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JOURNAL OF BUSINESS LOGISTICS, Vol. 31, No. 2, 2010 253

CUSTOMER LOYALTY IN LOGISTICS OUTSOURCING RELATIONSHIPS: AN

EXAMIN ATION OF THE MODERATING EFFECTS OF CONFLICT FREQ UENCY

by

David L. Cahill

The Ohio State University

Thomas J. Goldsby

University o f Kentucky

A. Michael Knemeyer

The Ohio State University

and

Carl Marcus Wallenburg

Technische Universitat Berlin, Germany

INTRODUCTION

According to a recent state of logistics outsourcing report, the third-party logistics (3PL) industry is still

growing (Langley et al. 2007). This report establishes that the priorities currently facing 3PL providers are regional

expansion, broadening services to meet the needs of current and future customers, integrating information

technologies, and dev eloping re lationships with customers and other business firms that will facilitate the growth

and expansion that lie ahead (Langley et al. 2007). As such, there remains the need for both users and providers of

logistics services to better understand the nature of their relationship.

Indeed, the late Robert V. Delaney suggested that relationships are what will carry the logistics industry into

the future' (Delaney 2000). Lieb and Butner (2007) point out that providers of logistics services are increasingly

attempting to build moie collaborative working relationships with their key customers. In the search for ways to

build and maintain these relationships, researchers have long investigated the connection between customer

satisfaction and loyalty behavior. A quick review of the extant business literature reveals almost 300 articles

published between 1967 and 2007 containing both the keywords customer satisfaction' and loyalty in their

abstracts. Of this number, almost one-half appeal- in marketing journals, with only a small percentage appealing in

logistics journals (Ellinger, Daugherty, and Plair 1999; Stank et al. 2003; Thomchick, Young, and Gienoble 1999).This quick snapshot of the literature illustrates the considerable energy and focus directed towards the understanding

of satisfaction and loyalty by non-logistics disciplines, particularly marketing.

In rccent years, researchers have begun to introduce the promise of moderating effects on the satisfaction-

loyalty linkage (Hornburg and Giering 2001; Homburg, Giering, and Menon 2003; Olsen. Wilcox, and Olsson 2005;

Suh and Yi 2006). Moderating variables are context variables outside the direct relationship between one or more

independent and dependent variables. A moderating effect occurs when the value of the moderating variable

influences the form of the relationship between the independent variable(s) and the dependent variable (Hair et al.

1995). Studies examining the influence of such context or outside factors on the satisfaction-loyalty linkage are

primarily found in the marketing literature with an emphasis on business-to-consumer settings. Only a very limited

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254 CAHILL, GOLDSBY, KNEMEYER & WALLENBURG

amount of research has examined the influence of potential moderators on important theoretical models in the

logistics outsourcing arena (Maloni and Carter 2006).

One potential moderator anticipated to be present in many logistics outsourcing relationships is conflict. For the

puiposes of this study, conflict is defined as a situation in which one organization perceives that its interests arebeing opposed or negatively affected by the other party (Wall and Cal lister 1995). While conflict exists in many

business relationships, it can be fully expected in logis tics outsourcing arrangements, in which performance aspects

of the service delivery are often in competition with cost objectives. Given the substantial influence outsourced

logistics has on overall logistics performance (Knemeyer and Murphy 2004. 2005; Langley et al. 2006) and firm

performance (Maltz and Ellram 1997; Menon. McGinnis, and Ackerman 1998; Stank et al. 2003). it is critical to

manage conflict effectively.

The need for an effective conflict management strategy is particularly important when customers rely on

extensive service delivery from an outside provider and. in turn, establish a high level of dependence on the provider

and its services. Dependence heightens not only the risks associated with the relationship but also the potential for

conflict to occur. In the absence of conflict management strategies, conflict can stress the relationship between

logistics service providers and customers, and threaten the level of service that outsourcing customers subsequently

offer to their customers (Muiphy and Poist 2000). Therefore, the presence of conflict may alter the satisfaction-

loyalty linkage in outsourced logistics relationships. It is also possible that the presence of conflict in the

relationship can shift the relative influence of the antecedents to loyalty, so that certain aspects of perceived

performance become more important for loyalty formation, while others become less important.

Conflict may be viewed as an episodic, singular occurrence, or as a cumulative experience. Conflict frequency

is examined in the current woik in a manner consistent with satisfaction and loyalty, as the cumulative perception

experienced over multiple episodes (i.e.. service transactions) between a company and its most important logistics

service provider. In particular, the puipose of this article is to examine the robustness of the relationship between

satisfaction and loyalty under low' and high frequency of interorganizational conflict. Conflict is believed to be

especially important in the logistics outsourcing context given the importance ofperceptions o f service in the

absence of tangible outputs, such as those found in the provision of products with measurable attributes. The

services literature suggests that this intangibility of services leads to performance ambiguity (Bowen and Jones

1986). Performance ambiguity in the current context is the difficulty a company might have in judging how well the

logistics outsourcing service was performed. It is this ambiguity that makes it difficult to assign blame forperformance failure (Hill, Baer, and Kosenko 1992). And thus , the f requency of confl ict tha t exists in a relationship

may influence the satisfaction-loyalty linkage.

In order to assess the influence of conflict frequency, a satisfaction-loyalty model is first established and tested

in the context of service relationships formed between logistics service providers (LSPs) and their customers. This

model is based on the framework developed by Stank, Goldsby, and Vickery (1999) and Stank et al. (2003), yet

proposes a three-dimensional view of satisfaction that corresponds with the three variables of logistics service

performance (i.e., operational performance, relational performance, and cost performance outlined in Stank et al.

2003). Given sound assessment of this baseline model, frequency of conflict is introduced as a potential moderator

of the satisfaction-loyalty relationship. Managerial and research implications are then presented based on the

findings.

LITERATURE REVIEW

A Model o f the Satisfaction-Loyalty Linkage in Logistics Outsourcing Relationships

Researchers studying customer satisfaction provide a multitude of concepts to help delineate the meaning of

satisfaction. While conceptualizations of satisfaction differ-, especially with regard to the type and number of

components to be included (Giese and Cote 2000), researcher's generally agree that satisfaction is a post-choice

evaluative judgm ent ' (Westbrook and Oliver 1991, p. 84). With respect to the formation of satisfaction, the majority

of researchers revert to the disconfirmation paradigm (Brady, Cronin, and Brand 2002; Churchill and Suprenant

1982). If perceived performance exceeds a consum er's expectations (a positive disconfirmation), then the consumer

is satisfied. But if perceived performance falls short of expectations (a negative disconfirmation), then the consumer

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is dissatisfied" (Spreng. MacKenzie. and Olshavsky 1996. p. 15). With this in mind, satisfaction can be understood

as a cognitive and affective evaluation of ones entirety of experiences with a provider of goods or services. Cronin

and Taylor (1992) contend that perceptions of current performance (i.e., performance to date) best reflect a

customers perception of service quality and that expectations do not factor significantly in this assessment.

The study of satisfaction is ordinarily not limited to this cognitive and affective end-state. Often researchers are

concerned with the business implications of satisfied or dissatisfied customers. The effect of satisfaction on

customer loyalty has been explored particularly in marketing research (Bolton, Kannan, and Bramlett 2000; Cronin,

Brady, and Hult 2000; De Wulf. Odekerken-Schroder. and Iacobucci 2001; Gronholdt, Martensen, and Kristensen

2000; Homburg. Giering. and Menon 2003; Mittal and Kamakura 2001; Olsen 2002). To a lesser extent, this

relationship has also been examined by logistics researchers (Knemeyer and Murphy 2004. 2005; Stank. Goldsby,

and Vickery 1999; Stank et al. 2003; Vickery et al. 2004). Loyalty is a critical outcome of satisfaction given that

loyal customer's often are positively linked to increased market share and revenue, as well as decreased costs of

acquiring new customer's (Innis and La Londe 1994; Vickery et al. 2004), thus enhancing overall firm performance.

While researchers have studied loyalty empirically, there is no general agreement on the aspects to be included

in its conceptualization. According to Fassnacht and Daus (2004), one group of articles focuses on purchasing

behavior, a second on referrals, and a third incorporates both aspects. In order to provide a comprehensive v iew of

loyalty, the current research embraces the latter approach and includes both purchasing and referral behaviors. We

therefore define customer loyalty as the intention of a buyer of logistics services to purchase the same services

(retention) and additional services (expansion) from the current provider in the future, as well as the buyers

activities in recommending this provider to others (referral).

While loyalty represents a key relationship outcome of satisfaction, a growing body of research has examined

the antecedents of satisfaction in a logistics service context. Mentzer, Flint, and Hult (2001) build upon the concept

of physical distribution service quality (PDSQ) developed by Perreault and Russ (1974, 1976), Mentzer, Gomez, and

Krapfel (1989), and Bienstock, Mentzer, and Bird (1997), and propose a process orientation to logistics service

quality (LSQ) where the customers perception of order placement activities influences the perceptions of order

receipt and subsequent satisfaction. Further, the LSQ process is applied to various segments of the U.S. Defense

Logistics Agency to demonstrate the value of service tailored to different customer segments (Mentzer, Flint, and

Hult 2001).

Also building on the initial PDSQ conceptualization, Stank, Goldsby, and Vickery (1999) determined that

logistics service quality consists of two broad dimensions: operational performance and relational performance.

Operational performance refers to the delivery characteristics that define and capture the form, place, and time

utilities of the service (p. 430). Relational performance, on the other hand, focuses on those activities that enhance

service firms closeness to customers, so that firms can understand customers needs and expectations and develop

processes to fulf ill them (p. 430). Both factors were found to influence customer satisfaction and, in turn, customer

loyalty in the context of the fast-food distribution business (Stank, Goldsby, and Vickery 1999). In subsequent

research conducted in the 3PL services arena, Stank et al. (2003) decouple cost performance from operational

performance and include this construct as a dist inct predictor of customer satisfaction. However, only relat ional

performance was empirically found to have a s ignif icant effec t on satisfaction.

In this article, we are proposing three satisfaction dimensions, which correspond to the three performance

dimensions in the Stank et al. (2003) article. Thus, we are examining the satisfaction-loyalty link in a more finelydefined approach. First, price satisfaction captures the satisfaction of a buyer of logistics services with respect to the

prices offered and the costs imposed by the LSP. Price plays a decisive role in the decision to maintain a relationship

with a LSP because it is an important driver of the perception of value which, in tum, has an effect on satisfaction

(Varki and Colgate 2001). Second, service satisfaction refers to the subjective evaluation o f the operational service

performance delivered by the LSP. Service satisfaction as perceived by the customer is measured independent from

the absolute and objective service level for it is the perception of rendered service that has an effect on the

customers satisfaction, ultimate attitude, and behavior. Finally, relational satisfaction grasps the social aspects

pertaining to a buyers interaction with and relationship to its LSP. By increasing performance and decreasing

transaction costs (Williamson 1975), relational satisfaction is an important factor that complements the former, more

tangible aspects of satisfaction. Examination of this more precisely defined view of the satisfaction-loyalty link

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should provide value to the academic literature beyond the investigation of conflict frequency as a potential

moderator of the link.

According to social exchange theory (SET), which w'as established primarily by Blau (1960; 1964; 1968),

Emerson (1962), Homans (1958), and Thibaut and Kelley (1959), any relationship yields both utilities and costs.Parties will choose to uphold and extend a relationship as long as the cost-utility-ratio is satisfactory (Lambe,

Wittmann, and Spekman 2001). In contrast to pure economic theories, SET incorporates both economic and social

outcomes, thus highlighting the fact that social as well as economic factors are taken into consideration when

evaluating relationships. While the exact composition of utilities and costs varies from individual to individual the

actual cost-utility-ratio, which is the benefit realized in the current relationship, is compared to the expected benefit

from the current relationship, the comparison level. The more the realized benefits exceed the comparison level, the

higher the satisfaction with the relationship, and the more likely are parties to maintain and expand it (Thibaut and

Kelley 1959).

Griffith, Harvey, and Lusch (2006) have applied SET to examine the impact of justice on satisfaction and

performance in supply chain relationships. In line with their results, we expect price satisfaction, service satisfaction,

and relational satisfaction to have a positive effect on the total benefit received from the relationship, resulting in a

higher likelihood of retention and expansion of this existing relationship. Hence, W'e hypothesize the following

effects:

Hi: Price satisfaction has a positive effect on loyalty to a LSP.

H:: Service satisfaction has a positive effect on loyalty to a LSP.

H3: Relational satisfaction has a positive effect on loyalty to a LSP.

Additionally, the three dimensions of satisfaction cannot be expected to be independent from each other.

According to the disconfirmation paradigm, satisfaction is achieved if initial expectations are positively

discontinued (i.e., met or exceeded). Price satisfaction can be attained either if price is lower than originally

expected, or if service satisfaction is higher, as this improves the price-performance ratio. Supportive of the positive

effect of service satisfaction on price satisfaction is the w'ork of Grewal, Monroe, and Krishnan (1998), which found

that the buyers internal reference price is influenced by the buyers perception of quality. In another study it w'asfound that the internal reference price is influenced by price discounts, brand name, and the brands perceived

quality (Grewal. Krishnan, Baker, and Borin 1998). This quahty-price connection is also supported by the literature

on hedonic price functions, which assumes that the price of a product or service is a function of the product or

services quality attributes (Baumgartner 2002). Therefore, we expect service satisfaction to have a positive effect

on price satisfaction:

H4: Service satisfaction has a positive effect on price satisfaction in logistics outsourcing relationships.

In several business contexts, relationship satisfaction has been defined as a positive affective state resulting

from a firms appraisal of all aspects of its working relationship with another firm (Anderson and Narus 1990;

Ganesan 1994; Dwyer, Schurr, and Oh 1987). Even though misunderstandings and disagreements are inevitable in

any business relationship, a high service quahty provided by an LSP can be expected to reduce the level of friction,

so that the interaction between the two parties should be less troublesome and the relationship should be perceivedas more rewarding and satisfying. Caceres and Paparoidamis (2007) found empirical support for the belief that

various service quality dimensions have a significant positive effect on overall relationship satisfaction. We

therefore surmise the corresponding positive effect of service satisfaction also for logistics services:

H?: Service satisfaction has a positive effect 011relational satisfaction in logistics outsourcing relationships.

Figure 1 depicts the hypothesized relationships o f the proposed satisfaction-loyalty model.

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FIGURE 1

HYPOTHESIZED MODEL

THE POTENTIAL MODERATING EFFECT OF FREQUENT CONFLICTS

Several studies have shown that exogenous factors can moderate the satisfaction-loyalty linkage in business

relationships (de Ruyter and Bloemer 1999; Homburg, Giering, and Menon 2003; Mittal and Kamakura 2001; von

Wangenheim 2003). Taking into account theoretical considerations as well as empirical results obtained by

Knemeyer and Muiphy (2005), who found some moderating effects of relationship characteristics on the formation

of customer loyalty within 3PL arrangements, we expect relationship characteristics to also affect the causal

linkages hypothesized in our model.

There exists an extensive amount of research on conflict across multiple disciplines (Wall and Callister 1995).

In general, the research has explored conflict on five distinct levels (Deutsch 1990). These levels include; (1)

personal; (2) interpersonal; (3) intergroup; (4) interorganizational; and (5) international. The focus of this study is on

the interorganizational level of conflict. In particular, the study examines the frequency of conflict that may occur

between an LSP and its customer. As such, this study begins to address the cal l by Maloni and Carter (2006) forfocused study of moderator effects in the logistics arena. The current study seeks to determine whether the effect of

satisfaction on loyalty is universal or dependent on the frequency of conflict present in a relationship.

Rex (1981) asserts that the core issue of interorganizational conflict is the siutation in which one party fully

understands what is expected from it, but rejects the line of conduct that the other party requires. Deutsch (1990)

suggests that conflict exists whenever incompatible activities occur. Pondy (1989) defines the five stages of conflict

as:

( 1 ) latent conflictincompatibility originates from competition for resources, competition for autonomy,

or disparities in functional aims;

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258 CAHILL, GOLDSBY KNEMEYER & WALLENBURG

(2) perceived conflict conditions of latent con flict are recognized;

(3) affective or felt conflict conflict is personified with senses of hostiIity and tension;

(4) manifest conflic t the behavior of one party bl ocksthe other s pursuit; and

(5) aftermathconflict is resolved or suppressed.

The marketing literature has focused extensively on the bases and nature of conflic t in marketing channels, with

particular focus on the manifest state of conf lict, where channel memba's go beyond the cogn itive and affective

states and engage in responsive behaviors (Brown, Cobb, and Lusch 2006; Brown and Day 1981; Gaski 1984; Lusch

1976). The focus on manifest conflict arises out of both interest in this particular stage of conflict and the perceived

ease and accuracy with which this active stage can be captured in f ie ld studies, through exani nation of the

frequency of disageements, the intensity of these disagreements, and the perceived importance of the conflicting

issue (Brown and Day 1981). In parallel, th e I ogi sti cs and supply chain management I itera ture has made references

to conflict in supply chains without examining its detailed effects on relationship stability and customer loyalty

(Bowersox, Closs, and Stank 2000; Lambert and Pohlen 2001; Lee 2004; Maloni and Benton 2000; Mentzer et al.

2001).

Based on SET it can be derived that the individual effects of satisfaction on loyal ty w ill only change due to

conflict in cases where the assessment of the respective facet of the relationship is also altered by the conflict

(Thibault and Kel ly 1959). When con flict occurs, some aspects of the relationship may become less important fo r its

overall assessment wh ile others become more important. Tension and disagreements with in a rel ati onship w il l cause

users of outsourd ng servi ces to spend more thought on the eval uati on of thei r provi der. These I ogi sti cs outsourci ng

customers w ill more active ly and consciously assess the relationship wi th the L SP in an environment characterized

by frequent confl ict. Consequently, managers responsible for the LSP relationship can be expected to focus more on

the tangible outcomes and performance of the outsourcing arangement in making their assessment of the

relationship. This, in turn, determines the extent of their loya lty towards the specific LSP. Thus, hard fa ds (i.e.,

price and quality) become more important with resped to loyalty formation, w hile soft facts" (i.e., thesatis fadion

wi th the way the parties are interacting) decrease in importance. The corresponding hypotheses are asfo llows:

H 6a,b,c- The frequency of confl ict pos itively moderates the effect of (a) pri ce sati sfacti on and (b) sav icesatisfaction on loya lty to a LSP, wh ile i t negatively moderates the effect of (c) relational

satisfaction on loya lty to a LSP.

Based on similar reasoning, it can also be expected that the effects of savice satisfaction on price satisfaction

and rel ati onshi p sa tisfad ion change in an environment characterized by frequent con flict . Wi thin logistics

outsourcing arrangements, service quality has the characteristics of a hard fact. Usually the performance of log istics

services are measured with aw id earra/ of indicators and metrics, e.g.. service levels, lead times, throughput times,

damage rates (Grif fis et al. 2007). Thus, it can be supposed that in relationships charaderized by frequent conflict,

the satisfaction w ith service quality w ill be an even more important factor influencing p rice satisfaction than when

the frequency of conflict is low.

With reg ad to rela tionship satisfaction i t can be asserted that in situati ons of frequent confl id , negative quality

deviations become an even larger source of fric tion and concern than when everything in the relationship is runningsmoothly. Thus, the reaction to changes in the satisfaction with sa vic e quality w ill be more significant when

confl i ct i s present i n the rel ati onshi p. Therefore, we hypothesize:

HBd,e: The frequency of conflict positively moderates the effect of savice satisfaction on (d) price

satisfaction and (e) relational satisfaction with a LSP.

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CAHILL, GOLDSBY KNEMEYER & WALLENBURG

TABLE 1

INDUSTRY REPRESENTATION AMO NG RESPONDENTS

Industry Per cent age

Food and be/erage 16.5%

Autom otive 4.8

Consumer goods 16.5

Industrial equipment 5.2

Electroni cs and rel ated i nstruments 8.5

Computer hardware and peripheral equipment 2.8

Chemicals and plastics 10.9

Retailing 9.7

Healthcare 10.1Other 14.9

TABLE 2

ANNUAL REV EN UE S OF RE SPO ND EN TS BUSIN ES SUNITS

Annual Revenue in M ill ionsU.S . $ Per centage


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expectations and outcomes). WTiile price satisfaction and relational satisfaction (PS1-3 and RSI-3 in the Appendix

and in Tables 3-5) are based on the scales used by Wallenburg (2004). service satisfaction (SSI-3 in the Appendix

and in Tables 3-5) is measured using an adapted version of the scale developed by Dabholkar. Shepherd, and Thoipe

(2000). Parasuraman. Zeithaml. and Berry's (1985. 1988) SERVQUAL scale was not employed, as its application to

industrial service settings has been found to be problematic (Babakus and Boiler 1992; Bienstock, Mentzer, and Bird1997; Cronin and Taylor 1992; Stank. Goldsby. and Vickery 1999). In particular, the validity of the dimensions and

the uniform applicability of the method for all service sectors have been questioned. Additionally, it has been

suggested that the use of difference scores in calculating SERVQUAL contributes to problems with the reliability,

discriminant validity, convergent validity, and predictive validity of the measurement (van Dyke. Prvbutok. and

Kappelmann 1999).

While a review of the literature failed to provide a commonly used scale for measuring interorganizational

conflict, it is generally agreed that conflict is built up through a process of interlocking episodes (Leonidou. Bames,

and Talias 2006; Pondy 1967; Vaaland and Hakansson 2003). Thus, the measurement of conflict (CF1-3 in the

Appendix and in Tables 3-5) was developed with this perspective in mind. It is based on Lusch (1976) and Kim and

Frazier (1997) and focuses on the frequency of interorganizational conflict. In particular, three items were used to

judge the frequency of confl ict between the LSP and its customer, as viewed by the customer. The scales were not

designed to assess the nature o f the conflict, but rather to measure the perceived frequency of conflict that existed in

the relationship. The importance of frequency as it relates to an examination of conflict has been established within

the literature (Cochran. Schnake. and Earl 1983; Coughlan. Anderson. Stem, and El-Ansary 2005). This scale was

pilot tested on a separate sample of 200 respondents and shown to be a reliable and valid measure of conflict

frequency (Cronbach alpha = 0.80). Further, it should be noted that the relationship between the LSP and customer

serves as the unit of analysis in the research. As such, the three satisfaction constructs, loyalty, and conflict reflect

the summation of experience between the two companies over the course of the relationship and are not intended to

capture individual episodes of satisfaction, loyalty behavior, or conflict. This recognition is critical toward ensuring

consistent operationalization across the model constructs.

Measurement Model Assessment

Structural equation modeling (SEM) using AMOS 5.0 was employed to test the measurement and structural

models. SEM is a multivariate technique that infers dependencies between latent variables, or constructs, on the

basis of empirically measured variances and covariances of observed variables, or indicators. Prior to testing thestructural models, confirmatory factor analysis (CFA) was conducted to assess the validity of the measurement

models. According to Anderson and Gerbing (1988). CFA provides a more rigorous approach to model testing than

criteria such as Cronbach alpha, exploratory factor analysis, or item-total correlation.

The results of the CFA for the five latent variables included in the structural model are repotted in Table 3. The

chi-square (%") statistic is an often used measure to assess how well the model covariance matrix matches the sample

covariance matrix (Chou and Bentler 1995). The chi-square value for our measurement model is 187.453 (p < .001).

As the use of the absolute chi-square is sometimes problematic (Bagozzi and Yi 1988), chi-square is adjusted for

model parsimony by stating it in relation to the model degrees of freedom. The normed chi-square (y_'/df) in our case

is 1.720 and thus, good (Bollen 1989).

In order to provide further information on model adaptation, a range of additional fit criteria was calculated for

the model. The comparative fit index (CFI), goodness-of-fit index (GFI), adjusted GFI (AGFI), Tucker-Lewis index(TLI). and root mean squared error of approximation (RMSEA), are often used measures of model adaptation

(Bagozzi and Yi 1988; Bentler and Bonett 1980; Browne and Cudeck 1993; Garver and Mentzer 1999; Hu and

Bentler 1995; Joreskog and Sorbom 1982; Stank et al. 2003; Zhang. Vonderembse. and Lim 2003). While the

former four measures are recommended to be at least 0.90. RMSEA should remain below 0.08. As shown in Table

4. five out of six measures indicate very good model fit. with AGFI calculated just below the 0.90 cutoff at 0.887.

Byrne (1994) and Bentler (1990) suggest that the comparative fit index (CFI) is the most reliable index since it is

shown to be less biased to small and large sample sizes. In our case, the CFI value of 0.978 demonstrates very good

fit for the CFA model.

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262 CAHILL, GOLDSBY KNEMEYER & WALLENBURG

TABLE 3

CONFIRMATORY FACTOR ANALYSISOF MEASUREMENT MODEL

Standardized Solution

ItemService

Satisfaction

Price

Satisfaction

Rdational

Satisfaction

Customer

LoyaltyConflict t-val uea

SS1 0.952 b

SS2 0.934 29.845

SS3 0.932 29.635

PS1 0.780 _b

PS2 0.972 16.702

PS3 0.792 13.759

RS1 0.842 _b

RS2 0.841 16.614

RS3 0.951 20.037

CL 1 0.834 _b

CL2 0.792 14.565

CL3 0.770 13.992

CL4 0.814 15.171

CL5 0.822 15.382

CF1 0.685 _b

CF2 0.774 11.012

CF3 0.932 12.030

at-val ues are from the unstandardized sol ution.

bt-values for these parameters were not avai labl e because they were fixed for scali ng purposes.

SS = Service Satisfaction: PS= Rice Satisfaction: RS = Relational Satisfaction; CL = Customer Loyalty:

CF = Conflict Frequency

Fit statistics:

Chi-square 187.453 df = 109, p < 0.001

Normed chi-square 1.720

CFI 0.978

GFI 0.919

AGFI 0.887

TLI 0.973

RMSEA 0.054

Anderson, Gerbing, and Hunter (1987) maintain that convergent va lid ity is supported when indicators load

sign ifica ntly on their designated latent variables. 3 nee the I owest f actor loading found in the model is 0.685 for CFI

(see Table 4), our model denonstrates convergent valid ity. Add itionally, discriminant validit y, wh ich refers to the

degree to which measurements of different concepts are distinct (Bagozzi 1980), was examined using the Fornell

and Larcker (1981) criterion. As repotted in Table 4, squared correlations between constructs are below the

respective constructs average variance extracted (AVE ) indicating discr iminant va lid ity in all instances, but one.

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JOURNAL OF BUSINESS LOGISTICS, Vol. 31,No.2, 2010 263

TABLE 4

TEST FOR DISCRIMINANT VALIDITY OF THE ME ASUREMENT MODEL

SS PS RS CLAVE 0.88 0.72 0.78 0.65

s s 0.88

PS 0.72 0.53

RS 0.78 0.61 0.47

CL 0.65 0.68 0.43 0.55

CF 0.63 0.35 0.30 0.47 0.28

SS = Service Satisfaction; PS = Price Satisfaction;

RS = Relational Satisfaction; CL = Customer

Loyalty; CF = Conflict Frequency

Italicized figures are the respective constructs AVEs.

Other figures are the squared correlations between

constructs in columns and constructs in raws.

The squared correlation of service satisfaction and customer loyalty tha t slightly exceeds the AYE of customer

loyalty is not problematic, though, but merely an expression of the strong relationship between the two constructs.

Examination of the measurement items for each of these two constructs provides support for their distinct character

through content validity. According to Mentzer and Flint (1997), content validity assesses how well the content

(contained in the theoretical definition of the construct) of the construct is captured by the studys measures of the

construct (p. 208). This aspect o f construct validity appear s to be satisfied based on the distinct meaning of the

measurement items for each latent variable. In addition, chi-square difference tests do not indicate lack of

discrimination between any of the constructs in the model (Anderson and Gerbing 1988: Garver and Mentzer 1999).

Thus, distinction between these two constructs can be made on the bases of their theoretical definitions and

measurement contents.

Moderating Analyses

Moderating analyses w-ere conducted using the multi-group analysis function of AMOS 5.0 to examine

invariance between two samples (Steenkamp and Baumgartner 1998). As suggested by Durvasula et al. (1993) and

Homburg, Giering, and Menon (2003), we split the sample into high and low conflict groups by the median of

conflict.

Next, invariance of structural pa ths was tested following the procedure proposed by Zitnmer-Gembeck, Geiger,

and Crick (2005). In a first step, a free model, ill which all parameters were estimated separately for the two samples

under scrutiny, Was compared to a model in which structural paths (/-paths) W'ere constrained to be equal in both

samples. If the chi-square was significantly worse for the restr icted model, we expected differences with regard to

the structural paths and conducted further analyses. If the chi-square was not significantly different, we assumed

sample invariance with regard to structural paths. Where differences were found, we examined each of the structural

paths individually to pinpoint the location of the difference(s) between the two samples (Thelen and Honeycutt

2004). For that, structural paths were restricted to equality one by one. If a restriction was found to cause a

significant increase in the chi-square, the respective path Was diagnosed to be significantly d ifferent for high and

low levels of conflict frequency.

FINDINGS

The fit statistics for the full model are similar to those reported for the measurement model, with a nornred chi-

square value of 2.026 (jf = 145.846, d f = 72). Additionally, four of the other five fit indices exceed the established

cutoff values (CFI = 0.977, GFI = 0.924, TLI = 0.970, and RMSEA = 0.064), with only the AGFI just below the

cutoff at 0.889. This is, again, a strong indication of adequate model fit. Given sound assessment of the overall

model fit, attention can turn to the m odels parameter estimates.

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Hypothesis test results for the base model are detailed in Figure 2. The first three hypotheses (Hi. H; and H})

examine the direct effects that price satisfaction, service satisfaction, and relational satisfaction, respectively, exert

on customer loyalty. Model results indicate strong support only for two of the three hypotheses. The effect o f price

satisfaction on customer loyalty (Hi) is not significant. In contrast, service satisfaction (H) and relational

satisfaction (Hs) directly affect customer loyalty. Both paths are positive and significant at the 0.01 level, while thepath coefficients indicate that service satisfaction has a stronger effect on loyalty than relational satisfaction.

When the effects of the three satisfaction dimensions on loyalty are combined they produce an R-square value

of 70.1 %, indicating that more than 2/3 o f the variance in the measurement of customer loyalty can be attributed to

these three constructs. Therefore, not only do two of the three satisfaction dimensions illustrate positive effects on

customer loyalty, they also appeal' to be very strong predictors, given that a very substantial amount of variance of

customer loyalty can be explained by these latent variables.

FIGURE 2

HYPOTHESIS TEST RESULTS

R 2 = 54.5 %

D esign ates significance at the 0.01 Level, n.s. = not significant.

Interestingly, we see that service satisfaction affects customer loyalty not only directly but also through two

indirect paths, mediated by price satisfaction and relational satisfaction. The model results provide strong backing

for both paths, thus supporting H4and Hs. Each path is significant at the 0.01 level and has a path coefficient above

0.7. Service satisfaction thereby affects customer loyalty directly and indirectly, with a total effect of 0.826. No

significant difference between the effects on price satisfaction and relational satisfaction can be detected and service

satisfaction thus appeals to drive both equally. At the same time, the very high R-square values for price satisfaction

(54.5 %) and relational satisfaction (62.8 %) further stress the high importance of service satisfaction for the

formation of these two additional aspects of satisfaction.

Using the moderation analysis approach described previously, we subsequently examined the hypotheses

focused on the potential moderating effect of the frequency of interorganizational conflict. This was done by

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conducting median-splitting, dividing the sample into two sub-samples. The first sample contains the low- and the

second one the high-conflict-frequency relationships. A summary of the results from the moderation analyses is

presented in Table 5. The summary table illustrates that of the five potential moderating effects hypothesized, three

paths are shown to vary signif icantly between the low- and high-conflict-frequency groups. Hypotheses 6a and 6e

are not supported as no significant differences between the two groups are apparent for both the price satisfaction-loyalty link and the service satisfactionrelational satisfaction link.

TABLE 5

SUMMARY OF MODERATOR ANALYSIS

BASE MODEL PATH

CL, PS

00

CL, SS

(b)

CL, RS

(c)

PS, SS

(d)

RS. SS

(e)

Tests for

Invariance

Chi-square

difference1.360 17.657 21.527 6.612 0.027

Significance n.s. ** ** * n.s.

Parameter

Estim ates

Low'Conflict - 0.901** n.s. 0.438** -

High Conflict - 0.232# 0.500** 0.796** -

**Designates Significance at 0.01 level, * at 0.05 level, # at 0.10 level, n.s. = not significant.

SS = Service Satisfaction; PS = Price Satisfaction; RS = Relational Satisfaction; CL = Customer Loyalty;

CF = Conflict Frequency

For the service satisfactionloyalty link, we observe a negative moderat ion effect by conflict, wliich is contrary

to hypothesis H6b. That is, for higher levels of conflict frequency this link does not become stronger, but instead

significantly (p < 0.01) weaker. The path coefficient declines considerably from 0.901 to 0.232. A corresponding

observation can also be made regarding hypothesis Hgc. Contrary to expectations, relationship satisfaction actually

has a stronger effect on loyalty under high conflict compared to low' conflict frequency: The relational satisfaction-

loyalty link changes from non-significant to 0.500 (p < 0.01). Thus, also H 6c has to be rejected. The only hypothesis

to be supported is H6ll, w'here we see the expected positive moderation by conflict. Here, the service satisfaction-

price satisfaction link increases from 0.438 under low conflict to 0.796 under high-conflict frequency (p < 0.05).

DISCUSSION OF FINDINGS

While operationalized somewiiat differently from the operational performance construct of Stank et al. (2003),

the importance of logistics service satisfaction is underscored in the current research. Stank et al. (2003) imply that

operational performance and cost performance represent order qualifiers in their study and not differentiators in the

eyes of customers" (p. 44). In contrast to that, our findings highlight the customer's satisfaction with service quality

to be the primary driver of customer loyalty. Additionally, it strongly drives both economic (i.e., price) and social

(i.e., relationship) aspects of the service provision. The current analysis suggests that the provision of excellent

operational performance might make good relations more attainable. In the absence of excellent operations, friction

may be more likely to make it difficult to be fully satisfied with the social aspects of the buyer-seller relationship.

Relational satisfaction is the second driver of customer loyalty, wliile the effect of price satisfaction on loyalty is not

significant in this context. Both of these findings correspond to the Stank et al. (2003) findings on LSP performance.

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While price and associated costs are key selection criteria when choosing a LSP (Langley et al. 2007). they

seem to lose their importance in the ongoing relationship. This may be attributed to four factors: (1) within the

relationship the customer may focus more on effectiveness and avoiding problems than on efficiency and lowest

costs when assessing the value provided by the LSP; (2) within an ongoing relationship prices are less readily

comparable for complex services as the tine price may only become transparent after an extensive tendering andnegotiation process; (3) as long as prices remain within a band of reason, w'hich is likely to be the case in the highly

competitive logistics service market in the U.S.. the high variance of observed price satisfaction may. in fact, be a

result of only small differences in the actual prices (in which case, the up- and downside potential of prices is much

smaller than for service satisfaction and relational satisfaction, where deficiencies may cause major follow-up costs

and excellence may create a strategic advantage); and (4) the respondents referred all answers to the relationship

with their most important LSP, and it can be assumed that price had already been considered in the selection of this

primary LSP. Accordingly, primary LSPs will most likely fulfill the requirement of offer ing prices within an

acceptable range.

In sum, the base model provides partial support for the application of SET to the examination of customer

percept ions of logistics service provision and customers loyalty to primary service providers. All hypothesized

relationships were significant in the base model with the exception of the price satisfaction-customer loyalty link.

The moderating analyses, however, show that the model described is not a universal one. Instead, the effects are

highly contingent on the nature of the relationship between the LSP and its customer. In situations where conflict is

less prevalent (i.e., less frequent), service satisfaction is found to be the only significant driver of customer loyalty.

Both price satisfaction and relational satisfaction seem to be of little relevance to loyalty in this setting. Therefore,

they also do not function as mediators and do not pass on the strong effects service satisfaction has on these two

satisfaction dimensions. Even if service satisfaction improves price satisfaction and relational satisfaction,

respectively, our findings suggest that this may not lead to more loyalty in a situation with low levels of conflict.

Yet this changes when increased levels of conflict enter the logistics outsourcing relationship. While price

satisfaction still has no significant effect, relational satisfaction now becomes the primary driver of loyalty and has a

stronger effect than service satisfaction. This is contrary to the common belief that in an environment characterized

by conflict, customers are expected to focus more on the tangible outcomes o f the outsourcing arrangement to assess

relationship performance. Instead, soft facts, i.e., the satisfaction with the way the parties interact, become more

important with respect to loyalty formation, while hard facts, i.e., quality, decrease in importance.

The interpretation for this is that once turbulence is created in the relationship by a high level of conflict (i.e.,

frequent conflict), the quahty o f the interaction may become the deciding criterion for continuing or abandoning the

relationship. We must therefore view conflict along two perspectives. As conflict may be functional as well as

dysfunctional (Pondy 1967) there can be a rationale for accepting conflict as an interactive tool for improvement and

innovation (Gadde and Hakansson 1993). This, however, only applies to functional conflict. Conflict in a business

exchange may also have a disease-like nature with primarily disruptive, dissociating, and dysfunctional

consequences. The aim is to avoid this type of conflict or reduce its consequences. Too little coherence can develop

into destructive conflict and ultimately a diffusion of focus from the relationship (Hakansson and Montgomery

2003).

A good relationship and high levels of conflict can translate to functional conflict, which does not confine

cooperation and reduce loyalty. In contrast, high levels of conflict combined with low- relational satisfaction maytranslate to the second type of conflict, which is dysfunctional, disruptive, and disease-like in nature. This can

clearly have a destructive effect, which strongly reduces loyalty and can only partially be compensated for by

exceptional service. Service satisfaction still has a positive direct effect on loyalty, but this is much weaker (path

coefficient of 0.232) than the effect of relational satisfaction (path coefficient of 0.500). The strong total effect of

service satisfaction (0.795) is mediated by relational satisfaction. This means that even in the case of high conflict,

service satisfaction can counteract dysfunctional tendencies. However, only if service satisfaction actually improves

relational satisfaction can this be expected to result in strong loyalty.

Interestingly, price satisfaction has no significant effect on loyalty independent of the frequency of conflict.

This leads to the conclusion that the abovementioned factors that offer explanation for the absence of a loyalty effect

of price are universal with respect to the frequency of conflict.

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MANAGERIAL IMPLIC ATIONS

CEOs at third-party logistics companies are expecting an increased focus on customer relationship management

activities as they pursue marketplace differentiation (Lieb 2008). The results of the current study indicate that in this

context LSPs should closely consider service satisfaction and relational satisfaction as these were found to besignificant determinants of customer loyalty. Meanwhile, price satisfaction registered no significant effect on

customer loyalty. The managerial implications o f these findings are that the tangible aspects of the logistics service

provision (e.g., throughput times, picking accuracy, on-time deliveries) along with the social aspects (e.g.,

interaction, cooperation) are the key drivers of customers retention, expansion, and referral within ongoing logistics

outsourcing relationships.

The current research agrees with Stank et al. (2003) in concluding that price is a less significant predictor of

loyalty in this context. From the results of the study, this conclusion holds in relationships w'here prices for the

logistics services remain within a band of reason, which is likely to be the case in highly competitive logistics

outsourcing markets. To bonowr the rationale provided by Stank et al. (2003), which found non-significant effects of

operational performance and cost performance on customer satisfaction, it is not necessarily true that price

satisfaction is not an important factor influencing loyalty. Rather, competitive pricing is the expectation, or an order-

qualifying criterion. Service satisfaction and relational satisfaction, on the other hand, represent order-winning

criteria. Commercial managers at LSPs should factor these results into their account management plans.

The role of service satisfaction is particularly important when one considers its effect on customer loyalty

directly, but also through relational satisfaction. Customers assessments of value not only rely on price, but are also

influenced by the quality of service provided at a given price. Similarly, a customers satisfaction with the social

aspects of the relationship is likely to be marked with much less friction if the operational elements sufficiently meet

their- needs.

Most importantly, the need for a well defined conflict management process within logistics outsourcing

relationships can be derived from this study. Managers on both sides of the logistics outsourcing relationship should

consider how' best to handle future conflicts with the other part)' in light of the results. In particular-, in those

relationships characterized by frequent conflict, both sets of managers should focus on the relationship aspects of the

business engagement. It is only through appropriate levels of relat ional satisfaction tha t the parties will be able to

W'eather the conflicts inherent in any relationship. Failure to ensure appropriate levels of overall relationalsatisfaction destabilizes the relationship and may result in dysfunctional conflict that is disruptive to the relationship.

A proactive consideration of the relationship between conflict and relational satisfaction should enable managers to

deal effectively with instances of heightened conflict. These efforts should strengthen the overall relationship while

mitigating the potential negative consequences of conflict.

Ertel (1991) provides an excellent starting point for managers looking to design a conflict management

process. His conflict resolution methodology allow's for managers involved in logis tics outsourcing rela tionships to

tailor air approach to the specific context of their relationships. Given the diversity of relationships in this area, it

will be important for managers to consider these contextual factors. Based on our research, the formation of an

effective conflict management process will be largely dependent on having a strong w'orking relationship. A good

W'orking relationship should enable the firms to deal effectively and efficiently with the disagreements, both large

and small, that inevitably arise in any complex relationship (Ertel 1991).

LIMITATIONS AND FUTURE RESEARCH

Although this is the first logistics study to define and empirically examine the potential moderating effects of

conflict frequency within outsourcing relationships, it is important to consider the studys limitations. First, the

literature on logistics outsourcing provides a multitude of perspectives in the depiction of typical strategic and

tactical activities (Coyle, Bardi, and Langley 2003; Knemeyer and Murphy 2005). Within this study, we focused on

important outsourcing relationships between companies and LSPs, which, compared with basic logistics services,

encompass a broader number of service functions and are characterized by a long-term orientation. By doing so, the

current study excludes logistics services that only comprise a small share of the outsourced logistics activities.

Future research should therefore view' relationships that are smaller- in volume and can therefore be considered to be

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of lower importance to both the provider and the customer. Also, logistics services that are rendered on a short-term,

transactional basis and are rather narrow in scope are likely excluded in our study. These transactional services are

often lower in specificity, uncertainty, and risk and, according to transaction cost theoiy, require a lower degree of

cooperation. Therefore future research should also examine these services, as it can be anticipated that the

relationship between satisfaction and loyalty may differ between transactional and relational settings. It may also bepromising to apply our m odel to other services in the field o f business process outsourcing to detect similarities and

differences.

Another limitation is the studys sampling frame. The results are based exclusively on the perspectives of

logistics executives at U.S. companies at one point of time. There may exist potential cultural differences that

influence how conflict affects the satisfaction and loyalty linkage. A logical extension of the study would be to

examine how other cultures either support or challenge the findings. In particular, it would be interesting to compare

cultures that differ in regard to the following characteristics: ( 1 ) desire for stable relationships: (2 ) loyalty toward

relationships; and (3) desire for consensus and avoidance of conflict. Another methodological extension would be a

longitudinal study design. Through this, future research could capture both the specific interdependencies of conflict

and satisfaction and how over the course of the relationship the effect of conflict on the satisfaction-loyalty link may

change.

Third, the current findings suggest that additional examination of conflict beyond frequency is merited. Our

research focused on the frequency of general forms of conflict between the LSP and customers. Future research

could examine conflict over specific issues, conflict that may vary not only in frequency but also in perceived

importance and intensity among the involved parties. Further, a study of critical incidents in combination with the

resulting conflicts could shed more light on episodic conflict in contrast to the overall conflict examined in our

study. In addition, a more detailed examination of the functional versus dysfunctional nature o f conflict is warranted

based upon our initial findings. Research tha t distinguishes between these two types of conflict will provide more

detailed insights into the ways conflicts influence the formation of loyalty. W e assume that such future studies will

support our interpretation regarding the different effects of functional and dysfunctional conflicts, both of which

may be present in a relationship at the same time. Examination of the independent effects and interaction among

these types of conflict is merited. Such a study w'ould be particularly insightfu l if conducted in a dyadic setting,

allowing for comparisons between customer and provider perspectives.

A fina l limitation is the lack of satisfaction antecedents examined in the study. Despite the apparent parsimonyof the base model, one should not assume that the inclusion of additional fact ore and improved operationalization

are beyond reproach. In fact, a comparison of the current results and those of Stank et al. (2003) suggests that further

investigation of the antecedent-outcome relationship between operational and relational aspects of the logistics

service experience is justified. Here, further insights may be gained by employing a dyadic study that is not confined

to the domain of the customer but also includes the actions taken by the LSPs. In addition, the examination of other

potential moderators might prove as consequential as the construct o f conflict frequency. While potential moderators

are countless, some promising ones include organizational characteristics, industrial and national settings, and scope

and duration of outsourcing relationships. The current research sheds light on a focal construct (i.e.,

interorganizational conflict) that resides in any business relationship, but can be fully expected in a service

relationship in a critical area like logistics operations, where expectations on delivery quality and cost are often at

odds with one another.

CONCLUSIONS

The results of this study indicate that in settings where conflict is less frequent in the interaction between a LSP

and its customer, the perceived service satisfaction is the only significant driver of customer loyalty. Both price

satisfaction and relational satisfaction seem to be of little relev ance to loyalty in this setting. Yet this changes when

conflict enters the relationship. While price satisfaction still has no significant effect, relational satisfaction now

becomes the primary driver of loyalty. Thus, once turbulence is created in the relationship by a high level of

conflict, the quality of the interaction may become the deciding criterion. A good relationship should enable

interorganizational conflict to become functional, i.e., conflict that does not confine cooperation or reduce loyalty

but rather incites improvement and innovation. In contrast, high levels of conflict combined with low relat ional

satisfaction can translate into a different type of conflictone that is dysfunctional, disruptive, and disease-like in

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JOURNAL OF BUSINESS LOGISTICS, Vol. 31 ,No. 2 ,2010 269

nature. Given the growth and importance of logistics outsourcing relationships, both parties to the relationships (i.e.,

providers and customers) should understand how their actions are affec ted by these findings.

APPENDIX

MEASUREMENT ITEMS

Note: Al l items are measured using a seven-point Likert-type scale, where 1 = strongly disagree, 7 strongly agree.


Customer Loyalty

Please indicate your level of agreement with the following statements

regarding your past and future relationship with th is LSP.Mean St. Dev.

CL1 Right nowr, w'e intend to extend existing contracts with this LSP. 5.020 1.596

CL2 If wre knew' then what we know' now', w'e W'ould again select this LSP. 4.948 1.701

CL3 In the future, w;e will use this LSP more than w?e do now'. 4.536 1.556

CL4

When w'e bid out other services than the ones w'e outsource today, we will

consider th is L SP preferentially. 4.710 1.531

CL5Within our organization, W'e have recommended preferential

consideration o f this LSP for further projects.4.544 1.627

Price Satisfaction

Please indicate your level of agreement with the following statem ents

regarding your LSPs pricing.Mean St. Dev.

PS1 Compared to other LSPs, our LSPs prices are very good. 5.040 1.249

PS2 The LSP offers a very good price-perfonnance ratio. 5.036 1.327

PS3Compared to carrying out those tasks ourselves, our L SPs prices are

very aood.5.085 1.505

Service SatisfactionPlease indicate your level of agreement with the following statements

on your satisfaction with the LS Ps service quality.Mean St. Dev.

SSI Overall, this LSP offers excellent services. 5.286 1.286

SS2 This L SP offers great performance. 5.073 1.296

SS3 This L SP offers very high quality. 5.161 1.262

Relational Satisfaction

Please indicate your level o f agreement with the following statements

on how satisfied you are with the relationship between this logistics

service provider and your company.

Mean St. Dev.

RSI We are very satisfied with the w'ay w'e interact with our LSP. 5.173 1.285

RS2 Differences when cooperating with this LSP are alw'ays settled smoothly. 5.101 1.311

RS3 The relationship with this LSP is very' good. 5.387 1.360

Conflict Frequency

Please indicate your level o f agreement with the following statementson your relationship with this logistics service provider.

Mean St. Dev.

CFIIn our relationship with this LSP, w'e frequently run into conflicts on the

organizational level.3.310 1.614

CF2On the operational level, conflicts between our employees and those of

the LSP frequently occur.2.940 1.548

CF3On the whole, our relationship with this LSP is characterized by frequent

conflicts.2.363 1.428

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