The Effects of Supply Chain Integration on the Cost Efficiency of Contract Manufacturing

While the literature on supply chain integration (SCI) is proliferating, the link between SCI and a firm's contract manufacturing performance has not been investigated yet. To fill this gap in the literature, we investigate the effects of supply chain integration on contract manufacturing efficiency using the objective measure of return on contract manufacturing. Unlike prior studies, this research uses finer‐grained dimensions of SCI by not only differentiating between customer and supplier integration but also by separating integration activities depending on their purpose for either product development or process improvement, thus enhancing our understanding of the underlying theoretical dynamics by disentangling each dimension's respective contribution to a firm's contract manufacturing efficiency. Using archival survey data from 322 manufacturing firms collected by the Korea Productivity Center, we demonstrate that integration activities with customers and suppliers, depending on whether they focus on products or processes, generate contradicting outcomes in terms of return on contract manufacturing, thereby challenging the implicit assumption about the equivocal benefits of SCI across manufacturing systems. Furthermore, our findings substantiate the positive moderating effects of cross‐functional integration on the external integration–performance links by demonstrating the amplified effects, either positive or negative, of integration on return on contract manufacturing.