Operational practices and financial performance: an empirical analysis of Brazilian manufacturing companies.
| Autor | de Castro Moura Duarte, Andre Luis |
| Cargo | Report |
Introduction
The search for a recipe for superior performance using operational practices has been a frequent concern in management literature since the early days of the scientific management by Taylor (1911). Several managerial publications claim to have found the formula for business success like the book by Joyce, Nohria and Roberson (2003) that states it in the title What really works: the 4+2 formula for sustained business success. Operations management has extensively explored the potential of the then successful Japanese management techniques when applied to western companies. This resulted in the Quality Management movement (Cole, 1998) and the Lean Manufacturing approach (Womack & Jones, 1996).
Despite its relevance to the field, a more rigorous and scientific evaluation of the impact of management practices in financial performance still shows mixed results as demonstrated in more detail in the literature review section of this paper. Several reasons can account for these mixed results. First, financial performance is an elusive dependent variable (March & Sutton, 1997) being affected by multiple variables simultaneously, making any investigation limited in terms of controls. Second, some operational practices may deliver positive outcomes in some settings, but negative outcomes in others, and identifying these interactions is not simple. Outsourcing is one example, as indicated by Rossetti and Choi (2005). Third, identifying what constitutes a practice is also not simple. Powell (1995) showed that the soft, cultural aspects of quality management are the ones that can affect performance and not simply the adoption of practices. Tan, Kannan and Narasimhan (2007) found that the capabilities behind the practice is what drives performance, a result consistent with the Resource-based theory (RBT) of strategy (Barney & Clark, 2007). Fourth, imitation of successful practices continuously wears out financial benefits through competition, following the RBT logic. Finally, given all the above points, large samples are necessary to have the power to identify relationships that may have been weakened or diluted by all of these factors.
This paper contributes to the attempt of answering the question: do management practices lead to superior financial performance? Addressing some, but not all, of the above points, we explore the impact on performance of a set of practices (Just-in-time; quality management; services outsourcing; ISO standards) in a sample of 1200 firms in the state of Sao Paulo, Brazil.
In the next section we review the literature and previous studies that explore the impact of operational practices and performance. A methodology section describes the sample, operationalization of variables and method of analysis used. We then present and discuss the results and a conclusions section ends the paper.
Operating Practices and Firm Performance
Assuming that internal factors at firms are primarily responsible for performance variation, organizations are expected to make changes based on best practices to their structural and infrastructural elements in order to attain selected performance goals (Narasimhan, Swink, & Kim, 2005). According to Hayes and Pisano (1996), firms are on performance curves based on the resources they use, but new manufacturing technologies, including management-related ones, such as JIT and TQM (Total Quality Management), might place firms on new performance curves.
We next provide a review of the literature that investigates the impact of operational practices--in particular JIT, Quality, ISO certification and Outsourcing--on firm performance. Table 1 summarizes the references that we use in each operational practice.
Quality and Performance Practices
TQM can be defined as a management philosophy that integrates with a series of practices emphasizing continued improvement, meeting consumer expectations and needs, reducing re-work, long-term planning, redesigning processes, competitive benchmarking, teamwork, constant results measurement, and a close relationship with suppliers (Ross, 1993).
The results of several of the empirical studies on ties between quality practices and organizational performance are mixed. Powell (1995), for example, uses RBT to study the impact of some elements of TQM programs on the creation of competitive advantage. The results suggest that practices associated with TQM programs are not capable of generating sustainable competitive advantages, but some of the characteristics present in quality programs help form intangible and behavioral elements such as leadership, organizational skills and culture.
Kaynak (2003) contributed to the discussion with a comprehensive review of the literature. The author investigated the links between the different TQM practices, attempting, in particular, to determine how they affect organizational performance on three levels: operational, marketing and financial. The results support the argument that only a few TQM practices (supplier quality management, product/service project, and process management) have a positive effect on an organization's operational performance. The same practices also affect financial and marketing performance through the organization's operational performance.
Cho and Pucik (2005) examined the relationship between quality, innovation, growth, profitability and the firm's market value. The results of the structural equations model show that quality has different effects on profitability and growth. While the quality has a direct impact on profitability, its effect on growth is mediated by innovation. On the other hand, Mohrman et al. (1995), were unable to use financial statistics to find a connection between adopting TQM and financial performance. Still, some positive ties were found between TQM and market share and between TQM and employee efficiency.
More recently, Sila (2007) tested the impact of TQM practices on certain organizational performance variables. The results show that a direct relationship exists between TQM practices and organizational efficiency, but no significant connection was found with either financial or market performance. Only indirect effects of TQM made themselves felt on these two latter performance variables.
Based on all of the above studies, we may say that some positive connection may be expected between quality and performance, but this relationship is not always direct, as suggested by some researchers. Furthermore, some results are difficult to compare and, sometimes, conflicting.
JIT and Performance
Literally, JIT means producing goods and services exactly when they become needed, not before or after. Slack, Chambers and Johnston (2002) divide JIT into philosophy and a series of techniques. The philosophy of JIT helps guide the actions of an organization's managers and is based on doing things well and simply, improving them constantly, and eliminating waste; all of this with the involvement of everyone in the organization. JIT as a set of techniques and tools represents the means to attain the fundamentals the philosophy prescribes.
Some of the main elements of JIT are also to be found in the TQM philosophy (Flynn, Sakakibara, & Schroeder, 1995). Vuppalapati, Ahire and Gupta (1995) argue that firms that implement both philosophies jointly attain better performance than those that view and implement them in isolation.
Several of the authors who empirically investigated the benefits of JIT, such as Bartezzaghi, Turco and Spina (1992) and Upton (1998), focused their studies on the benefits relative to organizations' operating performance, including reduced lead time, production time and procurement batches, increased process flexibility, accelerated delivery, low cost and low cycle time, to name a few. As a result, these authors found significantly improved operational efficiency.
Claycomb, Droge and Germain (1999) surveyed executives with 200 American organizations. The authors also found a positive relationship between JIT and financial and efficiency metrics. Fullerton, Cheryl and Fawson (2003) surveyed 95 firms that had implemented JIT and 158 firms without JIT in various US manufacturing industries. They found that firms with a broader adoption of the JIT approach were able to attain better financial performance. But no significant correlation was found between exclusive JIT variables (Kanban and JIT procurement) and profitability. The authors were also unable to find a positive correlation between the Manufacturing JIT variable and profitability, and a negative correlation between Quality JIT and profitability. Finally, the authors show that no significant evidence exists that firms with JIT become more profitable over the years.
Sale and Inman (2003) also performed an empirical comparison between JIT and TOC (Theory of Constraints) adopters and traditional manufacturers. Their results show that the best performance and greatest evolution were found with firms that had implemented TOC. JIT firms had no better performance than traditional manufacturers. In addition, they showed no performance improvement after implementing JIT.
We can see that here, too, no consensus exists among the various researchers as to whether JIT can truly improve an organization's financial performance. Even so, several studies showed improved operations performance. Another interesting view can be found in Fullerton et al. (2003), who argue that use of JIT is more closely related with long-term performance gains. Therefore, adoption of JIT is not supposed to bring about immediate return on investment. According to the authors, this partly explains the low validity and consistency of empirical surveys attempting to show a relationship between financial performance and JIT adoption.
ISO Standards and...
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