What do third party logistics buyers really want? An empirical analysis utilizing benefit based market segmentation

Abstract

During the last decade the third party logistics market has grown significantly in the United States. While a degree of uncertainty continues regarding the definition of third-party logistics, a reasonable consensus of the concept has been described as a relationship between a shipper and third party which, compared with basic services, has more customized offerings, encompasses a broader number of functions and is characterized by a longer-term, more mutually beneficial relationship (Afrik and Calkins, 1994). Competitive conditions have forced many firms to revise their priorities and focus resources on a limited number of key activities. Business process redesign has revealed the in-house Currently there exists a paucity of empirical research concerning the intrinsic drivers underlying the purchase of third party logistics services. The identification of market segments and the design of successful marketing strategies rely on understanding the benefits desired by existing and potential customers. provision of logistical services to be less than critical in the creation of customer value for a growing number of organizations. Thus, the U.S. third party logistics market now accounts for $85 billion of the $1.015 trillion total market for transportation, warehousing, and related supp-ort services (Langley, van Dort, Ang, and Sykes, 2005). The level of interest in logistics outsourcing can be further gauged by recent survey responses from chief logistics executives of the 500 largest American manufacturers. The participants currently reported spending 40 percent, on average, of their entire annual logistics budget with third party logistics providers. A consensus of the respondents indicated an expectation to increase this amount to 46 percent within three years (Lieb and Bentz, 2005). Past research has found the benefits derived from products and services to be prominent discriminatory vari-ables in market segmentation (Haley, 1968; Wind, 1978). The principle underlying benefit-based segmentation is that buyers are not seeking a product or service per se, but the value represented by the acquisition. In other words, how does the product help meet needs or provide benefits? The present literature does not reveal an attempt to empirically determine the benefits sought by firms seeking to outsource logistics or whether homogeneous buyer segments exist in this market. Further, suppliers appear deficient in their understanding of the inherent value industrial buyers are seeking from the acquisi-tion of third party logistics services. Current marketing strategies use broad based approaches in an attempt to reach potential customers based upon traditional measures of in-dustrial segmentation, i.e., geographical location, decision making process, SIC code or industry, etc. Thus, these shortcomings highlight the need to determine the benefits desired by the purchase of third party logistics services and whether the buyers of these services can be segmented into homogeneous groups based on the unique benefits sought by each group. Further, third party logistics firms may gain a sustainable competitive advantage via innovative industrial buyer market segmenta-tion. STRUCTURAL UNDERPINNING FROM EXISTING LITERATURE Segmentation is a process that subdivides markets into potential customers with similar traits likely to exhibit comparable purchasing behavior. Most firms cannot pursue each and every market opportunity, as resources are routinely limited. However, in practice, many organizations ignore this fact and treat the entire market as potential customers for their products or services. This approach to marketing is known as aggregation and employs an undif-ferentiated strategy. Industrial markets are more difficult to segment than consumer markets as industrial products are often employed in multiple applications or different products may be used in similar applications. …