Logistics Leverage Donald J. Bowersox Michigan State University • East Lansing, MI John 1. Mentzer The University of Tennessee • Knoxville, TN Thomas W. Speh Miami University • Oxford, OH Abstract It is the purpose of this paper to position marketing and logistics relation- ships in a strategic context. The strategic position of both areas is used to draw conclusions for the future relationships of marketing and logistics and to suggest the need to focus on creating "logistics leverage." Logistics leverage - the ability to achieve marketing advantage through logistics superiority - is accomplished through the resolution of nine key issues. Once resolved, logistics can be exploited to obtain and maintain significant competitive advantage. Introduction Much recent attention in both business and research has been devoted to the importance of interfunctional coordination (Crittenden, 1992; Deshpande & Web- ster, 1989; Kahn & Mentzer, 1994; Lichtenthal & Wilson, 1992; O'Reilly, 1991; Ruekert & Walker, 1987; St. John, 1991; St. John & Hall, 1991). Two areas that have received particular scrutiny have been marketing and logistics (Granzin, 1980; Granzin & Bahn, 1989; Mentzer, 1993; Rinehart, Cooper & Wagenheim, 1989; Voorhees & Coppett, 1986; Voorhees, Teas, Allen & DinkIer, 1988). It is the objec- tive of this paper is to examine the relationship between marketing and logistics within a strategic context. This examination is developed in four parts. In the first part, two catalysts to further integration of marketing and logistics are discussed. In the next part, the integration of marketing and logistics is projected into a strategic context. The third part introduces the concept of logistics leverage and the nine is- sues that must be resolved to accomplish it. Finally, conclusions for marketing and logistics managers and researchers are presented. Marketing/Logistics Integration Catalysts Although marketing and logistics often receive some degree of integration, two catalysts existing in the business environment are working to make logistics superiority, and its strategic integration with marketing, a necessity for many com- 86 Journal of Business Strategies panies. Understanding these catalysts better positions how logistics can be deployed as a key strategic resource. Time and Quality Based Competition Time and quality based competition focus on eliminating waste in the form of time, effort, defective units, and inventory in manufacturing-distribution sys- tems (Larsen & Lusch, 1990; Schonberger & EI Ansary, 1984; Schultz, 1985). The most popular time and quality based concepts are just-in-time (JIT) and quick response (QR). JIT has many facets and touches almost all aspects of a business enterprise (Bartholomew, 1984; Daugherty & Spencer, 1990; Frazier, Spekman & Oh, 1987; Jackson, 1983; Rosenberg & Campbell, 1985). As a result, purchasing, transporta- tion, inventory, and manufacturing personnel all consider JIT to be indigenous to their performance (Yanacek, 1987). In reality, all these activities, plus marketing, are impacted by the adoption of a JIT system within which logistics becomes the focal point of implementation. One of the effects of JIT is to direct logistics attention toward an overall pro- curement, manufacturing, operating, and marketing orientation of the business. Im- portantly, there are significant marketing benefits that can result from establishing JIT competency - for example, higher customer satisfaction from better quality products with zero defects, more consistent availability, and faster product deliv- ery. Typically, such benefits are fully exploited only if logistics managers are more attuned to internal, supply-side systems and cost control, while integrating with marketing programs and customer requirements. Quick Response (QR) systems are similar to JIT programs (i.e., the required integration of marketing, purchasing, transportation, inventory, and manufacturing), but differ by the fact that they deal with the distribution of finished products from manufacturers to wholesalers and retailers (Larsen & Lusch, 1990). Many of the principles of successful QR are similar to the logic that drives JIT. Because QR typi- cally deals with finished product distribution, performance is an integral part of total customer service (Dumaine, 1989). However, the drivers that make most existing QR programs successful are inventory velocity and total cost reduction. Only a limited number of firms have begun to manage QR programs toward the goal of achieving competitive advantage (Daugherty & Spencer, 1990). The competitive impetus for such coordination of inventory velocity and cost control with customer satisfaction serves as a catalyst for marketing/logistics integration in finished goods channels. Volume 25, Number 2 87 More advanced forms ofQR, however, focus primarily on customer satisfac- tion. Recently coined "Service Response Logistics" (Davis & Manrodt, 1991, 1993; Manrodt & Davis, 1992), these programs tend to position logistical competency as the core activity aimed at achieving customer satisfaction through inventory avail- ability, timely delivery, less product failure, and, thus, less lost sales or returns/ complaints (Stalk, Evans & Shulman, 1992). The achievement of such customer satisfaction requires significant integration of logistical competency and marketing performance. The combined effect of time and quality based systems has been to empha- size the need for marketing/logistics integration as a competitive advantage. While both JlT and QR thrive on interorganizational and interfunctional coordination, such arrangements must be driven by a desire to reduce cost, improve asset utiliza- tion, and more effectively service customers. Attention to service response logistics suggests that some significant breakthroughs that capitalize on the strategic impact of marketi ng/logistics integration are developing. Efficiency and Effectiveness Logistics, by its nature, is quantitative in the measurement of efficiency - delivery time, the number of short orders, inventory, and similar operational activi- ties can be readily measured. As a result, logistics practice and research has been more operationally oriented and tended to focus more on economic or efficiency measures of performance. The absolute magnitude of logistics cost has directed many firms to control the expense side of logistics; that is, to manage the process to achieve a level of efficiency. Although there has been considerable research in the logistics area concern- ing how logistics impacts customer service (for a review, see Mentzer, Gomes & Krapfel, 1989), no accepted protocol for measuring customer responsiveness to lo- gistics service levels exists. Further, the traditional focus of logistics research on economic (efficiency) issues rather than behavioral issues has not brought the atten- tion of behavioral researchers in marketing to bear on this problem. Although much research in marketing has been devoted to the behavioral implications of service quality and customer satisfaction/dissatisfaction (for a review, see Zeithaml, Berry & Parasuraman, 1993), Iittle such research has addressed the behavioral implica- tions of changes in logistics service quality as part of overall marketing strategy (Mentzer, Bienstock & Kahn, 1993). 88 Journal of Business Strategies However, cost control (efficiency) without recognition of customer service requirements (effectiveness) will doom any aspect of a marketing effort to failure. Logistics is no exception. The need for a clearly defined linkage between logistics performance, marketing strategy, and their behavioral consequences provides the second, and perhaps most important, catalyst for the implementation of logistics as a strategic marketing tool. Summary Current developments in the business environment and the marketing litera- ture suggest these catalysts are having an impact. There are increasing examples of firms such as Wal-Mart, Target, and Kmart establishing alliances with manufactur- ers to jointly reduce costs and leverage performance. Further, the recent interest in the marketing literature with relationship marketing (Anderson & Weitz, 1992; Anderson & Narus, 1990; Dant & Schul, 1992; Dwyer, Schurr & Oh, 1987; Frazier, Spekman & O'Neal, 1988; Heide & John, 1992; Larsen & Lusch, 1990) suggests progress in examining the strategic management of logistics issues in building re- lationships with customers. Results of such alliances and research scrutiny suggest that issues of efficiency and effectiveness measurement can be jointly resolved and that logistical performance can be integrated into mainstream marketing strategy and research. The reality of such catalysts and the potential to be gained from them argue strongly for in-depth examination of logistical effectiveness in overall mar- keting strategy and a searching consideration of the key role that logistics plays in creating customer satisfaction. The Marketing/Logistics Strategic Linkage In Porter's (1985) value chain, one ofthe four support activities (procurement) involves logistics and all of the five primary activities involve logistics (inbound logistics, operations, and outbound logistics), marketing (marketing activities), or both (service). It is interesting to note how these functions are so important and in- extricably linked in the value chain and suggests that increased focus be placed on effectively coordinating their interaction. The foundation of future marketing and logistics integration is strategic. With this goal in mind, Figure 1 utilizes the competitive advantage framework of Day and Wensley (1988) to develop the dimensions of the relationship and position the strategic importance of integrated marketing/logistics. Volume 25J Number 2 Figure 1 Integrated Strategic Planning 89 MARKETING FOCUS EFFECTIVENESS Superior Skills Superior Resources LOGISTICS FOCUS EFFICIENCY Superior Skills Superior Resources Catalysts to Integration INTEGRATION FOR SUPERIOR CUSTOMER VALUE AND LOWER RELATIVE COST STRATEGIC POSITIONING LOGISTICS LEVERAGE PERFORMANCE OUTCOMES COMPETETIVE ADVANTAGE The focus of logistics has been and will primarily continue to be upon cost drivers, i.e. skills and resources that generate efficiency. The integration of market- ing and logistics is necessary to bring the logistics sources of advantage into the realm of effectiveness, or drivers of differentiation. This will only occur and result in positional advantages if the leverage logistics can bring to marketing is realized. This leverage can only be realized by recognizing and exploring, both within the practitioner and academic communities, the strategic linkage between marketing and logistics wherein logistics skills and resources are translated into effective driv- ers of differentiation. Where this integration is accomplished, strategic positioning of the marketing/logistics integrated firm as cost efficient and customer effective 90 Journal of Business Strategies will result. It will be incumbent upon marketing to emphasize these superior perfor- mance outcomes to achieve sustainable competitive advantage. Firms that have successfully implemented such coordination are now build- ing corporate strategies that exploit logistics competency (Bowersox, Daugherty, Droge, Germain & Rogers, 1991). By focusing on logistics competency (e.g., one call for complete order status information, total flexibility in ordering to support either store direct or warehouse delivery, no order minimums), the leading logistics performers are providing tangible and significant benefits to customers. The net result is the creation of a meaningful competitive advantage. Selected firms are beginning to realize that logistics excellence is a signifi- cant differential advantage that can be exploited in the marketplace (Bowersox, et aI., 1991). Logistics service is an effective tool for building closer relationships with key customers. Although the expression "being easy to do business with" is over used, the fact remains that some firms are very difficult to buy products from and have poor response systems for providing information concerning such facts as order status and invoice discrepancy. Other firms have state-of-the-art logistics information systems that enable maximum control (Shapiro, Rangan & Sviokla, 1992; Stalk, Evans & Shulman, 1992) - a source of advantage which can be translated through integration with marketing into a positional advantage (Day & Wensley, 1988). The result is the performance outcome of significant cus- tomer impact. The final outcome of these superior logistics systems is an added positional advantage of preferred status for selected suppliers - and such sta- tus draws directly from the logistics competency (even in situations where price, product, and promotion are undifferentiated or marginally higher in comparison to selected competitors). As Day and Wensley (1988) observed, "The sustainability of this positional advantage requires that the business set up barriers that make imitation difficult." The true positional advantage of logistics competency is that a Chief Executive Of- ficer cannot, by the whisk of a pen, mandate such competency and automatically obtain the facilities, systems, human resources, and information control necessary to produce a consistent level of logistical performance. As marketing strategies evolve toward greater market segmentation sophistication, the ability to provide customized logistics service to unique segments will become increasingly demand- ing. Firms with high levels of logistical competence are better positioned to exploit such opportunities. Volume 25, Number 2 Logistics Leverage 91 The critical question is how to leverage the strategic benefits inherent in an effective logistics system for maximum competitive advantage. Logistics leverage is the ability to effectively influence market demand through the application of ex- cellent logistics systems, techniques, and programs. The term leverage indicates relatively high market returns may be gained from relatively small investments. Sig- nificant sales, market share, and consumer satisfaction gains can be achieved if the firm consciously positions itself to leverage its logistics capabilities. It is not enough to have created the human resources, technical tools, and operational systems for effective logistics, the firm must be able to market and use its logistics expertise to achieve marketing goals. Thus, logistics leverage is based upon successfully resolving nine issues. Creation of Value-Added Services The exploitation of logistics competence offers a meaningful way to create value-added services not achievable in other ways (Cooke, 1990; Mentzer, 1993; Wittersdorf, 1991). Such positioning requires defining critical business processes from a logistics perspective. Such value-added processes have spawned the devel- opment of new channel institutions. Logistics facilitation companies are one of the most rapidly growing marketing institutions. Such facilitators do not view them- selves as traditional wholesalers, retailers, warehousers, or transportation compa- nies. Their mission vision is one of being a service organization which satisfies a specific niche requirement. They provide logistics economies of scale, essential services, and time and quality based delivery. The combination of more effective delivery at a lower cost translates to in- creased value. Thus, what have traditionally been logistics cost drivers are becom- ing drivers of differentiation (Day & Wensley, 1988; Porter, 1985). Again, the shift from cost driving logistics activities to logistics drivers of differentiation requires the integration of marketing and logistics activities and strategic plans. Management Vision Top management must fully understand the real and significant market im- pact that results from logistics superiority. Recent history has demonstrated that many of the successes achieved by large consumer goods firms with mass mer- chandisers resulted from the manufacturer's ability to lower logistics costs while increasing logistics service, resulting in increased final consumer satisfaction com- 92 Journal of Business Strategies bined with reduced retailer inventory. These drivers of differentiation were accom- plished through management's vision of the potential oflogistics and a commitment to leveraging their logistics system for their customers. Management vision will achieve logistics leverage only if (1) top manage- ment applies resources to bring logistics expertise to their customers on a custom- er-by-customer basis (Davis & Manrodt, 1991), (2) the attitude of marketing cus- tomer satisfaction as a corporate core competency is nurtured by top management throughout the entire organization, not just in marketing, and (3) the logistics ben- efits of the manufacturer are communicated directly from the supplier CEO to the customer CEO. This latter point is an essential ingredient in the establishment of strategic alliances and partnerships. Strategic Alliances and Partnerships The marketing value of exploiting logistics competency is demonstrated by the positional advantage available as a result of linking firms and their customers into strategic alliances and partnerships. The last decade has witnessed the growth of vertically-integrated marketing systems in a behavioral or relational sense (Dw- yer, Shurr & Oh, 1987; Frazier, Spekman & O'Neal, 1988; Narus & Anderson, 1986). The strategic alliances that have evolved are broader in scope than simple out-sourcing because they include risk and reward sharing. A significant aspect of these newly created alliances is the central role typi- cally played by logistics (Bowersox, 1990). Inventory management, direct-store de- livery, warehousing, and transportation consolidation are typical logistics functions that are at the core of many partnerships. The efficient performance of these activi- ties by specialists produces benefits shared by both partners. As Frazier, Spekman, and O'Neal (1988) stated, the emphasis in such relationships is on "the notion of 'total cost of ownership' and the array of value-added services provided." Strategic Interfunctional Teams Logistics superiority as a driver of differentiation can be achieved only when all parties in the marketing organization are integrated in terms of the basic con- cept of customer satisfaction, the potential of logistics leverage to aid in obtain- ing customer satisfaction, how the message of logistics customer value needs to be communicated, and to whom this message should be delivered. Team marketing ap- proaches, typically composed of marketing, sales, logistics, finance, and production representatives, are common place and the norm in some industries, with significant Volume 25, Number 2 93 resultant advantages (Hutt & Speh, 1984). To achieve logistics leverage, marketing must recognize the role logistics plays in achieving customer satisfaction. Without this recognition, the related promotional, pricing, and "service package" strategies to market logistics expertise to the customer will not be achieved. It falls to logis- tics to develop and deliver the logistics excellence that marketing has identified as important to customers. Orientation of Marketing For many firms, particularly in the consumer goods industries, the overriding emphasis in marketing personnel training is given to the product and promotional dimensions of marketing strategy. Many factors reinforce this orientation: brand manager organizations; college marketing curricula with an emphasis on advertis- ing, promotion, and product development; and corporate training programs where marketing personnel are given little exposure to logistics. To achieve logistics le- verage, colleges and corporations need to rethink the manner in which marketing managers are developed. One step that can be taken by colleges in this leadership role is to make logistics courses required for all business students. Organizational Issues A major premise of this work is that logistics competency can be created, but unless the firm is positioned to exploit it, little strategic significance will result. One way to leverage logistics excellence is to establish hierarchies and reporting relationships that maximize the integrated potential. When marketing, sales, and logistics each report to a separate vice president, each with their own organization, more effort will be required to break down the inherent organizational barriers so that integration is achieved. Customer teams and matrix management are commonly used to overcome organizational inflexibiltty (Clark & Wheelwright, 1992; Gibson, Ivancevich & Donnelly, 1988; Lawrence, Kolodny & Davis, 1977). However, since logistics is a customer satisfaction impacting function and its significance as a competitive marketing tool has been demonstrated, logistics should logically be more closely aligned organizationally with marketing. Rather than a team approach, if logistics reports directly to marketing, the potential for maximum market impact oflogistics leverage is increased. 94 Market Intelligence Journal of Business Strategies To achieve logistics leverage, information systems need to be restructured so that new and different types of information are routinely gathered and supplied to the marketing/logistics function. Information on customer logistics problems and opportunities are required so the firm can quickly adapt their logistics expertise to meet these challenges. Market research needs to expand from the traditional study of needs, attitudes, and behavior related to product, price, and promotional offer- ings to include the study of customer logistics needs that customers may not even be aware exist. In addition, environmental assessment studies to benchmark the ef- forts of those firms deemed to be leaders in logistics excellence will supply strategic information relative to the firm's extant logistics offering. Channel Member Programs To effectively exploit logistics competence, significant efforts may be re- quired to upgrade the logistics systems of other channel members. All channel members must share the vision of the potential market impact of logistics excel- lence. Without that vision, there will be little hope of developing a marketing pro- gram with a logistical focus. Further, logistics leverage can only be achieved in market segments served by channel members when those members possess the level of logistics excellence required by those customers. This excellence can be developed by careful selec- tion of channel members by market segment, by transferring logistics excellence through strategic alliances, or outsourcing certain traditional channel functions to third party providers. Sole-Source Relationships Finally, the last several years have witnessed increasing efforts by firms to reduce their supplier base and move into sole-source relationships with key suppli- ers (Bertrand, 1986; Frazier, Spekman & Oh, 1988; Purchasing, 1989). This trend underscores the need to refocus strategic thinking on the role logistics can play in establishing sole-source relationships. Because of the impact of a vendor's logistics competence on the buyer's costs and operations Gust-in-time delivery to production sites, damage-free products, error-free orders, and real-time information are all cost drivers that are potentially also drivers of differentiation for the firm), the vendor's logistics system may be the most effective way to create and support a sole-source relationship. Volume 25, Number 2 Conclusions 95 The relationship between the related, but often independently managed, functions of marketing and logistics has been examined. The strength and longev- ity of the positional advantage from logistics excellence is impressive because of the difficulty of duplicating outstanding logistics systems and the significant benefits they provide to customers from a cost and quality standpoint. Logistics leverage has to be consciously created through the actions of mar- keting and logistics managers within the firm. Key issues to be resolved include the creation of value-added services, top management vision, strategic alliances and partnerships, interfunctional teams, the orientation of marketing, organization structure, marketing intelligence, channel member programs, and the nurturing of sole-source relationships. Once these issues are resolved, the firm will be positioned to effectively integrate logistics competence into marketing strategy to create sus- tainable differential advantage. Future research and management issues are very much related to the effort to create logistics leverage. Managers and researchers alike need to become more con- cerned with the buyer behavior implications of changes in the marketing/logistics customer service package. Buyer attitudes and behavior can be expected to change with integrated marketing/logistics efforts (Mentzer, Bienstock & Kahn, 1993). Whether this altered behavior will be for the good or detriment of the company, and in what degree, lies within the realm of buyer behavior and service quality research - both applied and academic. Measurement issues should continue to occupy the attention of researchers. Without valid models and predictions of logistics impact on sales, costs, and profits, it is difficult to successfully plot the most meaningful role for logistics in the stra- tegic thrust of a firm. More effective models are needed at two levels: within the channel and at the point of sales to the consumer. Logistics service (in-stock levels, order cycle time, etc.) interacts with a variety of other marketing variables (price, boundary person relationships, location, brand name, advertising claims, etc.) to determine the customer's satisfaction. It will be necessary to expand research ef- forts to measure these interactions and isolate the specific effect of each variable. Once these effects are better understood, marketing decision-making will be better positioned to make more effective decisions regarding the strategic positioning of logistics services within the overall marketing offering. The arenas of logistics and channels have long followed separate predom- inant paradigms - economic for logistics and socio-psychological for channels. 96 Journal of Business Strategies However, both areas of marketing address the same marketing phenomena - dis- tribution of products. The channels area typically addresses negotiation between channel members, whereas the logistics area addresses the operational interaction between these channel members. These two areas are not separate and cannot be meaningfully managed or researched without recognition of their interaction. The effect of negotiation upon operational reality and vice versa would seem a topic with rich potential for research and managerial creativity. In particular, the application of the transaction cost analysis paradigm (McNeil, 1980; Williamson, 1975, 1985) to the effect of logistics transaction specific investments upon negotiation behavior would seem to be a research area immediately ripe for investigation. Also within the TCA paradigm, an area of increasing importance is the role of third-party logistics suppliers. Effective logistics competency may be enhanced through the utilization of independent suppliers of a wide array of value-added lo- gistics services. Research, grounded in the transaction cost analysis paradigm, to evaluate the efficiency and effectiveness of out-sourcing logistics functions would help develop the dimensions of how logistics can contribute to maximum strategic impact. By out-sourcing some logistics functions (e.g. warehousing), a firm may gain cost and service advantages not available from internal performance, but in- cur additional transaction specific investments. 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