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JEIM
19,3 Supply chain management
practices of SMEs: from a
business growth perspective
292
Paul Hong and Jungsik Jeong
Department of Information Operations and Technology Management,
College of Business Administration, University of Toledo, Toledo, Ohio, USA

Abstract
Purpose The purpose of this research is to show that small or medium enterprises (SMEs) have
significant impacts on supply chain performance. They may take the roles of suppliers, producers,
distributors, and customers. In this paper large firms and SMEs are compared in terms of strategic and
operational choices.
Design/methodology/approach SMEs are classified on two dimensions chain relationship
position and strategic focus. Four types of SME characteristics are discussed: efficiency, coordination,
collaboration, and innovation. Also presented are the five possible growth paths of SMEs, along with
theoretical and managerial implications.
Findings The theoretical contribution of this paper to the nature of SMEs and their supply chain
relationships is threefold: the differences between large enterprises and SMEs have been examined in
terms of key management practices; key characteristics of four types of SMEs have been identified in
terms of their supply chain relationship position and strategic focus; and the transition paths that
SMEs may follow in moving from one type to another have been shown. The models presented in this
paper give an informed insight and understanding of the dynamic changes that can transform SMEs
within their supply chain relationships.
Research limitations/implications The growth paths that have been outlined for SMEs display
diverse patterns. In view of the sheer numbers of SMEs that comprise the global economy, and their
strategic roles as suppliers, component manufacturers, service providers, and distributors, their
growth patterns may not be easily discernible over a short time period.
Practical implications Managerial implications of the study include: SME executives may
diagnose their current business position and strategically plan intended changes by enhancing their
operational capabilities and chain relationship positions, in view of changing market realities; most
importantly, they may strive to take practical steps to evolve from Efficiency SMEs all the way to
Innovation SMEs. The road-map presented in this paper may be helpful in benchmarking current
operations and in planning future transitions. In this way, SME management may take practical steps
to implement desirable growth paths through appropriate management practices that utilize
appropriate intra- and inter-organizational capabilities.
Originality/value These SME growth patterns provide a useful framework for meaningful case
studies that illustrate the potential for the dynamic transformation of SMEs.
Keywords Small to medium-sized enterprises, Supply chain management, Strategic objectives
Paper type Research paper

Journal of Enterprise Information Introduction

Management Supply chain management is a set of approaches utilized to effectively integrate
Vol. 19 No. 3, 2006
pp. 292-302 suppliers, manufacturers, logistics, and customers for improving the long-term
q Emerald Group Publishing Limited
1741-0398
performance of the individual companies and the supply chain as a whole (Chopra and
DOI 10.1108/17410390610658478 Meindl, 2001; Lambert and Cooper, 2000; Zhao and Simchi-Levi, 2002). Supply chain
management includes links upstream (e.g., supply and manufacturing) and Supply chain
downstream (e.g., logistics and distribution) value chain entities. Successful supply management
chain management requires the integration of these value chain entities to create
cooperative and collaborative environments that facilitate information exchanges, practices
materials and cash flows (Kukalis, 1989).
According to the SBA Office of Advocacy (2003), 99.7 percent of US businesses are
small or medium enterprises (SMEs) that have fewer than 500 employees. For the 293
purpose of this paper, the primary criteria of SME classification is the number of
employees (, 500). Increasingly, SMEs play key roles in supply chain management as
they participate in value creating activities. They supply raw materials, produce
products, and distribute finished goods to customers. Through their efforts, SMEs
have significant impacts on supply chain processes (Huin et al., 2002). Many studies of
supply chain management focus on the practices of large firms, while small firms are
treated mostly from the viewpoint of larger firms (Chopra and Meindl, 2001; Kukalis,
1989; Lambert and Cooper, 2000).
A few studies have highlighted the growth patterns of SMEs in the context of
information systems (Levy et al., 2001; Venkatraman, 1991), industrial marketing
(Kalafatis et al., 2000), strategic planning (Berry, 1998; Cooper et al., 1986), and
integration issues (Shiels et al., 2003). More research effort is needed to study the
impacts of SMEs in the context of supply chain management. Since the long-term
sustainability of SMEs depends on where they compete and how they compete,
decisions on their chain relationship position and operational focus should be strategic.
This paper is organized as follows:
(1) a comparison of large enterprises with SMEs in terms of their operational and
strategic choices;
(2) four types of SMEs are described, in the context of supply chains;
(3) growth paths of the four types of SMEs are described; and
(4) the theoretical and managerial implications of our findings are discussed.

Comparison of large enterprises and SMEs

In discussing supply chain management issues related to SMEs, we first address
differences between SMEs and large enterprises. In applying theories to SMEs,
frequent questions are: Are management theories relevant to large firms readily
applicable to SMEs? A prudent approach might be to recognize the differences
between large firms and SMEs, and any theories applicable to large firms may need to
be tested in the context of SMEs. In this sense, we first compare large enterprises and
SMEs in terms of strategic and operational choices such as competitive priorities, key
strategies, external control structure, internal control structure, and goals of supply
chain management processes (De Toni and Nassimbeni, 1996). We examine their
differences and then discuss the supply chain management practices of SMEs. Table I
shows a summary of these comparisons.

Competitive priorities
Unliked large firms, most SMEs may not compete directly against large enterprises
because of their limited resources (Cooper et al., 1986). Competitive priorities of SMEs
JEIM
Category SCM by large enterprises SCM by small/medium enterprises
19,3
Competitive priorities Market dominance through Market niches through sustaining
sustaining large market share profitable market position
Key strategies Exert influences in supply chain Focus on specialized market; build on
both upstream and down stream; unique competencies; effective
294 strategic alliances with suppliers and customers/suppliers management
distributors
External control Command and control toward their Either accept command and control
structure small suppliers and distributors; by OEM or 1st tier suppliers or
collaborate with more dominant utilize their negotiation strengths;
suppliers and distributors pursue collaboration with other
SMEs
Internal control Decentralized, structured and highly Centralized, semi-structured and
structure specialized; multiple core moderately specialized; specific core
competencies development competencies development
Goals of supply chain Operational effectiveness with Operational effectiveness with
Table I. management processes multiple performance outcome focused performance outcome
Comparison of supply requirements (e.g. cost, quality, requirements (e.g. specific definition
chain management delivery, time, customer value, and of order qualifiers and order
practices large v. small disposal) bigger scopes of winners); smaller scopes of
and medium enterprises information flows and product flows information flows and product flows

are protecting their specialized niche market through which they generate sufficient
profits, regardless of the size of their market share (Lambert and Cooper, 2000).

Key strategies
With their relative strength through their market positions, large firms may exert more
influence on their supply chains. They are more flexible in forming strategic alliances
with suppliers and distributors. On the other hand, the scope of SME influence on
supply chains may be more restricted (Berry, 1998; Brouthers et al., 1998). SMEs focus
on building their unique competencies and strive for effective customer and supplier
management (Lee et al., 1999). Naturally, SMEs tend to focus on a specialized niche
market strategy.

External control structure

Because they have substantial power and influence over their suppliers, large firms
may use a command and control structure toward small suppliers. For dominant SMEs
within a supply chain, large firms may be more accommodating. Depending on their
power position, SMEs will either accept command and control imposition by large
firms or strive for better negotiation terms, based on their unique strengths. They may
also pursue independent collaboration with other small enterprises.

Internal control structure

In view of potential inefficiencies related to their size, many large firms may use a
decentralized form of control structure. Large firms are highly specialized with
multiple competencies, while SMEs are moderately specialized with specific core
competencies. Large firms tend to implement more autonomy in their internal
operations while SMEs tend to be more focused in their organizational decision-making Supply chain
and information flows. Accordingly, SMEs tend to centralize their key strategic management
operations (e.g., strategic planning, purchasing, and information technology
infrastructure). practices
Supply chain management practices
SMEs and large enterprises may use similar supply chain management processes in 295
the areas of customer relationship/service management, demand management, order
fulfillment, manufacturing flow management, product development and
commercialization, quality management, and returns management (Lambert and
Cooper, 2000; Powell, 1995; Tsang and Antony, 2001). Large firms tend to use their
management processes to achieve multiple performance outcomes while SMEs try to
achieve focused performance outcome requirements. The primary differences between
large firms and SMEs are in the scope of information and product flows. Large firms
have a much larger scope for these flows, through the complex relationship
requirements within their supply chains. Large enterprises may formalize their
documentation system practices and tend to be more timely in exploiting available
technologies, in contrast to SMEs.

Two defining characteristics of four types of SMEs

In defining the characteristics of SMEs in the context of supply chain management, we
use two dimensions:
(1) strategic focus; and
(2) supply chain relationship position.

SMEs need to decide where to compete (i.e. positioning in the supply chain) as well as
how to compete (i.e. strategic focus) (OGorman, 2001). To survive, SMEs need to
clarify their strategic focus and supply chain relationship position (Berry, 1998; Cooper
et al., 1986; Entrialgo et al., 2000; Fronmueller and Reed, 1996; Kemppainen and
Vepsalainen, 2003). Strategic focus refers broadly to how SMEs compete within supply
chains, in terms of either low cost operations or value added operations (e.g. new
product and service development) (Levy et al., 2001). Chain relationship position relates
to competitive positioning by particular SMEs. Relationship strength within the
supply chain may affect bargaining power with their customers (Kalafatis et al., 2000;
Olhager, 2003).
Survival and growth of SMEs may depend on how SMEs effectively allocate
resources through their strategic focus, and secure better negotiation terms through
improvement of their chain relationship position. In describing business practices in
the context of supply chains, these two dimensions highlight key characteristics of
SMEs. With their obvious size constraints, SMEs must carefully position themselves as
product or service component providers or producers. SMEs acting as suppliers are
more likely to offer product components, but if they are on the distribution side of
distributions, they are more likely to offer service components to their larger partners.
To continue as viable competitors, SMEs must be able to meet order qualifier
standards (i.e. quality and delivery). Frequently, order winning criteria are low costs
for mature manufacturing industries and innovative elements in product and service
offerings for knowledge-intensive industries.
JEIM Here, low cost refers to the extent of ability to produce goods and services at
19,3 competitive rates. Firms with a low cost focus tend to produce components for
mature products; consequently their market potential may not be growing. On the
other hand, firms with a value-added orientation show strengths in their capability to
design and deliver product or service components to meet changing customer
requirements, with more likelihood of market growth. Value-added refers to the
296 extent of value creation potential with the products and services offered to customers.
High value-add SMEs are able to create a larger value potential with their products and
services, but low value-add SMEs have relatively less capability to create value
potential (i.e. revenue enhancement for products and services they offer) (Kukalis,
1989).
SMEs that have high or low measures on the two defining characteristics of chain
relationship position and strategic focus result in four SME classifications. These are
shown in Figure 1.
If the strategic focus is low cost (i.e. productivity or operational efficiencies) and the
chain relationship position is low, then such a SME may be one of many small
competitors in the market. Such efficiency SMEs usually accept cost reduction
targets set by their customers and try to conform to their customer demands.
If their strategic focus is low cost and the chain relationship position is high, these
firms may be able to work toward better cost targets with their customers. With their
strong supply chain position they have fairly substantial negotiating power with their
customers. In this sense, we will refer to these companies as coordination SMEs.
If the strategic focus is value-added and the SMEs chain relationship position is
low, then such SMEs operate in a relatively collaborative market with competitive
strengths. Even if their negotiation position is not strong, their internal competencies in
relation to value creation capabilities allow them to stay in the business as viable
members. Therefore, we call these companies collaboration SMEs.
If the level of efficiency is high and the chain relationship position is high, then such
SMEs have a sustaining competitive position. Their negotiating position is strong and

Figure 1.
Value-added chain
relationship position
model
their internal competencies in relation to value creation capabilities allow them to stay Supply chain
in the business as dominant members. We call the companies innovation SMEs. management
practices
External and internal contexts of the four types of SMEs
In this section, we discuss business environments and management practices of the
four types of SMEs we identified. We first explain external contexts (market, position 297
in supply chain, external relationship patterns) and internal contexts (firm capabilities,
management process focus). Table II summarizes these essential supply chain
management characteristics for the four types of SMEs.

Competition characteristics
Competitive characteristics are the first pattern indicator of SMEs. Many component
suppliers in the US auto industry compete primarily on cost. Both efficiency and
coordination SMEs compete on cost or operational advantages. In information and
knowledge-intensive industries (e.g., IT and business consulting firms) the differences
between collaboration and innovation SMEs lie in their ability to compete, based either
on their current product or service advantages and their innovative capabilities.

Position in supply chain

Positional difference in supply chain is another indicator of different SME patterns.
SMEs that occupy a low position in supply chain tend to be expendable among
multiple possible competitors. On the other hand, SMEs that have a high position in
the supply chain possess dominant value propositions (e.g., reputation, brand image,
management leadership, relationship strengths) (Kalafatis et al., 2000; Olhager, 2003;
Venkatraman, 1991).

Efficiency Coordination Collaboration Innovation

Competition Competition on cost Competition on Competition on Competition on

characteristics advantages operational product advantages innovative
advantages capabilities
Position in One of many One of dominant One of many One of dominant
supply chain cost-driven cost-driven innovative innovative
competitors competitors competitors competitors
External Accept Negotiate Involve new Initiate new
relationship cost-reduction productivity product product
patterns targets dictated by improvement development effort development effort
their customers targets with their by their customers with their
customers customers
Firm Adequate cost Strong productivity Adequate product Strong product
capabilities improvement enhancement development development
capabilities capabilities capabilities capabilities
Management Specific target Sets of Specific new Sets of new product
process focus driven management targets-driven product families
control management development development Table II.
development initiatives Four types of SMEs
JEIM External relationship patterns
19,3 Based on positional strengths and competitive advantage, SMEs display different
relationship patterns within their supply chains. In the environment of low cost
competition, efficiency SMEs tend to accept cost reduction target terms dictated by
their customers, because of their relatively weak negotiation strengths. On the other
hand, coordination SMEs use their supply chain positions to secure better productivity
298 improvement targets with their customers. For SMEs that are suppliers, the amount of
product development effort is related to the extent and the manner of engagement with
their customers (e.g., original equipment manufacturers or OEMs). For example,
collaboration SMEs are somewhat reactive in that they tend to get involved in product
and service development efforts by their customers. Innovation SMEs are more
proactive in that they initiate new product development efforts with their customers,
based on new product concepts that are valuable to their customers.

Firm characteristics
The distinction among SMEs in this pattern is adequate or strong capabilities in
relation to their key strategic focus. Efficiency SMEs possess adequate cost
improvement capabilities to stay in business. Collaboration SMEs have adequate
product or service development capabilities. Coordination SMEs have strong
productivity enhancement capabilities and stand out among their competitors.
Innovation SMEs have strong product development capabilities that may result in
marketing multiple sets of new products and improving their market positions.

Management process focus

Coordination and innovation SMEs move toward exploring and realizing sets of
possibilities, while efficiency and collaboration SMEs tend to fix on achieving one or
more specific target. In other words, efficiency SMEs put their efforts into meeting
specific target-driven management controls while coordination SMEs work forward a
set of targets that drive effective management development. Collaboration SMEs focus
on specific new product development initiatives originating from their customers,
while innovation SMEs develop new product families. The differences among these
types of SMEs lie in the way they pursue product development potential.

Growth paths for the four types of SMEs

Most SMEs experience growth. Some of them grow to be effective enterprises by
adapting themselves to rapidly changing environments. In discussing the growth
paths of SMEs, we will make two assumptions:
(1) many SMEs are not interested in becoming large companies; and
(2) even so, they may make transitions from one pattern to another.

For the purpose of this paper, we do not consider examples like Dell, which grew into a
very large corporation in a relatively short time period. Our focus is more on the
majority of SMEs that, in spite of their noticeable growth over the years, have not
become large firms. The model we developed is based partially on the growth theory of
SMEs (Venkatraman, 1991), strategic and operational choices of SMEs (Berry, 1998),
dynamic changes of SMEs (Levy et al., 2001) and other positioning literature (Kalafatis
et al., 2000; Olhager, 2003). Our model focuses on the organizational transitions that Supply chain
SMEs may undergo, and is demonstrated in Figure 2. management
Efficiency to collaboration path practices
The central aspect of this transition is a change in strategic focus from low cost to
value-added. Such a transition requires major reorientation of the companys
functional strengths. The focus of a low cost SME is primarily on operational 299
efficiencies, based usually on the operations function. On the other hand, functional
strengths of value-added typically show in R&D and marketing. This transition
requires switching from operational efficiencies (cost reduction through waste
reduction) to customer-sensitive value creation capabilities. Here, the transformed
emphasis is on external market realities, beyond internal cross-functional integration
and work process transformation. In the short run, these changes may not necessarily
improve the firms position in the supply chain through increased market share.
Rather, the transition allows firms to be much more flexible in inter-organizational
relationship building practices.

Efficiency to coordination path

This transition goes beyond the level of specific functional competency. The
motivation for moving from an efficiency SME to a coordination SME is to improve the
companys supply chain position. The firm will focus on increasing market share, and
needs to manage the increased number of customers as it grows (Levy et al., 2001). A
drastic improvement in the companys positional strength requires more than
cross-functional integration. Rather, its positional changes requires
inter-organizational effort. A good example is the improvement of relationships with
customers, from a position of being one of many suppliers to becoming a priority
supplier. Positional changes can occur through enthusiastic top management
leadership, increased communication and visibility, enhanced economic resources,

Figure 2.
Growth paths
JEIM and better technological networks (De Toni and Nassimbeni, 1996; Kalafatis et al.,
19,3 2000; Levy et al., 2001).

Coordination to innovation path

Firms wishing to make this transition are interested in realizing improved market
potential while maintaining a dominant chain position. These firms look for growth
300 possibilities from their market realities. They focus value-creation opportunities
through new product and service offerings that extend beyond waste reduction and
productivity enhancement. Such a change in strategic focus is similar to the efficiency
to collaboration transition path, but on a bigger scale. For example, they strive to attain
business process change through strategic alliances with other firms, while redefining
their core strategic focus. These firms must be able to make major investments in order
to develop strategic alliances with other firms that will complement their relative
weaknesses.

Collaboration to innovation path

This transition goes beyond existing market boundaries and utilizes value chain
capabilities to deal with new suppliers, customers, and value chain partners. The
critical element in innovation SMEs is the ability to enhance their supply chain
positions. This path requires firms to grow through external networking, beyond
cross-functional integration. Here, the transition from collaboration to innovation SME
requires inter-organizational business process and relationship capabilities to utilize
existing strengths (product and service development capabilities, customer and
supplier relationship strengths, and effective succession by a new generation of
leaders) and stand out and become dominant among their many competitors.

Efficiency to innovation path

This path requires a radical transformation. It has to simultaneously accomplish an
intra-business process transformation and achieve an inter-organizational position of
power. Such a large transition places enormous strains on organizational resources,
and existing management practices need to experience rapid changes in multiple
fronts. Such a path change may occur through turnaround management or
extraordinary leadership. Because the transition is so rapid and drastic, firms that
adopt this path assume a high risk of corporate failure. However, effective leadership in
response to rapid market changes may be the most sensible option for some highly
successful SMEs.
The growth paths that we have outlined for SMEs display diverse patterns. In view
of the sheer numbers of SMEs that comprise the global economy, and their strategic
roles as suppliers, component manufacturers, service providers, and distributors, their
growth patterns may not be easily discernible over a short time period. However, these
SME growth patterns provide a useful framework for meaningful case studies that
illustrate the potential for the dynamic transformation of SMEs.

Conclusion
The theoretical contribution of this paper to the nature of SMEs and their supply chain
relationships is threefold:
 (1) we have examined the differences between large enterprises and SMEs in terms Supply chain
of key management practices; management
(2) we have identified key characteristics of four types of SMEs in terms of their practices
supply chain relationship position and strategic focus; and
(3) we have shown the transition paths that SMEs may follow.

The models presented in this paper give an informed insight and understanding of the 301
dynamic changes that can transform SMEs within their supply chain relationships.
Managerial implications of the study include:
(1) SME executives may diagnose their current business position and strategically
plan intended changes by enhancing their operational capabilities and chain
relationship positions, in view of changing market realities; and
(2) most importantly, they may strive to take practical steps to evolve from
efficiency SMEs all the way to innovation SMEs.

The roadmap presented in this paper may be helpful in benchmarking current

operations and in planning future transitions. In this way, SME management may take
practical steps to implement desirable growth paths through appropriate management
practices that utilize appropriate intra-organizational and inter-organizational
capabilities.

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Corresponding author
Paul Hong can be contacted at: Paul.Hong@Utoledo.Edu

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