Impact of Total Quality Management on Firm Performance of SMEs in Amhara Region: Analytical Essay

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I Introduction

1.1 Background of the study

In Ethiopia, in particular, in Amahara Regional State, textile and garment industries are the most potential areas for further development and job opportunities. Because of the large agricultural land for the production of cotton as the raw material source, Amhara Regional State should take advantages for further processing their raw material to finished product. According to a McKinsey (2015) study apparel buyers are sourcing large-volume items from Ethiopia.

Amahara Regional state is the second largest state in Ethiopia with a total population of 20 million. In Amhara region there are more than 685 small and medium manufacturing industries those are engaged in textile, garment and leather and leather products manufacturing. Some small and medium industries have started export finished products to international markets. The local manufacturers of garment and fashion products have their own attributes in local customers. In Ethiopia, particularly in Amahara Region, at holiday, peoples are wearing traditional clothes that are prepared from cotton and sometimes from wool. Therefore, the current study will focus on the supply chain integration, quality management and learning capability of small and medium industries towards their performance. The purpose of the study is to investigate the supplier and manufacturer integration and the impact of total quality management on firm performance of SMEs in Amahara region.

1.2 Statement of the problem

Recently, the manufacturing industry in developing countries has been facing pressure generated by the new business trends. To contend with this pressure, the manufacturing industries have tried to upgrade their operations by using different manufacturing techniques such as Supply chain integration, Total Quality Management, Kaizen practice, and human resource development. In Amahara region small and medium industries are trying to integrate more in their production activities such as raw material sourcing, production, and delivery to customers.

Firm performance is essential indicator of the strength of firms to stay in operation, expand, and compete in local and international markets and thereby contribute to employment, and economic development. In order to meet the target effective supply chain integration are becoming increasingly critical factors for small and medium enterprises performance. As Samaranayake (1998) stated that organizations integrating their information and raw material flow can transform to optimal utilization of the supply chain.

Most SMEs source their major raw materials from locally produced cotton product whereas other sources their major raw material from Chinese fabric manufacturer. In addition, the supply chain starts from cotton cultivation from local suppliers and then local textile manufacturers and finally distributes to local SMEs and foreign markets customers. However, this all steps lack integration, there is wastage of time in raw material delivery system, and information sharing between cotton producers and garment manufacturers is inefficient and lacks synergy. Many firms simply do not trust other members of the supply chain, and they reluctant to share information. This indicates that the main challenges of supply chain integration are information exchange and planning activities to fulfill the appropriate delivery lead time and organizational learning capability towards quality improvement. Therefore, the present study will try to investigate the impact of supply chain integration, quality management and organizational learning capability on small and medium industries operational and financial performance.

1.3 Research gap

Various researchers conducted in context of supply chain integration and firm performance (Frohlich and Westbrook, 2001; Cousins and Menguc, 2006; Mitra and Singhal, 2007, Flynn, Huo, and Zhao, 2010). Hence, they did not consider the critical contextual factors like organizational learning capability, Total Quality Management and the moderating role of Information Technology towards the organizational performance which play a prominent role for holistic understanding about firm performance.

Others also tried to investigate the role of Supply Chain integration to firms’ their competitive strategies and advantage as well as organization performance (Lambert & Cooper, 2000; Birhanu, 2014; Pathak, 2015; Rao, 2015). On the hand some researchers also investigate the impact of total quality management and employee performance on firms’ performance in order to satisfy customers need (N.M Zakuan et al., 2008).

Furthermore, others investigate human resource practices as critical strategic tools for promoting favorable behavior among employees and leveraging their knowledge, skills, and abilities, which should increase productivity and performance of firms’ (Bartlett, 2001; Bates & Chen, 2004; Clardy, 2008).

Hence, the above studies did not investigate firm performance in a comprehensive conceptual framework. The previous studies explored the influence of supply chain integration on firm performance has been largely overlooked. In addition, the impacts of Total Quality Management on firm performance have been investigated in the previous research adequately. However, the previous studies could not show us the human capital factors and IT competence as a comprehensive framework. To fill this gap in the literature, we have try to develop a system through which the effect of supply chain integration, Total Quality Management and organizational learning capability on firm performance with the moderating effect of IT strategy. So, the present study will be a step forward by applying a comprehensive conceptual framework to investigate firms’ performance.

1.4 Research Contribution

This study aims to make key contributions by providing key predictors that through influence firm performance in small and medium industries sourcing, making and delivering processes. This study identified three predictors of operational and financial firm performance which are supply chain integration (internal and external integration), Total Quality Management and the moderating effect of firms’ organizational learning capability. Therefore this study will try to fill two gaps.

First, it tries to extend the theories that supply chain integration is more important in small and medium enterprises in the context of developing countries and inter-organizational and extra-organizational transfer of raw materials and information sharing.

Secondly this study will use a comprehensive conceptual model to investigate the performance of manufacturing firms and assessing the relationship between supply chain integration, total quality management and organizational learning capability on firm operational and financial performance in the context of developing countries SMEs.

II. Literature review

2.1. Supply chain integration

The literature has provided numerous definitions for Supply chain integration. Some studies defined Supply Chain Integration as a regular process of partnership (Cao et al., 2010), others understand SCI as a set of practices that include sharing of resources and information across internal departments and external organizations (Swink et al., 2007). Furthermore, Flynn et al. (2010) argued that supply chain integration implies collaboration among industrialists and other supply chain partners in order to develop an effective and efﬁcient movement of materials, resources, and information to produce products and services that are valuable to the customer quickly and at low cost. Qi et al. (2017) also deﬁned supply chain integration as cooperation plans and activities between suppliers, manufacturers, and consumers that plan to develop products by transforming raw materials into ﬁnished goods.

Supply chain integration refers to the degree to which a firm coordinates intra- and inter-organizational processes with channel partners in a collaborative way (Liu et al., 2013; Kim, 2006). Basically, supply chain integration is related with firm information sharing and operational coordination with channel partners and the degree to which partners are provided with information that might help them (Liu et al., 2013). The present study will apply two major classiﬁcations of supply chain integration which are external integration and internal integration (Abdallah et al., 2017; Lii & Kuo, 2016).

2.1.1 Internal integration

Internal integration ensures product quality and reduces the duplicated tasks by promoting the internal resources and capability (Flynn et al., 2010). Internal Integration has been said to be the foundation of other kinds of integration and is defined as the linkage of business processes of departments in an organization into a strategic fit for improved performance (Fawcett &Magnan, 2002). Therefore internal integration in this study refers to the degree to which a firm can construct its organizational practices, procedures and behaviors into collaborative, integrative and manageable processes in order to fulfill customer requirements (Sank et al., 2001).

2.1.2 External integration

External integration refers to the degree to which a firm can partner with its key supply chain members (customers and suppliers) to structure their inter-organizational strategies, practices, procedures and behaviors into collaborative, synchronized and manageable processes in order to fulfill customer requirements (Stank et al., 2001).

2.2 Firm performance

Organizational performance refers to how to do mission and organizational activities and the results of them as well [19]. Based on the conducted researches, the evaluation of organizational performance is divided into two dimensions: operational performance and financial performance [21].

2.2.1. Financial performance

A company’s financial performance is defined as the achievement of organizational goals or as active, constructive, and effective performance [22]. Financial performance refers to the company’s achievement to shareholders’ financial goals in order to increase their wealth. These goals include indicators and criteria such as profit earnings, return on assets, return on investment, etc. which are considered as a part of organization’s performance [3,23,24]. Financial performance is one of the important concerns of shareholders and managers of economic entities and, using new methods, managers try to manage their organization and provide an outstanding performance [25].

2.2.2. Operational performance:

Operational performance refers to the ability of a company in reducing management costs, order-time, lead-time, improving effectiveness of using raw material and distribution capacity (Heizer et al., 2008). Operational performance has an important role to business firms by improving effectiveness of production activities and creating high quality products (Kaynak, 2003), in turn, leading to increased revenue and profit for companies

Many researchers Spasojevic et al., (2013), Spasojevic et al., (2011), Sadikoglu and Zehir (2010) and Samson and Terziovski (1999) formulate five dimensions to measure operational performance such as customer satisfaction, the share of defective products in relation to the volume of production, the cost of the warranty period as compared to total sales, quality costs in relation to total revenue and proportion of timely deliveries in total deliveries.

2.3) Organizational learning capability

Organizational learning capability is defined as the organizational and managerial characteristics, practices, skills or factors that facilitate the organizational learning process such as generating, acquiring, disseminating & integrating information and allow an organization to learn (Jerez Gomez et al, 2005).

Jerez-Gomez et al., (2005) stated that organizational learning capability have four dimensions managerial commitment, openness and experimentation, knowledge transfer and integration, and systems perspective.

Managerial commitment indicates the development of managerial support for and leadership commitment to the learning process and employee motivation (Jerez-Gomez et al., 2005). Systems perspective refers to bringing the organization’s members together around a common identity and a shared vision, interconnecting the activities of employees, and developing relationships based on the exchange of information and shared mental models (Jerez-Gomez et al., 2005). Openness and experimentation denotes a climate of accepting new ideas and points of view and allowing individual knowledge to be constantly renewed, widened and improved through experimentation (Jerez-Gomez et al., 2005). Knowledge transfer and integration refers to the internal spreading of knowledge through verbal and non-verbal communication and the information systems (Jerez-Gomez et al., 2005).

2.4 Total quality management

According to Dean & Bowen, (1994) define Total Quality Management as a system approach which is an integral part of organizational strategy aimed at people focused management featuring participation of all firm members and a culture of cooperation to create value for all stakeholders through continuous improvement. In addition, Terziovski (2006) define Total Quality Management improves effectiveness, flexibility, and competitiveness of a firm to meet customers’ requirements, as the source of sustainable competitive advantage for business organizations

Besides to its definition Total Quality Management has been successfully implemented in many small and large business firms, giving them the edge in international as well as local competitiveness through the production of high quality products to satisfy customer needs (N.M Zakuan et al., 2008). This is supported by Lakhal et al. (2006), who noted that organizations with Total Quality management systems in place consistently exceeded industry standards for return on investment. For this study we adopt Six fundamental factors of Total Quality Management practices such as customer focus, leadership, training, teamwork, communication, and top management.

2.5 IT Competence

The concept of IT competence was first put forward by foreign research scholars Ross et al. (1996). In their opinion, IT competence is the ability to influence the organization goal by controlling the cost relevant to IT and implement IT. Based on the resource-based view (RBV), IT competence was further classified into human, technology and relative resources. Some scholar defined IT competence as the ability to use and integrate IT resource (Bharadwaj, 2010). Thus, IT competence is the tools but purpose for enterprises to attain competitive advantages. Some scholar defined IT competence as the ability to use and integrate IT resource (Bharadwaj, 2010). For this study, IT competence particularly IT Strategy is used as moderating role.

III. Hypothesis development and Conceptual Framework.

3.1 Supply chain integration and operational performance

As Frohlich and Westbrook (2001) suggested that companies with the widest degree of integration with both suppliers and customers have the strongest association with performance improvement. In addition, (kim 2006) argued that Supply chain management (SCM) seeks to improve competitive performance by closely assimilating the internal functions within a company and effectively linking them with the external operations of suppliers, customers, and other channel members.

Droge et al., (2004) states that external integration with suppliers and customers has a direct positive influence on market share, while internal integration has an influence on financial performance. He also suggests that integration may enhance flexibility and reduce costs, thus leading to improved performance by retaining more customers and increasing profit ratios.

In addition, process integration with supplier helps the manufacturers reduce mistakes and improve product quality by information sharing and jointly planning to enhance the operation performance (Petersen et al., 2005).

The product integration with suppliers and customers can enhance manufacturers’ new product development capabilities, promoting product quality, flexibility and innovation in addition to product competitive advantage (Koufuteros et al., 2007; Swink & Song, 2007). Therefore, we proposed the following hypothesis:

H1: Supply chain integration /internal and external/ positively relate to firm performance.

3.2 Organizational Learning Capability and Firm Performance

Many studies have stated that organizations are going to promote productive learning as a core competency (Sinkula, Baker, & Noordewier, 1997). In addition, other researchers suggested that there is a significant and positive relationship between organizational learning and firm performance (Zahir et al., 2008; Garcia et al., 2006; and Carayannis & Alexander 2002). Moreover, others also suggested that learning at organizational level has a positive effect on firms’ performance (Milia & Birdi 2010); in the same line Baker and Sinkula (1999) suggested that learning orientation has a direct effect on company performance. Therefore based on the above empirical studies the following hypothesis is formulated.

H2: Organizational learning capability has a significant and positive relationship with firm performance.

3.3 Total Quality Management and Firm Performance

Some previous studies suggested that TQM have been positive relationship with manufacturing performance and productivity (Chenhall, 1997); financial performance (Agus & sagir, 2001; Kaynak, 2003; Fuentes et al., 2006) and comprehensive organizational performance (Sharma 2006; and Zahir & Sadikoglu, 2012). Sharma (2005), Samson and Terziovski (1999), suggested that quality improvement practices improve business performance.

Based on this relationship the following hypothesis is formulated

H3: Total Quality Management positively related with firm performance (operational and financial performance).

3.4 The moderating effect of IT Competence/IT Strategy/

IT influences the operation of a firm in multi aspects, including product quality, types and customer service. Some scholar proposed that IT influences the operation and strategy of a firm, and the effect of operation reflects the enterprises operation performance (Mukhopadhyay, 2002); also IT competence promotes the integration of supply chain.

H4: The positive relationship of Supply chain integration and Operational performance is strengthening by IT strategy of the firms.

H5: The positive relationship of Total Quality Management and Operational performance is strengthen by IT strategy of the firms

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