Variance vs average: supply chain lead‐time as a predictor of financial performance

Abstract

PurposeThe purpose of this paper is to examine the impact of supply chain lead‐time averages and variability on an organization's financial performance.Design/methodology/approachThe “executive” list for manufacturers, consisting of 1,264 individuals of the Institute of Supply Management provided the study's sampling frame, with surveys sent to 402 firms and responses obtained from 210 firms. The empirical model is tested using LISREL.FindingsThe results show that as variance in supply chain lead‐times increases, the financial performance of the organization decreases. Of equal significance, the results show that average supply chain lead‐times have no direct impact on financial performance. The results also indicate that demand uncertainty associates with greater supply chain lead‐time variance and that production technology routineness associates with lower supply chain lead‐time variance. Product complexity and organizational size have no impact on supply chain lead‐time variance or supply chain lead‐time average.Research limitations/implicationsThe research is an initial effort to understand variance in supply chain systems. An ongoing challenge in this area is operationalization of measures and data collection techniques that go beyond a single firm and examine a network of organizations cooperating in a value‐added supply chain.Practical implicationsThe results suggest that managing the variance in a supply chain system may be more important to an organization's financial performance than managing averages.Originality/valueThis is particularly significant since organizations often act contrary to these findings, focusing scarce resources on reducing average lead‐times rather than on reducing variability in supply chain lead‐times.