Establishing Logistics Service Strategies That Increase Sales

• Date: 01 September 2016
• DOI: http://doi.org/10.1111/jbl.12133
• Published date: 01 September 2016

Establishing Logistics Service Strategies That Increase Sales

Rudolf Leuschner

1

and Douglas M. Lambert

2

1

Rutgers University

2

The Ohio State University

While the linkage between logistics performance and firm performance has received attention in the literature, typically firm performance

is measured as customer satisfaction and customer loyalty rather than share of business or other measures that translate into a financial

benefit. Thus logistics executives continue to be judged primarily on cost and asset reductions. Only one study has documented how logistics

performance affects customer satisfaction and the percentage of business allocated to the suppliers as well as the differences in outcomes

between firms identified as primary and secondary suppliers (Leuschner et al. 2012). In this research, we use samples in the motion picture and

video production industry, and the plastic materials and resins industry to investigate the impact of the Marketing Mix on customer satisfaction

and share of business. Our results differ from Leuschner et al. (2012) regarding the impact of product, price, and promotion on customer satis-

faction, but we confirm the impact of logistics performance on customer satisfaction and the relationship between customer satisfaction and

share of business for primary and secondary suppliers combined. Finally, we provide a framework to identify logistics service strategies based

on a customer’s current profitability, potential growth, and the share of a customer’s purchases obtained.

Keywords: logistics service; customer satisfaction; share of business; replication; structural equation model

INTRODUCTION

In most organizations, logistics executives are judged primarily

on cost and asset reductions because the financial impact of

improvements in logistics service performance is not measured.

Consequently, top management focuses on service performance

when customers are complaining and when customers are silent

their attention turns to the amount of cost and asset reductions

achieved for the year. While there is evidence that strong perfor-

mance on logistics attributes improves business outcomes (Stank

et al. 1999; Mentzer et al. 2001; Davis-Sramek et al. 2008), the

outcomes used by these authors (satisfaction and loyalty) are not

metrics that will influence the behavior of senior management

such as sales increases or profit improvements related to sales

increases (Enz and Lambert 2015). One way to measure the

value of logistics service, is to show how it affects customer sat-

isfaction and the share of business that customers give to suppli-

ers. Share of business is the percentage of sales that is assigned

to a specific supplier by the customer (M€

agi 2003) when the cus-

tomer distributes purchases among several suppliers. Initiatives

that increase sales are typically viewed positively by top manage-

ment (Enz and Lambert 2012) and Wall Street. Because corpo-

rate resources are limited, it is important to understand how

logistics service affects customer satisfaction and share of busi-

ness relative to product, price, and promotion. Also, it is impor-

tant to determine how to establish logistics service levels for

individual customers.

Leuschner et al. (2012) investigate the relative impact of logis-

tics service, product, price, and promotion on customer satisfac-

tion and share of business for primary suppliers and secondary

suppliers. They find a significant relationship between

performance on promotion and logistics (place) with customer

satisfaction and the share of business customers allocated to indi-

vidual suppliers. The authors challenged prior literature that

found a significant link between logistics service and customer

satisfaction, by showing that the relationship between these two

constructs may be moderated by whether firms are being used as

the primary supplier or the secondary supplier by their cus-

tomers. Typically, customers are more satisfied with the service

they receive from primary suppliers, and providing these cus-

tomers with higher levels of service may yield no increase in

sales because the supplier is already performing better than other

suppliers being used by these customers. However, providing

service improvements to selective customers that are using the

firm as the secondary supplier may yield significant increases in

customer satisfaction and lead to higher sales to these customers

(share of business). Thus, the common practice of providing ser-

vice levels to customers based on current revenue or profitability

needs to be reevaluated.

In this research, we replicate the Leuschner et al. (2012)

study, which was conducted in the healthcare industry using two

new samples, one in the motion picture and video production

industry, and the other in the plastic materials and resins indus-

try. The need for replication has been recognized for more than

50 years (e.g., Furchtgott 1984; Hubbard and Armstrong 1994;

Sterling et al. 1995; Hubbard et al. 1998). In this study, the

industries include products that are different from blood banking

reagents, which were examined in Leuschner et al. (2012).

Respondents must have the same basis for evaluating their sup-

pliers (e.g., product categories purchased), and the original study

should not be generalized to the entire health care industry never

mind to other industries, because the buying process can be dif-

ferent depending on the product category being purchased. For

example, magnetic resonance imaging (MRI) equipment is pur-

chased by hospital committees, which are not involved in the

purchases of reagents. Thus, it is necessary to specify specific

product categories when asking respondents to evaluate their

suppliers so that their evaluations are based on similar products

and competitors. If one tried to study purchasing behavior in the

Corresponding author:

Rudolf Leuschner, PhD, Assistant Professor, Department of Supply

Chain Management, Rutgers Business School, Rutgers University, 1

Washington Park, Room 986, Newark, NJ 07102, USA; E-mail:

rleuschner@business.rutgers.edu

Journal of Business Logistics, 2016, 37(3): 247–270 doi: 10.1111/jbl.12133

© Council of Supply Chain Management Professionals

health care industry without doing this, who would be surveyed

and what products and competitors would respondents’answers

be based upon? Ignoring such differences would lead to varia-

tions in response based on the products the buyers purchased

which would not be identified by the researchers, thus invalidat-

ing the research findings. Indeed, the products studied in this

research are more similar to reagents than to other products in

the health care industry (such as MRI equipment, surgical

implants, etc.).

While the importance of replication has been the topic of a

number of research papers (Hunter 2001; Evanschitzky et al.

2007; Goldsby and Autry 2011), they are still not commonplace.

Yet, replications are important for the advancement of the disci-

pline. The results of a single study should not be regarded as

generalizable and it is also possible that the findings will not

hold over time. In fact, in replications of clinical research 16%

of highly cited studies were contradicted by subsequent research

and in another 16% stronger effects were found (Ioannidis

2005). Is it not reasonable to expect that in a competitive busi-

ness environment, management actions which lead to a competi-

tive advantage, as measured by customer satisfaction and share

of business, will be challenged by competitors (Anderson et al.

1994; Anderson and Mittal 2000)? In other words, the actions

that result in a competitive advantage for an organization today,

may not do so in the future, if competitors match or exceed the

firm’s performance. This further builds the case for replication.

We believe that this research is much more than a replication.

Our first goal for this research was to provide further evidence

that logistics service performance leads to customer satisfaction

and higher sales volume (share of business). Because corporate

resources are scarce, it is important to identify the impact of

expenditures on logistics relative to product, price, and promo-

tion. Given Porter’s (1979) five forces model, it is reasonable to

expect that research results will vary from industry to industry

and over time. Theoretically, it adds an important nuance to our

understanding of the Marketing Mix if the importance and signif-

icance of the individual components varies across industries.

Knowledge of how customers respond to corporate expenditures

enables management to allocate scarce resources more efficiently

and effectively.

The second goal was to determine how perceived differences

in performance between primary suppliers and secondary suppli-

ers affects customer satisfaction and share of business for prod-

ucts in industries that have different characteristics than those in

the original research (Leuschner et al. 2012). When all of a sup-

plier’s customers are considered as a sample (Emerson and

Grimm 1999; Davis-Sramek et al. 2008), a significant relation-

ship may be found between performance and satisfaction, but

this may occur because some respondents used the firm as a pri-

mary supplier and some as a secondary supplier, a fact that

would go undetected. Our research is consistent with calls for

more replication (Hunter 2001; Goldsby and Autry 2011).

The third goal, was to build on the work of Leuschner et al.

(2012) by providing a framework that management can use to

determine the appropriate logistics service strategies based on a

customer’s current profitability, potential growth, and the share

of the customer’s purchases obtained. For example, suppliers will

segment their customers and provide their best and largest cus-

tomers with the highest levels of service. However, while

providing the best service to these customers may keep them

loyal which is good, it does little to convince high-potential cus-

tomers who are using a supplier as a secondary source to make

that company the primary supplier. For this reason, there is a

need for a framework such as the one we are proposing.

In the next section, we describe the relevant literature and

development of the hypotheses. It is followed by the research

methodology. Data from two surveys were used to test the differ-

ences between primary and secondary suppliers using multigroup

structural equation modeling (SEM). Then, the results of the

analysis are presented, followed by a section describing a frame-

work for establishing logistics service level strategies. Finally,

conclusions, including implications for theory, implications for

management, limitations and opportunities for future research,

are provided.

LITERATURE REVIEW AND HYPOTHESIS

DEVELOPMENT

Logistics managers point to service improvements as evidence

that they add value beyond cost and asset reductions; however,

convincing upper management is difficult because typically these

improvements are not translated into financial performance

(Novack et al. 1994, 1996). If logistics service performance leads

to increased customer satisfaction and a higher share of a cus-

tomer’s purchases, measuring the associated increase in sales will

challenge the belief that logistics only contributes cost and asset

reductions. In addition, if superior logistics performance leads to

more revenue from satisfied customers, top management might

view logistics as way to achieve competitive differentiation given

that prior research has shown that financial measures of perfor-

mance influence the behavior of management (Enz and Lambert

2015).

A number of past studies have attempted to measure the rela-

tionship between superior logistics execution and higher revenue

from satisfied customers and nine of these research projects con-

ducted in the last 25 years are summarized in Table 1. In six of

the studies (Innis and La Londe 1994; Emerson and Grimm

1999; Stank et al. 1999; Mentzer et al. 2001; Davis-Sramek

et al. 2008; Fugate et al. 2010) firm performance was measured

as perceptual evaluations of customer satisfaction and loyalty,

but the authors did not address how these measures translate into

revenue or other financial benefits. It is important to measure the

revenue gains associated with logistics performance because

when resources are scarce, management must make trade-offs

between improving logistics service and investing in other areas

that might increase sales and profitability. For this reason, logis-

tics expenditures must be considered relative to other opportuni-

ties for improving sales and profitability (Innis and La Londe

1994; Emerson and Grimm 1999; Leuschner et al. 2012). Two

of the studies, summarized in Table 1, used overall market share

of the firm as the outcome, but logistics performance was mea-

sured at the individual customer level and the outcome was each

firm’s overall market share which was not related to the answers

provided by individual respondents included in the research

(Daugherty et al. 1998; Stank et al. 2003). There was only one

study that tied logistics performance to customer satisfaction and

share of business (Leuschner et al. 2012). In their research, the

248 R. Leuschner and D. M. Lambert