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LOGISTICS PERFORMANCE EFFICIENCY, EFFECTIVENESS, AND DIFFERENTIATION.pdf

LOGISTICS PERFORMANCE EFFICIENCY, EFFECTIVENESS, AND DIFFERENTIATION.pdf

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Published by: Alvaro Albornoz Bueno on Mar 11, 2013
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 JOURNAL OF BUSINESS LOGISTICS, Vol. 31, No. 1, 2010 43
LOGISTICS PERFORMANCE: EFFICIENCY, EFFECTIVENESS, ANDDIFFERENTIATION
 by
Brian S. Fugate
Colorado State University
John T. Mentzer
University of Tennessee
and


 
INTRODUCTION
The logistics function has long been under pressure to demonstrate its contribution to organizational performance (Rutner and Langley 2000). Consequently, research in logistics has examined the influence onorganizational performance of high-performance logistics practices and capabilities. For instance, previous researchhas shown that excellence in performing logistics activities and capabilities is associated with superior organizational performance (Lambert and Burduroglo 2000; Lynch, Keller, and Ozment 2000). Despite thisevidence, doubt remains concerning the strength of the direct link between logistics performance and organizational performance. Further investigation is needed, therefore, to understand logistics performance and to reinforce the potential value of logistics within the organization.In attempting to drive performance improvements, managers often struggle with multiple, seeminglyconflicting, objectives (Steers 1975). Logistics managers have traditionally assumed they face a tough choice:either strive for efficiency; or strive for effectiveness. Though recent logistics research has suggested that these two performance objectives are mutually exclusive (Griffis et al. 2004), it is possible that this dilemma is unwarranted.For example, it would be difficult to rank Dell’s performance in the late 1990’s as
either 
highly efficient
or 
 effective, but more appropriately highly efficient
and 
effective. Further, logistics managers must strive for morethan efficiency and effectiveness to ensure that they are providing the best comparative (i.e., differentiated) net valueto customers in order to compete in today’s hypercompetitive marketplace. More demanding customers, short product life cycles, rapid technological changes, globalization, and the need to deliver on Wall Street’s ever-risingexpectations (Singhal and Hendricks 2002), may in fact demand break-through thinking to simultaneously develophighly efficient, effective, and differentiated logistics activities.A key goal of this research was to model logistics performance with the concept of simultaneous pursuit of efficiency, effectiveness, and differentiation in mind. Past research portrayed logistics performance as a first order construct manifested—or “reflected”—by performance indicators (Helm 2005). In breaking with past research, andconsistent with a portrayal of logistics performance as consisting of dimensions of efficiency, effectiveness, anddifferentiation, we use a formative, second-order construct for logistics performance. To our knowledge, this is thefirst formative construct applied in logistics research. A better understanding of how to accurately specifyconstructs as reflective or formative is important to the logistics discipline because logistics research is increasinglyusing complex latent variables to test behavioral logistics phenomena (Dunn, Seaker, and Waller 1994), especially
 
44 FUGATE, MENTZER & STANK 
since research has shown misspecification can greatly compromise the validity of the findings (Jarvis, Mackenzie,and Podsakoff 2003).This research makes several important contributions toward the objective of enhancing our understanding of top performing logistics functions and documenting their influence on organizational performance. First, it draws fromresearch in organizational and strategic management and logistics to develop theoretically based conceptualizationsof logistics efficiency, effectiveness, and differentiation, and provides empirical results contradicting thetraditionally assumed mutually exclusive relationship among them. Further, it introduces the logistics discipline toformative constructs and presents criteria for determining whether a construct is formative or reflective. Finally, thisresearch empirically investigates the influence of the performance of the logistics function on organizational performance. Importantly, our perceptual measures for organization performance were strongly correlated withsecondary, objective financial data collected on participating firms from Compustat.
MODEL DEVELOPMENT
With the increasing awareness of the strategic implications of logistics (Cheng and Grimm 2006; Stank, Davis,and Fugate 2005) and the growing awareness of the benefits of leveraging logistics to increase customer value(Mentzer and Williams 2001; Stank et al. 2003), measuring the performance of logistics has become a high priority(Griffis et al. 2007). Understanding logistics performance has long been of interest to logistics researchers and has been conceptualized and empirically tested in a variety of ways (for an expansive list of logistics metrics, seeEnslow et al. 2005).Traditional logistics performance measures include “hard” measures such as service (e.g., order cycle time andfill rates), cost, and return on assets or investment (Brewer and Speh 2000; Morash, Dröge, and Vickery 1996) andsoft measures, such as managers’ perceptions of customer satisfaction and loyalty (Chow, Heaver, and Henriksson1994; Holmberg 2000). More recently, some have maintained that logistics performance measures be linked tocorporate strategy (Lambert and Pohlen 2001; Zacharia and Mentzer 2004) and more explicitly incorporatecustomers’ perspectives (Brewer and Speh 2000; Mentzer, Flint, and Kent 1999).Mentzer and Konrad (1991) defined logistics performance as effectiveness and efficiency in performinglogistics activities. Langley and Holcomb (1992) extended this definition by adding logistics differentiation as a keyelement of logistics performance because the value customers receive from logistics activities also serves as anindicator of logistics performance. They contended that logistics could create value through efficiency,effectiveness, and differentiation. For instance, value can be created through customer service elements such as product availability, timeliness and consistency of delivery, and ease of placing orders. If logistics can create valuethrough the inimitability of its logistics activities, a firm may be able to differentiate itself from its competitors.Excellence in logistics performance requires superiority when compared to competitors (i.e., differentiation). Later,Smith (2000) extended Langley and Holcomb (1992) to define logistics performance as a second-order constructconsisting of logistics efficiency, effectiveness, and differentiation. Bobbitt (2004) extended Smith (2000) to refinesome of the measures. In summary, virtually all of the diverse logistics performance criteria presented in previousliterature can be subsumed under the dimensions of effectiveness, efficiency, and differentiation, as shown in Figure1. Therefore, the cumulative evidence of previous research suggests that logistics performance is
multi-dimensional and is defined as the degree of efficiency, effectiveness, and differentiation associated with the accomplishment of logistics activities
(Bobbitt 2004; Cameron 1986).
 
Based on research long-rooted in the management discipline, effectiveness is defined as the resource gettingability, and refers to an absolute level of outcome attainment (Ostroff and Schmitt 1993). It has been defined as theratio between the real or actual outputs and normal or expected outputs (Katz and Kahn 1978; Sink 1985). Inlogistics, it has been described as the ability to achieve pre-defined objectives, for example, in meeting customer requirements in critical result areas (e.g., product guarantee, in-stock availability, fulfillment time, convenience)(Langley and Holcomb 1992). Similarly, we adopt Mentzer and Konrad’s (1991) definition of logisticseffectiveness as
the extent to which the logistics function’s goals are accomplished 
.
 
 JOURNAL OF BUSINESS LOGISTICS, Vol. 31, No. 1, 2010 45
FIGURE 1A MODEL OF LOGISTICS PERFORMANCE
 
Efficiency refers to the internal functioning of logistics and generally is considered best represented throughsome ratio of the normal level of inputs to the real level of outputs (Chamberlain 1968; Van der Meulen andSpijkerman 1985). Specifically, it is the ratio of resources utilized against the results derived (Mentzer and Konrad1991). It is considered the ability to provide the desired product/service mix at a level of cost that is acceptable tothe customer (Langley and Holcomb 1992). In a broader sense, it is the ability of the logistics function to manageresources wisely. Thus, we adopt the definition of efficiency as the measure of 
how well the resources expended areutilized 
.Logistics research has generally assumed that efficiency and effectiveness are mutually exclusive. Thisconceptualization of logistics performance has led to the “either-or” debate, where logistics research implies thatmanagers should strive for either effectiveness or efficiency. This perspective maintains that “pursuing one or theother to its extreme precludes pursuit of the other” (Griffis et al. 2004, p. 100). This view implies that logistics performance that progresses along one dimension entails regression along another.As an example of this “either-or” argument, Fisher’s (1997) popular theory contends that supply chains should
either 
be designed for efficiency by emphasizing physical functioning in delivering goods,
or 
for responsiveness byasserting the market mediating function for conveying information. In contrast, recent empirical research (Selldinand Olhager 2007) finds that firms that select properties from efficient
and 
responsive supply chains achieve higher financial performance than their competitors that select properties from one or the other. This sheds light on the factthat firms may not consider performance dimensions (e.g., efficiency and effectiveness) to be inversely related, butrather they may pursue both concurrently.In fact, since Barnard’s (1939) contention that effectiveness and efficiency are two central organizational goals,a number of organizational and strategic management researchers (Katz and Kahn 1978; Kotabe 1988; Miller 1981;Steers 1975; Venkatraman and Ramanujam 1986) have investigated this debate. The controversy centers on the possible trade-offs between the dimensions underlying the performance construct (Davis and Pett 2002). Mahoney(1988) argued that trade-offs exist between efficiency and effectiveness and, thus, result in organizations beingeither efficient or effective, but not both. Others, however, maintain that organizations are complex andsimultaneously pursue multiple goals (Steers 1975). For example, Ford and Schellenberg (1982) contend the highest performing organizations emphasize both efficiency and effectiveness. Further, Ostroff and Schmitt’s (1993, p.1345) empirical research findings imply that organizations can be highly “effective, efficient, both, or neither.”Beyond efficiency and effectiveness, logistics activities must also provide the best comparative net value tocustomers (Stahl and Bounds 1991) in order to compete in today’s competitive marketplace. Because of the
 
FIGURE 1A MODEL OF LOGISTICS PERFORMANCE

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