in specific assets, the environment uncertainty and the transactions frequency. These
conditions are sources of dependence making it practically impossible to replace the other party
(Williamson, 1985, 1993).

Izquierdo and Cillan (2004) suggest that relational-oriented exchanges are a consequence of the
degree of interdependence, that is, the mutual dependence between firms. In order to reflect
variable interdependence, two inherent concepts have been identified: magnitude and
asymmetry (Buchanan, 1992; Gundlach & Cadotte, 1994; Kumar et al., 1995). Interdependence
magnitude is defined as the sum of the dependence in an exchange and dependence asymmetry
as the comparative level of dependence. It has been demonstrated that high magnitude
interdependence influences the establishment of relational structures and processes because a
close relationship fosters the use of non-coercive force, reduces conflict, foments stability and
promotes durability. However, this positive effect of the magnitude of the interdependence, is
moderated (enhanced or diminished) by the asymmetry.

Asymmetry has a two-fold effect. If there is a balanced dependence, both parties have incentives
to invest in the relationship (the pursuit of mutual benefits) and opportunistic behaviour is
unlikely (Buchanan, 1992; Bucklin & Sengupta, 1993; Heide, 1994). On the other hand, if the
levels of dependence are unbalanced, the less dependent party will not have any incentive to
share its resources with the other in a close and long-term relationship as the benefit is both
insignificant and replaceable (Ganesan, 1994; Geyskens et al., 1996). Even where the more
dependent party was interested in sustaining a relationship oriented towards the long-term, the
less dependent party’s lack of interest in investing in joint actions and the fear of opportunistic
behaviour (probably with the aim of securing greater control) discourages the more dependent
party away from seeking a relational orientation.

Reciprocity motivations: social factors.

When Oliver (1990) mentions reciprocity as a motivation for developing relationships, she
refers to the objective of obtaining mutual benefits by means of cooperation, collaboration and
coordination. What are the conditions or factors which induce firms to establish relational-
oriented exchanges in order to obtain satisfactory results for both parties? In this case “social
conditions” are needed, by which we mean affective links between the parties. Thus, in
accordance with relationship marketing, trust is the key social variable in explaining inter-firm
cooperation and long-term relationships (Morgan & Hunt (1994); Goo & Huang, 2008). Taking
a social perspective, Morgan and Hunt (1994) put forward the trust-commitment theory to
explain how trust and commitment favour the success of relational exchange. These conditions:
• Encourage the parties to co-operate in order to take advantage of the investments made in
the relationship;
• Lead the parties to reject short-term alternatives in favour of long-term benefits; and

23 

 
• Allow them to undertake high-risk manoeuvres because they rely on the non-opportunistic
behaviour of the other party.

Trust has been defined as the willingness to rely on an exchange partner in whom one has
confidence (Dwyer et al., 1987). Trust acts as a substitute for hierarchical control (Rindfleisch
& Heide, 1997) and allows the development of flexible structures (Zaheer & Venkatraman,
1995) in as far as it removes the fear of opportunistic behaviour. It also increases satisfaction
with the relationship (Anderson & Weitz, 1989; Mohr & Spekman, 1994), enhances continuity
expectations (Ganesan, 1994), and foments cooperation, coordination, collaboration and
communication (Joshi & Stump, 1999; Smith & Barclay, 1997).

Lean Approach Supplier Management Strategy

Supply chain management (SCM) is a technique that is linked to the adoption of the lean
production system (Cox, 1999). For many organizations, developing the lean production system
is a key element is their SCM practice. There appear to be 8 characteristics of the lean approach:
• Strive for perfection in delivering value to customers.
• Only produce what is pulled from the customer just-in-time and concentrate only on those
actions that create value flow.
• Focus on the elimination of waste in all operational processes, internally and externally, that
arise from overproduction, waiting, transportation, inappropriate processing, defects and
unnecessary inventory and motion.
• Recognize that all participants in the supply chain are stakeholders and that we must add
value for everyone in the business.
• Develop close, collaborative, reciprocal and trusting (win-win), rather than arms- length and
adversarial (win-lose), relationships with suppliers.
• Work with suppliers to create a lean and demand-driven logistics process.
• Reduce the number of suppliers and work more intensively with those given a preferred
long-term relationship.
• Create a network of suppliers to build common understanding and learning about waste
reduction and operational efficiency in the delivery of existing products and services.

In outlining these characteristics it is obvious that a great deal of supply chain thinking is based
either on copying from, or adapting, the basic insights that have been gleaned from the way in
which Toyota has historically managed itself and its relationships with customers and suppliers.

METHODOLOGY

This research shall focus on technological product transfer through outsourcing therefore the
population for this study consists of the multinational firms in the semi-conductor and aerospace
businesses located in Penang. It is important to highlight that Penang state is highly populated
with multinational companies as compared with other states in Malaysia. Therefore the selected
state should be able to represent Malaysia as a whole.

The sampling frame will be drawn from multinational companies listed in Penang Development
Corporation’s directory. It is expected based on the information from the sampling frame, 120
multinational companies are from different countries of origin (namely US, Germany, Japan,
Malaysia, Taiwan and UK) and they are involved in semiconductor, computer & computer
peripherals, telecommunication, electrical products, composites, avionics, aerospace related and
instruments industries. Data to be analyzed using the multiple regression model.

The unit of analysis for this study is an individual (industrial professional) that had been
working with multinational companies for more than 5 years with an expectation that these
individuals must had an experience with product transfer through outsourcing event. The
respondents can be general managers, project managers, functional managers, executive staff
and supervisors. As such a purposive sampling method (non-probabilistic) will be used. This
24 

 
method is more
m approppriate than the random sam
mpling methhod because only specificc targets thatt
have invollved in outtsourcing acctivities are in the besst position to provide the desiredd
informationn for this stuudy.

Copies of the questionnnaire will be sent to each of the Human Reesource Man nager of thee
multinationnal companiies with cleear instructio ons and connditions for the distribu ution to thee
relevant reespondents by
b the Humaan Resource Manager. This T will maake sure thatt the Humann
Resource Manager diistributed eqqually to th he 3 positiion levels ((manager, executive
e &
supervisor)) at the targgeted responndents. Each h envelops will w containn 20 copies or more off
questionnaires. 3 weekss will be giveen for the Huuman Resourrce to collectt back the qu uestionnairess
from the reespondents and
a mail them m back. A firrst reminder will be sentt to the Hum man Resourcee
Manager after the first 3 weeks andd if it is stilll no reply affter 3 weeks a final remiinder will bee
sent out and another 3 weeks
w will be given.

Theoreticaal Frameworrk

Figure 1 Thheoretical Frramework

The dependent variable is Outsourrcing Successs, which is the variablee of primary y interest, inn
which the variance is attempted too explain by y two indepeendent variabbles which are Supplierr
Manufacturrer Relationsships with itss antecedentts and one moderating
m vaariable which
h is the Leann
Approach Supply
S Chainn Managemeent Strategy.

Statement of Hypotheeses
From the abbove framew work, 3 broadd hypothesess are derived:
H1: The rellational oriennted exchangge has a signiificant positive impact onn outsourcingg success.
H2: The anttecedent relaational orientted exchangee has a signifficant positivve impact on outsourcingg
success
H3: The im
mpact of lean approach suupplier manag gement strattegy will furtther improvee the positivee
relationshipp between suupplier manuufacturer relaationships and outsourcinng success.

Research Significance
S e
Lau and Hurley
H (19977) find a siggnificant relaationship beetween outsoourcing and profitabilityy
margin whhere they fouund Chryslerr’s profit maargin is four times as higgh as that off GM due too
effective outsourcing
o through straategic alliancces. The formed strateggic alliancess can createe
synergy am mongst comppanies that can
c lead to short
s and lonng terms bennefits. Thus the study off
Supplier-MManufacturer Relationshipp & Supplieer Managemeent Strategy is representing strategicc
alliance to the outsourccing success.

There is noo objection that

t the relattionship betw
ween supplieer and manuufacturer is an
a importantt
one but in the curreent competitive environ nment, supppliers are immportant reesources forr
manufacturrers. Supplieers have a laarge and dirrect impact on
o the cost, quality, techhnology andd

25
5 

 
time to market of new products (Handfield et al, 1999). In many industries the management of
suppliers can account for as much as 60% to 80% of manufacturing cost (Asmus & Griffin,
1993). The management of supplier relationships is a vital task for manufacturers as it can
contribute to both competitiveness and profitability of a company (Lemke et al. 2000).
Handfield and Nichols (1999) also emphasize the importance of relationships for the effective
management of supply chains. They state that the technological and physical transfer elements
are understood, and that the issue of relationships is more difficult, less well understood and
therefore more fundamentally important. Tait (1998) states that companies that make supplier
relationships a priority are rewarded with better financial performance and greater customer
satisfaction.

As highlighted by Christopher (1997), effective supplier management strategy can take costs out
of the supply chain. Supplier management strategy is the strategy used by the manufacturer to
improve its supplier’s performance and capabilities to meet the manufacturer’s short term and/or
long term supply needs. Supplier management is concerned with organizing the optimal flow of
high quality, value for money materials or component to manufacturing company from a
suitable set of innovative suppliers (Goffin et al, 1997). This strategy allows the manufacturer to
bridge the gaps after the supplier selection process, between its suppliers’ capabilities and its
own expectation. Effective supplier management can take costs out of the supply chain. By
involving suppliers in product development activities and continuous improvement efforts,
suppliers learn about customer requirements, culture and decision making patterns which help
them to be more efficient in meeting the manufacturer’s expectation (Cocks, 1996; Epatko,
1994; Leenders, 1994; Minahan, 1996; Morgan & Monczka, 1996; Towler, 1996). These
strategies help organizations enhance communication, share knowledge, improve decision
making, and upgrade supplier and manufacturer’s performance.

Research Justification

Outsourcing entails a long term relationship between supplier and beneficiary, with a high
degree of risk-sharing (Lee & Kim,1999). Essentially in outsourcing agreements, the
relationship between the companies and their partners are based on trust and contracts. So it is
very important that the right partners are selected based on criteria like credibility, expertise and
reliability (Elmuti, 2003). This will eventually lead to close ties and relationships (Barthelemy,
2003).

Successful implementation of an outsourcing strategy has been credited with helping to cut cost
(Greer, Youngblood & Gray, 1999; Gupta & Zeheuder, 1994), increase capacity, improve
capacity, improve quality (Lau & Hurley, 1997; Kotabe, Murray & Javalugi, 1998), increase
profitability and productivity (Casale, 1996; Sinderman 1995), improve financial performance
(Crane, 1999), lower innovation costs and risks (Cullen & Willcocks, 2003; Quinn, 2000), and
improve organizational competitiveness (Lever, 1997; Sharpe, 1997;Steensma & Corley, 2000).

Therefore it is important of this research to study the supplier relationships with its antecedent
and supplier management strategy and their contribution to the outsourcing success. Thus this
shall be the gap to be tested for the contribution to the body of knowledge in successful
outsourcing theory.

SUMMARY AND CONCLUSIONS

Many companies strive to fight global business pressure that amplified dramatically in recent
years through manoeuvring outsourcing. Nevertheless, outsourcing success highly rely on
relationship between supplier and manufacturer. On the whole, relationship between supplier
and manufacturer extremely provide several benefits such as impact on cost, quality, technology
and time to market of new products. More to the point, lean approach supplier management
strategy also plays its role through impact on the relationship between supplier-manufacturer
26 

 
relationships with outsourcing success. Therefore, this study reveals outsourcing success
through conceptualization of the relationship between relational oriented exchanges and
outsourcing success, antecedent relational oriented exchange and outsourcing success and
impact of lean approach supplier management strategy as a moderator to reveal impact on
outsourcing success. Theoretically, the present study emphasize role of lean approach supplier
management strategy towards improvement of relationship between supplier manufacturer
relationships and outsourcing success. Practically, the present theoretical framework may
beneficial for organizational administrators and managers particularly manufacturing industries
for an assessment of outsourcing success. Even though this study considers supplier-
manufacturer relationship with the outsourcing success and impact of lean approach supplier
management strategy as a moderator, there may be other critical factors that influence
outsourcing success should be considered in future studies.

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 IMPROVING PROJECT MANAGEMENT MONITORING AND CONTROL:
A SIMULATION APPROACH

MOHAMAD K. OMAR, F. C. LIM

Department of Manufacturing Management, Faculty of Manufacturing Engineering
University Technical Malaysia Melaka

ABSTRACT

There is a broad category of Operations Management problems having to do with the

management of project type operations. Such operations are typically illustrated by the
example of some large-scale, one-time activity such as the design and production of a new
prototype machine, the construction of a new facility, or the design and manufacturing of a
new system to serve a specific or general propose. The basic approach to all project
scheduling is to form an actual or implied network that graphically portrays the tasks and
milestone in the project. There are several techniques evolves in the late 1950s for
organizing and representing this basic information. Best known today are PERT (Program
Evaluation and Review Techniques) and CPM (Critical Path Method). Other network
techniques such as PERT/Cost, GERT and Decision CPM are largely extension and
modifications of these original two. It is well known and reported in the literature that
CPM is best used for situations with a deterministic nature; on the other hand, PERT is
best used for stochastic situations. However, although PERT is able to deal with
uncertainty in activities times by using three point estimates (optimistic time, most likely
time and pessimistic time), the estimate of activity times are clearly subjective and rely
solely on judgment. This research paper and through a real life construction project
propose a Monte Carlo simulation approach to deal with the short coming problems
inherited in the PERT. The results obtained from our comprehensive simulation approach
shows that project managers are able to estimate the probability of project completion time
and thus allocate contingency plan for the project. In addition, project managers are able
to consider the possibility of sub-critical path(s) that might eventually become the critical
path as the project progresses through time. The obvious contribution of this research work
is the opportunity that provides for project managers to carefully examine their estimation
of the project activities times and the sub-critical path(s) leading to a much improved
approach for monitoring and controlling the project.

Keywords: Operation Management; Project Management; PERT; CPM; Monte Carlo

Simulation
INTRODUCTION

Project management is a relatively pure form of management. It provides people with a

powerful set of tools that enhances their ability to plan, implement, and manage activities for the
purpose of achieving a specific objective (Gray and Larson, 2008). Project management
encompasses a lot of aspects, and numerous “tools” have been developed to help project
managers in coping with the complications inherent in the performance of their duties. The most
common utilized project management tools involve the modeling of a project as a network.
Among the two well known methods developed for project scheduling are the Critical Path
Method (CPM) and the Program Evaluation and Review Technique (PERT). These scheduling
methods had been used extensively in many disciplines like engineering, research and
development, business planning, healthcare activities and even taught widely in project
management academic courses. It is not surprised to see that almost all project management
software packages were embedded with CPM and PERT in their project scheduling tool options.

However, CPM and PERT are not perfect in dealing with project scheduling problems. Because
of the limitations CPM and PERT holds, simulation is seemed to be a promising tool to enhance
the capability of the existing project scheduling tool (Douglas, 1978). The use of simulation as a
method for the analysis of project networks was initiated by Van Slyke (1963). Since then, a lot
of new simulation procedures have been developed for application in project management.
Diamantas et al. (2007) compared the capabilities of PERT and Monte Carlo Simulation and
31 

 
addresses the incorporation of project risk management into the two approaches. Most recently,
a paper from Kirytopoulos et al. (2008) had validated the superiority of simulation over PERT
and aims to highlight the significance of historical information as well as the distribution
selection in activity duration estimating, by contrasting the various outcomes of scenarios when
historical information is or is not used. Various disciplines and industry has been
implementing simulation as a scheduling tool in project management although it is still
limited. Badri et al. (1997) had developed a simulation model for R&D planning stages
in a major petroleum company. Dukić et al. (2007) has presented a management model
for construction projects based on computer simulation. Thus the aim of this paper is to
utilize simulation in order to provide the project managers a much improved approach for
monitoring and controlling the project.

The remainder of the paper is organized as follows: The next section provides a description of
the problem being studied. Next, the solution methodology followed in this paper is presented in
detailed, followed by a thorough result and discussion. The last section concludes the overall
research of this paper.

PROBLEM DESCRIPTION

The presented case study was a small scale construction project conducted in Malaysia, as
shown in Appendix A, obtained from consultation firm which helps developer to design the
project layout for tender purposes. It dealt with the construction of a warehouse, where it
involves 31 activities.
The project activities shown in Appendix A can be easily modeled in a network by entering
the activity, duration and its precedence relationship in Microsoft Project. The network was able
to visualize the activities realization in its precedence relationship, the critical path and the total
project completion time. The project network for this problem is illustrated in Figure 1.

Once the project manager developed the project plans and the activities, he/she need to answer
these questions which constitute a general project management problem. These questions are:
1. How accurate/reliable the estimate produced by Microsoft Project in terms of total
project completion?
2. Is there a chance for an activity which is not in the critical path becoming a critical
activity and thus changing the original critical path?

Although the consultation firm utilizes Microsoft Project by using CPM, the capability of
Microsoft Project is somehow limited when uncertainty is taken into consideration. In addition,
construction projects are complicated in nature and subject to few uncertainties, which originate
from the unique characteristics of each project, the variety of resources and activities, and some
external factors as well. When these uncertainties are incorporated in each of the activities, the
critical path and the total project completion time is also become uncertain. Thus, simulation is
introduced to understand the project activity uncertainties and thus management may enhance
their decisions.

32 

 
Figure 1: The figure shows an Activity on Arrow (AOA) network visualizing the project
activities according to their precedence relationship as developed in Microsoft
Project.
Notes: Red arrow ( ) indicates critical activity.
Normal arrow ( ) indicates non-critical activity.
Dashed arrow ( ) indicates dummy activity.
L3, 11 represents activity L3 with mean activity duration of 11 weeks.

SOLUTION METHODOLOGY

In order to provide a solution to the problem described earlier, two simulation scenarios will be
used to answer the questions posed in the problem description. However, the model and
scenario assumptions should be stated as the following:
1. Each activity was normally distributed and mutually independent.
2. The estimated duration of the activity was equal to the mean of the activity duration.
3. The standard deviation of each activity was randomly sampled from 1 to 2 for activity
durations of 9 weeks and below; for activity durations of 10 weeks and above, the standard
deviation would be 3.
4. All negative values were ignored in sampling the normally distributed activity duration.
5. The maximum of each activity duration being sampled was given by μ +5 σ , where μ
represents the mean of the activity duration and σ represents the standard deviation of the
activity duration (Refer to Table 1).
Table 1: Activity duration parameters.
Actv Mean Std Dev, Mi Max, μ +5
, μ σ n σ
L1 3 2 0 13
L2 4 2 0 14
L3 11 3 0 26
L4 2 2 0 12
L5 2 2 0 12
L6 2 1 0 7
L7 2 1 0 7
L8 1 2 0 11
L9 1 1 0 6
L10 2 2 0 12
L11 2 1 0 7
33 

 
 Actv Mean Std Dev, Mi Max, μ +5
, μ σ n σ
L12 2 1 0 7
L13 4 1 0 9
L14 3 1 0 8
L15 1 1 0 6
L16 1 1 0 6
L17 3 1 0 8
L18 2 2 0 12
L19 2 1 0 7
L20 2 2 0 12
L21 2 2 0 12
L22 8 1 0 13
L23 8 2 0 18
L24 1 2 0 11
L25 8 2 0 18
L26 10 3 0 25
L27 4 2 0 14
L28 8 1 0 13
L29 4 2 0 14
L30 7 1 0 12
L31 1 2 0 11
Notes: Table above shows the parameters defined for each activity’s duration and its minimum
and maximum value to be sampled in a normal distribution.

The first scenario was to estimate the probability distribution of project completion time. The
duration of each activity is normally distributed according to the parameters being defined
which are the mean, standard deviation, minimum and maximum of the activity duration. After
that, the time in each node in the project network reached is computed according to the
precedence relationship of each activity.

Scenario 2 is dealing with determining the probability that an activity is critical. This scenario is
done by duplicating the simulation model developed in the first scenario but with some
adjustment i.e. by increasing the activity’s length by a small amount of time. There will be 31
simulations and for each simulation, only 1 activity will be increase by a small amount of time
on each simulation run. If the project completion time is increased by the same amount of time,
it implies that the activity is critical.

The authors have used an off-shelf simulation package that can be embedded in Ms Excel. The
simulation model was developed so that it generates two results, the probability distribution of
project completion time and the probability that an activity is critical. Once the simulation
model was fully developed, the simulation ran for 1000 times and the results were recorded into
Ms Excel spreadsheet.

RESULTS AND DISCUSSIONS

For the first scenario, the authors reported that the simulation results indicate that there is a
chance the project completion time will exceed the mean project completion time or a chance
the project will complete earlier than the mean project completion time. The results of the

34 

 
simulation model in estimating the probability distribution of project completion time are
presented in Figure 2 and Table 2.

Figure 2: The figure shows the probability distribution of the project completion time using
simulation in scenario 1. Examining Figure 2 indicates that approximately 90% of the
project completion times lies between 24 days and 35 days with the mean project
completion time of approximately 30 days.

Table 2: Percentiles of project completion times.

Percentile Project Length (days) Percentile Project Length (days)
th th
5 24.38919 55 30.10376
th th
10 25.53228 60 30.49598
th th
15 26.2635 65 30.92708
th th
20 26.91772 70 31.42144
th th
25 27.36941 75 31.93502
th th
30 27.86907 80 32.68281
th th
35 28.29995 85 33.34961
th th
40 28.64036 90 34.21607
th th
45 29.10377 95 35.57676
th
50 29.56332
Notes: The table above shows the percentiles of project completion time. For example, there is a
30% chance that the project will exceed 31 days and there is a 20% chance that the project will
finish in approximately 27 days.

For the second scenario, the authors were able to generate the probability that an activity is
critical. The activities which lie in the critical path had significantly higher probability than
other non-critical activities. The results of determining the probability that an activity is critical
are presented in Table 3.

Table 3: Estimation of probability that activities are critical.

Probability of Being Probability of Being
Activity Activity
Critical Critical
L1 0 L17 0.6
L2 0 L18 0
L3 0.4 L19 0
L4 0.6 L20 0
L5 0.6 L21 0.4

35 

 
 Probability of Being Probability of Being
Activity Activity
Critical Critical
L6 0.4 L22 0
L7 0.6 L23 0
L8 0.4 L24 0
L9 0 L25 0
L10 0.6 L26 0
L11 0.4 L27 0
L12 0.6 L28 0
L13 0.4 L29 0.6
L14 0.36 L30 0.6
L15 0.04 L31 0.6
L16 0
Notes: The table above shows the estimation of probability that activities are critical. For
instance, activity L29 which lie in the critical path had a probability of 0.6 but activity L27
which is does not lie in the critical path had a probability of 0. However, for activity L15 which
do not lie in the critical path had a 0.04 chance to become a critical activity. This implies that
non-critical activities had a chance in becoming critical and the original critical path identified
through CPM may change.

As compared to the results obtained from Microsoft Project, the results were more optimistic as
it does not account for any uncertainty. While Microsoft Project can give a single date for the
project completion and critical path based on slack calculation, on the other hand, through
simulation, it was able to yield unbiased project completion estimates by giving a range of
project completion times and the probability that an activity is critical. This is useful for
management to set aside a contingency plan in case of any delay and focus attention to activities
which have high probability in becoming critical. It should be note that the correlation between
the probability of an activity lies in the critical path and slack as calculated using CPM is weak

However, one of the most important thing when dealing with simulation in project scheduling is
the information that being fed into it. In this study, the authors are dealing with defining the
right distribution for the modeling of an activity’s duration. Right distribution mean the most
appropriate distribution used to model the duration of a project’s activity based on personal
experience and historical information (Kirytopoulos et al., 2008). Thus, project manager must
be wise in choosing probability distribution to run the simulation model. For simplicity purpose
of this study, the authors only assume that all the activities are normally distributed.

CONCLUSION

Project management is a very important discipline that determines the success and
competitiveness of an organization. It has been extensively used in the fields of civil
engineering, defense, aerospace engineering and product development. Although there are many
off-shelf software packages development in the required network, but one of the biggest
challenge of the ready made software is the fact that activity time is based on judgment which in
the opinion of the author is a drawback since it increases the risk and could be costly.

On the other hand, simulation is a powerful approach for investigation some scenarios that a
management may take, unfortunately, it is not widely used yet in project management. The
authors intend to investigate how simulation can be used to enhance management decisions
associated with activities time duration and the estimation of the probability that an activity is in
fact a critical activity that deserves the project engineering manager attention. The results
36 

 
presented by this paper proved that simulation was able to produce a more reliable estimate and
on the other hand it can better handle uncertainty in project scheduling in which Microsoft
Project is incapable of.

An interesting area for future research is the development of guidelines on how to select suitable
and more accurate probability distribution for modeling the duration of the project activities,
currently, the authors are working in that direction.

REFERENCES

Badri, M.A., Mortagy, A., Davis, D., and Davis, D. (1997). Effective analysis and planning of
R&D stages: a simulation approach, International Journal of Project Management, 15(6),
351-358.
Diamantas, V., Kirytopoulos, K. and Leopoulos, V., (2007). Project’s duration prediction:
traditional tools or simulation?, World Review of Entrepreneurship, Management and
Sustainable Development, Inderscience Publishers, 3(3/4), 317-333.
Dukić, D., Marić, T., and Babić, D. (2007). Analysis of Duration and Cost Estimate of
Construction Projects Through Computer Simulation, Proceedings of the 29th
International Conference on Information Technology Interfaces – ITI2007 (25-28 June
2007 – Cavtat, Crotia), 107-112.
Douglas, D.E. (1978) “Pert and Simulation.”, Proceedings of the 10th Winter Simulation
Conference, 89-98.
Gray, C.F., and Larson, E.W. (2008). “Project Management: The Managerial Process
(International Edition).” Singapore: McGraw-Hill.
Kirytopoulos, K.A., Leopoulos, V.N. and Diamantas, V.K. (2008). PERT vs. Monte Carlo
Simulation along with the suitable distribution effect, International Journal of
Organisation and Management, 1(1), 24–46.
Van Slyke, R.M. (1963). Monte Carlo methods and the PERT problem, Operations Research,
11(5), 839–860.
Winston, W.L. (2001). Simulation modeling using @Risk: update version for v4. Pacific Grove,
CA: Duxbury.

37 

 
 APPENDIX

Appendix A: List of activities and their predecessors and the duration of each activity in the
construction project.
Activit Description Predecessor(s)
L1 Preliminaries -
L2 Earthwork (cut & fill) -
L3 External rc. Retaining wall -
L4 Pilling works -
L5 R.C. pile cap L4
L6 Stump L3,L4
L7 Ground Beam L5
L8 Ground Floor Slab Works L6,L7
L9 RC Column L7
L10 Suspended RC Beam & Slab L7
L11 Steel Structure Work L8, L9
L12 Roofing Work L10
L13 Wall L11,L12
L14 Wall Finishing L13
L15 Floor Finishing L13
L16 Door & Window L13
L17 Drain Surrounding Building L12
L18 Apron & RC Ramp Work L17
L19 Sanitary & Plumbing L17
L20 S&P Finishing Work L19
L21 Painting Work L14, L15
L22 Electrical & Telephone L12
Installation
L23 Fire Fighting Installation L12
L24 Landscaping L7
L25 Weight Bridge Office L7
L26 TNB Sub-station L7
L27 Refuse Chamber L7
L28 External Drainage Work L7
L29 Road Work L17
L30 Main Entrance Gate L29
L31 Site Clearing Work L30

38 

 
 THE IMPACT OF LEAN MANUFACTURING PRACTICES
ON OPERATIONS PERFORMANCE:
A STUDY ON INDONESIAN MANUFACTURING COMPANIES

GUSMAN NAWANIR, SITI NOREZAM OTHMAN, LIM KONG TEONG

UUM College of Business, Universiti Utara Malaysia

ABSTRACT

The relationships between lean practices and operations performance were investigated in
this study. Lean practices include flexible resources, cellular layouts, pull system, small lot
production, quick setup, uniform production level, quality at the source, total productive
maintenance, and supplier networks. Operations performance measures include quality,
flexibility, lead time reduction, and cost reduction. Based on the theoretical framework,
four hypotheses were developed and tested statistically. The study was cross-sectional study
using survey methodology. The survey was carried out randomly in large Indonesian
manufacturing companies based on the data provided by the Data and Information Center
of Indonesian Ministry of Industry with the final number of respondents was 139. The study
hypotheses were tested statistically by applying Pearson correlation analysis, multiple
regression analysis, principal component analysis, and simple regression analysis. The
results support all the four hypotheses. The findings tend to support that lean practices
should be implemented collectively and comprehensively, rather than piecemeal and in
limited subsets, and that lean practices have positive and significant impact on operations
performance.

Keywords: Lean manufacturing; lean practices; operations performance

INTRODUCTION

Lean manufacturing has contributed significantly to the success of Japanese and US firms in last
three decades (Finch, 2008). Even, Krafcik (1989) suggested that high performance depends on
creating lean production system. Nowadays, in the competitive era, many companies are turning
to lean manufacturing to get better performance by targeting the central theme of lean, waste
(non-value added activities) elimination.

Various studies have concluded that lean manufacturing helped numerous companies to
improve their performances. Callen, Fader, and Krinsky (2000) noted that
organizational performance of lean firms was marginally higher than non-lean firms.
Fullerton and McWatters (2002) postulated that lean was a vital manufacturing strategy
to sustain competitive advantage through performance improvement. Claycomb,
Germain and Droge (1999) also claimed that lean directly associated with
organizational efficiency and financial result. On the other hand, a few studies have
shown different findings. The study conducted by Dao (2000) concluded that lean
manufacturing in purchasing did not have significant impact on quality, cost,
productivity, and lead time. Sakakibara, Flynn, Schroeder, and Morris (1997) found that
there was no significant relationship between lean practices and operations
performance. Ahmad, Mehra, and Pletcher (2004) also concluded that lean practices did
not contribute significantly to the financial performance.

Past studies indicated the contradict findings regarding the implication of lean
manufacturing on companies’ performance. There was no single acceptable opinion
among practitioners and researchers regarding the definition and practices of lean
manufacturing may become the main source of these misconceptions (Ahmad,
Schroeder, & Sinha, 2003; Callen et al., 2000; Fullerton, Huntsman, Wempe, & Neeley,
39 

 
2009; Mehra & Inman, 1992; Ramarapu, Mehra, & Frolick, 1995), therefore
practitioners and researchers offered a set of different definition and practices. In
addition, lean manufacturing was often not implemented as total system (Claycomb et
al., 1999; Cua, McKone, & Schroeder, 2001), while Mehra and Inman (1992), and
White and Prybutok (2001), argued that potential benefits of lean manufacturing will
not be realized before it is implemented as a total system. Literature review tends to
suggest implementing lean practices integrally and comprehensively. However,
literature review shown that the empirical evidence in favor of lean manufacturing’s
impacts on operations performance is still lacking.

LITERATURE REVIEW

Lean Manufacturing Practices

The basic underlying objective of lean is to improve operations performance through waste
elimination (Bartezzaghi & Turco, 1989; Cheng & Podolsky, 1993; Fullerton, Huntsman,
Wempe, & Neeley, 2009). According to Abdallah and Matsui (2007), Russell and Taylor III
(2008), and Finch (2008), over productions, inventory, defects, motions (unnecessary
movement), over processing, waiting (delay) time, and transportation are the types of waste
which lean aims to eliminate.

For lean production to work well in achieving a better operations performance, some
fundamental practices must be in place. Due to the consensus that no single acceptable opinion
regarding the relative importance of the practices in the lean process, the most commonly used
practices proposed by the particular past studies are compiled by regrouping various activities
into nine practices i.e. flexible resources (Ahmad et al., 2004; Fullerton, McWatters, & Fawson,
2003; Shah & Ward, 2007), cellular layouts (Matsui, 2007; Shah & Ward, 2007), pull system
(Ahmad et al., 2004; Matsui, 2007; Shah & Ward, 2007), small lots production (Ahmad et al.,
2004; Matsui, 2007; Shah & Ward, 2007), quick setup (Ahmad et al., 2004; Matsui, 2007;
Sakakibara et al., 1997; Shah & Ward, 2007), uniform production level (Fullerton et al., 2003;
Olsen, 2004), quality at the source (Matsui, 2007; Olsen, 2004; Shah & Ward, 2007), total
productive maintenance (Ahmad et al., 2004; Sakakibara et al., 1997; Shah & Ward, 2007), and
supplier network (Ahmad et al., 2004; Sakakibara et al., 1997; Shah & Ward, 2007). Even
though this study does not include some of the lean categories discussed in the literature as
separate components, many are assimilated into related practices.

Lean Manufacturing and Performance

Performance measurement is a process in quantifying action and can be defined as measuring
the efficiency and effectiveness of action toward achieving predetermined objectives (Neely,
Gregory, & Platts, 2005). They noted; although many practitioners have argued some areas in
which performance measurement might be useful, little guidance on how the appropriate
measures can be identified and ultimately used to manage the business. In the area of lean, due
to lean is more frequently implemented in the shop floor, especially associated to production
process, the use of operations performance measures is proving useful at the production level in
lean manufacturing area (Abdel-Maksoud, Dugdale, & Luther, 2005). Operations performance
is influenced by operating conditions and reflects some internal properties of the production
system (Bartezzaghi & Turco, 1989; Chang & Lee, 1995).

Several studies have been conducted by practitioners and academicians to prove the impact of
lean manufacturing on operations performance. Various performance measures have been
chosen to measure the performance gained after lean implementation. The measures such as
quality (Bhasin, 2008; Fullerton et al., 2009; Matsui, 2007), flexibility (Ahmad et al., 2004;
Bhasin, 2008; Matsui, 2007), lead time reduction (Bhasin, 2008; Fullerton et al., 2009; Matsui,
2007), and cost reduction (Bhasin, 2008; Matsui, 2007; Shah & Ward, 2003) are the most
commonly used in the recent empirical studies.

40 

 
As argued by Abdel-Maksoud et al. (2005), and Fullerton et al. (2009), utilization of lean
manufacturing are associated with operations performance. Although the studies conducted by
Flynn et al. (1995) and Matsui (2007) concluded that lean practices did not affect quality
performance, several past studies found different findings. Callen et al. (2000); Cua et al.
(2001); Shah and Ward (2003); Ahmad et al. (2004); and Abdallah and Matsui (2007)) has
shown that quality performances were significantly related to lean practices. Recent literatures
also noted the significant relationship between lean practices and flexibility performance (see
Ahmad et al. (2003), Chang and Lee (1995), Cua et al. (2001), and Matsui (2007)). Lead time
reduction in term of setup time, moving time, processing time, waiting time, and queuing time
will enable a company to respond quickly to customer needs (Cheng & Podolsky, 1993).
Several studies such as Callen et al. (2000), Shah and Ward (2003), Ahmad et al. (2004), and
Abdallah and Matsui (2007) have confirmed that implementing lean practices significantly
reduced manufacturing lead time. Cost reduction (in term of unit manufacturing cost and quality
cost), several empirical studies such as Callen et al. (2000); Cua et al. (2001); Shah and Ward
(2003); Ahmad et al. (2004); Matsui (2007); and Abdallah and Matsui (2007) concluded that
there were significantly relationships between cost performance and lean practices.

Theoretical Framework and Hypotheses

Based on the literature review, the theoretical framework as appeared in figure 1 has been
developed.

Lean Practices
1. Flexible Resources
2. Cellular Layouts Operations performance
3. Pull system
1. Quality
4. Small Lots Production
2. Flexibility
5. Quick Setups
3. Lead time Reduction
6. Uniform Production Level
4. Cost Reduction
7. Quality at the source
8. Total Productive Maintenance
9. Supplier Networks Dependent Variable

Independent Variable
Figure 1 Theoretical Framework

The study tests several research hypotheses to systematically analyze the question of whether
lean practices affect operations performance. Based on the theoretical framework and the
research objectives, four hypotheses are posited.
H1: Lean practices have positive relationships with quality
H2: Lean practices have positive relationships with flexibility
H3: Lean practices have positive relationships with lead time reduction
H4: Lean practices have positive relationships with cost reduction

RESEARCH METHODOLOGY

Research Design
Organization was considered as unit of analysis in this study. Based on the responsibility in
organization and the person who can assess lean practices and operations performance, the
middle and top management in production or manufacturing (such as director, head of
department, and manager) were posited as element of unit of analysis. The research design
employed in this study was cross-sectional study using survey methodology. Data were
collected from selected manufacturing firms in Indonesia by using a set of structured
questionnaire adopted from several sources (samples of measurement item are provided in
Appendix 1 and 2). The measurements were performed by using the perceptual scale. Each

41 

 
question was answered using the following five-point likert scale: strongly disagree (1);
disagree (2); neither agree nor disagree (3); agree (4); and strongly agree (5).

Population and Sample

The Data and Information Center of the Indonesian Ministry of Industry (2008) provided a
sampling frame of 22,259 manufacturing companies. The original list was reduced to 2,421 by
eliminating small and medium companies (number of employee less than 100). Using stratified
random sampling method, 1,000 of 2,421 manufacturing companies were selected and mailed a
questionnaire. A total of 161 questionnaires were completed and returned. This led to an
effective response rate of 16.10%. However, the total sample size was reduced to 139
companies because of too many missing values, inappropriate respondent, and data outliers.

RESEARCH FINDINGS

Construct Validity and Reliability Analysis

Factor analysis was carried out to measure construct validity. Factor analysis was applied on
each construct separately. Principal components method was used to identify factors with
eigenvalues of at least 1.0. Only items that have a factor loading of at least 0.40 were retained.
Moreover, all constructs explain more than 50% (from 50.155 to 70.929) of total variance.
KMO values are greater than 0.60 and Bartlett's test of sphericity is significant at the 0.05 level
for all constructs. Thus, it can be concluded that all constructs are eligible (Coakes & Steed,
2007). Reliability refers to the internal consistency and stability of an item to measure a
construct has been tested by using Cronbach’s coefficient alpha. All values of Cronbach’s alpha
are greater than 0.70. In general, the questionnaire used in this study is valid and reliable. In
detail, result of construct validity and reliability analysis are shown in Table 1.

Table 1 Statistical summary of construct validity and reliability analysis

Number Deleted Factor Loading for % of Cronbach’s
No Variable KMO
of Itema Itemb Retained Items Variance Alphac
Lean Practices (Independent Variable)
Flexible 0.856, 0.831, 0.815, 0.815,
1 8 none 0.858 59.161 0.888
Resources 0.795, 0.759, 0.673, 0.566
0.860, 0.853, 0.837, 0.829,
2 Cellular Layouts 8 none 0.730 56.981 0.873
0.822, 0.670, 0.603, 0.464
0.919, 0.908, 0.886, 0.849,
3 Pull System 7 2, 7 0.839 57.014 0.926
0.824
Small Lot 0.879, 0.871, 0.866, 0.865,
4 6 none 0.826 70.929 0.917
Production 0.805, 0.760
0.828, 0.786, 0.772, 0.765,
5 Quick Setup 7 none 0.835 52.819 0.837
0.761, 0.608, 0.513
Uniform 0.810, 0.805, 0.723, 0.695,
6 8 none 0.796 51.032 0.859
Production Level 0.689, 0.684, 0.649, 0.639
Quality at the 0.855, 0.846, 0.793, 0.739,
7 8 none 0.819 54.074 0.870
Source 0.729, 0.702, 0.608, 0.556
Total Productive 0.877, 0.850, 0.797, 0.760,
8 7 none 0.817 55.319 0.831
Maintenance 0.756, 0.659, 0.406
Supplier 0.852, 0.850, 0.823, 0.815,
9 8 none 0.850 58.195 0.892
Networks 0.718, 0.693, 0.687, 0.632
Operations Performance (Dependent Variable)
0.789, 0.766, 0.751, 0.727,
1 Quality 6 none 0.808 54.594 0.830
0.716, 0.679
0.812, 0.783, 0.781, 0.721,
2 Flexibility 5 none 0.724 53.733 0.773
0.534
Lead Time 0.790, 0.788, 0.702, 0.631,
3 5 none 0.664 50.155 0.740
Reduction 0.610
4 Cost Reduction 4 none 0.901, 0.857, 0.725, 0.647 0.699 62.252 0.787
Notes: a Number of item before deletion; b Sequence number based on the questionnaire; c Cronbach’s alpha after
deleting the items with factor loading less than 0.4 in factor analysis

42 

 
Linear Correlation between Variables: Pearson Correlation Analysis
Pearson correlation analysis was conducted to measure the association between two variables in
the study, how a variable relates to another variable. The result of Pearson correlation analysis is
shown in Table 2. Based on the table, all lean practices are positively associated each other at
the 0.01 level. The r-values range between 0.292 and 0.736, with the highest r-value is detected
in the relationship between small lot production and pull system. The table also gives empirical
evidence that lean practices are positively and significantly correlated with all measures of
operations performance at the 0.01 levels, the r-values range between 0.245 and 0.648. It
implies, the better lean practices implementation, the better operations performance.

Table 2 Results of Pearson Correlation Analysis

Lean Practices
No Construct
1 2 3 4 5 6 7 8 9
Lean Practices (Independent Variable)
1 Flexible Resources 1
2 Cellular Layouts .622 1
3 Pull System .584 .565 1
4 Small Lot Production .555 .564 .736 1
5 Quick Setups .530 .492 .292 .355 1
6 Uniform Production Level .551 .614 .444 .438 .577 1
7 Quality at the Source .541 .476 .469 .429 .567 .559 1
8 Total Productive Maintenance .449 .456 .497 .325 .416 .394 .528 1
9 Supplier Networks .542 .510 .657 .529 .336 .441 .500 .533 1
Operations Performance (Dependent Variable)
10 Quality .536 .461 .566 .435 .450 .434 .605 .557 .648
11 Flexibility .557 .470 .487 .439 .510 .429 .520 .473 .523
12 Lead Time Reduction .334 .345 .286 .245 .301 .303 .358 .397 .478
13 Cost Reduction .442 .429 .347 .302 .324 .396 .445 .318 .378
Notes: All correlations are significant at the 0.01 level (1-tailed)

Results of Pearson correlation analysis assert that a prerequisite to apply multiple regression
analysis is fulfilled. In the next section, multiple regression analyses are applied to investigate
the relationship among variables involved in this study.

The Relationship between Lean Practices and Operations Performance: Multiple

Regression Analysis
To measure the significant relationship between lean practices and operations performance, the
model as below is tested.

ܱܲ௜ ൌ ߙ ൅ ߚଵ ‫ܮ‬ଵ ൅ ߚଶ ‫ܮ‬ଶ ൅ ߚଷ ‫ܮ‬ଷ ൅ ߚସ ‫ܮ‬ସ ൅ ߚହ ‫ܮ‬ହ ൅ ߚ଺ ‫ ଺ܮ‬൅ ߚ଻ ‫ ଻ܮ‬൅ ߚ଼ ‫ ଼ܮ‬൅ ߚଽ ‫ܮ‬ଽ ൅ ݁

Where,
OPi = Operations performance; i = 1,…, 4 (operations performance measures); α = Intercept; β1,…,9 =
Regression coefficient; L1= Flexible resources; L2 = Cellular layouts; L3 = Pull system; L4 = Small lot
production; L5 = Quick setups; L6 = Uniform production level; L7 = Quality at the source; L8 = Total
productive maintenance; L9 = Supplier networks; e = Random distribution of error.

The result of regression analysis is given in Table 3. The adjusted R2 values ranges
between 0.233 and 0.537. The adjusted R2 value of quality is the highest of all
operations performance measures with 53.70% variance explained by variances in
independent variables. F-statistic which tests H0: R2 = 0 is significant at the 0.05 level
for all regression models.

The t-statistic which tests H0: βi = 0 indicates that majority of regression coefficients are
not significant at the 0.05 level. For example, regression model of quality informs that
43 

 
there are only two lean practices with significant t; they are quality at the source (p =
0.003) and supplier networks (p = 0.000). Regression model of flexibility also shows
the similar result, only one lean practices with the significant t; quick setups (p = 0.012).
The similar results are also suggested in regression model of lead time reduction and
cost reduction. Meanwhile, multiple regression analysis produces small values of t-
statistics; consequently certain independent variables should be dropped from the
regression models. These evidences indicate the possibility for multicollinearity in the
model.

Table 3 Results of multiple regression analysis

Unstandardized Unstandardized
Lean Practices Standardized Standardized
Std. t Sig. Std. t Sig.
(Independent Beta Beta Beta Beta
Variable) Error Error
Dependent Variable: Quality Dependent Variable: Flexibility
(Constant) 1.257 0.298 4.220 0.000 1.394 0.343 4.070 0.000
Flexible Resources 0.068 0.072 0.082 0.947 0.345 0.153 0.082 0.181 1.863 0.065
Cellular Layouts -0.020 0.082 -0.021 -0.242 0.809 0.017 0.094 0.018 0.181 0.857
Pull System 0.073 0.044 0.168 1.636 0.104 0.035 0.051 0.078 0.683 0.496
Small Lot
-0.028 0.040 -0.064 -0.697 0.487 0.015 0.046 0.033 0.319 0.750
Production
Quick Setups 0.099 0.074 0.109 1.351 0.179 0.215 0.085 0.229 2.539 0.012
Uniform
-0.034 0.069 -0.042 -0.497 0.620 -0.039 0.080 -0.046 -0.491 0.624
Production Level
Quality at the
0.233 0.078 0.247 2.987 0.003 0.114 0.090 0.117 1.269 0.207
Source
Total Productive
0.127 0.073 0.135 1.753 0.082 0.097 0.084 0.100 1.162 0.248
Maintenance
Supplier Networks 0.197 0.051 0.323 3.848 0.000 0.112 0.059 0.179 1.908 0.059
R2 0.567 0.460
Adjusted R2 0.537 0.423
Sig F 0.000 0.000

Table 3 Results of multiple regression analysis (Continued)

Unstandardized Unstandardized
Lean Practices Standardized Standardized
Std. t Sig. Std. t Sig.
(Independent Beta Beta Beta Beta
Variable) Error Error
Dependent Variable: Lead Time Reduction Dependent Variable: Cost Reduction
(Constant) 2.173 0.347 6.268 0.000 1.837 0.372 4.935 0.000
Flexible Resources 0.019 0.083 0.025 0.226 0.821 0.138 0.089 0.172 1.539 0.126
Cellular Layouts 0.079 0.095 0.093 0.827 0.410 0.155 0.102 0.169 1.514 0.133
Pull System -0.058 0.052 -0.150 -1.129 0.261 0.003 0.056 0.006 0.046 0.963
Small Lot
-0.007 0.047 -0.018 -0.154 0.878 -0.025 0.050 -0.059 -0.502 0.617
Production
Quick Setups 0.046 0.086 0.056 0.539 0.591 -0.028 0.092 -0.031 -0.300 0.764
Uniform
0.003 0.081 0.003 0.031 0.975 0.058 0.087 0.072 0.674 0.502
Production Level
Quality at the
0.059 0.091 0.069 0.648 0.518 0.209 0.097 0.228 2.146 0.034
Source
Total Productive
0.133 0.085 0.156 1.573 0.118 -0.005 0.091 -0.006 -0.057 0.955
Maintenance
Supplier Networks 0.214 0.060 0.387 3.580 0.000 0.056 0.064 0.094 0.869 0.386
R2 0.283 0.286
Adjusted R2 0.233 0.237
Sig F 0.000 0.000

Reducing the Effects of Multicollinearity in Regression Model: Principal Component

Analysis and Simple Regression Analysis
Multicollinearity is an underlying assumption of the use of regression. Hair, Black, Babin, &
Anderson (2010) also stated that as multicollinearity increases, it complicates the interpretation
of relationships because it is more difficult to ascertain the effect of any single construct owing
to other interrelationship. More detail, multicollinearity can affect the following conditions
(Wang, 1996): (a) The estimated standard errors for the coefficient will be large and produce
small value of t-statistic; (b) The estimated coefficients may become insignificant or have
wrong signs (positive or negative); (c) Because of the large estimated standard errors, the
relative importance of independent variables will be difficult to be assessed. (d) The certain
independent variables should be dropped from the models, because of the low t-statistics.
44 

 
According to Mueller (1996) and Grapentine (1997), multicollinearity might be present if any of
the common situations below exists:
1. Correlation coefficients among independent variables are relatively high, say 0.70 or larger.
2. One or more of the metric or standardized regression coefficients have theory contradicting
signs. For example, the coefficients take on negative values while theory or common sense
suggests a positive relationship exists between the independent and dependent variables.
3. One or more of the standardized regression weights are very large.
4. Unusually large of the standard errors of the beta regression coefficients.
5. The regression equation has a large R2 with several insignificant independent variables.

However, the possibility of multicollinearity is appeared in the model. Based on Table 2,

Pearson correlation coefficients among lean practices are statistically high and significant (p <
0.01) with the highest value 0.736 (between pull system and small lot production). The all
regression models developed in this study indicate the high adjusted R2 values; between 0.233
and 0.537 (see Table 3). Else, F-statistics for all multiple regression models are statistically very
significant. On the other sides of regression result, t-statistics indicate very few independent
variables which contribute significantly to dependent variable as explained above.

Tolerance and Variance Inflation Factor (VIF) are the two direct measures of multicollinearity
in multiple regression analysis (Hair et al., 2010). Tolerance is defined as the amount of
variability of the selected independent variable not explained by the other independent
variables. Tolerance value should be high, which means a small degree of multicollinearity. VIF
is the inverse of tolerance value. Thus, instances of higher degrees of multicollinearity are
reflected in lower tolerance values and higher VIF values. The tolerance value of each
independent variable of less than 0.40 and VIF value of greater than 2.50 are enough to indicate
a serious multicollinearity problem in the model (Allison, 1999; Miles & Shevlin, 2001). In
detail, the result of multicollinearity diagnostics for all lean practices and operations
performance are appeared in Table 4. The table points out that the multicollinearity problem is
existed in the regression model especially for pull system (tolerance = 0.317, VIF = 3.159) and
small lot production (tolerance: 0.400, VIF = 2.502).

Table 4 Tolerance and VIF values for lean practices

No Lean Practices (Independent Variable) Tolerance VIF
1 Flexible Resources 0.445 2.248
2 Cellular Layouts 0.442 2.262
3 Pull System 0.317 3.159
4 Small Lot Production 0.400 2.502
5 Quick Setups 0.515 1.942
6 Uniform Production Level 0.481 2.080
7 Quality at the Source 0.490 2.039
8 Total Productive Maintenance 0.565 1.771
9 Supplier Networks 0.476 2.099

Due to the relationships among lean practices are statistically significant and positive, and the
important role of pull system and small lot production in lean manufacturing, simple regression
analysis on principal component as suggested by Hair et al. (2010) is applied to reduce the
possible effect of multicollinearity. Principal component analysis (PCA) is aimed to summarize
most of original information (variance) in minimum number of factors for prediction purposes
by considering the total variance and derives factors that contain small proportions of unique
variance (Hair et al., 2010). The outputs of PCA are the first principal component score
explaining the maximum variance of independent variable and a linear combination of the
original data. As suggested by Lim (2003) and Agus (2000), simple regression is applied among
independent variables with the first principal component score explaining the largest variances
of independent variable by following the regression model: Y = α + β1X1. F-test is used to point
out whether regression models significantly explain variances of dependent variable.

45 

 
Appendix 3 tabulates the output of principal component analysis in detail. Based on Appendix
3, the first principal component or linear combination of lean practices is: 0.359 (flexible
resources) + 0.354 (cellular layouts) + 0.351 (pull system) + 0.329 (small lot production) +
0.298 (quick setups) + 0.332 (uniform production level) + 0.335 (quality at the source) + 0.301
(total productive maintenance) + 0.336 (supplier networks). The first principal component
explains 55.90% of total variance from the nine lean practices. The results of simple regression
analysis between independent variable and score of the first principal component of lean
practices are shown in Table 5. Operations performance measures are contributed by lean
practices collectively. Regression coefficients of all regression models are statistically positive
and significant (p = 0.05). It means that mutually supportive lean practices contribute
significantly on operations performance, in term of quality, flexibility, lead time reduction, and
cost reduction. Finally, hypotheses H1, H2, H3, and H4 are then accepted.

Table 5 Results of simple linear regression between principal component scores of lean
practices and operations performance measures.
Unstandardized Standardized
Model t Sig. R2
Beta Std. Error Beta
Constant 1.671 0.215 7.755 0.000
Regression 0.209 0.019 0.689 11.113 0.000 0.474*
IV = Principal component scores of lean practices
DV = Quality
Constant 1.916 0.235 8.157 0.000
Regression 0.200 0.021 0.641 9.767 0.000 0.410*
IV = Principal component scores of lean practices
DV = Flexibility
Constant 2.693 0.242 11.131 0.000
Regression 0.119 0.021 0.434 5.641 0.000 0.189*
IV = Principal component scores of lean practices
DV = Lead Time Reduction
Constant 2.441 0.253 9.653 0.000
Regression 0.143 0.022 0.485 6.495 0.000 0.235*
IV = Principal component scores of lean practices
DV = Cost Reduction
Notes: IV = Independent variable; DV = Dependent Variable; Principal component scores are resulted from principal
component analysis; * F-statistics are significant at the 0.05 level.

DISCUSSIONS ON RESEARCH FINDINGS

Generally, this study is aimed to investigate empirically the impact of lean practices on
operations performance. For this aim, the relationships between lean practices and operations
performance have been accomplished. The study objectives have been achieved by applying
several statistical techniques; Pearson correlation analysis, multiple regression analysis,
principal component analysis, and simple linear regression analysis. Pearson correlation
coefficients among lean practices suggest that lean practices should be implemented collectively
and comprehensively, because each practice is interdependent one another. Lean practices
should not be implemented as individual practice and limited subset. Several authors, such as
Mehra and Inman (1992), White and Prybutok (2001), and Shah and Ward (2003, 2007),
support substantially this conclusion.

The result of principal component analysis for lean practices supports the evidence that lean
practices must be implemented holistically (see Appendix 3). The first principal component or
linear combination of the nine lean practices; 0.359 (flexible resources) + 0.354 (cellular
layouts) + 0.351 (pull system) + 0.329 (small lot production) + 0.298 (quick setups) + 0.332
(uniform production level) + 0.335 (quality at the source) + 0.301 (total productive
maintenance) + 0.336 (supplier networks) has the close resemblance and positive loading
values. These close resemblance and positive loading values indicate the same importance of all
lean practices on the first principal component. Equally important, the first principal component
resulted from principal component analysis can explain more than 55 % variance in lean
practices.

46 

 
The result of Pearson correlation and principal component analysis support the evidence stated
by Sakakibara et al. (1997), Claycomb et al. (1999), Cua et al. (2001), and Fullerton et al.
(2009) that piecemeal adoption of lean practices can assert the variation in performance effects,
in other words, lean practices can benefit some firms, but on the other hand may not benefit
some other firms. Furthermore, the study conducted by Mehra and Inman (1992), and White and
Prybutok (2001) have also supported this result that before lean practices are implemented
comprehensively and as a total system, its potential benefits will not be realized.
The result of Pearson correlation analysis also provides empirical evidence that lean practices
positively and significantly associated with all operations performance measures. Simple
regression analyses assert that the first principal component of lean practices contributes
significantly on all measures of operations performance. All lean practices can statistically
explain significant percent of variance of operations performance.

In term of lean manufacturing impacts on operations performance, Ahmad et al. (2004),

Abdallah and Matsui (2007), and Fullerton et al. (2009) support this result. Numerous authors
have developed the reasonable considerations. Abdel-Maksoud et al. (2005) explained the
reason to support this conclusion that lean practices are more frequently implemented in the
shop floor and related to production process. Despitefully, Bartezzaghi and Turco (1989) and
Chang and Lee (1995) also explained that operations performance is actually reflected by some
internal properties of production system which is influenced by manufacturing practices applied.

Implications of the Study

The results of this study are valuable theoretically and practically. The study provides an
addition on the theory in operations management especially lean manufacturing and operations
performance. The study also adds to the better understanding about the impact of lean practices
on operations performance in the context of a developing country. In addition, this study also
can help in clearing up the misconception among researchers and practitioners regarding the
lean impact on operations performance. The results help practitioners of lean manufacturing to
consider the integral perspective in implementing lean manufacturing.

In the implementation context, in order to succeed in implementing this approach, the practices
should be implemented holistically because all lean practices tested in this study are
interdependent each other and the importance of all practices are about the same.
The findings of the study also imply that in order to survive in the world wide competition,
manufacturing companies should be encouraged to implement lean manufacturing that have
been proven successful in improving operations performance of manufacturing companies
throughout the world.

Limitations of the Study and Suggestions for Future Research

Of course, this study is not without limitations. As in all survey research, an assumption in data
collection was that the respondents had sufficient knowledge to answer the questionnaire, and
that, respondents answered the questions conscientiously and truthfully. Although the
questionnaire has been pretested and passed the validity and reliability test, respondents’
interpretations may have differed from that intended.

The data used in this study were collected from one person employed in operations area in
Indonesian manufacturing companies. Therefore, the extent of lean implementation and
performance were entirely subjective. The future researcher can consider collecting the data
from many employees in a manufacturing company in order to prevent the bias responds.

This study is cross sectional study, by gathering the data just once. Several studies stated that
lean manufacturing implementation needs long term commitment and the benefit of lean
sometime cannot be realized in a short term. Studying the phenomena of lean manufacturing
impact on performance in more than one point in time (longitudinal study) is required.

47 

 
Conclusion
To achieve the potential benefits of lean manufacturing implementation, all the practices should
be implemented holistically and comprehensively as a system, rather than piecemeal or in
limited subsets. Meanwhile, the evidence provides strong support that the higher extent of lean
practices implementation will bring to the better operations performance in term of quality,
flexibility, lead time reduction, and cost reduction.

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 APPENDICES
Appendix 1 Samples of lean practices measurement items
No Item Adopted from:
Flexible Resources
1 Many problems have been solved through small group Sakakibara et al. (1993); Ramarapu et al.
sessions (1995); olsen (2004); Fullerton et al. (2009)
2 Our employees are capable of performing several different Sakakibara et al. (1993); Russell and Taylor
tasks III (2008)
Cellular Layouts
1 We have laid out the shop floor so that processes and Sakakibara et al. (1993); Abdallah and
machines are in close proximity to each other Matsui (2007); Matsui (2007)
2 Our processes are located close together, so that material Sakakibara et al. (1993); Abdallah and
handling and part storage are minimized Matsui (2007); Matsui (2007)
Pull System
1 We use a production system in which items are produced Russell and Taylor III (2008); Shah and
only when called for by the users of those items Ward (2007)
2 We use a production system in which items are produced Russell and Taylor III (2008); Cheng and
only in necessary quantities, no more and no less. Podolsky (1993)
Small Lot Production
1 We emphasize small lot sizes to increase manufacturing Matsui (2007); Finch (2008)
flexibility
2 We are aggressively working to lower lot sizes in our plant Sakakibara et al. (1993); Flynn et al. (1995);
Matsui (2007)
Quick Setup
1 We are aggressively working to lower machine setup times Sakakibara et al. (1993); Abdallah and
in our plant Matsui (2007); Shah and Ward (2007)
2 Our shop floor employees perform their own setups to Sakakibara et al. (1993); Flynn et al. (1995);
reduce the time required Abdallah and Matsui (2007)
Uniform Production Level
1 We produce every model of product every day to anticipate Sakakibara et al. (1993); Russell and Taylor
customer demand variability III (2008)
2 Based on our master schedule, we produce more than one Sakakibara et al. (1993); Russell and Taylor
product model from hour to hour and day to day III (2008)
Quality at the Source
1 Our shop floor employees are authorized to stop Sakakibara et al. (1993); Russell and Taylor
production for quality problems III (2008)
2 Statistical techniques are used to identify and reduce Olsen (2004); Russell and Taylor III (2008)
process variances
Total Productive Maintenance
1 Records of routine maintenance are kept Olsen (2004); Shah and Ward (2007)
2 We emphasize good maintenance system as a strategy for Sakakibara et al. (1993); Olsen (2004)
achieving quality and schedule compliance
Supplier Networks
1 Our suppliers deliver materials/products to us just as it is Abdallah and Matsui (2007); Shah and Ward
needed (on a just-in-time basis) (2007); Matsui (2007)
2 Our suppliers maintain a small warehouse near to our plant Russell and Taylor III (2008); Olsen (2004)

50 

 
Appendix 2 Samples of operations performance measurement items
No Item Adopted from:
Quality
1 We have superior quality of product compared to our Flynn et al. (1995); Bhasin (2008)
competitors’
2 Activities in fixing defective products to conform the quality Dao (2000); Fullerton et al. (2009)
specifications (reworks) have reduced
Flexibility
1 Machine flexibility has increased (Machine flexibility is the Russell and Taylor III (2008); Cheng and
ability to perform several different types of operations) Podolsky (1993)
2 Number of employees who can perform several different Russell and Taylor III (2008); Krajewski
tasks (multi-skilled workforce) has increased and Ritzman (2005); Cheng and Podolsky
(1993)
Lead time Reduction
1 The times waiting for the part to be moved to the next Cheng and Podolsky (1993); Heizer and
operation have reduced Render (2008)
2 Transportation times from storage, to storage, or between Cheng and Podolsky (1993); Heizer and
work centers have reduced Render (2008)
Cost Reduction
1 Our unit manufacturing cost is lower than our competitors’ Cua et al. (2001); Shah and Ward (2003);
Bhasin (2008); Ahmad et al. (2003);
2 Internal failure costs (i.e. defect, scrap, rework, process Russell and Taylor III (2008)
failure, price reduction, and downtime) have reduced

Appendix 3 Output of principal component analysis for lean manufacturing practices

Appendix 3 Output of principal component analysis for lean manufacturing practices

Eigenanalysis of the Correlation Matrix

Eigenvalue 5.0320 1.0124 0.7484 0.4856 0.4343 0.4041 0.3608 0.3132

Proportion 0.559 0.112 0.083 0.054 0.048 0.045 0.040 0.035
Cumulative 0.559 0.672 0.755 0.809 0.857 0.902 0.942 0.977

Eigenvalue 0.2092
Proportion 0.023
Cumulative 1.000

Variable PC1 PC2 PC3 PC4 PC5 PC6 PC7 PC8 PC9
FR 0.359 0.022 -0.179 -0.027 -0.439 0.615 -0.415 0.288 -0.106
CL 0.354 0.015 -0.279 -0.591 -0.060 -0.146 -0.146 -0.627 0.089
PS 0.351 -0.477 0.001 0.104 0.003 -0.178 -0.021 0.238 0.741
SLP 0.329 -0.410 -0.356 0.334 -0.134 -0.377 0.127 0.012 -0.556
QS 0.298 0.566 -0.112 0.224 -0.376 -0.039 0.581 -0.039 0.214
UPL 0.332 0.330 -0.273 -0.244 0.622 -0.091 0.013 0.493 -0.093
QAS 0.335 0.283 0.247 0.565 0.283 -0.057 -0.472 -0.347 0.027
TPM 0.301 0.056 0.720 -0.312 -0.262 -0.345 -0.046 0.229 -0.220
SN 0.336 -0.302 0.311 -0.026 0.331 0.542 0.477 -0.221 -0.137

51 

 
 SUSTAINING COST PERFORMANCE THROUGH TPM APPROACH:
A STUDY OF MANUFACTURING ORGANIZATIONS IN MALAYSIA

HALIM MAD LAZIM

COB College of Business, Universiti Utara Malaysia

T. RAMAYAH
School of Management, Universiti Sains Malaysia

ABSTRACT

Manufacturing companies need to respond quickly to ensure smooth daily operations and
manage adjustments to uncertainties in the market place. In manufacturing companies the
pressure to ensure equipment operates without breakdowns, stoppages, failures and so
forth has become a major concern for maintenance staff (Carannante, Haigh & Morris,
1996). The failure of equipments or machines to produce products on time as required can
reflect the inefficiency in operations thus, failure to deliver quality products to the
customers on time. Total productive maintenance (TPM) put more importance on total
employee involvement in the maintenance activities. This paper discusses the findings of a
study on TPM practices among Malaysian manufacturing companies. More than 1000
questionnaires were sent out to investigate the extent of TPM practices in Malaysian
manufacturing companies and to study the relationship of TPM practices and performance.
An analysis was carried out and the results show there are no differences between the TPM
practices and size of companies. No differences also found in the TPM practices and
certified quality management system companies. There were significant relationships
between TPM practices and cost performance.

Keywords: Total productive maintenance (TPM), improvement, manufacturing, Malaysia

INTRODUCTION
 
TPM has established itself in maintenance activities that focus on an organisation’s internal
resources. Furthermore, TPM integrates preventive maintenance, condition-based maintenance
and predictive maintenance activities as well. Basically, predictive maintenance plays a
significant role in TPM by utilising advanced and modern monitoring techniques to diagnose
the signs of deterioration of equipment. TPM is a maintenance management system that strongly
focuses on improving equipment effectiveness, productivity and eliminating six big losses. To
enable the TPM objectives to be achieved all employees must be involved. More importantly,
TPM also established an effective way of workplace management through the 5’s approach.
Moreover, through proper workplace management, all potential problems of the equipment can
be seen and detected for improvement. TPM is a maintenance system that covers the lifespan of
equipment and involves total employee participation (Nakajima, 1988). In fact, Chan et al.
(2005) describe TPM as a synergistic relationship among various departments for continuous
improvements of product quality, operational efficiency, capacity assurance as well as safety
aspects. Historically, there are three eras of maintenance in Japan, where TPM originated
(Nakajima, 1988, 1989). The first era, is known as preventive maintenance era (1950’s) that
emphasises on establishing maintenance functions. The second era (1960’s) is the introduction
of productive maintenance, where maintenance prevention, reliability, maintainability
engineering take place. However, the third era, total productive maintenance in 1970’s put
emphasis on total employee participation and strong support from top management.
 
In the 1960’s, the era of productive maintenance has evolved extensively and main attention is
given to recognize the importance of reliability, maintenance, and efficiency in plant design.
However, the era of total productive maintenance (TPM) in 1970s is focused on preventive
maintenance efficiency. The emphasis was on individuals and total employee involvement
through a comprehensive system (Nakajima, 1989).

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 LITERATURE REVIEW

Traditionally maintenance has been considered as a support function, non-productive and not a
core function thus adding little value to the business (Bamber, Sharp, & Hides, 1999).
According to Al-Najjar and Alsyouf (2003) maintenance function has been more challenging in
order to maintain and improve product quality, safety requirements, plant cost effectiveness.
However, the era of total productive maintenance (TPM) in 1970s was focused on preventive
maintenance efficiency. The emphasis is on individuals and total employee involvement through
a comprehensive system (Nakajima, 1989). Overall, the evolution of maintenance, particularly
preventive maintenance can be divided into four stages of development (Nakajima, 1988, 1989):
Stage 1: Breakdown maintenance
Stage 2: Preventive maintenance
Stage 3: Productive maintenance
Stage 4: Total productive maintenance

Ireland and Dale (2006) argue that:

‘TPM is considered as a total method of management that combines preventive
maintenance (PM) with total quality management (TQM) and total employee
involvement’ (p.208).

Moreover, TPM shows an important aspect of employee involvement from all levels, teamwork
and continuous improvement activities. The history of TPM began back in 1969 when the
pioneer in implementing TPM, Nippon Denso Company was the first company to be awarded
the Distinguished Plant Prize or PM Prize in 1971 (Nakajima, 1989). Moreover, Nakajima
(1988) defines TPM comprehensively, which includes 5 major elements:
1. Overall equipment effectiveness maximization
2. Thorough system of preventive maintenance for the equipment’s whole life span
3. Implementation by various departments (engineering, production, maintenance, etc.)
4. Total employee involvement from top management to workers on the floor
5. Motivation management through small group activities and teamwork

Many studies have been conducted to study the TPM practices in various settings such as
manufacturing (Ahmaed et al, 2004; Ahuja & Khamba, 2007; Salaheldin & Eid, 2007; Seth
&Tripathi, 2006) and service industry (Patra et al, 2005; Pramod et al 2006; Tsarouhas, 2007).
Barney (1991) argues that in the resource-based view (RBV) resources of the firms enable to
achieve competitive advantage and can lead to superior long-term performance. Moreover,
resource-base of the firms has contributed to a theory of competitive advantage (Barney 1991;
Fahy, 2000).

TPM strategy are activities conducted that relate to maximize equipment effectiveness;
continuous improvement actions taken to improve quality (“kaizen”), increasing safety and
reducing costs; actions to raise the morale of the team that is implementing TPM (Et, Ogaji &
Probert, 2004). In addition, Jantan, Ramayh & Ghazali (2003) concluded that the extent of
TPM implementation (autonomous maintenance and planned maintenance) has a positive and
significant effect on organizational performance. The contributions of autonomous maintenance
and planned maintenance enable the production operator to run the equipment effectively thus
prevent deterioration as well (Nakajima, 1989). The operations management literature provides
multiple dimensions to evaluate manufacturing performance Mc Kone et al (2001); Skinner
(1974); Ward et al. (1995). In fact, Awrd et al. (1995;1998) categorize manufacturing
performance into four dimensions of quality, cost, delivery, and flexibility. Basically, there are
lot of advantages can be achieved through TPM implementation. For instance, TPM can lead to
the improvements in quality cost delivery and flexibility (Sharma et al., 2006; Cua et al
2001;McKone et al 1999; McKone et al 2001; Seth & Triphati, 2005; 2006). There are control
variables in this study as well such as company size and capacity utilization. The company size
definition is varied among countries (Bonavia & Marin, 2006) and high capacity equipment

53 

 
utilization tends to be maintained regularly in order to prevent deterioration (Nakajima, 1988).
The contribution of effective maintenance program can eliminate any possibility of equipment
stoppages and failures.

The TPM team contributes significantly to the TPM implementation. In fact, the importance of
TPM team in TPM implementation has been widely discussed by many authors (Bamber et al.,
2003 & 1999 and Lycke, 2003). TPM team are also a vital element to ensure that manufacturing
performance can be achieved, as without proper team management, TPM objectives are difficult
to be achieved. Moreover, McKone et al (2001) ascertain that teamwork in TPM is very
important and have used it as one of the measures to assess the level of TPM implementation.
However, in order to obtain teamwork, an environment which enables total employee
involvement from various departments must be established. Since the goals of TPM are
optimising equipment effectiveness and ensuring the efficient management of plant assets, total
employee involvement is surely needed (Brar, 2006). Ferrari et al.’s (2002) study has shown
how a TPM team and a work team have been established to ensure the smooth operations of a
TPM programme in some Italian factories. According to Ferrari et al. (2002) a TPM team is led
by manufacturing manager and supported by maintenance managers and consists of delegates
from maintenance, production, quality and manufacturing. A work team on the other hand,
consists of workers from production line and maintenance. This clearly shows that the human
factor is very important in TPM implementation. In fact, Ireland and Dale (2006) suggest that
teamwork is not only essential in TPM practices but is considered as one of criterions for
success.

TPM strategy is conceptualised as activities conducted that relate to maximising equipment

effectiveness, continuous improvement actions taken to improve quality (‘kaizen’), increasing
safety and reducing costs as well as actions to raise the morale of the team that is implementing
TPM (Eti et al., 2004). The TPM objective is to bring together all employees from various
departments to participate actively in daily operation. And, more importantly, the total
involvement and ownership of the process by operators to ensure zero breakdowns, zero defects
and improved throughput can be achieved. Cooke (2003) defined maintenance strategy as
preventive, predictive and reactive or breakdown maintenance. However, Kevin and Penlesky
(1988) suggested that there are five important elements that can be used to formulate
maintenance strategy. Their five elements are reactive maintenance, regularly scheduled
preventive maintenance, inspection, backup equipment and equipment upgrade. These elements
form the guidelines in determining the maintenance mix to be used. This, however, also depends
on the goals of maintenance, the nature of the facility or equipment to be maintained and the
work environments in which operations take place. Proactive and aggressive maintenance
strategies (TPM) have a significant positive relationship with performance (quality, equipment
availability and production cost) (Swanson, 2001). In TPM, two activities that would be
normally found at plant-level of the organisation are embraced and reframed as autonomous and
planned maintenance (McKone et al., 2001).

RESEARCH METHODOLOGY

This study is a cross-sectional focusing on manufacturing companies in Malaysia. This study

was conducted in order to respond to the following research questions:
• What is the extent of TPM practices in the Malaysian manufacturing organization?
• Does the extent of TPM practices are implemented differ with the size of firms?
• Does the extent of TPM practices are implemented differ with the quality certification
status?
• What are the relationships between TPM practices and manufacturing performance?

The target population was manufacturing organizations in Malaysia that have implemented
TPM practices. The sampling frame used was from Federation of Malaysian Manufacturers
(FMM). The sampling technique is proportionate stratified random sampling and employed
54 

 
steps by Gay and Deihl (1992) to determine the required samples size. Total of 1053 self-
administered questionnaires were sent to respondents who were managers of quality, operations,
plants, engineering and those who were familiar with TPM. Moreover, they had to be
knowledgeable about their company’s TPM practices and their firms’ performance. A support
letter from Malaysian Industrial Development Authority (MIDA) was attached together with the
questionnaire.

Variable measures: TPM team was measured using 5-point scale ranging from 1 (strongly
disagree) to 5 (strongly agree). However, the other independent variables were measured using
5-point scale ranging from 1 (not at all) to 5 (a very great extent). The dependent variable was
measured using 5-point scale ranging from 1 (not at all) to 5 (very big improvement). The
measures of this study were taken from various sources. For instance, TPM team was adapted
from Brah and Chong (2004); TPM strategy, items were adapted from Eti et al. (2004) and Brah
and Chong (2004); Autonomous maintenance, measured by 8 items and planned maintenance,
measured by 5 items were adapted from McKone and Schroeder (1999) and Brah and Chong
(2004). Dependent variable was measure using 6 items, which adapted from various authors
such as Seth and Tripathi (2005), Ward et al (1995), Brah and Chong (2004), and Raymond and
St-Pierre (2005). Finally, data on demographics also gathered.

RESEARCH HYPOTHESES

TPM practices at Difference level of Firm size

TPM practices such as TPM team, TPM strategy, autonomous maintenance and planned
maintenance are implemented widely in the manufacturing companies. The size of firms
determines the equipments, capacity and workforce in the companies. Big companies enable
more potential allocation of fund towards continuous improvement activities. Moreover,
Jonnson (1997) reported that size of firm and status of maintenance are different between big
and small firms. However, in TPM, the organization structure is more important compare to
firm size as top management becomes major catalyst to ensure TPM practices are implemented
according. Therefore, well structured TPM organizations will contribute to smooth TPM
practices implementation. Thus, the following hypothesis is proposed:

Hypothesis 1: The extent of TPM practices implemented does not differ at different sizes of
firm.

Meanwhile, quality certifications such ISO 9000 series are becoming more important especially
for Malaysian manufacturing organizations. Many companies are looking forward of getting
certified with ISO standards. TPM practices in such ISO certified companies are more likely to
be implemented compared to non-certified ISO standards companies (Brah & Chong, 2004). All
processes are needed to document accordingly. However, TPM is continuous improvement
activities that require long term commitment from all employees in the organization. They work
closely to avoid any equipment breakdowns, failures, and stoppages happened with no regards
of whether the companies are ISO certified or not. Thus, the following hypothesis is proposed:
Hypothesis 2: The extent of TPM practices does not differ for quality certified companies and
non-certified companies.

TPM practices and Manufacturing Performance

Many researchers have found that TPM significantly improved performance (Ahuja & Khamba,
2009; Seth & Tripathi, 2005, 2006; Brah & Chong, 2004; Sun, Yam & Wai-Keung, 2003). The
research included various types of industries and types of production processes. TPM inevitably
improves performance (Nakajima, 1988). The ability of top management to drive all employees
to work closely together can be a catalyst for TPM successful implementation.

55 

 
 DATA ANALYSES AND RESULTS

Respondent Profile
Data was analyzed using 106 usable questionnaires. There were 167 questionnaires returned
back and usable responses were only 106 (10.07%) and data was analyzed accordingly. There
were 71 (67.2%) large companies and 24 medium companies and 11 (1.2%) small companies.
The number of permanent staff was applied in order to categorise the company size since annual
sales and revenue were not given by the companies. The Small and Medium Industries
Development Corporation (SMIDEC) of Malaysia provided the definitions of manufacturing
companies’ size. Companies that have less than five full time employees are classed as micro
enterprises, 5 to 50 permanent employees are small enterprises, and 51-150 permanent
employees are medium sized companies (SMIDEC, 2008).). The majority of the respondents
were involved in mass or assembly production processes (51 companies) which represents more
than 48% of respondents, batch production 30.2% (32 companies), continuous production 17%
(18 companies) and the least was project with (5 companies) making up 4.7%. The companies
responding to this study mainly had over 10 years experience of operations (more than 90%).
Companies from the electrical and electronics industry were the main respondents with 34
companies (32.1%).

Reliability Analysis
Factor analysis is used to determine the construct adequacy of a measuring device (Cooper &
Schindler, 2001). The principal component analysis (PCA) method with varimax rotation (Hair,
Anderson, Tatham & Black, 1998) was applied in this study. After components of variables
were extracted from factor analysis using varimax rotation, reliability test was conducted to
assess the “goodness” of a measure. Table 1 shows the reliability coefficients (Cronbach’s
alpha) of the variables which ranges from 0.85 to 0.97. Basically, all the variables in the study
show acceptable Cronbach’s alpha values, which are more than 0.8.

Table 1: Reliability Coefficient

Variable Number Items Items Cronbach’s

of items dropped added Alpha
TPM team 9 - - 0.95
TPM strategy 12 - - 0.94
Autonomous maintenance 9 2 - 0.89
Planned maintenance 4 - - 0.85
Cost 6 2 - 0.92

The extent of TPM practices

This study set out with the aim of assessing the extent of TPM practices in Malaysian
manufacturing companies as its first research question. The extent of TPM practices in
Malaysian manufacturing companies can be observed from Table 2. As can be observed from
Table 2, out of the four dependent variables, delivery showed the highest mean value of 3.76
with standard deviation of 0.86. This indicates that all the participating manufacturing
companies were concerned about meeting on-time delivery to customers by putting it as the first
priority. This is followed by quality which resulted in a mean of 3.59 and with a standard
deviation of 0.82, thus respondents seem to be putting a lot of emphasis on ensuring the quality
of their products is at the highest level. Meanwhile, the components of the independent variable
TPM strategy showed the highest mean (3.93), followed by autonomous maintenance
(mean=3.91), TPM team (mean=3.81) and planned maintenance (mean=3.70). All the
respondents agree that all the components are important. The standard deviations of dependent

56 

 
variable, cost was 0.80 also small, indicating that most respondents were close to the mean of
the dependent variable.

Table 2: Descriptive Analysis

Variable Mean Standard Deviation
TPM team 3.81 0.76
TPM strategy 3.93 0.61
Autonomous maintenance 3.91 0.63
Planned maintenance 3.70 0.72
Cost 3.54 0.80

Meanwhile, ANOVA was used to test the mean differences of the variables investigated in this
study- the extent of TPM practices and firm size. The two assumptions of ANOVA are (Hair, et
al., 1998):
i. The normal distribution of dependent variables
ii. Equal variance for all treatment groups

The result was consistent with Hypothesis 1, indicating that the extent of TPM practices does
not differ according to the size of firm as shown in Table 3. The TPM practices can be
implemented TPM practices regardless of the firm size. It doesn’t matter whether the companies
are big or small, all members in the companies must work together to achieve smooth daily
operations and avoid any potential equipment deterioration. Meanwhile, no statistically
significant differences existed among the TPM practices between certified quality standard
firms and non-certified quality standard firms, supporting Hypothesis 2 as indicated in Table 4..
In light of the result concerning Hypothesis 1, it appears that small, medium or big companies
realise the similar benefits as long as they implement TPM practices. The concept of TPM puts
strong emphasis on total involvement of all employees. The contribution of employees towards
TPM practices of certified companies and non-certified companies are equally important.

Table 3: Result of Analysis of Variance: The size of firm

Variable F value Significant
TPM team 0.96 0.38
TPM strategy 0.48 0.62
Autonomous maintenance 0.62 0.54
Planned maintenance 0.35 0.71

Table 4: Result of Independent Samples Test: Certified quality standard and non-certified
quality standard firms
Variable F value t- value Significant
TPM team 0.96 1.37 0.18
TPM strategy 0.48 1.45 0.15
Autonomous maintenance 0.62 1.32 0.19
Planned maintenance 0.35 0.95 0.35

Table 5 shows the relationships between TPM team, TPM strategy, autonomous maintenance,
and planned maintenance towards cost. The result showed that the F value of 16.86 is
significant at a confidence level of 0.01, and R2 of 0.40 indicated that the independent variables
explained about 40% of the variance in cost. From the Table 5, TPM strategy and planned
maintenance are found to have significant positive relationships with cost (p< 0.01 & p< 0.05).
There are no multicollinearity problems as tolerance and VIF values were less than 1.0 and less
than 10.0 respectively.
57 

 
Table 5: Relationship between TPM practices and cost
Independent Standardized t Significance Collinearity Statistic
Variable Beta p-value Tolerance VIF
TPM team -0.04 -0.43 0.67 0.62 1.63
TPM strategy 0.34*** 2.64 0.01 0.36 2.78
Autonomous 0.07 0.57 0.57 0.37 2.69
maintenance
Planned
0.32*** 3.13 0.01 0.55 1.81
maintenance
2
*** Significant at p < 0.01, R = 0.40, F = 16.86

DISCUSSION AND CONCLUSION

This study investigates the extent of TPM practices such as TPM Team, TPM Strategy,
Autonomous Maintenance and Planned Maintenance of the Malaysian manufacturing
organizations. The findings show that TPM strategy and autonomous maintenance have become
the most important TPM practices in the manufacturing organizations. It cannot be denied that
TPM strategy focuses a lot on activities related to continuous improvements. Moreover, TPM
strategy ((mean=3.93) requires not only good action plan and also good execution. Therefore,
the top management will drive all human resources towards achieving a safe and healthy
workplace and also reducing breakdowns and stoppages and equipment deterioration. This
indicates that all employees must be given the opportunity to clean and look after equipment
under their responsibility. The findings also indicate that Malaysian manufacturing
organizations focusing in delivery and quality aspect. It is generally accepted that uninterrupted.
This implies that marketers should carefully plan their marketing communications so as to instill
the right attitude among consumers towards their products. The manufacturing companies were
concerned about proper plans to achieve overall equipment effective, continuous improvements,
high safety and environmental standards, and increasing morale of TPM team members. It is
certainly essential for manufacturing companies to properly plan such activities due to the stiff
challenges of the manufacturing environment. The pressures of uncertainty in the market place,
customer needs and so forth reflect that fast actions must be taken. On the other hand, TPM
strategy needs strong support from top management and all levels of employees. It is very
important to ensure the various parties in the organisation are sharing the same goals and
visions. Meanwhile, autonomous maintenance is the second highest implemented TPM practice
in the Malaysian manufacturing companies studied here (mean=3.91). In autonomous
maintenance, an operator who operates the equipment is also responsible for ensuring the
equipment is in good condition. In autonomous maintenance, operators are equipped with skills
and knowledge that enable them to detect any abnormality of the equipment via a thorough and
effective training plan. Operators who clean and take care of the equipment can avoid potential
failures and breakdowns as they monitor and look after the equipment’s condition. Loose bolts
and nuts, for instance, may cause equipment to operate in a very vulnerable condition. Due to
this problem, the product being produced by the equipment may be off-centred and cause poor
quality performance. Through autonomous maintenance operators are given the opportunity to
contribute to the daily operations. On the other hand, the ANOVA analysis indicates that all
companies no matter small, medium or big implementing TPM practices accordingly. TPM is
about total participation of all employees from top management to operators at the production
lines. Therefore, as long as top management plays the roles to encouraged total participation and
accommodate the training and education programs to support TPM practices. Perhaps, big
companies are able to provide frequent training and education programs compared to small
companies as the provision for training may abundant. However, White et al. (1996) postulate
that there are differences between big and small companies in the total productive maintenance
when they analysing the Just In Time practices in the US manufacturing companies. TPM is not
designated only to big companies. TPM requires active involvement of operators at the
production floor to contribute towards equipment deterioration. All companies’ sizes should
58 

 
emphasis on ensuring sufficient resources are allocated in daily maintenance jobs such as
cleaning, lubricating, tightening and so forth. The certified quality standard firms and non-
certified quality standard firms also showed no differences in the TPM practices. Therefore, it is
suggested that quality certification standards are not the main issue as far as all companies make
sure each TPM practices are implemented. The certifications, however, can create perceptions
that certified quality standards firms are more likely to have better process of implementing
things. On the other hand, through TPM strategy which focuses on activities to eliminate
equipment breakdowns, failures and stoppages requires full commitment form top management.
TPM strategy and planned maintenance play a vital role in reducing overall manufacturing cost.
Activities to eliminate waste and continuous improvement for instance can reduce cost in long
run and must be planned accordingly. Meanwhile, the ability of all employees to share the
important figures about defects status, reject rates, rework, breakdowns etc. can ensure every
employee commitment towards cost reduction initiatives.

SUGGESTIONS FOR FUTURE RESEARCH

This study only focuses on four TPM practices to study the research questions. Future study
should focus on TPM practices influence on manufacturing performance. Many other potential
factors exist such as leadership, continuous improvement activities; focus on customer
satisfaction, information architecture (Seth & Tripathi, 2005) and so forth affect manufacturing
performance. Future research should also attempt to examine the influence of such factors on
manufacturing performance. In addition, there are moderating variables that can potentially
affect the relationship between TPM practices and manufacturing performance such as types of
production process and years of operations. Perhaps further research can be conducted to
investigate the moderating effect of these variables on the relationship between TPM practices
and manufacturing performance.

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 MANAGING SEASONAL DRY INVENTORY AT PT. DE LIONS

RADIX PRASETYA, MURSYID HASANBASRI

School of Business and Management, Institut Teknologi Bandung

ABSTRACT

PT. De Lions is a joint venture company between recognized group from local company
and a multinational company which has long experience in modern retail business. Almost
every year De Lions encounter highest demand problem during seasonal period. To
overcome the problem, De Lions currently applied conventional method by assuming
annual sales growth as a factor to plan and to set inventory during seasonal period.

This paper presents a new method and strategy to solve the problem. Due to special
characteristic of demand and selling period, News Vendor model is applied to obtain the
number of optimal order to maximize profit. In addition, Crossdock Strategy is also
proposed to reduce number of non-seasonal products inventories.

The results show that implementation of News Vendor model at De Lions can gain
estimated profit about Rp. 171,134,720 or increasing 5.45% compared to that with
conventional method. Additional benefit from implementation of Crossdock strategy would
reduce warehouse rent expense about Rp. 510,000,000. Hence, estimated total benefit from
both methods would be Rp. 681,134,720 or increasing up to 21.70% compared that with
conventional method. The result is very significant if it is compared with PT. De Lions
average monthly margin from sales in 2008 which was only 13.52%.

Keywords: Seasonal demand; Newsvendor; Crossdock Strategy

INTRODUCTION

PT. De Lions or De Lions is a joint venture company between recognized group from local
company and a multinational company which has had experience more than 142 years in
modern retail business. In this business De Lions choose supermarket format as their operational
strategy, which is providing various daily requirement of household for middle class family in
Indonesia. This company has vision to be Indonesian public choice supermarket at every main
town in Indonesia.

Almost every year De Lions is always faced with highest demand problem during seasonal
period. Seasonal is the time when The Moslems in Indonesia do fasting and celebrate Idul Fitri.
The main problems faced by De Lions are mainly related to product supply process and
limitation of inventory level during seasonal periods.

In recent days most of the companies faced with the similar business challenges such
maintaining customer service level, reducing inventory cost, increasing inventory turn over and
optimizing operational efficiency. From all the problems, inventory is the main key to create
significant efficiency in supply chain process with concern not to raise the conflict between
delivering high level of customer service level and creating efficiency in inventory
management.

Inventory in retail business plays an important part and it moves up and down along with sales
and promotional activities. At De Lions almost two-third of current asset consists of
merchandise inventory. According to De Lions historical data, in seasonal period the number of
sales will increase up to 32.44% from its regular sales (Annual Commercial Meeting, 2008). To
overcome problem lacking of inventory during seasonal period, nowadays De Lions make a
decision to submit an order process for suppliers approximately two months before seasonal

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demand occurred. In placing an order, De Lions currently applied conventional method by
assuming annual sales growth as a factor to plan and to set inventory during seasonal period.

Inventory is the stock of any items or resources use in an organization with the purpose to meet
the variation in product demand and to take economic purchase of order size (Chase, Jacobs and
Aquilano, 2006).Current research conducted by Capgemini Consulting on March 2009 indicated
reveal the business drivers that have direct influence on the activities and projects that supply
chain managers will execute in the coming periods.The result showed inventory optimization is
the first rank of attention for managers to lead their business survival from the impact of 2009
financial crisis. Figure 1 show the results of Capgemini Consulting survey about the top 10
supply chain project that will be taken by supply chain managers to minimize the 2009 crisis
impact.

Figure 1. Top 10 Supply Chain Project (Haarman et.al 2009).

This study tries to propose an improvement to the method used in managing inventories at De
Lions. In general, improvement will be done in two ways: First by using newsvendor model to
get the number of optimal order in maximizing profit and second by using crossdock strategy to
decrease the number of non seasonal products inventories at De Lions distribution center. The
crossdock strategy was taken to create more space for seasonal products inventories at De Lions
distribution Center so De Lions wasn’t necessary to provide another facility during the seasonal
period.

DE LIONS INVENTORY

In keeping their regular inventory, De Lions has three different locations with different capacity
and purpose, as follows:
1. Distribution Center Facility
Located in Cikarang, 33 km from Jakarta, occupied 38,852 m2 of land with total
building area 12,239 m2 which can hold all dry inventories around 11,000 m3 in
volumes. The purposes of DC facility are to keep all centralized inventory from the
variation of customer demand and to give better position for De Lions in negotiating
price, promotion and other activities for the suppliers.
2. Store Back Room

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 Located in every store with total area are vary from 100 m2 to 500 m2 per store. The
purpose of store back room is to keep only the fast moving products at store to
anticipate uncertainty in customer demand during daily activities at stores level.
3. Shelving Rack at Stores
Inventory at this section is adjusted by category of management policy. Every store has
600 m2 to 700 m2 of dry selling floor area which contain numbers of shelving racks.
this means the largest inventories at De Lions are placed in shelving rack.

Table 1 shows the regular inventory at De Lions before seasonal demand takes place. Table 1
indicated the number of extra space in volume at DC is less than 70% than the total space.
According to the previous data on 2008 sales, during seasonal period the number of sales will
increase up to 32.44 % from its regular sales. If the trend of sales increase which is equal to the
trend of volume increase, thus De Lions need to provide additional facilities to keep their
inventory during seasonal period. Regarding to that issue De Lions logistic manager mention
that the cheapest rate to lease additional warehouse near from their facility reach Rp.
510,000,000 and valid for six months renting periods. That means the investment fee for renting
new facilities will be greater than 510 million since De Lions should also install new supporting
system, tolls and mans. Otherwise according to De Lions logistic manager utility of new
facilities is only 50% since they only use the facilities for three months out of six months
minimum contract.

Table 1. Average Inventory Position before Seasonal period

TOP : Term of payment.

“We will create more expenses if we running our additional facilities after the seasonal period
ended. Because we can keep all of our inventory in our regular DC, running other temporary
facilities will creating more problem in control and expense on distribution routing”, said the
logistic manager.

Seasonal Supply Planning

The First step in seasonal supply planning process is stipulating the products list to differentiate
which items will be classified as centralized seasonal product and which items are not. The
process will be started and ended by buying division. The process started when buying division
create list of seasonal products include with its quantity. Then the list will be spread to operation
division in order to check and revise the proposed quantity offered by buying division. After
that process buying division will issue list of order quantity to supplier and negotiate the price,
volume and discount.
Seasonal product list can be divided into two main product categories:
1. Non Continuous Replenishment Product.
This product type is only available or only sold during seasonal period, because the
value of these products will be depreciated drastically after the period elapses or those
products are not listed as regular product at De Lions after seasonal period. During the
period suppliers will give a big amount of discount if retailer makes big volume of order
then after the period retailers should bring additional discount to make sure all the
products will be flush out from the store shelves in the short time.
Examples: Dates, fireworks, sarong, Mokena and other special biscuit or products
which embedded by current fasting logo.
2. Continuous Replenishment Product.

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 This type of products is available both on seasonal period and on regular period. During
seasonal period suppliers will give a big amount of discount if retailer can make a big
volume of purchase to fulfill the customer demand, after seasonal this products can be
sold regularly by retailers.
Examples: All fast moving product which have high level increment of sales trend
during seasonal period such as bangau soy sauce, blue band and ABC syrup.

In total there were 309 of seasonal products will be centralized in 2009 seasonal periods, with
only 45 products are categorized as non continuous replenishment product. Figure 2 show the
estimated order schedule and inventory period during seasonal demand.

Figure 2. Time Periods of 2009 Seasonal Products

Existing Order Placement

Existing order placement (later will be called as conventional method) was used by De Lions to
predict the number of order quantity placed during seasonal period. There are some steps used
by management in order to run the conventional methods such as follows:
• Level of ordering quantity during the seasonal period was made based on the current period
of sales growth and referring to estimate budget from the current year, that calculation
figure are explained in Table 2. Based on above assumption, management De Lions decides
in the year 2009 level of ordering growth is specified equal to 20% compared to number of
sales in the last year (PT. De Lions database in 2009). That assumption was bigger than the
existing national sales growth because there were some variable considered such new stores
opening, new promotion strategy etc which estimated will drive the sales increase higher
than existing growth.

Table 2. PT. De Lions Sales Growth

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• After the level of seasonal growth was made, the next step is to find the number of quantity
ordered to estimate the expected profit earning value. Based on 20% seasonal growth the
number of seasonal order quantity can be found by increasing last year seasonal sales
quantity with 20% growth. by this conventional method then the expected profit earning can
be calculated. The complete result of conventional method calculation can be shown in
Table 3.

Table 3. Conventional Method of Profit Earning

Total profit earning from conventional method calculation is only 3,1 billion Rupiah with total
space required is 5,015 m3. This means De Lions still need to rent additional facilities to carry
the seasonal inventory during seasonal period.

NEWSVENDOR MODEL

Seasonal demand at De Lions is occurred every year. However, it cannot be treated as if those
exist in regular period. Certain characteristics are embedded in this selling period. If De Lions
provides products more than customer need (too much), they will suffer from cost of over-age.
On the other hand, if De Lions provides products less than customer need, they will suffer from
lost sales. In addition to this issue, De Lions needs to gain more benefit of discount and rebate
from suppliers by having one time order agreement. Therefore, in the single selling period
environment as presented in this case, news vendor model would be appropriate to apply. The
purpose of news vendor in this study is to maximize profit by reducing expenses from overage
and underage cost which emerge from seasonal inventory management.

To analyze the system understudy with news vendor model, the following steps was done.
1. Determine the order quantity to maximize profit.
Number of estimated order is very important key in influencing the ending profit. There are
two costs that have close relationship with the order quantity: overage and underage cost.
Overage cost (Co) is the lost incurred when a unit is ordered but not sold, while underage
cost (Cu) is the opportunity cost of not ordering a unit that could have been sold (Cachon
and Terwiesch, 2006)
2. Create profit earning simulation.
To maximize the profit, the total cost of underage and overage should be minimized. The
ratio between underage cost and overage cost is called the critical ratio. Then the value of

66 

 
 profit earning can be simulated. Those processes are called as performance measurement
process.

Details of formula to calculate those performance measures are taken from Cachon and
Terwiesch (2006). Diagrammatic flow of calculation can be seen at Figure 3. Each performance
measures formula is listed on Appendix.

Overage Cost Underage cost

Optimal Order
Quantity

Expected
Expected Expected Stock Out
Left Over Fill Rate
Lost Sales Sales Probability
Inventory

Expected Profit

Figure 3. Profit Calculation

Profit from Newsvendor Order Placement

In calculating expected profit during seasonal period at De Lions, there are two kind of expected
profit which can be measured from the newsvendor model: first, expected profit from optimal
order quantity and second, expected profit from volume efficiency as the result of new order
quantity from newsvendor method.
The expected profit from optimal order quantity by using newsvendor method is presented in
Table 4. Table 4 also shows comparison between expected profit of conventional method and
newsvendor model.

Table 4. Expected Profit from Optimal Order Quantity

Profit from Newsvendor Volume Efficiency

Further analysis leads to the reduced number of inventory volume. Total required volume to
keep seasonal inventory will decrease from 5,015 m3 to 4,568 m3 after implement optimal order
quantity from newsvendor method.

Based on exact volume cost data, the total number of newsvendor efficiency during the seasonal
period can be calculated. Finally difference of total expected profit from volume efficiency
between both methods is obtained and presented in Table 5.

Table 5. Volume Cost Efficiency

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As a result, total expected profit form newsvendor method would increase about 5.45% as
presented in Table 6. Such improvement is reasonable if compared with De Lions profit margin
during seasonal in the year 2008 which only reach 13%.

Table 6. Expected Profit Comparison

CROSSDOCK STRATEGY

Existing volume capacity at De Lions distribution center for dry inventories is 11,000 m3. From
De Lions management data total inventory for regular season reach 8000 m3 - 9000 m3 and
during seasonal period inventory will increase almost to 15,000 m3 as presented in Table 7.
Then it can be estimated in seasonal period De Lions will face with shortage of volume capacity
whether they apply newsvendor model or not.

Table 7. De Lions DC Capacity

To solve the problem De Lions management counter the issue with renting additional facilities
every year during the seasonal period. The cost to rent the facility is about 510 millions rupiahs
for six months periods with 5000 m2 floor capacity. According to De Lions management that
cost is the cheapest price they can find to rent the facility that close to their distribution center.
The problem during seasonal period is not only caused by increasing cost from renting
temporary facility but also how to operate the facility in order to fit with the existing system.
New personnel should be added, some equipment should be transferred and also with the
information system should be installed fit with the existing program.

To cope with this problem, Crossdock strategy is proposed to reduce inventory during seasonal
period without reducing DC capability to absorb sales fluctuation in regular inventories. In
distribution strategies crossdock strategy usually used in case of warehouse or distribution
centre serve as a transfer points for inventory (Simchi-Levi et.al, 2008). The crossdock system
only reduce inventory at distribution center by transferring inventory immediately to stores after
the receiving process are cleared. Figure 4 describes some strategies to manage inventory flow
at Warehouse/Distribution Center (Frazelle, 2002).

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Figure 4. Inventory Flow

De Lions has implemented crossdock strategy in their system only to maintain promotion
inventory product, with less inventory involved. Based on Table 8, De Lions needs to reduce
inventory up to 50% from regular DC stock to create more space in keeping temporary seasonal
inventories. There are some steps should be followed by De Lions to adopt the crossdock
strategy:
1. Create product list that will be processed by crossdocking system from the regular products.
The products should be come from fast moving item especially in seasonal period.
2. Build strong relationship between DC and stores in maintaining order request & realization,
and also in creating crossdocking product list.
3. Improve data stock accuracy both at DC & Stores to make sure the stock availability at DC
& stores after crossdocking system are running.

Based on information at Table 8, De Lions should remove approximately 3000- 4000 m3 of DC

inventory into crossdocking system, so the total inventory at DC can be managed near to 11.000
m3 in volume.

Table 8. Profit Estimation after Crossdocking Strategy.

Level of additional facility rent expenses in the year 2009 estimated to a number of 510,000,000
rupiah. With newsvendor and crossdock strategy, Total profit & cost efficiency which will be
earned by De Lions obtained 681,134,720 or equal to 21.70% compared to existing method.

CONCLUSION

1. News vendor model and crossdock strategy can be used by De Lions during the seasonal
period to overcome limited capacity at De Lions distribution center.
2. De Lions can earn profit in seasonal period more than 600 million rupiah or 21.70% from
existing method by implementing news vendor model & crossdock strategy during the
seasonal period.

REFERENCES

Annual Commercial Meeting PT. De Lions (2008), unpublished document.

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Cachon, G. and Terwiesch, C. (2006), Matching Supply with Demand, McGraw-Hill.

Frazelle, E.H., (2002), World Class Warehousing And Material Handling, McGraw-Hill
Education (Asia) Singapore.

Haarman, H., Den Exter, E., Van der Schaar, J., and Van Heijst, W. (2009), Crisis Dominates
The Supply Chain Agenda in 2009,
http://www.de.capgemini.com/m/de/tl/Crisis_dominates_the_supply_chain_agenda_in_2009.pdf

Jacobs, F.R., Chase, R.B., and Aquilano, N.J. (2006), Operations Management For Competitive
Advantage eleventh edition, New York: McGraw-Hill/Irwin Series.

PT. De Lions Database (2009), unpublished document.

Simchi-Levi, D., Kaminsky, P., and Simchi-Levi, E. (2008), Designing and Managing The
Supply Chain: Concepts, Strategies and Case Studies, 3rd edition, Mc Graw-Hill.

APPENDIX
Probability when the demand quantity less than the order quantity
F(Q) = Prob{Demand ≤ Q) (i) .................................................................................................... (i)
Expected overage cost = Co x F(Q) .......................................................................................... (ii)

Expected gain on a unit is the benefit of selling a unit (underage cost) times the probability the
unit is sold = Cu x (1-F(Q)) ...................................................................................................... (iii)

Hence, to find the order quantity Q can be calculated using

.................................................................................................................. (iv)
Cu
F (Q) =
C o + Cu
If F(Q) follow the normal distribution, so the optimum of order quantity can be found.

Q − μ ....................................................................................................................... (v)
F (Z ) =
Q = μ + z ×σσ ........................................................................................................................... (vi)

Performance Measurement
Expected loss sales value = σ x L(z)......................................................................................... (vii)
Where
σ = standard deviation of the normal distribution representing demand,
L(z) = loss function with the standard normal distribution
Expected sales = µ - Expected lost sales ................................................................................. (viii)
Where µ is the mean of the demand distribution
Expected leftover inventory = Q – Expected sales .................................................................... (ix)

Expected profit = [(price-cost)x Expected sales – [(cost-salvage value)x Expected leftover

inventory] .................................................................................................................................... (x)
Fill rate = Expected sales/μ = 1 – (Expected lost sales/µ)
Stockout probability = 1- F(Q)

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 CONTRIBUTION OF COLLABORATIVE PROJECT PERFORMANCE TO
CORPORATE PERFORMANCE IN ENGINEERING, PROCUREMENT, AND
CONSTRUCTION (EPC) COMPANIES
ICHSAN SYARIFUDIN, DERMAWAN WIBISONO
School of Business and Management, Bandung Institute of Technology

ABSTRACT

Main purpose of this study is to explore relationships between collaborative supply chain to
project performance measures and the contribution of these measures to corporate
performance measures in engineering, procurement, and construction (EPC) industry.
Collaborative supply chain is useful due to the fact that EPC projects require
multidiscipline capabilities, but it is also challenging because of the short term contractual
relationships among parties in the collaboration. The existence of EPC contracting
companies is important to support the development of infrastructure projects in developing
countries. Integrated scope and concurrent project cycle development within EPC contract
enable the projects to be developed in a more timely and efficient manner. Contribution of
project performance to corporate performance in this industry plays a critical role to
maintain sustainable capabilities and growth of an EPC company. A series of interview and
survey will be undertaken to acquire information from executives in EPC companies
regarding their perception on performance measures of projects and how these measures
may support the corporate performance. Constructs emerge from the interviews, will be
compared with a predetermined conceptual constructs based on previous research and
references.

Result of this research may be used as the basis for defining the EPC companies’ corporate
performance objectives as a function of collaborative project performance measures. The
finding may also be used in assessing the capability of EPC companies to cope with the
challenge of accelerated infrastructure development in developing countries. Although a
considerable number of construction companies have been developing an EPC division or
subsidiary in the past five years, the number of established EPC contractors operating in
Indonesia is very limited (less than twenty companies). This limited number of EPC
companies implies that data collection activity in this research should consider the ability
to represent the industry characteristics.

Keywords: Supply Chain Collaboration; Project Performance; Corporate Performance;

EPC Projects

INTRODUCTION

This research will investigate relationship between degrees of supply chain collaboration with
project performance, in engineering-procurement-construction-installation (EPC/EPCI) projects.
Project performance in this study is defined as the ability to achieve functionality, quality, cost
and schedule performance which is higher than specified in the contract between project owner
and project contractor.

The reason behind the selection of these performance measures as the main measures in project
performance is because in the industries which are familiarly served by EPC contractors,
investment effectiveness is determined by the ability of the constructed facilities to function
according to its purpose. In order to function properly, compliance with specification is the
basic requirement. Concerning the time value and the amount of investment needed in industries
served by EPC companies, the ability to design, procure, and construct the project in timely and
efficient manner is valuable for the whole project stakeholders. Ability to achieve the
performance measures mentioned above will lead to efficient manner in running business in
EPC industries. Lam, Chan, and Chan (2007) proposed that functionality, time and costs are
defined as very important measures in design and build projects.

71 

 
The importance of relating project performance to corporate performance is based on the needs
to ensure sustainable success of project based operations companies. Construction industry, as
one of the country’s economic development enablers, shares a significant positive contribution
to Indonesia’s gross domestic product (GDP). Accelerated development after 1998’s monetary
crisis has not yet been supported by a significant improvement in construction industry supply
chain management. Fragmented industry and project based, short-term relationships among
parties still dominates transaction pattern in construction industry.

In Asia Construct 2008 conference, data from Institute for Construction Service Development
(Lembaga Pengembangan Jasa Konstruksi / LPJK) described that until 2010, Indonesia’ has the
second largest construction industry in Asia, right after People Republic of China. Contribution
of this sector to Indonesia’s GDP also increases from 8.17% in 2004 up to 8.9% in 2007.

This significant contribution is due to the fact that construction service industry is basically
acting as facilitator to other industries’ investment activities. Oil-and-gas or energy-related
sectors is one of examples for industries whose performance relies heavily on the construction
stage of their business. Another significant contribution can be derived from the fact that
availability and reliability of infrastructure is one the main consideration for direct foreign
investment in a developing country.

The opportunity to improve supply chain performance of construction industry through

collaborative arrangement should be supported by improvement in relationships arrangement
among parties involved in the projects, stated in the scope of project contract. An integrated
contract may enable project implementation performance improvement through more
synchronous and synergized information, decisions, and material flow. Humphrey, et.al (2003)
proposed that transition from traditional approach characterized by partial scope of contract to
project partnership and strategic partnership characterized by integrated-long term contract, is
the path to a successful collaborative relationship.

Evaluation of collaborative supply chain performance improvement requires identification of

key performance indicators and key success factors of supply chain collaboration in this sector
of construction industry.

Even though the integrated scheme (EPC) contract is more popular in oil and gas or energy
related sector, due to their complex interfaces among project stages, it might be useful to
explore the opportunity to apply some of the principles in other sectors, such as infrastructure or
property sectors of construction industry.

Comprehensive studies have been undertaken to explore unique characteristics of construction

supply chain. Its project based relationships and contractual agreement among parties involved
in the projects are among the factors considered in those studies. Abduh, Soemardi, and
Wirahadikusumah (2009) mention that supply chain management in project delivery settings is
unique, due to the fact that many project supply chains are relatively short-lived, but yet, they
must be established, configured rapidly, and remain flexible to match demands that vary over
the course of project execution. The possibility to build collaborative supply chain in
construction projects has also been studied in previous researches. Benefit and consequences of
the collaborative arrangement have been discussed in several related studies.

Although the number is limited, studies on engineering, procurement, and construction projects
have also been conducted, regarding the benefit of integrated scheme compared to the
traditional partial scheme of contract (Ballard, 1993; Kumar Dey, 2002; Michelli et al, 2008).
Support of this integrated scheme in undertaking supply risk management is one of topics
discussed in previous researches.

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Considering that EPC project contract requires multidiscipline competencies, which may not be
owned internally by a contractor’s own resources, EPC project usually involves collaboration in
its project supply chain to achieve high project performance (Kumar Dey, 2002). Performance
measures of integrated engineering (design), procurement, and construction (build) type of
project includes time, cost, quality and functionality as the principal success criteria for design
and builds projects (Lam and Chan, 2007).

However, relationships between collaborative projects supply chain and project performance in
terms of functionality, quality, cost and schedule performance; and the effect of project scope
integration (EPC or EPCI scheme) to these performance measures has not been explored yet.
This study would be beneficial considering that in most of sectors served by construction
industry, there are still various interpretations on the benefit and consequences of EPC contract
scheme.

Expected results from this research is the development of model relating supply chain
collaboration in project environment, project performance, and the effect of integrated scope of
projects (EPC scheme) to project success. This expected results lead to the formulation of
research questions which includes:
• What are the benefits of having supply chain collaboration to project performance?
• In what condition does project performance will lead to corporate performance?
• What are the contributions of integrated EPC contract to the success of collaborative
project supply chain?

LITERATURE REVIEW

Suradji and Kusnandar (2008) from the Institute for Construction Service Development
(Lembaga Pengembangan Jasa Konstruksi / LPJK), divided construction industry into 15 groups
which consist of: (1) residential; (2) non-residential; (3) electrical installation; (4) gas and water
facilities installation; (5) sanitation facilities; (6) foundation; (7) sound system and air
conditioning; (8) water supply network; (9) gas and oil pipe network; (10) electricity network;
(11) irrigation and drainage; (12) electric power generator and telecommunication network; (14)
port, air port, and terminal; (15) other construction works.

Suprapto (2007) from Indonesian Association of Project Management (Ikatan Ahli Manajemen
Proyek Indonesia / IAMPI), classified construction industry based on construction types, which
includes: (1) housing construction; (2) non-residential or non-housing construction; (3) heavy
construction; (4) industrial building construction.

A more common classification used by construction practitioners is grouping between property

and infrastructure construction. Property construction can later be grouped into: (1) residential;
(2) commercial; (3) office; (4) industrial; (5) and public facilities. Infrastructure construction
can be grouped into: (1) transportation facilities; (2) electricity; (3) telecommunication; (4)
water; (5) oil and gas sectors.

Other grouping is based on the ownership of the facilities. This type of classification groups
construction into government institution projects and non-government or private sector projects.
This classification is based on a significant difference in goods and service procurement
process, communication patterns, and decision making process related with project contracts in
those two groups. Supply chain collaboration is defined as two or more independent firms
jointly working to align their supply chain processes so as to create value to end customers and
stakeholders with greater success than working alone (Simatupang and Sridharan, 2002).

Barrat (2004) describes that supply chain collaboration may not only exist between adjacent
stage of supply chain, but also between parties at the same chain in a supply chain. This is
explained by the existence of vertical collaboration and horizontal collaboration. Vertical

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collaboration is defined as collaboration between parties in successive stages or chain in a
supply chain (EPC contractor with its subcontractors, suppliers, or clients), while horizontal
collaboration is defined as collaboration between parties at the same stage or chain in a supply
chain (in this case, collaboration between EPC contractors). This collaboration involves
collaborative culture, joint decision making, SC metrics, and cross functional activities which
leads to process alignment. Collaboration is supported by cultural elements which involve
collaborative culture, supported by trust, mutuality, information exchange, and openness &
communication. Successful collaboration needs to be aligned with strategic elements which
consist of: resource commitment, technology, business case, and corporate focus (Barrat, 2004).

Simatupang and Sridharan (2004) propose an integrative framework for supply chain
collaboration based on reciprocal approach. According to this integrative framework, a
collaborative SC collaboration is composed of five connecting features of collaboration which
includes: collaborative performance system; information sharing; decision synchronization;
incentive alignment; and integrated supply chain processes. Successful implementation of SCM
in manufacturing based industries inspires practitioners and researchers to implement and study
the implementation of SCM in construction sectors. Despite the constraints and problems
limiting the implementation, SCM offers beneficial and valuable changes to construction
industry (Dainty et al, 2001; Vrijhoef et al, 2001; Cox and Ireland, 2002; Briscoe and Dainty,
2005; Marosszecky, 2005; Fearnie and Thorpe, 2007).

Vrijhoef, et.al (2001) stated that major part of ineffective condition and inefficiency in
construction is due to supply chain problems, originating from the interfaces of different parties.
A large share of this supply chain problems are caused by poor articulation and communication
of commitments.To build a comprehensive supply chain in construction industry, Kumar Dey
(2002) underline the importance to classify two main supply chains, which includes local supply
chain and global supply chain.

Childerhouse, et.al (2003) proposed the significance of material flow improvement in

construction supply chain. They emphasized the role of business process reengineering (BPR)
implementation in reducing lead times, through cellular manufacturing and lean process flow of
material.

Humphrey, et.al (2003) stated that major requirement to a successful collaborative relationship
in construction supply chain is trust among parties involved in the projects. This relationship is
becoming more important considering the use of subcontracting within construction industry
has become a common practice, especially when the main contractor only undertakes the
management and coordination activities. Humphrey also mentioned that to overcome increasing
tension in relationships between main contractor and subcontractor, it is important to reconsider
the balance of power and domination between them.

Despite the benefit of having standardized products and process in lean supply chain, Capo, et.al
(2003) reminded that in construction industry, certain clients may not be looking for
standardized or low cost products, but high quality and personalized (specifically designed)
products that adapt to their specific needs. This requirement leads to the needs of collaboration
in project development, even if it means that they have to bear higher costs.

Considering the lean or regularity in project environment, Ireland (2004) reminded that power
regime exists in construction supply chain may create resistance to lean and partnership
development. Ireland stated that only in supply chain with high level of extended buyer
domination or interdependence and with regular volumes, is a lean or partnering approach
feasible.

Other mode to build collaborative relationship, as proposed by Maturana, et.al (2004) is buy
onsite subcontractors’ evaluation. This type of evaluation enables fast responsive proactive

74 

 
performance attitude, which in the long run, will develop the collaboration between main
contractor and subcontractors.

Khalfan, et.al (2005) mentioned that construction industry is moving from traditional
procurement toward innovative procurement method. This transformation into a more integrated
supply chain requires equal power and dependency between transacting parties. Trust in
partnering development, is also a prerequisite to sustaining multi project procurement and
repetitive contracting. The authors also mentioned that early involvement of subcontractors and
suppliers create opportunity for downstream participants to offer their expertise in advance
which could result in potential cost saving.

This early involvement is related to the concept of innovation friendly climate which will
contribute to supply chain performance improvement proposed by Eriksson, et.al (2007); and
relationship marketing proposed by Davis (2008) which mentioned that it could create more
value for customers and all stakeholders in the long term.

Complex engineering based interfaces in oil and gas or energy related sector projects leads to
the significance of EPC contract arrangement. Micheli, et.al (2008) stated that this EPC scheme
also contributes to the implementation of supply risk management (SRM) which includes
demand, product, information, and supply management. The authors also mentioned that a
thorough supplier selection (SS) process will support SRM in construction projects.

Azambuja and O’Brien (2009) emphasize the needs of integrating strategic and operational
decisions in three main stages in project implementation to increase efficiency and reduce
project costs. These three stages includes: (1) pre-project planning/detail design/engineering; (2)
procurement; and (3) construction.

Integration of these three main stages is needed to anticipate complexities in demand and supply
decisions due to: (1) lack of reliability of site production system; (2) insufficient information
flow regarding material requirement changes; (3) subcontractors’ and suppliers’ capability to
support multiple projects; (4) project owners’ and engineers’ requirement changes and approval
process. They also summarized seven distinction of construction or project based supply chain,
compared to manufacturing based supply chain, which include: (1) structure; (2) information
flow; (3) collaboration; (4) product demand; (5) production variability; (6) buffering; and (7)
capacity planning characteristics. List of explanation that differentiates construction based
supply chain from manufacturing based supply chain is provided in table 1.

Table 1.Manufacturing vs. Construction Characteristics (Azambuja and O’Brien, 2009)

Characteristics Manufacturing SC’s Construction SC’s
structure Highly consolidated; high barriers to entry; Highly fragmented; low barriers to
fixed locations; high interdependency; entry; transient locations; low
predominantly global markets interdependency; predominantly local
markets
information flow Highly integrated, fast, and shared; high Recreated several times between
availability of supporting SCM tools trades; lack of sharing; slow flow; lack
of IT tools
collaboration Long-term relationships; shared benefits and Adversarial practices
incentives
product demand Uncertain due to seasonality, competition, and Less uncertain due to pre-described
innovation; advanced forecasting method contract or specification
production variability Highly automated and low variability Labor productivity and availability;
environment tools; open environment; lack of
standardization; high complexity and
variability in material flow and trades

75 

 
buffering Inventory models (economics of order, safety No models; inventory to reduce risks;
stock, etc) time float (slack) as buffer
capacity planning Aggregate planning; optimizing models Independent planning; infinite capacity
characteristics assumptions; reactive approach

METHODOLOGY

Preliminary studies regarding the characteristics of construction industry, especially in sectors

familiar with integrated (EPC) contracts (ex: energy and oil & gas sectors) was conducted, to
capture the uniqueness of integrated contract projects environment.

In depth interview and survey with decision makers in EPC contractors operating in Indonesia
was conducted to acquire the information collected by the above questions. Decision makers
whom are interviewed include those who are involved in collaboration development and project
performance evaluation decisions. Profile of the respondents include: (1) Responsible for
middle to long term planning of the company; (2) Possess the capability and authority to
control technical and commercial performance of the project; (3) Has the access and knowledge
to company’s past experience related with supply chain collaboration.

EPC contractors which are studied include those which serve sectors familiar with integrated
contract (energy and oil & gas sectors) and have been conducting relatively the same size of
projects, in terms of values and complexity. These companies include national and multinational
EPC companies. Four major questions used in the interview, the purpose, and the relevancy to
research questions is provided in table 2.

The reason why the first question asks whether the company that the respondent works for
engaged in a collaborative supply chain is to determine whether the respondent gives the answer
based on experience or based on expectation.

The use of open question for the remaining questions will allow the respondent to share his/her
opinion regarding the topics using his/her own framework and constructs.

Table 2.List of Questions

Interview Questions Purpose Relevancy to Research
Questions
1 Does your company have the To identify whether the To determine whether the
experience of building supply chain company is engaged in a respondents answer interview
collaboration among contractors? collaborative supply chain or questions number one based
If your company doesn’t have not. on their experience or based
experience in building collaboration, is To identify the potential of on their
there any plan or intention to build building collaborative supply expectation/requirement
collaboration? chain.
2 What are the benefits of having supply To explore the respondent’s The answer may provide
chain collaborations on your opinion about the impact of useful information to measure
company’s project performance? collaborative supply chain to the positive impact of supply
the projects being carried chain collaboration to project
out. performance.
3 How does the achievement of your To identify the alignment of This question will identify the
project performance contribute to the project performance to synchronization between
corporate performance objectives? corporate performance project performance with
measurements. corporate performance and
among project performance
measures.
4 What are the contributions of the To explore the respondent’s To identify the contributions
integrated EPC contract in supporting opinion about the benefit of of integrated EPC contract to
76 

 
 perform
mance of collaaborative suppply having in
ntegrated contraact to the performancee of
chain buuilt in your projjects? achieve project
p objectivees. collaboorative supply chain.
c

FIN
NDING AND
D DISCUSS
SION

EPC comppanies, or reecently know wn as EPCII (engineerinng, procurem ment, constrruction, andd
installationn) contractorss play imporrtant role on
n many infrastructure devvelopment su upply chain,,
especially in energy-reelated or oil--and-gas secctors. These contractors, supplied by y goods andd
services byy engineeringg companies,, procuremen nt agent, connstruction (orr fabrication)) companies,,
and installaation compannies, basicallly serve the owner and operator of llarge industrrial facilitiess
such as eneergy and oil and
a gas com mpanies.

As described by Barraat (2004) thaat there are two t kind of collaboratioon which maay exist in a
supply chaain (vertical and
a horizonttal collaborattion), the samme thing also exists in EPC
E projectss
supply chaain. An EPC company (oor contractorr) may not onnly build suppply chain collaboration
c n
with its subb-contractorss or supplierrs, but also with
w other EP PC contractoor. Policy to enhance thee
use of local products and servicees, enforced by regulatioon to comply with min nimum locall
content appplied by couuntries wheree the EPC prrojects are loocated, drive the needs too build thesee
kinds of coollaboration.

A schemattic diagram describing thhe potential collaboratioon which caan be develo oped in EPC C
projects suupply chain can
c be seen in i figure 1 below. Red-ddashed circle represents collaborative
c e
supply chaain betweenn EPC contrractor with its sub-conntractors, supppliers, and other EPC C
contractor. The blue dashed
d circlee represents collaborativve supply chhain with prroject ownerr
and/or otheer EPC contrractor.

Figure 1.Pootential collaaboration in EPC

E project supply chainn

Benefits of
o supply chhain collabooration to prroject perfoormance incllude risk minimization,
m ,
through cost reduction;; quality assuurance; optim
mize utilizatioon of expertiise; and timeeliness of thee
77
7 

 
project execution. All respondents agree that long term commitment with suppliers or
subcontractors will give higher level of certainty in demand to their suppliers and
subcontractors. This certainty enables the EPCI companies to have more competitive offers for
their outsourced services or goods. This higher level of demand certainty also contributes to the
willingness of suppliers and subcontractors to do significant investment to support their EPCI
customers. Relatively large proportion of costs in procurement part of EPC or EPCI projects
(40%-55%) is also one of the considerations for developing long-term relationships. For local
EPC companies, collaborative supply chain also enables them to have strong support and trust
from their suppliers, which later allows more efficient project cash flow and working capital.

Contribution of project performance to corporate performance is considered to be very positive

related, due to the fact that project activities are the EPCI companies’ core activities. Cross
subsidy among projects and support to long-term beneficial investment such as research and
development are among the contributions of project success to corporate performance. This
contribution can be utilized under certain condition that the proportion of invested fund has
been carefully analyzed to prevent unexpected losses and risks.

EPC and EPCI contracts are considered to be very beneficial to EPC companies, considering
that this integrated scheme of contract allows an integrated and comprehensive control to all
project activities. This comprehensive control is mandatory since in energy related or oil and
gas sectors development, many decisions are interrelated and have complex dependencies.
Higher level of technology adaption and lower level of interchangeability of goods and services
are main reasons for this interrelated decisions condition. This integrated scheme of contract
also allows the EPC companies to have access to resources and expertise available around the
world.

Explorative interview with project managers and directors of EPC companies operating in
Indonesia proposes that EPC project performance consists of (starting from the highest priority):
functionality, quality, time and cost performance measures. Functionality represents the ability
of the designed, procured, and constructed project to solve the clients’ needs regarding the
function of newly built facilities or specific technical challenge of the project. Quality reflects
not only the ability to comply with the specification of work results, but also the specification of
process / methods, and qualification of resources utilized in the project. Time and cost
performance are closely related, since most of EPC projects require utilization of relatively high
cost resources, any delay in the project execution will affect project costs severely.

CONCLUSION

All respondents mentioned the benefit of having supply chain collaboration due to the high
proportion of procurement value in EPC projects and the importance to minimize risks in time,
cost, and quality of projects. Very close relationship between project performances to corporate
performance can be utilized under the condition that decisions related with resource allocation
and investment proportion value are conducted through careful analysis. The significance of
having EPC contract to support project success is based on the unique characteristics of specific
location of every projects and close interrelated decision in EPC projects.
The needs to combine and synergy resources and capabilities trigger the needs to build
collaboration in EPC project supply chain. Willingness agreed upon collaborated parties to
develop: (1) information sharing; (2) synchronous decision making; (3) integrated process; (4)
incentive alignment; and (5) collaborative performance metrics is the key requirement to build
the collaboration.

Closer interfaces between different stages of project activities (between engineering,

procurement, and construction activities) resulted from the collaboration will lead to higher
project performance. This higher project performance achievement will justify decisions to
build longer term relationships among parties involved in the project and a relatively stable

78 

 
performance in projects conducted by EPC companies. Successful implementation of projects
undertaken by EPC companies will lead to a more sustainable companywide or corporate
performance. Figure 2 below provide a schematic diagram of the above explanation.

Willingness to  Closer & longer term collaboration 
develop: (1) 
Needs to  information sharing;  Yes 
integrate  (2) synchronous 
resources  decision making; (3)  Project  Sustainable 
performance  corporate 
and  integrated process; 
capabilities  improved? performance
(4) incentive 
alignment; and (5) 
collaborative  No

performance 
Reconsider collaboration 

Figure 2.Benefits of Supply Chain Collaboration to Corporate Performance

Result of this research may be used as the basis for defining the EPC companies’ corporate
performance objectives as a function of collaborative project performance measures. The
finding may also be used in assessing the capability of EPC companies to cope with the
challenge of accelerated infrastructure development in developing countries.

Model developed from this research could be used as one of considerations in determining the
relevance of building supply chain collaboration in construction projects. Findings of this
research which is studied in oil and gas or energy related sector of construction could be used to
similar outline of research studied in different sectors served by construction industry. This
comparative study could be useful in proposing beneficial changes in other sectors.

Large number of previous studies related with supply chain and construction industry, will
provide valuable sources for conceptual development in this research. Study exploring factors
considered by practitioners in EPC companies operating in Indonesia shall give strong empirical
basis in identifying factors to be measured in the core research.

Although provide considerable portion in discussing contractual aspect of relationships among

parties in construction supply chain, this study will not offer detailed discussion regarding legal
or regulatory aspects constraining the relationships.

REFERENCES

Barrat, Mark. Understanding the meaning of collaboration supply chain. Supply Chain
Management: an International Journal, Volume 9/1, 2004, pp 30-42
Capo, Josep, Lario, Fransisco C, and Ortiz, Angel (2003). Proposal of an Advanced Model for
Supply Chain Management in Construction Industries, based on the Virtual Enterprise.
Universidad Politecnica de Valencia, Spain.
Childerhouse, Paul, Lewis, Jayne, Naim, Mohamed, and Towill, Dennis R., (2003).
Reengineering a Construction Supply Chain: a Material Flow Control Approach. Supply
Chain Management: an International Journal, Volume 8, Number 4, 2003, pp 395-406.
Dainty, Andrew R.J., Briscoe, Goefrey.H., Millett, Sarah.J. New perspective of construction
supply chain integration. Supply Chain Management: an International Journal, Volume
6/4, 2001, pp 163-173.
Davis, Peter R., (2008). A Relationship Approach to Construction Supply Chain. Faculty of the
Built Environment, Art, and Design, Curtin University of Technology, Perth, Australia.
Industrial Management and Data System, Volume 108, Number 2, 2008.

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Dey, Prasanta Kumar (2002). Supply Chain Management in Construction through Partnership.
AACE International Transaction, 2002.
Eriksson, P.E., Dickinson, Michael, and Khalfan, Malik M.A., (2007). The Influence of
Partnering and Procurement on Subcontractors’ Involvement and Innovation. Lulea
University of Technology, Sweden, and University of Salford, Greater Manchester, UK.
Humphreys, Paul, Mathews, Jason, and Kumaraswamy, Monan (2003). Preconstruction Project
Partnering: from Adversarial to Collaborative Relationships. Supply Chain Management:
an International Journal, Volume 8, Number 2, 2003, pp 166-178.
Ireland, Paul, (2004). Managing Appropriately in Construction Power Regime: Understanding
the Impact of Regularity in the Project Environment. Supply Chain Management: an
International Journal, Volume 9, Number 5, 2004, pp 372-382.
Khalfan, Malik M.A., Ericksson, P.E., Dickinson, M, and McDermott, Peter (2005). Listening
to the Voices of Suppliers and Subcontractors. University of Salford, Greater Manchester,
UK, and Lulea University of Technology, Sweden.
Khalfan, Malik M.A., McDermott, Peter, and Swan, Will (2007). Building Trust in Construction
Projects. Supply Chain Management: an International Journal, Volume 12, Number 6,
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Khalfan, Malik M.A., McDermott, Peter, Vrijhoef, Ruben, and Asad, Salman (2005). The Effect
of Procurement on the Integration of the Supply Chain within Construction Industry.
University of Salford, Greater Manchester, UK, and Technische Universiteit, Delft.
Marosszecky, Marton, 2005. Best practices in the construction supply chain. University of New
South Wales.
Maturana, Sergio, Alarcon, Luis, and Vrsalovic, Mladen (2004). Achieving Collaboration in the
Construction Supply Chain: an Onsite Subcontracting Evaluation Methodology.
Pontificia Universidad Catolica de Chile.
Micheli, Guido J.L., Cagno, Enrico, and Zorzini, Marta (2008). Supply Risk Management vs.
Supplier Selection to Manage the Supply Risk in the EPC Supply Chain. Politecnico de
Milano, Italy. Management Research News, Volume 31, Number 11, 2008.
Simatupang, Togar.M., Sridharan, Ramaswami. The collaboration index: a measure for supply
chain collaboration. International Journal of Physical Distribution and Logistics
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Simatupang, Togar.M., Wright, Alan C., Sridharan, Ramaswami. Applying the Theory of
Constraints to Supply Chain Collaboration. Supply Chain Management: an International
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Soemardi, Biemo W., Wirahadikusumah, Reini D., Larasati, D, 2006. Preliminary study on the
Indonesian construction industry supply chain system. Institut Teknologi Bandung.
Suparto, Hari G., 2007. Industri konstruksi Indonesia. Ikatan Ahli Manajemen Proyek Indonesia
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Suradji and Kusnandar (2008), Construction Market in Asia. Institute for Construction Service
Development (Lembaga Pengembangan Jasa Konstruksi / LPJK).
Vrijhoef, Ruben, Korkela, Lauri, and Howell, Greg, (2001). Understanding Construction Supply
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Wirahadikusumah, Reini D., Abduh, Muhamad, 2003. Metode kontrak inovatif untuk
peningkatan kualitas jalan: peluang dan tantangan. Fakultas Teknik Sipil dan
Lingkungan, Institut Teknologi Bandung.
Wirahadikusumah, Reini D., Susilawati, 2006. Pola supply chain pada proyek konstruksi
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 FRAMEWORK OF BUSINESS PROCESS RE-ENGINEERING SUCCESS AND
FAILURE FACTORS
KABIRU JINJIRI RINGIM, MOHD RIZAL RAZALLI, NORLENA HASNAN
UUM College of Business, Universiti Utara Malaysia

ABSTRACT

The purpose of the paper is to take a comprehensive look at Business Process Re-
engineering (BPR), which is a new management paradigm that examine the flow of
activities and information that make up the key business processes in an organization with
a view to simplify processes, to achieve firm’s operational desired goals of cost and cycle
time reduction, speed, customer satisfaction and or improvement in quality and flexibility
(Morrow and Hazel 1992). It focuses exclusively on improving the internal process
operations to pull off dramatic improvement in corporate performance objectives (Short
and Venkatraman 1992). BPR has attracted the attention of so many professionals,
academicians and practitioner. The subject matter becomes a hot jingle word in
management and information system disciplines. This paper attempts to discuss the
differences and similarities between BPR and other management tools of approach, re-
engineering success factors, reasons for BPR failures and explanations on the four
keywords in BPR definition: fundamental, radical, dramatic, and process. The discussion
is based on an extensive literature analysis on the subject matter.

Keywords: Business process re-engineering; Processes performance; Quality and Time based
movement; Re-engineering success and failure factors; Banking

INTRODUCTION

As the world becomes technologically advanced coupled with the rise in global competitive
market, banks are left with no choice but to improve their operational processes performance.
The global economic meltdown, have necessitated for banks to enhance their professional
capability by engaging in process change and reengineering that bring about efficiency,
accuracy and intensifying new ways in order to enhance banking services and to meet customer
needs. Banks tend to improve on processes performance by utilising information technology to
reduce cost and cycle time, eliminate mistakes, affect cost control, improve human relations and
above all speed up product development in order to satisfy customer needs. To meet these
challenges banking services such as remittances, credit evaluation, customer service tellering
and cash transactions processes should be reviewed, redesigned, and reengineered to enhance
efficiency and effectiveness for customer value. The advocates of BPR claimed that, if BPR is
rightly and correctly implemented, organisation would achieve quantum leap of improvement in
cost reduction, speed, productivity and profitability (Hammer 1993). Business process
Reengineering (BPR) is new management approach introduced by Hammer (1990) and
Davenport and Short (1990) that would enable organisation to manage their business profitably
in the 1990’s and beyond. The progressive globalisation of financial markets is requiring major
adaptation on part of market participants to move beyond national level competition and achieve
international and global competitiveness. The entire banking industry is now focusing on major
performance enhancements and gains in domestic market share as a springboard to successful
international expansion. Banks are concentrating their efforts on market segments offering the
potential for growth and rising profits, resulting in a reorientation within the overall financial
service sector. New type of banks, including distribution, processing and portfolio banks, are
evolving as the market consolidates due to merger and acquisitions. This dual trend toward
specialisation and consolidation is forging banks that will be able to compete in international
and global markets.
Operational processes performance enhancement efforts would aim at a complete realignment
of internal and inter-organizational processes. In contrast to the trend in the recent years, the
focus is no longer on cost containment alone, but rather on simultaneously improving service to
81 

 
customers. Not only processes to become efficient, they must be made more customers friendly
as well. Attempts are being made to transfer approaches that have proven effective in other
industries, particularly manufacturing to the financial sector. According to Al-Mashari, Irani and
Zairi (2001) the average success rate achievement of implementing BPR in advanced developed
countries, Multi National Corporation was 55 percent, being 61 percent achieved in USA and 49
percent in Europe. Majority of studies in BPR have focused on the importance of the various
factors for successful implementation in manufacturing industry, while relatively few studies
have been conducted in banking industry. It is therefore risky to generalise the BPR success
rate, because the evaluation is subjective as cross national differences (such as cultural belief,
norms and values) may exist. Reengineering is a painful process because the whole set of values
and belief in the enterprises are being challenged (Champy 1995). Hammer and Stanton (1995)
said top managers did not reengineer but claimed to have done it. This dilemma frequently
happened in some banks in Nigeria; some managers claimed to agree with the ideas and concept
of BPR but see its implementation and practices as troublesome. Therefore there is doubt
whether the kind of radical process improvement can rightly be carried out in the Nigerian
banking environment. Hence, this paper would explore the benefits associated with
reengineering factors, as it affects the operations and success of banking performance in
Nigeria. There is no doubt that reengineering in the present day globalized economy is not only
a necessity but is important as the prerequisite for success of any financial institutions.

PROCESS REENGINEERING

Business process reengineering is referred as core process redesign; new industrial engineering
or working smarter. The paper will provide a definition of BPR by Hammer and Champy
(1993), framework, process, and success and failure factors. Various scholars and experts have
defined BPR in different ways with different emphases. The BPR concept was developed by
Hammer and Champy (1993) in a book written by them called: Re-engineering the Corporation.
They provided the following definition: “Reengineering is the fundamental rethinking and
radical redesign of business processes to achieve dramatic improvements in critical quantum
leap, contemporary measures of performance, such as cost, quality, service, and speed.” This
definition comprises four keywords: fundamental, radical, and dramatic and processes.

BPR seek to split away from old and current processes to come up with a new ways of doing
thing/task, organizing peoples and making use of IT systems so that the resulting processes
would better support the goals of the organization. The basic operation of a business is the first
and important priorities to reengineering. The essential question of how an organisation should
be run should be asked by the business owners, the answers to these questions always lead to
the understanding of the fundamental operations of the company and rationale behind any
existing assumption. Re-engineering start with no assumption and companies that implement
reengineering must guards against such assumptions, take nothing for granted and must
determine what a company needs and how effectively done.

Radical redesigning is the second keyword to reengineering which means abandoning all
existing arrangement and methods and creating completely new contemporary system of
achieving task. This means reengineering is all about beginning with a new processes with no
assumption or modification therefore business processes are re-innovated.

The third keyword in BPR concept is dramatic improvement, reengineering which involves
achieving greater performance unlike making marginal or incremental improvement. Marginal
improvement requires re-adjustment while dramatic improvement demands doing away with
existing process and replacing it with something new and contemporary.

The forth keyword is definition of BPR is Processes. This is the paramount concept in
reengineering. The division of labour approach which is wholly applied in classic business
structure should be transformed to process based approach to ensure effectiveness and
82 

 
efficiency of processes. Processes are complex and largely interdependent systems, in which
minor changes in parameters (e.g. capacity) may significantly impact overall process
performance. This interdependence and the need for ongoing adaptation to changing market and
competitive conditions require an effective system of controls. Operational control systems
involve a quantitative presentation of the quo versus a given target, as well as instruments for
analysis of factors influence the complex system refer to as processes. The core business
processes of an organisation according to Tinnila (1995) and Hammer (1996) are:
customer acquisition and service, product development, and order fulfilment. These
processes are extending over different functions and embed suppliers as well as
customers. Hence, one of the characteristics of a business process is that it begins and
ends outside the organisation (Hammer, 1996: 9-12), and has clear interfaces towards
other processes.

According to Hammer & Champy (1993) one of the main criteria for reengineering success is to
get all the way around the business system diamond (Hammer & Champy, 1993). The business
system diamond identifies the relationship between business processes, jobs and structures,
management and measurement systems, and values and beliefs. BPR is a method of improving
the operational performance of an organization. The objective is to find a new ways to
organized people and redesign information technology so that the processes support the
organizational goals. When restructuring the business process, the content of jobs and of
organisational structures changes for all employees. Changing jobs and structures require
changes in management principles and performance measurement systems. These new
management principles and performance measurement systems induce change in values and
beliefs, which in turn enable the new business processes. Consequently, reengineering is not
complete until all elements of the business system diamond have been changed and aligned as
shown in figure 1.

 
Business
       Determine       Process
           Enable 

 
Jobs and
Values and
Values and 
Structure
  Belief
Belief 

 
Management
  and
Measurement
Require       System          Induce 

Figure 1: The Business System diamond: (Hammer and Champy 1993)

The business system diamond would be the framework reference model developed by
Hammer and Champy (1993). It summarised the changes that occur when company re-
engineers its business processes, jobs and structure certainly change, as business processes
ultimately changes practically everything about the company, because people, jobs,
managers and values are linked together. It is called the four points of business system
diamond as shown above. The top point on the diamond is the company’s business processes
(method of the ways company’s work is done); the second is its jobs and structure; the third, its
management and measurement systems; and the fourth, its organisational culture (employees
value and believe).

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The linkages between each point as diagrammatically drawn above are very important to the
success of the reengineering process, while the top point of the business system diamond is
business process it determines the second point job and structure. The ways in which work is
performed determine the nature of people’s task and how the people who perform these tasks
are grouped together. Likewise, people who perform multidimensional jobs are organised into
teams. They are recruited, evaluated, and compensated by means of appropriate management
systems. In other words, jobs and structures are determined by the process designs. This led us
to the third point on the diamond.

The kind of management systems a company should employed, how people are paid, the
measure by which their performance is evaluated. The forth stage on diamond is the
organisational culture that shape the employees values and beliefs. Finally, the reigning values
and beliefs in an organisation must support performance of its process designs. This brings us
back to the top of the diamond. Once again, we say that in reengineering it is not sufficient to
redesign processes alone. All the four points on the business system diamond must fit together
or the company will be flawed and misshapen.

Discussion of process management today revolves mainly around challenges to technical

processes support, the integration of technical process step into operational systems and quality
of technical control functions in an information technology context. Process performance
controls are viewed in the overall context of business performance metrics, quantitative
reporting of process performance being seen as an integral part thereof (Siebert 1998; Sandt
2004). The diagram of the basic types of process measurement in figure 2, below provides an
overview of the four (4) general categories of key performance indicators (KPIs), or metric.
Quality and timeliness tend to be external measures usually determine by reference to the
customer of the process. Efficiency and cycle time tend to be internal measures and are pursued
to assure that the process does what it does in the most cost-efficient possible manner.

Quality
Meet or Exceed
Customer Expectation
Timeliness
Process
Performance
Efficiency
Attain Superior
Business Results
Cycle Time

Figure 2: Basic type of process measurement

Quality – measure the conformance or non conformance (defects) to requirements or expected

performance
Timeliness – measure the success in meeting a customer commitment
Efficiency – measure the output that a customer request and delivery of the product or service to
the customer.
Cycle-time – measure the time between a customer request and delivery of the product or
services to the customer.

BUSINESS PROCESS REENGINEERING VS OTHER PROCESS MOVEMENT

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The world wide success of Japanese companies led to the emergence of Japanese principles in
Western management literature during the 1980s. These developments together with value chain
analysis (Porter 1980, 1985) gradually brought horizontal business processes back to the focus
of management attention (Juga 1996, Hannus 1993). The total quality management (TQM) was
a horizontal process cutting across the boundaries separating organizational unit’s in order to
leverage quality in companies products and activities (Ghoshal and Bertlett 1995, 1989). More
recent notions such as lean management (Womack et al. 1990) and time based competition and
management (Stalk and Hout, 1990), also contain the same basic ideas. These two (2) school of
thoughts i.e. the quality movement (TQM) and time based movement (JIT) were argued to have
form a sort of synthesis, revolving around such concept as lean activity based management and
finally business process reengineering (BPR) as shown in figure 3 diagram below

Figure 3: Trend in Quality and Time based movement

Davenport (1990) pointed out that major difference between BPR and other organizational
approaches especially the continuous improvement or TQM movement where he states:
“Today’s organization must seek not fractional but multiplicative level of improvement.
Johnson and Swigart (1994) provide an explanation of BPR relative to other process oriented
views, such as TQM, and Just in Time (JIT) thus: “Business Process Reengineering although a
closed relative seeks radical rather than merely continuous improvement. It accelerated the
effect of JIT and TQM to make process orientation a strategic means and capabilities of the
organisation. BPR concentrates on business processes and uses the specific techniques within
JIT and TQM concepts as enabler, while enlarging the process vision”

The objective of restructuring is to reduce business capacity to meet lower cost, address poor
financial performance by eliminating unprofitable businesses or personnel (Makridakis 1996)
while downsizing entails reduction in number of personnel of an organization (Green and
Wayhan 1996; Chief Executive 1996). However, BPR efforts attempt to change the way work is
done, downsizing does not include re-invention, which sets target for the disengagement of
manpower. In reorganization project, the organisational structure is altered by either de-
layering several levels of middle management or by acquiring or disposing of corporate assets
(Green and Wayhan 1996). In de-layering or de-levelling, the aim is to reduce the number of

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layers in the organization, resulting in flatter organizational structure with few middle
management staff (Makridakis 1996; People Management 1997).

TQM and BPR share common features, such as: the principle of processes (Wells et al. 1993;
Green and Wayhan1996; Zairi and Sinclair, 1995), the need for organisational and cultural
change (Davenport, 1993b; Gulden and Reck1992; Wells et al. 1993; Zairi and Sinclair, 1995),
the use of benchmarking (Zairi and Sinclair, 1995), the focus on customer needs (Wells et al.
1993; Green and Wayhan1996), the importance of process measurement (Wells et al.1993; Zairi
and Sinclair, 1995; Davenport, 1993b; Gulden and Reck 1992), and their aim of improving
business performance for competitive gains (Davenport, 1993b; Gulden and Reck1992; Zairi
and Sinclair, 1995). Hammer (1990) suggested that they should both put in under the process
management, while authors such as Chang (1994); Furey (1993); Taylor (1993) described
programmes that integrate TQM and BPR as management tools. Hammer (1991) explained the
series of sequential performance improvements using the two techniques and warned against the
concurrent usage of the two approaches.

However, the two approaches are different in many respects. Firstly, TQM is focuses on
incremental, evolutionary and continuous in nature (Kaizen) while, BPR is, in contrast, radical,
innovative, revolutionary and a one-time approach (Gulden and Reck, 1992; Wells et al.1993;
Zairi and Sinclair 1995; Green and Wayhan 1996; Clemmer 1994; Davenport 1993; Hammer
1990). Secondly, TQM addresses tight processes regularly within departments; BPR, on the
other hand, is wider in scope and addresses one or more processes that cross multiple functions
(Gulden and Reck, 1992; Wells et al.1993). Thirdly, while quality is considered necessary in
BPR projects, benefits such as cost and cycle-time reduction are among the major targets (Wells
et al.1993; Clemmer 1994; Kelada 1994). Finally, IT has a major role in BPR, while in TQM
the role of I T is less important (Gulden and Reck, 1992; Wells et al.1993).

RE-ENGINEERING SUCCESS FACTORS IN BANKS

A bank is an institution which deals in money and credit. It accepts deposit from public, lends
money to those who need help in the remittance of money from one place to another and
performs auxiliary system means the accepting for the purpose of lending or investment,
deposits of money from public, repayable on demand or otherwise, and withdrawal by cheque,
draft, order or otherwise. The general utility functions of a bank includes: issuing credit
instrument such as letter of credit, travellers cheques to customer, people can transfer fund
through these modes without carrying currency notes with them. Others are underwriting capital
issues (shares and debentures), safe custody of valuables, advice and information, ATM and
Credit cards. The implementation of BPR in banks claims fantastic outcome of performance
improvement and is able to provide an enhance results. Several banks achieved high cost
reductions; enhance profits, effective quality and productivity, efficient response to market, and
good customer service. Factors that resulted to the successful results for reengineering projects
(www.prosci.com) include:
1. Strong, consistent, commitment and sponsorship of top management
2. Strategic Alignment of business objectives with firm’s strategic direction
3. Specific commitment to focus on customers and performance measurement objectives
4. Effective methodology that includes a vision process
5. Effective Change Management and cultural transformation
6. Management ownership and accountability
7. BPR Team with in-depth knowledge of re-engineering

Table 1 below summarised previous studies on BPR undertaken in banking industry are as
follows.

Table 1: Summary of previous studies on CSF of BPR

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Authors Title/Relations Findings Highlight
hip Examine
Currie and The New The research finding raises a number The research uncovered a
Willcocks Columbus of complex issues and provides some wide range of practical
(1996) project at answers about the degree and difficulties, many of which
Bank of circumstances whereby reengineering are likely to be experienced
Scotland: the can produce the wide ranging by other organizations
implementatio organizational, managerial and attempting large-scale I.T
n of large- technical changes especially by those enabled reengineering.
scale business who advocate radical, or A big question facing the
process revolutionary change. bank is the fast growing
reengineering competition from the
existing and new entrants
into financial service market.
Brandon, Empirically In general results indicate that The study has some
Bransford, assessing the organizations are not emphasizing limitation which should be
Guimaraes and impact of BPR some of the most important goals and viewed as opportunities for
Tor (1999) on banking objectives recommended in BPR future research. The absence
firms literatures. of any established BPR
theory capable of producing
results significant for
business practice has led to
model based on newly
developed constructs.
Chen 1999 Critical The research finding derived four The CSFs explain
success factors critical success factors in the banking commercial bank success
for various industry which can reflect four clearly and practical
strategies in business goals for commercial bank implication of these CSFs
banking manager. They are: 1) ability of bank can provide useful
industry operation management, 2) ability of managerial direction in
bank marketing, 3) ability of hiring, training, evaluation
developing bank trademarks, 4) and reward system
ability of financial market
management.

Shin and BPR and The study provides guidelines for As seen in Chase BPR
Jemella (2002) Performance BPR projects in financial institutions projects such as e-fund
improvement with similar organizational context. disbursement cards and
– The case of This study improves our service charge
Chase understanding of BPR by describing reengineering, BPR efforts
Manhattan and analyzing the major phases and produced new products and
Bank. associated activities conducted in services in addition to
reengineering. dramatic increase in revenue
According to Davidson (1993) and operating savings.
successful reengineering efforts
ultimately lead to business
transformation. New product, services
and customer services appear in the
form of improved information flows.

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Terziovski, Successful The finding revealed that organization BPR practices have
Fitzpatrick and predictors of is more likely to achieve greater significant and positive
O’Neill (2003) BPR in profitability if reengineering is effect on profitability, cycle
financial implemented in a proactive manner as time reduction, customer
services part of organization business strategy. satisfaction.
Organizations that implement BPR
reactively as a quick fix do not However, I.T does not
achieve significant performance appear to be a best predictor
outcomes. of successful BPR. This
There is no apparent relationship confirms previous studies
between increase use of I.T and cycle that I.T act as an enabler.
time reduction and focusing
redesigned effort on core customer
focused business processes.

Khong and Business CSFs of BPR implementation have It is hoped further research
Richardson process positive effects on banking in terms in this area can be
(2003) reengineering of customer service and business conducted. Some of more
in Malaysian performance as follow: important investigation
banks and • Change management system and would be comparing the
finance culture has positive effect on models with other foreign
companies business performance of banks banks operating in Malaysia,
However, evidence indicated that testing the feasibility of the
it has no effect on customer two models in industry other
service than banking, measuring
• Management of risk and BPR customer satisfaction with
project management positively CSFs of BPR
affect customer service, but do implementations and testing
not have effect on business the models in other
performance. countries.
• I.T infrastructure usage has
positive effect on customer
service but do not have effect on
business performance.
• Customer service management
has positive effect on business
performance of banks
• Change of management system
and culture, management of risk
and BPR project management and
I.T infrastructure usage are highly
correlated

Cheng and CSFs of BPR The study identified four (4) CSFs The limitation to the study is
Chiu (2008) in the banking (management commitment, customer as follows: Firstly the data
industry focus, use of I.T infrastructure and collected only perceptive
communication of change) which are information from banking
different from those identified in the personnel who possessed
manufacturing industry. BPR related experience.
Project management and I.T Secondly the study covers
infrastructure usage are two only banking practitioners
commonly found factors in and was cross-sectional in

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 Manufacturing, which are less design, it would be hard to
important in banking industry. The generalize the result and
finding indicated customer focus is apply them to all industries
the only factor is significantly related in Hong Kong and other
to firm performance. This reflects the places.
actual business-operating Finally, respondent could be
environment in Hong Kong. It was subjected to other sources of
strongly recommended that bias, such as pressure from
confirmatory factor analysis should top management that could
be conducted for any future studies. have distorted the feedback.

THE REASONS FOR BPR FAILURE

Many organizations have implemented BPR projects. However, 70% by estimate of the
organizations BPR project failed to achieve the objectives of their reengineering efforts (Hall,
Rosenthal and Wade 1993; Hammer and Champy 1993). A survey of executives of Fortune 500
companies and large British companies by Price Waterhouse showed the partial achievement of
the outcome by the organizations (Berman, 1994). The survey observed different reasons for the
failure in a BPR effort were classified as a result of either lack of understanding of BPR or the
inability to perform BPR.

The lack of understanding of BPR

Two reported reasons of failures due to the lack of understanding of BPR are stated as follows:
1. Misinterpretation of BPR: - Many considered reengineering as a spontaneous, innovative
effort instead of an engineering discipline; some may confuse reengineering with other
improvement programs such as total-quality management (TQM) or restructuring; and some
may confuse functions with processes (Millman, 1994).
2. Unrealistic expectation - many managers have a great expectation on BPR performance
outcome (Millman, 1994). They targeted unachievable goals for the BPR projects
(Manganelli, 1993). Unfortunately, at the end, the out come results do not meet the
unrealistic goals; they conclude that the BPR project has failed. These unrealistic
expectations reduce the commitment and confidence of management to BPR. Furthermore,
there are unrealistic expectations of the greater achievement as the BPR concept is aims at
dramatic improvements, the achievement should be conditioned upon realistic situations
(Klein, 1994).

The inability to perform BPR

Many BPR efforts failed due to the inability to perform BPR for a different kind of reasons.
Some of the reported causes of failures attributed to the inability to perform BPR as follows:
1. Lack of an effective methodology – Reengineering requires a new way of thinking to break
away from old system and to develop visions (Klein, 1994).
2. No clear concept of process – Reengineering calls for multi perspectives and creative
thinking. People with in adequate exposure and misunderstanding of operational processes
may not be able to adequately handle the reengineering techniques. This is true particularly
with the capability to value evolving information technologies (Rai and Paper, 1994).
3. Wrong scope of process objectives - Some managers may target restructuring rather than
reengineering process which is not a problem to operations, since downsizing process add
value or result to a better situation after re-engineering.
4. An incorrect defined business objective results in reengineering process failure as the
contribution of BPR would be reduced to negative (Mathews, 1995).

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5. Non recognition of BPR benefit - The inability to realise any benefit or vision from the
dramatic improvement of customer satisfaction and effective process operation (Rai and
Paper, 1994).
6. Over dependence on information technology - many managers over-relied on information
technology solutions. They forget to investigate into the business process and attempt
instead to simply automate the ineffective process (Anonymous, 1994).
7. Opposition and lack commitment from top management - To achieve satisfactory results of
BPR, it requires top management commitment (Bashein, 1994). A top management needs
commitment in order to endorse the change and direct the changes of operations and culture
(Klein, 1994).

In line with those causes of failures, it was found that, in many situations for BPR, the process
and the benefits are poorly-defined.
BPR SUCCESS AND FAILURE

The result of the survey by CSC index (1994) shows that the success rate of BPR is higher of
55.46%, this is supported by the study of Sockalingam and Doswell (1996) which revealed that
only 6 percent of the BPR projects in Scotland failed, and in the USA it is 78 percent different
view from Hall, Rosenthal and Wade (1993) that said the total estimate is up to 70 percent
failure rate. The difference between studies in this regard refers to the views in measuring BPR
success and the lack of a common ground on which BPR measures and application level are
understood. Sockalingam and Doswell (1996) state that “it would be dangerous to conclude that
BPR is a global success phenomenon. BPR performance assessment is naturally subjective,
goals and targets set vary between organizations”. This equally suggests that more research need
to be done in the area of BPR measurement, so a common framework might be worth
developing to suit various levels of BPR application in terms of business position and level of
competition, strategic targets, cultural and organisational beliefs and values. BPR is a long-term
programme of change, especially when it includes a strategic improvement effort; it is more
likely that a longitudinal type of research will be most suitable for studying such a phenomenon.
A research that designs its quantitative and qualitative samples to be heterogeneous,
representing varying sectors, of cultural, approaches and management arrangement, should
enable the outcome of more research findings.

SUMMARY/CONCLUSION

In this paper, the presenter firstly explored the concept of BPR, the detailed explanations of the
four key words for business process reengineering, the re-engineering success factors and
reasons for failures. Dramatic changes in business environment throughout the 1990’s forced
organizations to examine outdated modes of work and develop new focused strategies based on
new business models. BPR has been the most influential business management concept that
emerged during 1990’s. The concept was geared toward a clean slate and radical approach.
Reengineering is not just a matter of fundamental and radical improvement in performance, but
is also an approach to analyzing and transforming the nature of businesses.
In view of the evaluation associated to the future of BPR concepts and practice, it would be
attracted for researchers to investigate how the concepts and practice of BPR are being
integrated with other recently-emerging management approaches, like enterprise resource
planning (ERP), business process management (BPM), learning organisation, and knowledge
management. It is assumed that companies would begin to face the challenge of assimilating
different management tools in a free approach. In addition, the area of electronic commerce
(EC) is becoming known very rapidly. E-commerce applications would certainly request for
some key business process change.
Therefore, it would be interesting for scholars and expert practitioner to investigate how the
application of EC technologies, such as the Internet, would integrate with the principles of BPR.
In addition, researchers and practitioners alike will need to develop suitable frame of references

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to support the navigation through evaluating the scope and impact of BPR-IT related change
initiatives

REFERENCES

Anonymous, (1994). Manufacturing expert answers top 10 questions about reengineering.

Managing Office Technology, 39(10) 22224.
Bashein, B.J., Markus, M.L., Riley, P. (1994). Preconditions for BPR success Information
Systems Management, 1 l, (2) 7-13.
Berman, S. (1994). Strategic direction: don’t reengineer without it. Planning Review, 22(6)
1823.
Champy, J. (1995). Reengineering Management: The mandate for new leadership, Harper
Business, New York, NY

Clemmer, J. (1994). Process reengineering and process improvement not an either or choice.
CMA Magazine, June, 36-39.
CSC index (1994). State of reengineering report. North America and Europe CSC Index, Inc,
London.
Davenport, T. (1993a). Need radical innovation and continuous improvement? Integrate process
reengineering and TQM. Planning Review, 21, 3, 6-12.
Davenport, T.H; & Short, J.E. (1990). The new industrial engineering: information technology
and business process redesign. Sloan Management Review, 4, 11-27.
Dickinson, B. (1997), "Knowing that the project clothes have no emperor", Knowledge and
Process Management, 4 (4), 26, 1-7.
Furey, T. (1993). A six step guide to processing reengineering. Planning Review, March/April
20-23.
Green, F., Wayhan, V. (1996), "Viewpoint – re-engineering: clarifying the confusion", SAM
Advanced Management Journal AMJ, 61(3)37-40.
Gulden, G., Reck, R. (1992), "Combining quality and re-engineering efforts for process
excellence", Information Strategy: The Executive’s Journal, 10(1), 10-16.
Hall, G., Rosenthal, J., & Wade, J. (1993). How to make reengineering really work. Harvard
Business Review, 71, 6, 119-131.
Hammer (1990) Reengineering work: don’t automate, obliterate. Harvard Business Review, 68,
4, 104-112
Hammer, M., & Champy, J. (1993). Reengineering the Corporation, Harper Collins, New York.
Hammer, M., Champy, J. (1993), Re-engineering the Corporation: A Manifesto for Business
Revolution, Harper Business, New York, NY.,
Hammer, M., & Stanton, A. (1995). The Re-engineering revolution: A Handbook, Harper
Business, New York, NY.,
Johansson, H.J. & McHugh, P. & Pendle bury, A.J. & Wheeler III, W.A. (1993). Business
Process Reengineering - Breakpoint Strategies for Market Dominance, Wiley.
Kelada, J. (1994), "Is re-engineering replacing total quality?" Quality Progress, 27 (12), 79-85.
Klein, M.M., 1994. The most fatal reengineering mistakes Information strategy: The Executive’s
J. l0, (4) 21-28
Klein, M.M., 1993. IEs fill facilitator role in benchmarking operations to improve performance.
Ind. Eng. 25(9) 40-42.
Makridakis, S. (1996), "Factors affecting success in business: management theories/tools versus
predicting changes", European Management Journal, 14 (1), 1-20.
Manganelli, L. R. (1993). Define re-engineer computer. World COW, 27(0010-4841), 29, 86-87.
Millman, B., 1994. Executives: gel real about reengineering. Training Dev. 48(3) 11-12
ProSci (1997), Best Practices in Business Process Reengineering and Process Design, ProSci,
(http://www.prosci.com)
Rai, A., Paper, D., 1994. Successful re-engineering through IT investment information Strategy:
The Executive’s J. l0, (4), 15-20

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Sockalingam, S., Doswell, A. (1996), "Business process re-engineering in Scotland: survey and
comparison", Business Change & Re-engineering, Vol. 3 No.4, pp.33-44
Volkmann, T., Brazas, M. (1993), "Downsizing", European Management Journal, 11 1, 18-29.
Zairi, M., Sinclair, D. (1995), "Business process re-engineering and process management: a
survey of current practice and future trends in integrated management", Management
Decision, 33 (3), 3-16

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 THE RELATIONSHIP OF BUDGETARY PROCESS IN MANAGEMENT
ACCOUNTING TECHNIQUES AND JOB PERFORMANCE

MASNAWATY SANGKALA
Makassar State University, Indonesia

MANSYUR SAIN
Hasanuddin University, Indonesia

ABSTRACT

The relationship between budgetary participation in budgetary process and job

performance and job satisfaction has been examined in several management accounting
studies with complicting results. The conflicting evidence may reflect the influence of
contingency variables.The purpose of the present study is to examine the relationship
between budgetary participation and job performance and job satisfaction, moderated by
locus of control, job relevant information and cultural dimensions. In this study, we
analysed indeeply the results of prior researchs in the relationship between budgetary
participation and job performance and job satisfaction. Specially for Indonesian context,
we analysed the results of study which have done by Indonesian Researchers which used
samples from the managers of manufacturing campany.

The results of this study for Indonesian context,suggest that budgetary participation affect
job performance and job satisfaction, locus of control did not seen moderate the effect of
budgetary participation on job performance and job satisfaction, job relevant information
did not influence job performance and cultural dimensions did not moderate the
relationship between budgetary participation and job performasnce.

Keywords: Budgetary participation, job performance, job satisfaction, locus of control, job relevant
information and cultural dimensions.

INTRODUCTION

Economic globalization of this magnitude can lead to local adoption of management

techniques that have proven useful in other parts of the world. Yet, cultural differences may
cause some management accounting techniques that work in one region to be less effective in
others, perhaps because of behaviorally related consequences of those techniques. Since
culturally different management can react differently to techniques, designers of management
control systems may need to consider carefully the issue of potentially “incompatible”
techniques, the budgetary process is included in those techniques that are not always compatible
with a new environment (Nur Indriantoro, 1993).

Frucot and Shearon (1991) mentioned that the effectiveness of the management planning and
control systems used in developing countries remains an important issue because as developing
countries will become more industrialized and progressive they may import system and
techniques from the more industrialized nations.

Indeed such importation may be encouraged by educational institution and consultants.

Unfortunately, the progressive local firm may be importing systems from the industrialized
world without considering the potential impact of cultural differences on the success of
implementing such system.

Dakhli (2009) stated “importing management system developed in industrial country may create
coherence problems. When management approaches are transferred and insufficient
consideration given their cultural assumptions, they are likely to miss their objectives and top
prove very disappointing.”

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Prior research indicates that cultural differences have an effect on management control system
(MCSs) such as a participative budget process (Leach-Lopez, 2002). In the context of
organizational culture, multinational firm are faced with an additional problem arising from the
multicultural setting in which they operate; i.e., the interaction of organizational members with
diverse cultural backgrounds. According to Frucot and Sheron (1991) this cultural interface can
occur at various levels within the organization; for example between the subsidiaries high and
low-level management (i.e., when an American executive is sent to manage the Mexican
subsidiary) or between the management of the subsidiary and the parent. The diverse cultural
backgrounds translate into a lack of cognitive similarities which can significantly hamper
communication at that interface (Stening, 1979).

Baker et al. (2009) studied the organizational identification by examining the impact of cultural
values as antecedent on organizational identification in a multinational sales force. They
concluded that collectivism, masculinity, uncertainty avoidance, and long-term orientation were
found to be significantly correlation with organizational identification, but power distance was
not related.

In the context of national cultural, Hofstede’s (1983) study of cultural values found that
Indonesian ranked high on the power distance index in contrast with the US., which was
considered low in this measure. Conversely, the US ranked high in individualism and
masculinity/femininity in contrast with Indonesia which was ranked low on those dimensions.
The only dimension for which Indonesia was ranked approximately the same as the US was
uncertainty avoidance.

In Indonesia, there are approximately three hundred native ethnic groups excluding the
immigrant ethnic groups such as Chinese, Indian, and Arab. Of the three hundred of native
ethnic groups, a major group is "Javanese". Each ethnic group has its own unique culture and in
many cases these ethnic cultures are not compatible (Koentjaraningrat, 1975). The term ethnic
culture refers to the culture that is common among people who perceive themselves as
constituting a community because of ancestry, language, history, religion, or customs (Riggins,
1992). Frucot and Shearon (1991), for instance, suggest that culture influences values, and
behavior of employees.

SIGNIFICANT OF THE STUDY

In the relationship between budgetary participation and job satisfaction, some studies have
found a positive relationship between budgetary participation and job performance (e.g.,
Brownell and McInnes, 1986, Dunk, 1993). Other studies have suggested that there is a weak
positive relationship (Milani, 1975; Mia, 1988) or even negative relationship (Bryan and Locke,
1967; Kenis, 1979).

In the relationship between budgetary participation and job satisfaction, some studies have
found a positive relationship between budgetary participation and job satisfaction
(e.g.,Cherrington and Cherrington, 1973; Milani, 1975; Collin, 1978). Other studies have
suggested that there is a negative relationship (Vroom, 1960; Tosi, 1970).

Empirical evidence on the relationship between budgetary participation-performance and

budgetary participation-satisfaction has been offered by several researches by using varieties
mediating and moderating variables such as; locus of control as moderating variable
(Brownell, 1981; Latham and Yuki, 1976; Yuki and Latham, 1978; Frucot and Shearon, 1991);
Goal level, goal commitment and Task Relevant Knowledge as moderating variable (Vroom,
1960; Brownell, 1982c); motivation as mediating variable (Searfoss and Monczka,1973 ; Ronen
and Livingstone,1975 ; Kenis, 1979, Merchant, 1981 ; Brownell and Mc Innes, 1986). Job-
relevant information as mediating variable (Maria et al.,2007 ; Chong and Johnson, 2007 ;

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Chong and Chong, 2002). Job-relevant information as moderating ( Maria, 2002 ). Culture as
moderating variable (Baker et al.,2009). Culture as mediating variable (Maria et al.,2007).

In determining the relationship between participation in the budgeting process and job
performance and job satisfaction, some researches has been use varieties theories, such as
expectancy theory (eg. Brownell and McInnes, 1986), cognitive dissonance theory (eg.Tiller,
1983), person-environment fit theory (eg. Shield, Deng and Kato, 2000), organizational justice
theory (eg. Libby,1999,2001) and role theory (eg. Chenhall & Brownell, 1988).

The current study may reveal that a firm owned by outside interests should exercise
caution when applying participative budgeting techniques in Indonesia. While the result
would not necessarily be generalizable to countries other than Indonesia, a multinational
firm’s management may wish to consider more thoroughly job relevant information and
cultural differences between management’s country of origin and the locality where
their firm operates. Hopefully, findings in this study can provide a starting point for
such considerations, i.e., the study hopes contribute to the behaviorial and management
accounting.

The current study may also lead management control system designers in Indonesia to
consider using or developing techniques in the budgetary process that are appropriate
for this region (It is mean that the study hoping contribution to the practition)..

In other words, the result of this study can give contribution to improve theory that related to
management and accounting knowledge and also to the practice of participative budgeting of
manufacturing firms and as reference for research in the future who want to work in the field of
managerial accounting.

FRAMEWORK OF THE STUDY

Participative Budgeting
Participation is considered to be one of the critical design factors that can significantly impact
an organizations overall effectiveness. The effect participation are the generally considered
positive with respect to morale, motivation, performance, job satisfaction, and a subordinates
attitude toward job, superior, and job company.

Job Performance
Job performance is a factor that can improve organizational effectiveness. Maria et al. (2007)
found that there are strong associations between budget participation and performance for both
U.S. manager working in the U.S. and Mexican managers working for U.S. controlled
maquiladoras in Mexico. Maria et al. (2009) found that are strong association between budget
participation and performance for both sample of managers (U.S. managers and South Korean
managers working for U.S. controlled companies).

Job Satisfaction
Chenhall (1986) examined the role of subordinate and superior authoritarianism as a moderating
variable in a participative budgeting environment. He argued that the equivocal results of
previous studies may be a consequence of examining the personality of only one member of the
group involved in the participative process, usually the subordinate. He found that homogeneous
authoritarian dyads (subordinate and superior were matched) were positively associated with
subordinate job satisfaction and budgetary attitudes.

Locus of Control
Licata et al. (1986) examined the effect of locus of control on the relationship between
participation and the performance of both superiors and subordinates in a participative

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budgeting environment. The results of their experiment indicated that "internal" managers were
willing to allow subordinates greater participation than were "external" managers.

Cultural Dimensions
Cultural dimension as a moderating variable. This construct was popularized by Hofstede’s
(1980) original work, but later, Hofstede and Bond (1988) identifies the five primary
dimensions characterizing a culture as: (a) individualism/ collectivism, (b) power distance, (c)
masculinity/femininity, (d) uncertainty avoidance, and (e) time orientation.

Job-Relevant Information (JRI)

The positive performance effect of job relevant information provided by Campbell and Gingrich
(1988). Chong and Johnson (2007) confirmed that higher levels of budgetary participation led to
increased job relevant information under condition of higher task uncertainty. An argument
could be made that increased communication would in turn reduce ambiguity at work. Thus JRI
should positively correlate to job satisfaction.

Lau and Tan (2003) found a positive relationship between job relevant information and
satisfaction. Insofar as job relevant information reduces role ambiguity and satisfaction
theorized and found by Chenhall and Brownell’s (1988).

The model that is employed by the present study depicted in figure 3.1.

Locus of  Cultural 
Control  Dimension 
     Job 
Performance
Budget 
Participation 
     Job 
Job Relevant  Satisfaction
Information 

Figure 3.1 An Expanded View for the Present Study of Relationship between Participative
Budgeting and Job Performance and Job Satisfaction

BACKGROUND THEORY

Budgetary Participation and Performance Positive Relationship.

Brownell (1982 c) hypothesizes that there is no significant interaction between supervisory
evaluated style and budgetary participation affecting performance. The results indicate that the
impact of supervisory evaluation style on performance is moderated by budgetary participation,
which in turn, exerts a substantial positive influence on performance.

Brownell (1983) in another study, investigating the effect of participative budgeting and
leadership style on performance. Brownell hypothesized that there is a significant interaction
between participation and leadership style affecting performance. The results of the study
provide evidence that performance is significantly positively affected by the interaction between
participative budgeting and the leadership style of consideration. Subordinates perceive leaders
believed to have high levels of consideration as supportive and helpful. He states that under
certain leadership conditions, participation has a positive significant effect on performance; and
under certain conditions the reverse is true. This finding is important because it indicates that

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when the consideration leadership style is used, it generates greater participation, which results
in higher performance.

Brownell and McInnes (1986) investigate the relationship of budgetary participation to

motivation and performance among middle-level managers in three manufacturing firms.
Brownell and McInnes hypothesized that there is a positive relationship between motivation and
performance and any observed relationship between participation and performance will be
attributable to the indirect effect of participation, operating through motivation, to affect
performance.. Brownell and McInnes conclude that participation has a direct correlation with
performance, but fail to support the prediction of a mediating effect of motivation on the
participation-performance linkage.

Nouri and Parker (1998) indicate the link between the difficulty of budget goal and
performance. The budget goal difficulty reduces the commitment of organization and the
commitment of organization improves performance.

Chong and Chong (2002) indicate that participative budgeting affects budget goal commitment
which is in turn it affects the acquisition of job relevant information which then affects
performance. Wentzel (2002) proves that participative budgeting affects fairness beliefs, which
is in turn it affects the goal commitment which then affects performance.

Negative Relationships
Stedry (1960) investigated the relationship between the types of goals represented by a budget
employed in management practice and individual performance. Specifically. Stedry studied the
differences in performance across “implicit,” “medium,” “high,” and “low” budget conditions
and concludes that participation in setting budget goals is negatively related to performance.

Bryan and Locke (1967) investigated the relationship between participative set goals and
performance. Specifically, they studied individuals with low motivation versus those with high
motivation in a laboratory experiment. Subjects were given tasks and told to “do their best” or
were assigned a specific goal. The results of the study indicate that assigning goals to subjects
with low motivation increases performance. On the other hand, the results indicate that
assigning goals to highly motivated subjects has a negative effect on performance.

Hopwood (1976) in a literature survey indicates that an increase participation in decision

making improves morale, but the effect on productivity and performance is ambiguous. In some
circumstances participation was found to increase productivity and in others decrease
productivity.

Kenis (1979) reported a negative correlation between participation and performance. Locke and
Schweiger’s (1979) literature review in the organizational behavior area conclude that there is
no consistent evidence of the participation positive effect on performance.
Gul et al. (1995) found budgetary participation to be negatively related to job performance in
less-decentralized organizations. Gul et al. (1995) reported that increased participation improved
performance in environmentally uncertain situations, but hampered performance in situations of
low uncertainty.

Insignificant Relationships

Milani (1975) investigated the effects of budgetary participation on attitudes and performance.
Results of the study indicate that there is no significant relationship between participation and
performance.

Kenis (1979) examined the effects of budgetary goal characteristics on job related attitudes,
budget-related attitudes, and self-rated performance. Specifically, Kenis investigated the

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hypothesis that participative budgeting, budget goal clarity, and budgetary feedback have a
positive effect on budgetary performance and job performance. The results indicate that
participative budgeting and budget goal clarity are both positively related to budgetary
performance. However, the findings fail to support the hypothesized positive effects of
participative budgeting on the job performance of managers.

Mia (1989) examined the effects of participative budgeting and job difficulty on managerial
performance by investigating the interaction of participation and job difficulty on performance.
Mia hypothesized that managerial performance increases in circumstances of high (low) job
difficulty and high (low) participation. The results support the hypothesis, indicating that an
interaction between high (low) job difficulty and high (low) participation leads to higher
managerial performance. However, the analysis does not examine the potential for a direct
relationship between participation and performance.

Dunk (1989) investigated the effects of budget emphasis and participative budgeting on
managerial performance. The study’s results indicate that the interaction effect is significant;
however, the interaction tends to decrease performance rather than increase it as hypothesized.
The study’s model also allows the direct effect of participation on performance to be measured.
The findings fail to indicate a significant relationship between participation and performance.
This particular result supported the non significant relationship found by Brownell and Hirst
(1986) but contradicted the significantly positive relationship found by Brownell (1982c).

Wentzel (2002) examined whether perceived fairness in the budgeting process improved
performance by increasing managers’ commitment to budgetary goals. Specifically, Wentzel
hypothesized that the impact of participative budgeting on performance (budgetary and
managerial) is significant when fairness perceptions and goal commitment act as mediating
variables in the model. Additionally, Wentzel examined the direct relationship between
participation and both budgetary and managerial performance measures. The study’s results
support these propositions; participative budgeting leads to a sense of fairness resulting in
higher budgetary goal commitment, thus enhancing performance. However, the findings do not
provide evidence of a direct relationship between participation and performance, suggesting that
participation does not directly influence performance; rather, participation leads to other factors
which in turn increase performance. Wentzel attributed the non-significant relationship between
participation and performance to the complexity of the budgetary process.

Budgetary Participation and Locus of Control

Swieringa and Moncur (1975) studied the effects of participative budgeting on managerial
behavior. They discover that participation is an important predictor of budget related behavior.
Their study cites locus of control as one of the attitudinal variables which best predicts the
budget related behavior of managers.

Phares (1976) ) notices the difference in behavioral patterns between the internals and the
externals. The internals (1) pose a greater effort to control their environment ,(2) demonstrate
superior learning, and (3) seem to be more adept with information.

Brownell (1981) focused on the moderating effects of individuals’ locus of control on the
participative budgeting and managerial performance relationship in a laboratory setting. While
previous studies examined attitudes such as job satisfaction, morale, and attitudes toward the job
and company, this study introduces and examines a personality variable (i.e., locus of control).
Locus of control is the degree to which individuals accept personal responsibility for what
happens to them. Individuals with an internal locus of control believe that they are responsible
for what happens to them, while individuals with an external locus of control believe that they
are not responsible for what happens to them. The results indicate that participative budgeting
has a positive effect on performance for individuals with an internal locus of control and a
negative effect for individuals with an external locus of control. Additionally, Brownell

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examined the direct relationship between participation and performance and found a
significantly positive association between the two. In an effort to validate and extend the
findings of Brownell (1981), Brownell(1982a) examined the effects of participative budgeting
and locus of control on performance and job satisfaction in a field setting. The results of this
study indicate that the interaction between participation and locus of control significantly affect
performance, with internally oriented individuals having higher performance than externally
oriented individuals.

According to Lefcourt (1991). The locus of control construct differs from other constructs In
that it is used primarily as a personality characteristic, an individual difference that is assumed
to have some stability and generalization.

Hofstede (1968) discovers that employees’ participation having a high need for independence
correlates with improved performance. The internal-external feelings of locus of control are the
most important predictors of the managers’ methods to achieve their budgets which tend to be
accepted by others and the managers tend to be influential in the budgeting process and have a
positive attitude toward budgeting.

In a laboratory experiment, Likata et al. (1986) examined the participative relationship between
superior and subordinates. The finding of laboratory experiment indicate that locus of control
also may influence the behavior of superiors involved in the participative budgeting process in
accepting the inputs of their subordinates, and internal managers are willing to allow
subordinates greater participation than are external managers .

Latham and Yukl (1976) and Yukl and Latham (1978) detected no moderating effect of locus
of control on the relationship of participation and performance. Dosset et al. (1979) discover
similar performance about the relationship between participation and performance as of Latham
and Yukl (1976) and Yukl and Latham (1978). Murray (1990) argues that the results of these
three papers are not very informative since the mechanism by which the locus of control can
moderate the correlation between participation and performance is experimentally constrained.

Brownell (1982 a) studied the correlation between budgetary participation and performance. In
this study he discovers that there is no correlation between the two variables. He argues that
conditional factors are at play that may affect the correlation of the two variables. But he
discovers a moderating effect of locus of control on the correlation between participation and
performance in an experimental setting (Brownell 1981) and in a field setting (Brownell 1982
b).

Brownell (1982 b) examined the moderating effect of locus of control personality variable on
the correlation between budgetary participation and subordinates’ performance. The results
show that participation has a positive correlation with performance and the correlation is
stronger among internals than externals. The correlation between participation and locus of
control affecting the performance is significant. Brownell also indicates that budgetary
participation is most effective for internally oriented individuals. He concludes that internals
perform best in high participation conditions while relatively extreme externals perform best in
low participation conditions.

In a laboratory experiment, Licata et al. (1986) examined the participative correlation between
supervisors and subordinates to discover the effect of locus of control on the supervisors’
behavior involving in the budgetary process. Licata et al. discover that locus of control may
affect the supervisors’ behavior involved in the participative budgeting process in accepting the
subordinates’ inputs. Licata et al. conclude that internal managers are willing to have
subordinates’ greater participation than the external managers. They argue that external
managers tend to be authoritarians and tend to subvert the participative process by refuting the
subordinates’ inputs. Internal managers tend to use a friendly persuasive approach and are most

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likely to accept the participative format. The results support the hypothesis that internal
managers are willing to have greater participation of subordinates than those of external
managers.

In his literature research, Murray (1990) concludes that budgetary participation has a favorable
affect on individuals’ performance classified as internals and adversely affects individuals’
performance classified as extreme externals. Murray suggests that in respect to the locus of
control moderator, companies should follow a participatory budget setting. He believes that the
results indicate that only in the case of extreme externals should a company consider to follow
an assigned or a mandatory budget setting.

Budgetary Participation and Job Relevant Information

Job relevant information is information that facilitates job-related decision making (Kren,
1992). Literature on accounting (Baiman 1982; Baiman and Demski 1980; Tiessen and
Waterhouse 1983). has identified two main types of information in organizations: First,
Decision influencing, in which information manager’s behavior is collected for the purpose of
performance evaluation. Second, Job relevant information, in which information obtained will
help a manager to improve his/her choice of action through better informed efforts.

Baiman (1982), Tiessen and Waterhouse (1983) call job relevant information as ex-ante
information. Job relevant information provides the manager with a better understanding of
decision alternatives and actions needed to reach objectives (Locke et al. 1986).

Charlos and Haka (1990), in most budgetary situation, performance determined by jointly
environmental factors, managerial skills, and effort. Job relevant information can improve
performance because it allows more accurate predictions of environmental states and thus allow
more effective selection of appropriate course of action (Kren, 1992). Campbell and Gingrich
(1986), in their experiment provided evidence supporting the positive performance effects of job
relevant information. Campbell and Gingrich (1986) discover that performance can be improved
by the use of job relevant information. They hypothesized that job relevant information gives
more accurate predictions of environment and effective selection of appropriate courses of
action. They discover that participating programmers exposed to job related information
significantly outperformed those not exposed to it. However, the improvement of performance
is found only when a project is complex and not found for simple projects.

According to Kren (1992), budgetary participation can similarly facilitate the acquisition and
use of job relevant information. Kren (1992), in his study concluded that increased budget
participation leads to increased job relevant information and that increased job relevant
information leads to increased performance.

Lau and Tan (2003) find a significant path coefficient linking budget participation and job
satisfaction among Singaporean managers, and find a positive relationship between job relevant
information and satisfaction.

Mia (1989) made a survey to middle level managers in six companies and proposed that
perception of job difficulty moderate the relationship between budgetary participation and
performance because participation provides valuable information for difficult jobs, and found a
positive correlation between participation and performance only when the job difficulty was
high.

Chenhall and Brownell (1988) proposed the ambiguity of role as an mediating variable in the
linking between budgetary participation and performance. In a survey they discover that
participation reduces the ambiguity of role and which improved performance. According to
Kren (1992), job relevant information and role ambiguity are similar constructs in that the latter

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reflects the extent to which managers understand their duties and responsibilities, while the
former is a measure for the information available to managers to accomplish job-related tasks.

Chong and Chong (2002) investigated the budget goal and informational effects of participative
budgeting on job performance. They hypothesized that
(1) Participative budgeting and budget goal commitment are positively related;
(2) Budget goal commitment and job-relevant information are positively related; and
(3) Job-relevant information and job performance are positively related.
The findings support the theoretical model. Specifically, Chong and Chong found that
participation and performance are positively related through the mediating effects of goal
commitment and job relevant information. While there is no specific hypothesis testing
mediation, they used a type of structural equations model that allows sequential testing of the
interactions.

Budgetary Participation and Job Satisfaction

Budgetary participation and job satisfaction has long been recognized as an important issue in
organization. This is perhaps one of the reasons why the relationship has been central to so
much organizational research for more than fifty years since the study by Argyris (1952). For
instance, Shields and Shields (1998) review of the literature on budgetary participation reveals
that a large number of the 47 studies on budgetary participation, investigated the participation –
job satisfaction relationship.

Positive Relationship
Cherrington and Cherrington (1973) conducted an experiment designed to test the effects of
budgetary control and reward contingencies on performance and satisfaction. Their study
addressed the optimal conditions of budget participation and reinforcement contingencies as
means of maximizing both performance and satisfaction. The study supported the positive
effects of participation on job satisfaction and job performance.

Swieringa and Moncur (1975) studied some effects of participative budgeting on managerial
behavior. They found that participation was an important predictor of budget-related behavior.
In addition ,their study cited locous of control as one of three attitudinal variables which were
the best predictor of managers’ budget-related behavior. They discovered that three of the
attitudinal variables loaded on a single factor correlated significantly to job satisfaction.

Kenis (1979) empirically examined some effects of budgetary goal characteristics (dimensions
of budgeting style} on job-related attitudes (job satisfaction, job involvement. and job tension),
budget-related attitudes (attitude toward budgets and budgetary motivation), and performance
(budgetary performance, cost efficiency, and job performance) of lower-level managers in
industry. The study found that budgetary participation in this setting tended to have positive and
significant effects on job satisfaction. But the study found that budgetary participation was
unrelated to job performance. Kenis, however, cautioned that he did not include mediating
situational variables : thus, such variables as personality and internal needs of managers, goal
acceptance, reward expectancy, and perhaps organizational and environmental variables as well,
were thought to be capable of influencing the relationships.

Brownell (1983) studied the role of leadership style as a moderator variable with respect to the
effect of participative budgeting on performance and job satisfaction. His study indicated an
interaction between consideration and structure as these variables affected performance and a
major effect of consideration on Job satisfaction. In addition, he found that consideration had
positive effects on job satisfaction for all levels of participation. However, positive effects of
consideration on performance occurred only under conditions of high participation. Moreover,
he found that initiating structure influenced job satisfaction positively only under conditions of
low participation. Brownell found also In this 1983 study that there is an interaction between
consideration and initiating structure under conditions of high participation.

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Chenhall and Brownell (1988) studied the effects of participative budgeting on job satisfaction
and performance by examining how role ambiguity affects the participation satisfaction/
performance linkage. Role ambiguity is believed to be present when the required behaviors and
expected performance levels are not clear to individuals. These researchers hypothesized that
participation reduces role ambiguity, which in turn enhances job satisfaction and subordinate
performance. The results of the study support their predictions that participation reduces role
ambiguity and that lower role ambiguity leads to higher job satisfaction and subordinate
performance. Chenhall and Brownell also found that, with respect to subordinates, participation
is significantly related to job satisfaction but not to performance.

Frucot and Shearon (1991) find a significant positive relationship between budget participation
and satisfaction among Mexican managers working at the high levels of companies that are less
than 100 percent foreign-owned.

Lau and Tan (2003) find a significant path coefficient linking budget participation and job
satisfaction among Singaporean managers.

Negative or Insignificant Relationship

Tosi (1970) replicated Vroom's (I960) study using the same methodology. He found that
differences,in personality categories (authoritarianlsm and need for independence) did not-
produce different relationships between participation and the dependent variables (satisfaction
and effectiveness). Tosi failed to corroborate Vroom's findings on the personality/participation
effects relationship. Tosi suggested that the lack of similarity between subjects, the
organizations, and the specific characteristics of the job could each be factors that contributed to
the differences In his findings.

Research by Carroll and Tosi (1973) indicate that participation does not improve attitude and
job satisfaction. They suggested that the effect of participation on job satisfaction is conditioned
by perceived legitimacy of participation and the extent of participative management practices
spread throughout the organization.

Brownell (1982a) examined the effects of participative budgeting and locus of control on
performance and job satisfaction in a field setting. The results indicate that participation does
not have a significant direct effect on job satisfaction, but that individuals’ locus of control has a
moderating effect on the relationship between participation and job satisfaction.

Frucot and Shearon (1991), by using Mexican managers, examined whether cultural differences
affect the previously identified interrelationship of individual locus of control and participation
in the budgeting process as it impacts managerial performance and satisfaction. They
hypothesized that in Mexico, the degree of participation in budgetary process does not lead to
higher satisfaction, and locus of control does not have, through an interaction effect with
budgetary participation, a significant effect on satisfaction. They concluded that participation
alone positively affects the overall satisfaction of Mexican Managers. It seem that internals are
not significantly more satisfied with high budgetary participation.

Cultural Dimensions
Kroeber and Kluckhohn (l952), presented a comprehensive definition of culture as. “Culture
consists of patterns, explicit and implicit, of and for behavior acquired and transmitted by
symbols, constituting the distinctive achievement of human groups, including their
embodiments in artifacts: the essential core of culture consists of traditional (i.e., historically
derived and selected) ideas and especially their attached values; culture systems may, on the one
hand, be considered as products of action, and on the other, as conditioning elements of future
action”.

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Tefstra and David (1985), provided definition of culture : “ views the construct as a learned,
shared, compelling, interrelated set of symbols whose meanings reflect a set of orientations for
members of a society. These orientations, taken together, provide solutions to problems that all
societies must solve if they are to remain viable “

Parera and Matheus (1990) defined culture as: “the total way of life of a people: the social
legacy the individual acquires from his group: a way of thinking, feeling and believing: a
storehouse of pooled learning: learned behavior.

Hofstede (1994) defined culture as “the collective programming of the mind which distinguishes
the member of one group or category of people from those of another”

According to Hofstede (1997) “The core of culture … is formed by values. Values are broad
tendencies to prefer certain states of affairs over others.”

Hoftede (1990) initially proposed four distinct dimension or value to describe what he defined
as “national culture” These included : (1) uncertainty avoidance, (2) power distance, (3)
masculinity/femininity, (4) and individualism/collectivism. Later, Hopstede and Bond (1988)
added a fifth dimension, now referred to as (5) time orientation.

According to Baker et al. (2009) : Not only do these five cultural values differ among nations
(Dwyer,Mezak, & Hsu,(2005), but they vary between individuals in the same nation (Clugston,
Howel, & Dorfman, (2000) . That is, cultural values are disparate both between and within
cultures (Triandis,1995). While the majority in a particular country maybe high on
individualism, there will likely be others who are high on collectivism (e.g., Wasti,2003).

Job Performance and Job Satisfaction Relationships

The relationship between job performance and job satisfaction has been the focus of numerous
studies for more than five decades (Norris et al, 1986). One of the primary conclusions that can
be drawn from this body of research is that job performance – job satisfaction relationships are
complex (Jacobs & Soloman, 1977).

The speculation that job satisfaction is related to performance dates back to the early days of the
field of Industrial/Organizational Psychology (e.g., Kornhauser & Sharp, 1932). Throughout the
years, organizational theorists have advanced several viewpoints regarding the nature of the
satisfaction-performance relationship: (1) satisfaction causes performance; (2) performance
causes satisfaction; (3) the satisfaction-performance relationship is moderated by a number of
other variables; or (4) both are caused by an exogenous variable. Some moderators examined in
past research include the contingency of rewards (e.g., Jacobs & Solomon, 1977; Lawler, 1973),
situational constraints (e.g., Bhagat, 1982; Herman, 1973), self-esteem (e.g., Jacobs & Solomon,
1977; Lopez, 1982), pressures for production (Triandis, 1959), and reciprocity norms (Organ,
1977). Each of these proposed relationships has been investigated by numerous researchers. Yet
there remains no clear consensus on which explanation is most valid across all settings or the
circumstances in which each explanation is most valid. Furthermore, the majority of empirical
findings published on this topic point to the apparent conclusion that the relationship between
satisfaction and performance is weak at best. Nonetheless, many researchers continue to pursue
the investigation of this relationship largely because of the apparently commonsensical link
between the two variables. While most people associated with the human relations movement
focused on improving performance through satisfying employees’ needs, research results
contradicted this underlying assumption (e.g., Katz, Maccoby, Gurin, & Floor, 1951; Katz,
Maccoby, & Morse, 1950). These researchers found no differences in satisfaction between high
and low performance groups, and, in some cases, concluded that those with lower performance
levels reported higher satisfaction. Brayfield and Crocket (1955) reviewed existing literature
and profoundly changed the nature of investigations regarding this relationship when they

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concluded that there was little evidence of a connection between employee attitudes and their
performance. Many researchers now consider the relationship between job satisfaction and
performance among employees to be what Chapman and Chapman (1969) called an “illusory
correlation” – a perceived relationship between two variables that we logically or intuitively
think should interrelate, but, in fact, do not.
 
INDONESIAN CONTEXT

Candra (2007) studied the influence of budget adequacy and job-relevant information as
variable mediating on the relationship between budget participation and managerial
performance. He distributed questionnaires to 900 production managers or chief operational
officer or production supervisor at garment and textile company in West Java and Banten. The
result of research showed that budget participation did not influence directly managerial
performance, job-relevant information did not influence budget adequate and budget adequate
did not influence managerial performance. However, the study showed that budget participation
influenced budget adequate, budget participation influenced job-relevant information, and job-
relevant information influenced managerial performance.

Gozali and Yusfaningrum (2005) analysed the influence of budget participation on managerial
performance, by introducing goal commitment and job relevant information as intervening
variable. They used data by obtaining ideas or perceptions of managers/chief leveled as
managers from 155 manufacturing company listed at Jakarta stock exchange (Bursa Efek
Jakarta). They hypothesized that there are positive relationship between budget participation and
job-relation information. They conclusion that budget goal commitment and job-relevant
information as intervening variable weaken influence managers participation in compose budget
toward their performance on managerial activities.

Nur Indriantoro (1993) analysed the effect of participative budgeting on job performance and
job satisfaction with locus of control and cultural dimensions as moderating variables in
Indonesia, by using more than 100 companies as samlples. Nur Indriantoro (1993) concluded
that, participative budgeting in Indonesia positively affects job performance. These finding were
in line with many prior research results. In Indonesia, locus of control did not seem to moderate
the effect of participative budgeting on job performance. Also this study failed to find any
moderating effect of three cultural dimensions that were examined on the relationship between
participative budgeting and job performance. With respect to job satisfaction, this study found
that participative budgeting in Indonesia positively affect job satisfaction. At the same time, the
study revealed that locus of control did not moderate the effect of participative budgeting on job
satisfaction.

CONCLUSION

The results of the studies on the relationship between participative budgeting and job
performance are varied, some studies found significant positive effect relationship (e.g. Frucot
and Shearon, 1991; Leach-Lopez et al., 2002, 2007, 2009; Cherrington and Cherrington, 1973).
Other suggested insignificant effect relationship (e.g. Brownell and Hirst, 1986; Milani, 1975),
or even a negative relationship (Bryan and Locke, 1967; Stedry,1960). The results of the studies
on the relationship between participative budgeting and job satisfaction are also varied, some
studies found positive relationship (e.g. Lou and Tan, 2003; Chenhall and Brownell, 1988), and
other suggested negative or insignificant relationship (e.g. Brownell, 1982a, Carol and Tosi,
1973; Tosi, 1970).

In the context of Indonesia, participative budgeting positively affect job performance and job
satisfaction, locus of control did not seem moderate the effect of participative budgeting on job
performance and job satisfaction, job relevant information did not influence job performance

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and cultural dimensions did not moderate the relationship between participative budgeting and
job performance.

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 THE ANALYSIS OF THE RELATIONSHIP BETWEEN MANAGEMENT
CONTROL SYSTEM AND FINANCIAL PERFORMANCE OF SMALL FIRMS
MANSYUR SAIN, AGUS BANDANG
Hasanuddin University, Indonesia

ABSTRACT

The relationship between management control system and financial performance has been
examined in several management accounting studies with inconsistency result. Prior
studied based on data from larger companies or their sub-units. Small business studies
have been rare-at least based on their number of published studies.
The purpose of the present study is to analysis the relationship between management
control system and small firm’s financial performance in a contingency theoretical
framework. In this study, we analysed deeply the results of prior researchs in the
relationship between management control system and small firm’s financial performance.
Specially for Indonesian context, we analysed the results of study which have done by
Indonesian Researchers which used data from small firms in South Sulawesi Indonesia.
The results of this study for Indonesian (South Sulawesi) context, suggest that the use of
MCS seem to have only e few positive effect on small firm’s financial performance. The
external environment did not influence small firm’s financial performance. The pursued
strategy seems to drive small firm’s profitability and growth in net sales. The small firms
do use a wide range of MCS practices, information and by using a more diversified
management team seems to increase the use of MCS practices and information.

Keywords: Management control system, financial performance and small firm.

INTRODUCTION

Although the research on current management accounting practices and MCS has been
comprehensive, their empirical evidence has almost totally been based on data from larger
companies or their sub-units. Small business studies have been rare – at least based on their
number of published studies as pointed out by e.g. McMahon (2001), Mitchell and Reid (2000),
Luft and Shields (2003) and Reid and Smith (2002). The mainstream of the research in MA
seems to concentrate on the middle range of organizational size (Luft and Shields 2003).
Typically, if small firms have been included in these studies, and for example, not been
discarded as outliers, researchers seem rather to have been more interested in the effects of size
variation within larger organizations or between size groups of firms (i.e. small, medium and
large) than in the small businesses as such or possible variation among firms in this size group
(Chenhall2003, Luft & Shields 2003, Mitchell & Reid 2000).

Nevertheless, some studies on MCS in small businesses have been conducted, but the designs
and focuses of these undertakings have varied . For example, Reid and Smith (2000, 2002, see
also Nayak and Greenfield 1994) have studied the use of management accounting techniques of
small UK micro firms with less than ten employees; Gul (1991) has revealed the interaction
effect of MCS and perceived environmental uncertainty on managerial performance in small
firms; Laitinen (2002) has examined MA and its change in small Finnish technology
companies; Moores and Yuen (2001) have approached the use of management accounting
systems in life-cycle configurations of Australian clothing and footwear firms, albeit using a
sample including also larger firms; and McMahon (2001) has analyzed the relation between
financial reporting practices, business growth and performance among Australian manufacturing
small and medium-sized firms.

Despite a small number of the small business studies in MA, for example, Hicks (1999),
Laitinen (1996) and Mitchell and Reid (2000) have stated that modern management accounting
practices and sophisticated systems might also be useful for small businesses. Furthermore,
although small firms may have different needs than large companies, there is also some
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promising empirical evidence, for example, on the possibilities of the Balanced Scorecard as an
efficient management tool for small businesses as well (Chow et al. 1997, Kaplan & Norton
2001c, 369-370). Laitinen (1996), and Mitchell and Reid (2000) have stressed, practices and
systems should not be somehow down sized copies of the ones used in large companies.
Nordberg (1997) stated practices and system sought to be tailored to fit the needs of small
businesses and their managing directors. However, what are these needs? How should the
practices and systems be adapted for the SME’s?. Research evidence on the above questions, the
current state and nature of small business management accounting practices and their
associations with contextual factors like the environment, strategies, organizational
characteristics, as well as the role an owner-manager plays in these relationships is very limited
(e.g. Chenhall 2003, McMahon and Stanger 1995, Reid and Smith 2000, see also Ittner and
Larcker 2001). For example, we do not know very well the answers to such questions as:
a. How widely are new ideas and innovations of Management Accounting already in
use in the small business sector or are they at all?
b. What kind of information do managing directors in small firms prefer and use to
pursue strategies and strategic priorities of their businesses
c. What are the main factors influencing the designs and use of Management Control
System (MCS) in small firms, and how do these factors possibly influence MCS?
d. To what extent are the empirical research results based on large companies on the
design and use of MCS consistent with those based on small businesses?
e. Is the possible use of MCS related to firm performance of small firms?

Most executives agree that there is no magic formula……or one right measure…….for
evaluating business performance. Therefore, in an effort to capture the essence of business
performance, many companies are creating new performance measurement systems that include
a broad range of financial and nonfinancial measures,(Bonnie P. Stivers et al 1998).

Drury (2000), Anthony and Govindarajan (2001) stated that the accounting perspective claims
that the headquarters increase the intensity of Management Control System (MCS) after the
performance has worsened in order to adjust for deviations from planned strategy and
operations. On the other hand, an intensified (MCS) assures achieving planned goals and
objectives (Egelhoff 1988; Harzing 1999). These two streams in the scientific research make the
explanation of the relationship between Management Control Systems (MCS) and performance
extremely difficult. Additionally, the data for measuring success of the influences of MCS on
the performance has still to be provided (Epstein and Manzoni 2002).

The last trends, including integrated measures (e.g. Kaplan and Norton Balanced Scorecard),
suggest for evaluating various management controls. However, the integrated measures make
comparisons between companies difficult (Epstein and Manzoni 2002).

This paper analysis the relationship between management control system and financial
performance of small firms in South Sulawesi, Indonesia.

LITERATURE REVIEW

The literature review is focused on a view of the relationships between management control
system, organizational performance and small firm.

Management Control System.

The earliest definition of MCS was provided by Anthony (1965), according to whom
management control is “the process by which managers ensure that resources are obtained and
used effectively and efficiently in the accomplishment of the organization’s objectives”.
Anthony’s (1965) definition is of slightly narrow nature since it separates management control
from strategic control and operational control. Flamholz (1983), on the other hand, emphasis the
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behavioral aspect of MCS by arguing that individuals and organizations share only partially
congruent objectives why it is necessary to channel human efforts toward a specified set of
institutional goals, which inevitably leads to a need for control. The behavioral viewpoint is also
supported by Merchant & Van der Stede (2003) who argue that “...management control involves
managers taking steps to ensure that the employees do what is best for the organization. This is
an important function because it is people in the organization who make things happen…If all
employees could always be relied on to do what is best for the organization there would be no
need for MCS”. In addition, MCS have been conceptualized as formal, information-based
routines and procedures managers use to maintain or alter patterns of organizational activities
(Simons, 2000). Merchant & Otley (2007) state that “almost everything in the organization is
included as part of the overall control system”. In aggregate, Malmi & Brown (2008) define
MCS as follows:
Management controls include all the devices and systems managers use to ensure that the
behaviors and decisions of their employees are consistent with the organization’s objectives and
strategies, but exclude pure decision-support systems. Any system, such as budgeting or a
strategy scorecard can be categorized as a management control system.

As Malmi & Brown (2008) point out, the definition is broader than definitions provided by
Anthony (1965) and Simons (2000), since strategic and operational controls targeted at directing
employees and other than information-based routines fall inside the scope, respectively.
However, the definition is narrower than the ones that take decision support systems into
consideration.

Contingency Variables
Chenhall (2003) reviewed the empirical contingency-based literature regarding the development
and structure of management control systems. His studied focus to contingency-based theories
developed from a functionalist perspective. In other words, the assumption is that management
control systems are adopted to assist managers achieve some desired organizational outcome or
organizational goals. Each organization has to choose the most suitable system by taking into
account some contingency variables such as external environment, technology, organizational
structure, size, strategy, and culture. Many empirical studies have been carried out and the
literature often calls for an innovative approach (Ittner and Larcker, 1998; Nanni et al., 1992;
Shirley and Reitsperger, 1991). Though some non-financial measures are introduced in MCS
studies, the majority continue to focus on accounting aspects, and innovative models are not
proposed nor are the contingency factors well defined (Reid and Smith, 2000).

The External Environment

The external environment has been identified as an important contextual variable influencing
the design of management control systems (Chenhall, 2003). Flamholtz et al (1985) define the
external environment as ‘the societal context for the organization and its members’ indicates
that this is a broad concept, and as such has been conceived in numerous ways, including
complexity (Duncan, 1972), variability (Amigoni, 1978), hostility, heterogeneity and dynamism
(Gordon & Miller, 1976). Each of these elements has been hypothesized to have particular
influences upon organizational design, however, in terms of MCS research, environmental
uncertainty has been the dominant aspect considered (Chenhall, 2003). To maintain consistency
with prior literature, this study will focus on the dimension of uncertainty.

Merchant (1988) relates uncertainty to ‘the broad set of factors that, individually and
collectively, make it difficult or impossible to predict the future in a given area’. As the level of
uncertainty increases, the control function in an organization becomes increasingly difficult
(Duncan, 1972), as the ability to predict the relationship between actions and outcomes of
organizational tasks is diminished. Under these circumstances, accounting based mechanisms
will provide an incomplete set of information (Chapman, 1997). This is consistent with
Galbraith’s (1973) view of uncertainty as synonymous to an information deficit. In synthesizing

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the works of Lawrence & Lorsch (1967), Woodward (1965) and Burns & Stalker (1961),
Galbraith (1973) proposes that uncertainty is the fundamental concept underlying the design of
complex organizations. While environmental uncertainty has been employed in numerous
management accounting studies, its impact upon a broader set of management controls has not
been readily considered. This has limited our understanding of what mechanisms may act as
substitutes or compliments, and under what conditions they would be suited to.

The external environment is a powerful contextual variable that is at foundation of contingency-

based research. Perhaps the most widely researched aspect of the environment is uncertainty.
Early contingency research in organization design focused on the effect of uncertainty on
organizational structure. Example include Burns and Stalker (1961), Galbraith (1973),
Lawrence and Lorsch (1967) and Perrow (1970). The importance of uncertainty as a
fundamental variable in MCS contingency-based research has been stressed recently by
Chapman (1977) and Hartmann (2000). Both reinterpret aspects of MCS research by examining
the impact of environment uncertainty.

The more uncertain the external environment the more open and externally focused the MCS.
The more hostile and turbulent the external environment the greater the reliance on formal
controls and an emphasis on traditional budgets. Where MCS focused on tight financial controls
are used in uncertain external environments they will be used together with an emphasis on
flexible, interpersonal interactions

Strategy
The word strategy is derived from the Greek word “strategos,” which means army and leading.
Initially, the concept of strategy was referred to the leading role of a general in command of
army as well as meant for military purposes (Greenly, 1989; and Mintzberg and Quinn, 1991).
Strategy is defined as a major action taken or planned by the management of a business
organization, considering its resources, skills and environment risks. Corporate strategy usually
refers to the product-market choices of the firms (Hofer and Schendel, 1978). Strategy is an
important explanatory variable in the design of MCS. Langfield-Smith (1997) and Ittner &
Larcker (1997) maintain that management control systems should be explicitly aligned with the
strategic direction of the firm. This argument is also supported by Shank & Govindarajan (1993)
who write that ‘a continuing concern in the design of control systems should be whether the
behavior induced by the system is the one that is consistent with the strategy’. It follows that the
adoption of various strategies by firms facing idiosyncratic environments and competitive
demands will place different requirements upon the control system, resulting in a diversity of
MCS arrangements across organizations (Dermer, 1977; Simons, 1990; Otley, 1999). The
inclusion of strategy as a variable also addresses the criticism of contingency-based research
which has assumed that MCS design is dictated by the organisation’s context (Child, 1972;
Chenhall, 2003). Langfield-Smith (1997) outlines three generic levels of strategy considered in
MCS research; corporate, competitive and operational. However, in the current study only
competitive strategy is considered, as the relevant level of analysis is the business unit. This
choice also provides greater comparability to prior MCS research, in which competitive strategy
has been the principal level of interest (Langfield-Smith, 1997). Business unit, or competitive,
strategy relates to the manner in which an individual business unit positions itself within a
market and creates or identifies competitive advantages (Langfield-Smith, 1997). A number of
typologies have been developed to allow measurement of business unit strategy. In MCS
research, strategy has generally been considered in terms of strategic position (Porter, 1980,
1985), strategic pattern (Miles & Snow, 1978) or strategic mission (Gupta & Govindarajan,
1984) of the business (Kald, Nilsson & Rapp, 2000). While each has the potential to influence
choice of control systems, in this study only the strategic position of the business unit is
analyzed, using the framework of Porter (1980, 1985). This provides consistency with previous
MCS research utilizing a systems view of contingent fit (eg Chenhall & Langfield-Smith, 1998;
Jermias & Gani, 2004). Porter’s (1980, 1985) typology has been operationalised as two generic

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strategies that can be followed in developing a sustainable competitive advantage, which are
low cost or differentiation strategies.

From MCS research, evidence suggests links between strategy and cost control and to formality
of performance evaluation. The studies are focused on strategy at the strategic business unit
level, rather than corporate or functional levels. Most of studies explore the association between
MCS and strategic typologies. Concerning performance measurement, build compared to
harvest strategies, which involve low specialization and difficulty in measuring outcomes, suit
more subjective and long-term controls e.g (Govindarajan and Gupta, 1985).

Strategies characterized by conservatism, defender orientations and cost leaderships are more
associated with formal, traditional MCS focused on cost control, specific operating goals and
budgets and rigid budget controls, than entrepreneurial, build and product differentiation
strategies.

According to Simons, (1990, p. 128), “management control systems are the formalized
procedures and systems that use information to maintain or alter patterns in organizational
activity”. Simons (1990, p. 128) further maintained that based on extensive field research,
“management control systems are used not only to monitor that outcomes are in accordance
with plans, but also to motivate the organization to be fully informed concerning the current and
expected state of strategic uncertainties”. Thus, strategy is a paramount sub-component in the
overall management control framework. The literature provides a number of definitions of the
term “strategy”. A strategy is a master plan on how an organization intends to compete in its
environment and what sort of structure, including coordination and control devices, is required
to implement the plan
(Macintosh, 1994, p. 89). Strategy is mainly concerned with the operative goals of
anorganization and the problems of achieving them. Wilson (1991, p. 82) defined strategy as
“an integrated set of actions aimed at securing a sustainable competitive advantage” (original
emphasis). According to this definition, a given strategy in an organization should support the
achievement of goals and objectives relative to its competitors. A much broader definition of
strategy has been given by Glueck (1980): A strategy is a unified, comprehensive, and
integrated plan relating the strategic advantages of the firm to the challenges of the
environment. It is designed to ensure that the basic objectives of the enterprise are achieved (p.
9).

As the above definitions explain, a strategy is expected to provide support in the

accomplishment of organizational goals in harmony with the organizational environment, both
internal and external. Strategy is believed to be the road map for any organizational effort and,
thus, the strategy should be given the utmost priority in designing and maintaining an effective
management control system. It is with this understanding that Anthony et al. (1984, p. 10) gave
a semantic definition of management control as “the processes by which management assures
that the organization carries out its strategies”. Following this definition, many research studies
“built on Anthony’s work and that of others by attempting to develop the best way to design and
use formal systems to help organizations implement their strategies and objectives” (Simons,
1990, p. 127) and attempted to describe organizational practices in terms of the extent to which
they implemented strategies. For example, Teall (1992, p. 31) maintained, “as the ultimate
objective of a management control system is to assist in achieving the company’s strategy, it is
imperative that the company’s strategy be explicitly stated”.

The Corporate Governance Structure

Corporate governance structure is considered to be the whole set of structures and processes
used to guide and control an enterprise (OECD, 1999). Its influence is made explicit in the
mutual influence between managerial systems and corporate governance structure (Miller and
Toulouse, 1986). Different approaches are applied in corporate governance studies. Most of the
papers available use agency theory as a main theoretical background (Zahra and Pearce, 1989).

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Two dimensions are often applied to analyze corporate governance: the composition of the
board of directors and its role. Board composition refers to the number and type of directors
who serve on the board, and the widely recognized dichotomy between inside and outside
directors has a significant impact on the decision-making processes. The board composition in
SMEs plays a key role; in these companies the presence of inside directors belonging to the
entrepreneur’s family is quite common and is a decisive factor in the decision-making process.
The literature offers a long list of what boards of directors should and could do, but evidence on
what boards actually do in SMEs is not yet well documented. With regard to the role of the
board of directors, three main roles are recognized by the literature: strategic, control and
service roles (Zahra and Pearce, 1989). Some of the main service roles of the board of directors
in family companies are the re-balance role, the share support role and the relationship support
role. The service roles are mainly adopted where ownership and management overlap.

In order to study corporate governance structure in SMEs, two key dimensions will be
considered: the role of the board of directors and the influence of ownership on corporate
governance. There are three SME typologies: traditional family company, open family company
and managerial company. In a traditional family company capital is held by an entrepreneur or a
small group of shareholders belonging to the same family; the decision-making power regarding
strategic and managerial issues lies with the owners and the board of directors has a “service
role”. An open family company is characterized by two main kinds of owners: entrepreneurs
that are directly involved in managerial activities and shareholders that pay attention solely to
the profitability of the business. The shareholders do not influence the company governance and
the board of directors is mainly used to control the management activities, i.e. it plays a
“controlling role”. A managerial company is owned by shareholders that are not interested in
the company’s core business; they only check the profitability of their investment. The
managerial activities depend totally on the managers and the board of directors, who through
formal and informal meetings decide on the company’s strategies and objectives, i.e. it plays a
“strategic role”.

Management Information System

The term “information” means different things to different people. It is and always has been an
elusive but important concept, especially in the business world. Many attempts have been made
to come up with some sensible and intuitively acceptable definition; up to now none of these
have succeeded (Van Rijsbergen and Lalmas, 1996). A management information system is “an
integrated structure of data bases and information flow over all levels and components of an
organization, whereby the collection, transfer, and presentation of information is optimized to
meet the needs of the organization” (Long, 1989). Management control systems have become
inseparable from modern management (Vithal, 1988), and are increasingly becoming essential
in meeting the information needs of organizations. As such they can be used by organizations to
obtain a competitive advantage or to keep up with the competition to survive or retain market
share (Chandler and Holzer, 1988).

Initially, the information for management control meant accounting information (see
Marginson, 1999; Otley, 1996, 1994) – a notion that still holds true for many present-day
organizations. With the broader understanding that some managerial activities are difficult to
measure or unable to be measured and controlled in accounting terms in recent years, alternative
means of control such as action, results and personnel have been put forward by several
academics and researchers in the area (see Marginson, 1999; Merchant, 1985). Particularly, in
the case where the meaningful measurement of the effectiveness of activities cannot be achieved
using the output generated, the value of accounting information tends to be very limited. Thus,
the focus on the accounting information system becomes generalized into a focus on the
management information system (Otley, 1996). Today almost every organization devotes a
large amount of their resources to the area of management information systems. They are likely
to include one or more of the following capabilities: report generation, information retrieval
from queries, arithmetic calculations, quantitative functions; and modeling (Kole, 1979).

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With the development of information technology, the use of computers in information
management has been instrumental in many organizations. The use of computerized
management information in managerial decision-making is a critical task. The role it plays in
achieving organizational goals and objectives is an even more critical task. Business managers
make decisions to solve problems and information is used in making their decisions. As
Morrison and Laffin (1995) pointed out, “to facilitate those decisions, it is important that
computerised management information systems (MIS) are used to full advantage”. For example,
today many accounting information systems are computerised. An accounting information
system performs a firm’s accounting applications. Such a system is supposed to provide
information of a financial nature. Organizational managers should make sure that such a system
is designed and operated to meet the organization’s financial information requirements with the
highest possible effectiveness and efficiency. A computerised system is expected to provide
information efficiently and effectively.

The introduction of powerful technological tools has often led companies to focus their attention
on technology – called hard aspects – and to neglect managerial practices and human behaviour
– called soft aspects. Consequently, insufficient attention is given to the organizational impact
of information systems (Serafeimidis and Smithson, 2000). Recently, many authors have
underlined the importance of analyzing soft aspects such as performance measurement practices
and human behaviour (Claver et al., 2001; Haag et al., 2002). Nonetheless, assessing an
information system is recognised as a complex activity and, at least up to now, the models
applied to assess MIS are still mainly based on cost benefit analysis, evaluation as experiments
and user satisfaction (Stone, 1990).

Corporate Culture and Management Style

Corporate culture is defined as the deepest level of basic assumptions and beliefs that are shared
by members of an organization (Schein, 1985) and considered to be one of the most stable and
inertial factors in an organization. Consequently, changes inculture are often described as
complex and part of a long process. Management style is defined as the practices adopted by
leaders in decision making, management of information, relationships, motivation and
managing subordinates (Burton and Obel, 1998). Management style influences the level of
delegation, the approach and time required to make decisions and the control of activities.
Moreover, management style is considered to be one of the key aspects to understanding
organizational culture (Cameron and Quinn, 1999; Pheysey, 1993). Different frameworks have
been developed to study organizational culture and management style. A recent empirical study
was carried out by Bititci et al. (2006) on the relationship between performance measurement,
organizational culture and management styles. These authors adopted a classification based on
Harrison’s (1987) and Hofstede’s (1980) categorization of culture with corresponding
management styles.

Corporate culture consists of shared values and belief systems held by the organizations and
their actors (Dawson, 1996; Ouchi, 1979). For example, according to Dawson (1996, p. 141),
“the term ‘culture’ in organizational analysis refers to ‘shared values and beliefs” which are
seen to characterise particular organizations”. Corporate culture as an element of the
management control system represents relationships and interactions among the human actors of
the organization derived mainly from beliefs, values, morals, customs, and knowledge.
Corporate culture can thus be applied in understanding organizations and their members’
behaviour.

The term “culture” as it is used today has developed slowly over the last century (Dearstone,
1989, p. 12). Simply, corporate culture is about what organizational members are allowed to do
and what is forbidden. Thus, culture is something that can create improved organizational
efficiency and effectiveness through organizational participants. Therefore, the culture of an
organization can be considered a guiding perspective that constrains the actions of

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organizational members and directs towards accepted behaviour. Hofstede (1990) described
how people develop mental programs, which create patterned ways of thinking, feeling and
action. As such, organizational managers can manipulate the behaviour of organizational
members in the way they consider desired.

Corporate culture as a component of management control consists of beliefs and attitudes of

employees and customers as reflected by organizational policies or top management’s practices,
the dominant values and norms such as product quality, behaviour patterns such as rituals and
language and climate factors such as interaction between managers and subordinates and so on.
In the given framework, the relationships between the core management control package and
corporate culture are two-way because once created, they have an impact on the way values are
subsequently improved. This means that corporate culture is regarded as something manageable,
although it can be considered as created through the passage of the organization. In this regard,
Johnson and Gill (1993, p. 104) pointed out: Founders establish organizational culture to a
crucial degree, but, it is argued, what we see at this stage is culture being created rather than
consciously managed – even though leaders inevitably play a key part in the formative process.
It is believed that the of dimension corporate culture has a profound influence on the
organizational management control system. The organization’s core management control
package should be compatible with the organizational culture (Flamholtz, 1983). The
dimensions of organizational culture influence the behaviour of organizational actors. “Once the
desired culture has been defined, the remaining elements of the organizational control system [.
. .] help transmit and reinforce the entity’s culture throughout the organization to govern
strategic and operational decisions and actions” (Flamholtz, 1983, p. 159).

Organizational Structure
Another important element of the overall management control system is the organizational
structure. As with Dawson (1996, p. 110) organization “structure is a social creation of rules,
roles and relationships which at best facilitates effective co-ordination and control, as far as
corporate governors are concerned”. Thus, organizational structure is considered a means of co-
ordination and control through which organizational actors’ behavior can be directed towards
organizational effectiveness. As Trompenaars (1985, p. 93) stated: organization “structure is a
product of human interaction, which, in turn, is a product of structure”. Thus, organizational
structure is considered a means of co-ordination and control through which organizational
actors’ behaviour can be directed towards organizational goal achievement. Organizational
structure is very often used in analyzing organizations, and a variety of organizational structures
can be found in the literature depending upon the type of the organization. This variety can be
accounted for by the various positions scholars take in their conceptualization of social reality in
general, and of human organizations in particular (Trompenaars, 1985, p. 93). In general terms,
“the structure of a group of people such as an organization, or a society is the pattern of their
relationships with each other and the way their various roles, powers, laws, etc are arranged”
(Sinclair, 1994, p. 1451; original emphasis). Thus, any structure can be considered a whole
consisting of parts. As Gutman (1955, p. 7) explained (cited by Trompenaars, 1985, p. 94),
“what is common to all structures is (the) fact that their components have a meaningful
relationship to the whole either by virtue of their arrangement which produces in the whole
certain properties or makes it useful for certain purposes, or by virtue of the role that the parts
play in the function of the whole” (original emphasis). The type of meaningfulness of the
relationship between the elements and between the elements and the wholedepends on the type
of system of which they are a part (Trompenaars, 1985, p. 94).

Organizational Performance
The traditional management accounting literature advocates the use of organizational
performance measures in evaluating managerial performance. Many writers (e.g. Anthony,
1965; Merchant, 1998) argue that organizational performance measures communicate financial
objectives, provide an overall summary of performance, do not require top management
involvement in operating decisions taken at business units, can play a diagnostic role in

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deciding whether or not to continue with current strategies and do not require additional costs in
order to prepare them since they are already available for external financial reporting purposes.

Although the traditional management accounting literature advocates the use of organizational
performance measure many writers attribute many problems to use of organizational
performance measures. Eccles and Pyburn (1992) argue that organizational performance
measures are ‘lagging indicators’ since they determine the outcomes of management’s actions
after a time period. Therefore, it is difficult to establish a relationship between managers’ action
and the report financial result.

Organizational performance can be measured by many criteria. In general, the literature

suggests that organizational performance is commonly measured in terms of effectiveness,
efficiency, growth and productivity (Kim Man, 2009). Montanari, Morgan and Bracker (1990)
suggested that organizational effectiveness may be measured in terms of financial measures,
operational measures as well as behavioural measures.

Most executives agree that there is no magic formula……or one right measure…….for
evaluating business performance. Therefore, In an effort to capture the essence of business
performance, many companies are creating new performance measurement systems that include
a broad range of financial and nonfinancial measures.(Bonnie P. Stivers et al 1998).

Small and Medium Enterprises.

Small and medium-sized enterprises (SME’s) play a significant role in the business system of
both developed and developing economics (United Nation, 1993). In nearly every country, they
play a significant role in providing employment opportunities and supporting large-scale
manufacturing firm (Gunasekaran et al. 2000). SME’s are critical to almost every national and
local economy because of their potential to grow larger (Duan & Kinman, 2000). In the
developing countries, SME(s) account for nearly 80-95 percent of the total number of
enterprises (Abdullah, 1999; Heymans, 2000; Martin, 2002). Within the European Community
small businesses contitute at least 95 % of all enterprises (Storey, 1994). The same applies to
developed countries (Randall, 2002). As observed by Randall (2002) in Australia,over a 15 year
period from 1983/84 to 1998/99, small business had an annual growth rate of 3.7% compared
with the growth rate of 2.6 percent of other business. In most European countries and in North
America, SME(s) began increasing their relative importance as of the mid-1970s (Loveman and
Sengenberger 1991; Acs and Audretsch 1993). SME(s) accounted for one-fifth of
manufacturing sales in the USA in 1976, but the small firm share of sales had risen to over one-
quarter by 1986 (Acs and Audretsch 1990).
Definition of SME’s : it has no publicity-traded securities, the owner have undiversified
personal portfolio, limited liability is absent or ineffective, first generation owner are
entrepreneurial and prone to risk taking, incomplete management team, the business
experiences the high cost of market and institutional imperfection, relationships with
stakeholder are less formal. And it has a high degree of flexibility in designing compensation
schemes (Ojala, 2002). Small business is a business in which there is no public negotiability of
common stock and that owner must personally guarantee any existing or any planned
financing (Osteryoung and Newman, 1993).

In Indonesia, definition of SME’s (Jan Husada, 2006) : Micro entreprises are business units
with maximum net assets of 200 million rupiahs excluding properties of business or have 1-4
labor force. Small entreprises are entreprises that have maximum assets of 200 million rupiahs
excluding properties or are entreprises that have maximum annual selling of 1 billion rupiahs or
have 5-19 labor forces. Middle entreprises have assets range from 20 million to 10 billion
rupiahs excluding land and building, with 20-99 labor forces. Big enterprises have more assets
values and more number of labor forces than middle entreprises.

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In Indonesia (2002) , the number of SME(s) was 41,4 million business units in Indonesia, of that
number, 23,7 million were micro business of farming sector. SME(s) in Indonesia contributes
20 % of total non-oil and natural gas exports.(Business News 16 Desember 2004). In 2003,
numbers of business units in Indonesia are dominated by SME(s),99.8%. Big business and
BUMN (state-owned corporation) are only 0.2% of all business units that contribute 2/3 of GDP
and absorb 33% of labor forces. Of 39 million units SME(s) registered in SME Ministry, only 1
million are small enterprises, 70 thousand are cooperation and 55 thousand are medium
enterprises, the rest are micro enterprises. (Business News 1 April 2004)

Management Control System and Performance

Kennedy and Affleck-Graves (2001) show how the implementation of Activity Based Costing
systems has a positive effect on performance. These authors compare two matched samples
composed by 37 British companies. Those companies that implemented cost systems
significantly achieved a 27% higher performance than those without this system. Bright, Davies,
Downs and Sweeting (1992) find a significant relationship between the development of new
cost techniques and the improvement of product performance. Chenhall and Langfield-Smith
(1998b), on a sample of 140 Australian manufacturing companies, find evidence on the positive
relationship between MCS use and company performance. Adler, Everett and Waldron (2000)
show, after analyzing 165 manufacturing companies of New Zealand, that MCS positively
influences product performance. Finally, McMahon and Davies (1994), state a positive
correlation between amplitude and frequency of accounting information elaborated by the
company and the net profit per employee.

CONCLUSION

In the context of Indonesia (South Sulawesi Province), the research findings described in this
paper suggest that the use of MCS seem to have only e few positive effect on small firm’s
financial performance. The external environment did not influence small firm’s financial
performance. The pursued strategy seems to drive small firm’s profitability and growth in net
sales. The small firms do use a wide range of MCS practices, information and by using a more
diversified management team seems to increase the use of MCS practices and information.

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 COMPETITIVE BARRIERS IN ACQUIRING BUSINESS
INTERNATIONALLY:
A CASE ON MALAYSIAN FIRMS.

SHAHIMI MOHTAR, FAWAD HUSSAIN

 
UUM College of Business, University Utara Malaysia

ABSTRACT
 
In trend with the current economic situation that has affected the international industry
world wide, this paper previews literature, which focuses on internationalization
strategy, internet communication, ecommerce and Malaysian firm which involve in the
process of internationalization. Over the past few decades the internationalization has
change the concept and ideology how the international market was perceived. The aim
of this paper is to examine internationalization strategies among the Malaysian firms
and competitive advantage of internationalization for Malaysian firms. This paper will
look into, what are the approaches needed to innovate the environment for firm to go
via internationalization process. The Malaysian local firms can only survive, when they
have competitive advantage over products and services. These competitive advantages
can depend on managerial approach, strategy and perception of the international
markets (Javalgi, R. R. G., et al, 2003). It is important to reduce the trade barriers for
Malaysian firms. These approaches will also support Malaysian local firms and
provide better opportunities for Malaysian local firms to grow internationally with a
competitive edge.

Keywords: Internationalization, Process, Strategy, Malaysia Firms.

INTRODUCTION
 
The world is deviating from the tradition business to technology influence base business. The
most pronounced difference between the world today and world of yesteryear is the rapid pace
of technological change (Khalil, 2007). The world penetrates in an era of accelerating change in
the decade following World War II. One direction of change was the rise and spread of
internationalization. Not unexpectedly, internationalization has become one of the most
interesting topics for firms around the world. There is a complete transforming process of
information technology all around the global economy. Technological displacement is
displacing all the business activities into information technology based activities.
Internationalization is sighted as the strategy through which a firm progresses from operating
solely in its domestic marketplace to international markets (Buckley & Casson, 1998; O’ Farrell
et al., 1998, Janatul, 2007). Due to the web there, is availability of extended opportunities for
the customer and companies.

There are many controversies and issues which have been highlighted by past researchers.
Further, critical issues of internationalization those are relevant to world’s competition need to
be debated and give solution according to the need and demand of our industry. There are some
bias and barriers which don’t help firm to participate in international business. That is the reason
it is easy for bigger firm to participate but difficult of smaller. There are many success stories of
firm who are performing internationally (e.g. DELL, AMAZON, TOYOTA, SHELL and Wall
Mart etc...).

On the other hand, today’s competition is getting more intense than ever and firms from
countries like China and India are giving more critical competition to the global industry. It is
not just to hold a new idea but to utilize the product to be considered as not only in the home
country but internationally.

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There are many catalyst which helps firm to participate internationally. Porter’s diamond,
(1990), is the approach to define these catalysts. Porter plotted four broad attributes of a nation
shape the environment in which local firms compete, and these attributes promotes or impede
the creation of competitive advantage. These attributes are factor endowments, demand
conditions, relating and supporting industries and firm’s strategy, structure and rivalry.

INTERNATIONALIZATION
 
The phrase Internationalization is clarified as the process of integrating or increasing
involvement in international operations across borders (Welch and Luostarinen, 1988).

As discussed by Hitt et al. (2006), that there is a positive link between firm performance and
internationalization. According to Porter’s five diamonds, the firms should focus on such forces
which are driving industry’s competition as a threat of potential entrants, a bargaining power of
buyers, a threat of alternate products or services, a bargaining power of suppliers, a rivalry
among existing firms. Wheelen (1995) projected another addition to these five forces which is
the relative power of other stakeholders. (Andrei Panibratov, 2009).

Internationalization process has a variety of approaches which are mentioned below:

1. The strategy renovation.
2. Compensation of deficient of plots in big cities,
3. Search for new sales opportunities or just an attempt to improve the image of a company.

All these goals were related to the competitive actions. With the rapid development of economy
globalization, some internationalization strategies have to be enacted not only by firms in
developed countries but also in developing countries (Axinn and Matthyssens, 2002; Bianchi
and Ostale, 2006). ‘‘Internationalization’’ has been widely used to describe the outward
movement of the international operations of a firm (Welch and Luostarinen, 1988). This
involves the process of adapting the firm’s operations to cope with the strategy, structure and
resources of international environments (Calof and Beamish, 1995). (Zeng, Xie, Tam and Wan,
2008).

ECONOMIC OVER VIEW OF MALAYSIAN EXPORT

Malaysian economy is one of the most stable among economies within the region.
Malaysia play’s an important role among the ASEAN markets. With reference to the
data published by Bank Negara Malaysia, (BNM), stated that the total trade rose in the
year 2008, was RM80.5 trillion, 6.8%, more that what has been received in the year
2007. There was a boom in Malaysian economy in 2008 as it has jumped to RM663.5
billion recording 9.6% increase and the imports also rose to RM521.5 billion registering
3.3% growth, ensuing RM142 billion in trade surplus. Though, the import export in
Malaysia declined in December 2008, it still recorded the trade surplus of RM11.67
million. (Gen Wright, 2009).

As there was a world recession all over the world, Malaysia industries have also failed
to perform very well in the international market as you can see in the table 2.1 given
below, which states that the total export 2007-2008-2009. As you can see, exports have
decreased to RM43.6 billion by 15.6% as compared with 2008, which shows, that
Malaysian industries are lacking in term of penetrating in international markets. (Macro
Economic Review Report, 2009).

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 MAJOR MALAYSIAN EXPORT
Major products exported from Malaysia is given below in the table 1.1, which
includes electrical and electronic goods, liquefied natural gas (LNG), palm oil and
related products, petroleum and related products, timber and timber based products,
chemicals and metals.

Table 1.1: Major Malaysia Export 2007-2009

RM Millions
Categories
2007 2008 2009
Electronics, electrical machinery and appliances 287,696 277,282 246,897
Electronics 213,704 195,933 179,087
Semiconductors 96,653 89,819 92,972
Electronic equipment & parts 117,051 106,114 86,115
Electrical machinery & appliances 73,993 81,349 67,809
Consumer electrical products 16,461 21,388 18,794
Industrial & commercial electrical products 29,696 31,088 23,986
Electrical industrial machinery and equipment 24,297 25,382 21,905
Household electrical appliances 3,538 3,491 3,125
Chemicals & chemical products 37,159 40,926 34,161
Manufactures of metal 26,372 29,257 22,644
Petroleum products 22,093 31,149 21,939
Optical and scientific c equipment 13,626 14,944 13,095
Textiles, clothing and footwear 10,631 10,911 9,375
Wood products 9,736 9,767 7,978
Rubber products 10,326 12,426 12,125
Crude oil and condensates 32,865 43,698 25,360
Liquefi ed natural gas (LNG) 26,936 40,732 31,195
Palm oil 32,027 45,955 36,365
Rubber 7,334 8,112 4,460
Others 16,201 15,931 10,009
Source: Department of Statistics, Malaysia Bank Negara Malaysia, Annual Report 2009

MAJOR MALAYSIAN EXPORT DESTINATION

Major export destination for Malaysian goods includes Japan, China, USA, Singapore,
South Korea, Thailand, India, Australia, Hong Kong and Netherlands. According to the
figures available, with reference to department of statistic BNM, 2009, 71.8% of
Malaysia's total exports destination are given below in the table 1.2.

Table 1.2 Table of Major Export Destination

Major Malaysian Export Destination

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 Japan
China
USA
Singapore
South Korea
Thailand
India
Australia
Hong Kong
Netherlands
Source: Department of Statistics, Malaysia Bank Negara Malaysia, Annual Report 2009

PROBLEM STATEMENT

We have come to recognize that there is need to further research on certain trends of
emerging economy. As recommended by (Preet and Chittoor, 2009), that the future
research is needed in two scope.
1. The first one is on transformation of organizations in these economies as response to the
dual imperative of economic liberalization initiated by home country.
2. The second in on internationalization strategies of emerging economy firms to respond to
increased competition in their erstwhile protected markets.

It is also need to highlight such avenues of research have the potential to further our
understanding of firms from emerging economies (Preet and Chittoor, 2009). However,
there are number of companies mistakenly perceive that an internationally accessible
website is the equivalent to trade in an international market. In order to take maximum
benefits of international commerce, one must have an understanding of national and
cultural variations and how these variations shape the stages of technology adoption,
while utilizing internet and e-commerce (Kshetri, 2007).

Domestically, there are numerous problems, which are either depreciating or

appreciating internet base culture, such as language, regional or local technological
infrastructure, legislation and legal framework, and restriction to prevent national
identity. The most regular internationalization barrier between people from different
countries is language. There are many countries, which required labeling the product in
the official language of the country, which hold back the easy and free flow of good
between counties, but dealing in with a huge business environment one can offer a multi
language website which can help to attract consumers, in order to have better
understanding of the product description (Gilani & Razeghi, 2010).

Internationally Malaysia has many developmental opportunities, which can not only
support the economic infrastructure but also helps the nation to generate huge amount of
foreign exchange. There are many countries, which are making an effort to present a
combined internet front so that the entire country can benefit from latest national and
international internet base opportunities. Malaysian firms if increase their level of
expertise and if financial support is provided to them, than these firms can generate
good revenues internationally (Keegan, 2002).

Luo and Tung (2007) propose a ‘springboard’ perspective whereby emerging market
multinational’s systematically use international expansion as a springboard to acquire
125 

 
critical resources needed to compete effectively against global rivals at home and
abroad and to reduce their vulnerability to institutional and market constraints at home.
While access to globally dispersed resources as a motivation for internationalization is a
reasonable proposition, and which can also explain the internationalization of developed
countries, on the other hand it is not completely clear how resources lead to capability
development for emerging economy firms (Luo and Tung, 2007).

However, the explosive growth of the Internet and the coming tidal wave of E-
Commerce till provides vast possibilities for Malaysia to exploit the potential and use
these for accelerating its economic recovery.

As identified by (Jannatul Firdaus, 2007), that currently the economic condition, exports
performance and foreign direct investment from Malaysia increased significantly in the
1990s. And base on the current literature available on internationalization process does
not directly apply to the case of firms based in developing economies, and most
particularly Malaysia.

It is clearly conscious of the fact that the hyper speed of change in the IT causing
Malaysia an escape of opportunities, which cannot be compensated at any cost. This
fact dictates that any meaningful action or decisions for the IT industry in Malaysia has
to be implemented immediately. Malaysia and similar countries hoping to exploit the
inherent potential of internationalization process must act immediately and decisively to
restructure the domestic firms to become effective role players with in the global IT
scenario.

These are some other problems which identified by Janatul, (2007), base her study on
the internationalization of Malaysian firms into foreign market, she has be found that, in
order to meet the international standards it is important to know that our industry is fully
capable to using internationalization process in order to play the role internationally. It
has been identifies that there are number of B2B firms who do not even have the
awareness to EC or internationalization process. On the other hand they are lacking in
term of managerial and economic strategic. So it is the biggest challenge to the whole
Malaysian firms in to bring up innovative e-commerce strategies, in order to understand
the role of internationalization process. There are many examples of these businesses
which produces a service or product that could be competitive in international markets,
but they are not sure of the appropriate international business strategy. In the result it
shows a failure to follow up on global opportunities, or there are number of barriers in
entering the international wing with insufficient knowledge of expert managerial and
economic consideration. Based on the past academic research it has been seen that
international business are more towards case studies and these studies are based on
firms that have tried to participate in internationalization process or either they have
approached to enter the global market place only to face many obstacles that lead them
to failure (Janatul , 2007).

At certain level, B2B firms are enforced to used internet access and use, a range of
measures policies have developed through number of funding references over the last
five years (Martin & Matlay, 2001).

As most firms are taking the advantage from the usage of internet, small firms are
expected to significantly increase the usage of Net for B2B and B2C transactions in the

126 

 
future. All over the business sector, the usage of internet is significantly improving, but
its access is still not that what the firms should practice (Martin, 2001).

Lack of entrepreneurial skills and managerial know-how of IT professionals is also one

of the important problems in attracting the foreign buyers. As (Ragayah, 1999) are not
pretty aware of the technology the manufacturing cost is also very high and hard for the
manufacturer to through their product in the global market place. In order to attract the
B2B customer, it is important to have the cost effective solution and web sites, is the
cost-effective in increasing foreign customer. Web based B2B transactions are
inexpensive, time effective and operationally phsiable for firms (Lituchy and Rail,
2000).

It has been seen that after the contextualization of new technology, it has been found
that it is a revolution for every aspect of the industry and firm are using e-commerce
techniques successfully from B2B perspective. On the other it has been seen from the
previous studies that still the firms are using the traditional way of trading and these
firm are facing obstacles in implementation to go technologically internationalize.
This is one the factor which is firms is lacking behind in technology adoption
(Martin, 2002; Martin and Matay, 2003).

One of the aims of this study is to model the internationalization process used among
the Malaysian B2B firms. It explains how the international market entry has changed
with respect to what is practiced among the firms internationally in term of technology.

This research will be examining the barriers in internationalization process and all those factors
which help these firms to do their business transaction internationally. It will also give exposure
to new firms to enter these markets without any prior experience (Osarenkhoe, 2009).

CONCLUSION AND RECOMMENDATION

 
There are number of potential opportunities for Malaysian firms internationally. Modern trade
faces a huge substantial challenge to successfully compete in increasingly internationalize
market place, which frequently change along different dimensions, time and speed constraints.
Today internationalization is not only a strategy but it is an internationalization intelligence
which Malaysian firms need to be aware of rapidly changing competitors’ actions as well as
internationalization trends.

As discussed by Michael, Oliver & Mark, (2009), that competing internationally, requires
constant monitoring of the most important markets. It is also needed to integrate ever changing
consumer demands, Malaysian firms not only need to understand but also need to react upon
their competitors’ ever changing activities. One of the most significant basic problems in
competitive marketing strategy pertains to competitive advantage and its sustainability no
matter if the focus is on local, national, international or global markets. It is generally
recommended that Malaysian local firms, need to be in possession of governing competitive
positioning such as Malaysian heritage; international competitive intelligence; anti-
internationalization activists and product piracy.

Malaysian firms needs to watch the evolution of markets and, especially, competition as
regulation and deregulation pose fundamental opportunities and threats. Obviously establishing
an internationally active system of competitor intelligence is imperative. If a firm follows the
basic guidelines and pays attention to the problems highlighted given above can significantly
compete international challenges.

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Aihie Osarenkhoe. (2009).An integrated framework for understanding the driving forces behind
non-sequential process of internationalization among firms”, Business Process
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technology on the globalization of small businesses”, Journal of International Marketing,
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General Management, 14(2) 34-64.

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THE INTERNATIONALIZATION PROCESS OF MALAYSIAN SMES: A CASE
ON CONCERNED AND TENDENCY TOWARDS UNCERTAINTY
AVOIDANCE.

SHAHIMI MOHTAR, FAWAD HUSSAIN

UUM College of Business, University Utara Malaysia

ABSTRACT

The main objective of the paper is to aim those factors of uncertainty avoidance which
prevent Malaysian SMEs towards internationalization process. The impact of
uncertainty avoidance is very high as to know whether Malaysian SMEs are risk takers
or not. The human life only differentiates with animals by identifying ethical values
among them, and when dealing with different culture around the world it differs in term
of how a society deals with international trading electronically. This paper will be
looking at how Malaysian SMEs acquire international business while utilizing their risk
taking factor on the international business communities.

Keywords: Internationalization; Process, Malaysia SMEs; Uncertainty Avoidance

INTRODUCTION

It is the challenge of 21st century, for Malaysia SMEs to develop its learning curves and grow
with the age of information technology. However it is important for Malaysian SMEs to
participate with new innovative ideas to enter in an international business environment. The
efficient exchange of information communication through technology can help Malaysian SMEs
to earn more opportunities in the international markets. So, it is important to facilitate Malaysian
SMEs to learn all these technological tools to meet the global challenges. The is a revolution
in this era in internet commerce which is changing the way how organization processes
and create integrated opportunities and challenges for international markets as many
global markets are fast becoming borderless and integrated (Hitt et al., 2006).

In order to be competitive with in the local and the international market these firms are needed
to avail these opportunities which are available through internationalization process. As the
definition of practicing business is changing and there are no transactional or geographical
boundaries, across time zones, business transaction can now be performed more rapidly with the
help of electronic commerce and internet age. As the electronic trading has become the boom
for market trend for this Century (Alemayehu Molla et.al, 2005).

UNCERTAINITY AVOIDANCE

Hofstede, (1984), have studied the one of the most important cultural dimension among the
workplace. This dimension which is known as uncertainty avoidance is the scale to know the
society's tolerance level for uncertainty and ambiguity. It deals with the society’s actual search
towards truth. It help to find, that at what level a culture line up it members to feel either
comfortable or uncomfortable in unstructured situations.

These unstructured situations are unknown, novel, surprising, and different from usual.
Uncertainty avoiding cultures aims to reduce the risk of such situations by strict laws and rules,
safety and security measures, and on the philosophical and religious level by a belief in
absolute.

In the countries where people avoid uncertainty are considered to be more motivated and
emotional by their inner nervous energy. On the other hand the other type of people or societies,
they accept uncertainty as a part of culture. These people or societies have more tolerance level
130 

 
and their lives are fixed on few rules and philosophies and religious guide lines. People or
societies which involves in these cultures are more phlegmatic and contemplative, and not
expected by their environment to express emotions.

Given below is the chart which is showing the uncertainty avoidance (UAI) for selected
countries:
Country UAI
Malaysia 36
Indonesia 48
United States of America 46
Portugal 104
Pakistan 70
Israel 81
Japan 92
Singapore 8
Source : http://www.cocreativity.com/handouts/numbers.pdf

DEFINITION OF KEY TERMS

The term internationalization is explained as the process of integrating or increasing

involvement in international operations across borders (Welch and Luostarinen, 1988).
Creating new and challenging opportunities for companies to play internationally with
their suppliers is known as internationalization (Lancioni et al., 2000).

International Markets
Before the commercialization of the Internet in the early 1990’s, geographical
constraints hindered many small and mid-market sized companies from expanding
globally. Since the Internet’s introduction to the field of commerce, many industries
(especially the retail industry) have taken the extreme advantage to target the
international market. Many companies however, have mistakenly assumed that a
“globally accessible website” is the equivalent to selling in a global market. In order to
take advantage of global E-commerce, one must have an understanding of national and
cultural differences and how these differences shape the levels of technological
adoption, Internet usage, and Internet commerce (Kshetri, 2007).

Hurdles for Malaysian SMEs

There are number of difficulties which Malaysian SMEs are facing in term of
penetrating in international markets. As mentioned by (Janatul, 2007), that Malaysian
SMEs needed to involve in an internationalization process. These Malaysian firms are
lacking in term of having a competitive advantages over other international SMEs.
Malaysian SMEs can cut operational cost, which can decrease the overhead expanses.
Malaysian SMEs are better off in term of direct feedback from their international clines
and likewise they can improve the quality of product or services. There is bigger scope
for Malaysian SMEs if these SMEs involve in internationalization process efficiently. In
a similar direction has been discussed by (Fu, Chen, Chang and Chien, 2006).

Born Globals
The concept of “Born Global” was introduced by Cavusgil (1994, p. 18). This model is
giving the characteristics of born globals because there are many companies who have
not able to establish domestic sales previously to initialize international sales. It has be
been observed that majority of firms ignored psychically close markets in aim to
international market entry (Osarenkhoe, 2009).
131 

 
Instead of the limited financial and human resource that characterize smaller firms,
international small and medium enterprises (ISME) s, are increasingly the norm in the
landscape of international trade and investment. Perhaps the most interesting
manifestation of this trend is the wider spread emergence of born-global firms (‘Born
Globals’), companies that internationally at or near their founding. Born globals sell a
substantial share of their offerings in international markets from an early stage in their
development. Born globals are also sometimes called ‘international new ventures’ or
‘global start ups’ (Oviatt and McDougall, 1994). The distinguishing feature of these
firms is that their origins are international, as demonstrated by management’s tendency
to view the world as their marketplace. From an early stage, born globals commit
certain types of organizational resources to international activities.

This term born global refers to that firms that is aiming to rapid growth internationally
and want is as early as possible, the implementation of a global strategy from inception.
(McDougall et al., 1994; Oviatt and McDougall, 1994).

Globalization, Internationalization And Born Globals

This research is based on the theory, “Born Global”, which was first used almost 10
years ago in an Australian report, (McKinsey & Co., 1993), and it has been used and
discussed together with similar concepts, for example International New Ventures, see
(McDougall et al., 1994; Oviatt & McDougall, 1994;Oviatt ;Zahra et al., 2000). We
think that it is time to evaluate the research carried out and to discuss what it has
brought of new insights about the internationalization process of firms. Similar it is time
to look forward and discuss the directions of the research on highly international firms.
It is also one of the important factors to examining the moderators of perceived
electronic commerce based promise and the ease of use (Wixom and Todd, 2005).

There are research like (Moen, 2002) who have highlighted the concept of ‘Born
Globals’ (or ‘instant internationals’), that is newly established firms with an important
involvement in exporting or it can be said as those firms which has high contribution
from national exporting. This phenomenon has been facilitated recently by various
trends, such as the increasing importance of niche markets in various countries, the
opportunities associated with the rapid advances in communication technology, and the
increasing role of global networks and alliances (Knight and Cavusgil, 1996). The
problems of ‘born global’ have been examined from a number of perspectives, with
particular attention being given to entrepreneurial related factors (Mc Auley, 1999).

In this paper is also looking at another concept which is known as “Stage Theory”, the
diagram is shown below. The process of Internationalization can be described as “the
process of increasing involvement in international operations”. (Welch and Luostarinen,
1988). The process essentially involves the adoption of SMEs operations like strategy,
structure, resources etc. to perfectly fit the international environments. Furthermore, the
degree of internationalization can be measured as foreign sales relative to total sales.
(Welch and Luostarinen, 1988).

132 

 
 Innternationallization stagges
Source: Jim Bell, (19995). “The internationa
i alization of Small Com
mputer Softw
ware firms.””
European Journal off Marketing,, 29(8), 60-775.

CONCL
LUSION

This papeer concludees that som me time low wer uncertaainty avoiddance groun nds do nott
support thhe businesss people to do busin ness successsfully. Thhese higher values off
uncertaintty avoidancce help Maalaysian SM MEs take too more delliberate rolle in doingg
business internationaally. There is i no fixed standard to involve in internation
nal businesss
process; itt is there foor needed to calculate the risk beefore enterinng in the in
nternationall
market. This
T paper has
h focusedd on the baarrier behinnd uncertainnty avoidan nce level off
Malaysiann SMEs andd internationnal businesss participatiion. It is alsso highlightted base onn
the past liiterature thaat there are high risk and
a high returns and thhe countriess like Chinaa
and Japann are one of o the beauutiful exam mple of riskk takers annd maximizzation theirr
business opportunitie
o es internatioonally.

SUM
MMARY AN
ND FUTUR
RE RECOM
MMENDA
ATION

Based on the above literature,

l w
which is foccused on thhe Internatioonalization process forr
the Malayysian SMEss and their willingnesss to participate in intternational trade, it iss
suggested that Malayysian SMEs should takee initiate to internationnal trade as it is provenn
from suchh concepts as “Born Global”G thatt small andd medium ffirms can successfully
s y
participatee in internaational businness transacctions. It is also recommmended to o initiate byy
the Malayysian governnment to suupport thesee SMEs in a context oof taxes and d rebates too
ensure thaat these SME Es are veryy successful internationnally and likke wise SME Es can playy
a significaant role in thhe boostingg up Malayssian econom my. Malaysiian SMEs could
c play a
vital role which can further decrrease the faactor of monnopoly or ooligopoly in n the globall
market.

REFER
RENCES

133
3 

 
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