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A model of logistics performance measurement: A structural equation

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Article  in  International Journal of Operations and Quantitative Management · September 2007

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 A Model of Logistics Performance Measurement:
A SEM Approach
Susana Garrido Azevedo, João Ferreira
Department of Management and Economics
University of Beira Interior
Management and Economics Department
Pólo IV – Edifício Ernesto Cruz, 6200-209 Covilhã
Volume 13, Number 3
Portugal
September 2007, pp. 1-23
(sazevedo@ubi.pt, jjmf@ubi.pt)

This paper aims to propose a model of logistics performance measurement

applied to manufacturing industry. In this study we offer a brief discussion on
the literature about the linkage between logistics activities and performance
measurement. A Structural Equation Modelling (SEM) in its non-parametric
approach (PLS) is used to access the reliability of constructs. The results
support the necessity to use operational performance measures to assess the
logistics responsiveness of firms. This research will help managers to
understand the benefits of adopting a performance measurement system more
suitable to the news priorities of firms enhancing the use of operational
measures instead of accounting and financial ones.
Keywords: Performance Measurement, Logistics Activities, Structural Equation
Modelling.

1. Introduction
Logistics engages many cross-functional processes which may involve many flat
structures in a vertical organization design. We assist an increase concern about
which Performance Measurement System (PMS) use to evaluate the performance of
it. Logistics performance is a rapidly developing area of research. Many firms are
revisiting their performance measures in response to growing pressures to present
metrics more focused on the news priorities of firms. Measurement is a quality
management tool enabling the monitoring and subsequent better understanding of
processes and operations and is not just about how well a firm is doing (Nelly et al.,
2005; Chen et al., 2006; Gomes et al., 2007). However, studies highlighting the
link between logistics activities and performance measurement are few (Forslund,
2007). This paper will hopefully answer this neglected area; and for that we focus
our research on the following aspects: First discuss some concepts of performance
measurement and current literature on design of performance measurement systems
applied to logistics. We argue that the reasons for measuring and the way
performance measurement differ largely depend on the context. We establish also a
conceptual model for the analysis of performance measurement. To support the
implications of our theoretical reflections, we will carry out an empirical study
applied on Portuguese manufacturing industry. This research will help managers to
understand the complexity that may be related with the performance measurement
2 LOGISTICS PERFORMANCE MEASUREMENT

process and it is timely and relevant from both an academic and a practitioner’s
perspective.
The aim of our research is to identify measures of performance as a control
mechanism and tool in the manufacturing industry, and to explore whether some
differences may be explained through different performance of logistics activities.
In this sense, we pointed out the following research questions. (i) What are the
performance measures that must be used in any logistics’ performance measurement
system? (ii) What are the criteria that must orient the selection of the performance
measures? And (iii) What are the main disadvantages associated with the use of
accounting-financial measures?
The paper is structured as follows. We start with the identification of performance
measurement systems in a logistics context and the validity of measures of
performance. The following section contains methodological details of our survey
and presents the research hypothesis and the conceptual model. Next, we complete
the empirical analysis by assessing the validity of performance measures and the
main results of the research are discussed. Finally we conclude by discussing
implication for future research and presenting some limitation of the research.

2. State-of-the-art of Performance Measurement

We have assisted a lot of changes which have contributed to highlight the
importance of logistics not only as a source of competitive advantage (Bowersox,
1990; Williamson, et al., 1990; Christopher, 1998; Carvalho and Dias, 2000; Lai et
al., 2006; West and Bengstsson, 2007; Sharma et al., 2007), but also as a
determinant factor for the success of firms (Bowersox, 1990; Post et al., 2002;
Sadler and Sohal, 2005; Feng and Yuan, 2006). Some of those changes faced by
firms are: (i) the globalisation of businesses (Christopher, 1998; HIDC, 1998;
Evans, 2000); (ii) the continuous shortening of products life-cycle; (iii) a greater
industrial competition (NEVEM-workgroup, 1989); and (iv) the appearance of new
competitive priorities (Wheelwright, 1978). In this context logistics has a crucial
role in promoting firms responsiveness to these changes influencing their
performance.
Over time the same measures of performance have not always been used. Since
around 1880s until 1980s, the emphasis went to the utilisation of financial
measures, such as: profit, Return on Investment (ROI), productivity (Ghalayini and
Noble, 1996), variation of purchasing prices and sales per employee (Drucker,
1990), occupying the first positions. These measures of financial-accounting nature
present a weak connection with strategic targets of firms, which made them
irrelevant for decision making (Tatikonda and Tatikonda, 1998). More, Bromwich
and Bhimani (1989) reported that management accounting systems had a short-
term orientation, a lack of a strategic focus, and relied on redundant assumptions.
Apart from this, financial-accounting measures were found in aggregated form
which causes difficulties in terms of control and decision making (Mentzer and
Konrad, 1991). In logistics context, traditional performance measures are also
considered inadequate (Rathore and Andrabi, 2004). This is because the grouping of
costs in aggregated categories does not allow neither a detailed analysis none the
AZEVEDO, FERREIRA 3

disclosure of trade-offs that may exist within logistics processes (Christopher, 1998)
since they adopt a cross-functional nature (Rathore and Andrabi, 2004).
Furthermore, in this new economic and global context much more competitive,
the performance indicators such as investment, variation in purchasing prices, sales
per employee, profit per unit of production, and also productivity (Drucker, 1990)
start to become obsolete. Some of the changes verified in entrepreneurial
environment include: (i) the emerging of Just-in-time practices; (ii) a greater
emphasis on internal integration and on management process; (iii) the adoption of
integrated strategies in the supply chain; (iv) a establishing global networks; (v) a
greater recognition of clients needs (Fawcett and Cooper, 1998); (vi) the highlight
of performance measures based on time; (vii) a greater emphasis on processes
integration (Lieb and Miller, 1998; Johansson, 2007; Kim, 2007); (viii) the
implementation of new production planning methods; and (iv) a greater emphasis
on operational side instead the financial one (TRILOG, 1999).
In order to overcome the deficiencies and limitations already attributed to
traditional performance measurement systems (Chen et al., 2006; Gomes et al.,
2007), Kaplan and Norton (1992) created the Balanced Scorecard, instrument
which allows analysing and measuring the firm performance, in strategic,
operational, and financial way. However, the Balanced Scorecard has being
criticized because if a manager introduces a set of measures based only on it, he
would not be able to know what competitors are doing (the competitive perspective)
(Neely et al., 2005). Keegan et al. (1989) proposed a similar, but lesser known
performance measurement framework - the performance measurement matrix. As
with the Balanced Scorecard, its strength lies on the way it seeks to integrate
different dimensions of performance, and the fact that it employs the generic terms
"internal", "external", "cost" and "non-cost" as a way of enhancing its flexibility.
Another model that was developed was the Sand Cone Model of Ferdows and De
Meyer. The Sand Cone model suggests that although in the short term it is possible
to trade off capabilities one against the other, there is actually a hierarchy amongst
the four capabilities. To build cumulative and lasting manufacturing capability,
management attention and resources should go first towards enhancing quality, then
- while the efforts to enhance quality are further expanded - attention should be paid
to improve also the dependability of the production system, then - and again while
efforts on the previous two are further enhanced - production flexibility (or reaction
speed) should also be improved, and finally, while all these efforts are further
enlarged, direct attention can be paid to cost efficiency (Ferdows and De Meyer,
1990). The right sequence of improvement enables manufacturers to reach a point
where a high level of performance is achieved simultaneously on all four criteria.
As a way to overcome the criticisms proportioned by the traditional management
accounting Cooper (1987a,b, 1988a,b, 1989a,b) developed an approach known as
Activity-Based Costing (ABC). Jeans and Morrow (1989) argue that ABC
overcomes many of management accounting's traditional problems since it allows
managers to develop activities for their cost needs while simultaneously generates
service or process costs. The advantage of the detail in ABC for the manager is to
give visibility to value added and non-value activities.
4 LOGISTICS PERFORMANCE MEASUREMENT

2.1 Performance Measurement Systems (PMS) in Logistics

The reasons which have lead firms to invest in a logistics performance
measurement system are the following: (i) obtaining a great visibility of the logistics
process; (ii) accompanying the development of logistics activities along time
(TRILOG, 1999); (iii) understanding of what is happening; (iv) the possibility of
influencing behaviours; (v) obtaining competitive results (Fawcett and Cooper,
1998); (vi) understanding firms´ unique competences (Clinton, et al., 1996); (vii) a
better allocation and control of resources (Bowersox and Closs, 1996); (viii)
identification of inefficiencies and reduction of costs; (ix) improvement of customer
service; (x) discovery of added-value services for which the customers would be
willing to pay for; and (xi) improvement of processes (Keebler, et al., 1999).
Two theoretical perspectives of approaching logistics performance measurement
systems are referred in literature: (i) functional perspective (Mentzer and Konrad,
1991; Pohlen and LaLonde, 1994; Davis and Drumm, 1997); and (ii) processual
perspective (Carvalho, 1995; Bowersox and Closs, 1996; Keebler, et al., 1999;
Carvalho et al, 2001). The main difference between these two perspectives lays on
the incidence of Performance Measurement Systems (PMS). According to the
functional perspective, the logistics PMS should fall upon a determined function or
activity, considering this as an isolated entity. However, this perspective has raised
some criticism, mainly from followers of the processual perspective, under the
argument that efficiency and effectiveness of a determined action does not allow
measuring the performance of all the process, obtaining in this case only a biased
performance measurement (Keebler, et al., 1999). In contrast, the processual
perspective defends that PMS should fall on the whole process. In this sense, it
appears more adequate to the new competitive context of the firms.
When choosing the performance measures, firms must decide between general
performance measures, which are financial-accounting nature (sales, profit, return
on investments), or measures directly related to the logistics processes, that is
measures of operational nature (White, 1996). Several authors (Kaplan and Norton,
1992; Gerwin, 2005; Cassab and Maclachlan, 2006) defend that, independently of
the function or the business area, measures of operational nature should be always
used. This is due to the following: (i) firms more than ever highlight competences
and qualifications (not measured by aggregated measures of financial-accounting
nature) and; (ii) the connection between operational improvements and financial
success are quite tenuous and uncertain . Barker (1995) also argues that financial
measures being short term control mechanisms they become almost of the time
inadequate in the analysis of long term improvements. Apart from these limitations,
Ghalayini and Noble (1996) point out some disadvantages associated with financial-
accounting measures such as: (i) a lack of flexibility; (ii) high cost; (iii) inadequacy
to the new competitive environment; (iv) more probability of becoming out-of-date;
and (v) the difficulty of quantifying improvements in monetary terms. Thus, it is
reasonable to conclude that measures of operational nature should prevail in a
logistics’ PMS.
AZEVEDO, FERREIRA 5

3. Performance Measures: Selected Criteria

Performance can be considered in a context where it intends to measure the firms’
capability in reaching certain targets or objectives, previously defined. Being so,
targets and objectives should be previously established; and measures and indicators
that allow a better performance measurement should be chosen.
In this circumstance, some targets or objectives appear as leading factors in the
selection of performance measures. Kellen (1992) and Carvalho et al. (2001) defend
the connection between strategic planning of the firm and measurement system, in
order to guarantee a suitability of the logistics processes and specific objectives of
the firm. In the literature it is frequently argued that performance measures should
be derived from strategy; that is, they should be used to reinforce the importance of
certain strategic variables (Skinner, 1969; Mintzberg, 1978; Fombrun and Wally,
1989; Zahra, 1993; Chandler and Hanks, 1994). And although this does not always
appear to happen in reality (Neely et al, 1999), the link between performance
measurement and strategy has been extensively explored in the business strategy
literature and variety of models in the developing of strategy can be found in
literature.
Well-known models include: (i) the generic strategies of Porter (1980); (ii) the
strategic typology of Miles and Snow (1978); (iii) the VRIO model of Barney
(1991); and (iv) the entrepreneurial Orientation of Lumpkin and Dess (1996). Each
of these models relates a group of variables which do not depend on performance.
Besides this the Miles and Snow model (Hambrick, 1983; Zahra and Pearce, 1994;
Gimenez, 1999) and also Porter’s one (Miller, 1983) were empirically tested to
validate that relationship. Another factor that is pointed out by some authors
(NEVEM-workgroup, 1989; Van Amstel and D’Hert, 1996; Bowersox and Closs,
1996) is the logistics objectives (Van Amstel and D’Hert, 1996; Bowersox and
Closs, 1996). The NEVEM-workgroup (1989) also points out the organizational
way of production, in determining the selection of performance measures. Other
criterion used in the selection process is the logistics priorities. For Fawcett and
Smith (1995) the main logistics priorities in the logistics PMS are the following: (i)
order fulfilment; (i) customer service level; (iii) flexibility and responsiveness; (iv)
service innovation; and (v) cost.
Wheelwright (1978) and also Carvalho et al. (2001) defend that firms can only
follow the performance of logistics activities, if they have implemented a PMS
which reflects the firms’ competitive priorities. These competitive priorities are:
cost, service/quality, productivity, and time. Adding to these factors, Fernie and
Sparks (2004) propose another one related with the elimination of all types of
wastes, that is, “leanness”. Fitzgerald et al. (1991) have a different way of facing
this question. They suggest that there are two basic types of performance measures
in any organization those related with results (competitiveness, financial
performance), and those that focus on the determinants of the results (quality,
flexibility, resource utilization and innovation). This suggests that it should be
possible to build a performance measurement framework around the results and its
determinants. In sum, there exists a great variety of proposed solutions in what
6 LOGISTICS PERFORMANCE MEASUREMENT

refers to the factors that should be considered when selecting performance

measures. For a faster and easier analysis of them, we present it in the following
Table 1.

4. Performance Measurement System Proposed

Given the panoply of proposed measures, what matters is to respond to the question:
which measures to adopt in practice? To assist in responding to this question,
Keebler et al. (1999) adopting a processual perspective propose a set of measures
considered as basic and fundamental, independently of the firm and the type of
strategy considered. Those measures are: time, cost, and quality. Adopting a very
similar position, Christopher (1998) considers time, cost and quality as three key
performance measures which should form part of any PMS. This is because these
measures contribute directly to the success or failure of a firm. Leong et al. (1990)
claim that it is widely accepted that in a manufacturing context there are a set of key
performance measures, such as: quality, delivery speed, delivery reliability, price
(cost), and flexibility.They are in fact, the expression of the philosophy with regards
to performance, above all set on: “Better, Quicker and Cheaper”, in other words,
superior quality of service, in times, evermore shorter and with lower costs.

Table 1 Leading Factors in the Selection of Performance Measures

Factors Performance Measures Authors
Delivery fulfilment; Customer
Key success factors Cavaco and Themido
service; Order lead times;
(2000)
Responsiveness level
Availability and reliability of the
customer service; Acceptable costs
for the level of foreseen service; Carvalho et al., (2001)
Strategy
Investment and financial control; Kellen (1992)
Productivity and operational
improvement
Van Amstel and
Delivery lead time; Trust deliveries; D’Hert (1996);
Logistics objectives
Flexibility; Stock level Bowersox and Closs
(1996)
Organizational way of NEVEM-workgroup
Delivery lead time
production (1989)
Fast and reliable deliveries;
Customer service quality; Flexibility; Fawcett and Smith
Logistics priorities
Responsiveness; Service innovation; (1995)
Cost
Carvalho et al., (2001)
Competitive priorities Cost; Service/quality; Productivity;
Fernie and Sparks
of firms Time; Leanness
(2004)
Measures related with results:
Fitzgerald et al.
Results/determinants competitiveness, financial
(1991)
of results performance; Measures related with
determinants of the results: quality,
AZEVEDO, FERREIRA 7

flexibility, resource utilization and

innovation.
Source: Elaboration of the authors

In this perspective, the performance measures proposed in this study are: cost,
quality, time and flexibility. Slack (1987) identifies range and response, as
dimensions of flexibility, where range refers to the issue of how far the
manufacturing system can change and response focuses on the question of how
rapidly and cheaply it can change. These four measures are also proposed by
Keebler et al. (1999). Several authors argued that generic terms quality, time, cost
and flexibility encompass a variety of different indicators (Table 2).

Table 2 Measures and Indicators of Logistics Performance Com

cho
Measures Indicators Authors othe
Cost to satisfy customer Neely and Wilson (1992); diff
requirements; Cost with Bloemen and Petrov (1994);
Cost continuous improvement Keebler et al. (1999); Lambert
philosophy; Cost with safety and Stock (1999); Fernie and
stocks; Cost with non-quality Sparks (2004)
Number of modifications
accepted by order; Stalk (1988); Nevem-workgroup
Responsiveness to customer (1989); LaLonde and Masters
Flexibility
requirements; Logistics system (1994); Fawcett and Smith
responsiveness to environment (1995); Beamon (1999)
instability
Chow et al. (1994); Keebler, et
Customer satisfaction; Quality of
al. (1999); Garvin (1987);
information shared; Stockout
Quality Bowersox, et al. (1999); Sohal, et
level; Orders fulfilment; Orders
al. (1999); Garver and Mentzer
without quality problems
(1999)
Fawcett and Cooper, (1998);
Delivery lead time
Time Bowersox, et al. (1999); Dias
Order cycle-time
(1999); Carvalho et al. (2001)
Source: Elaboration of the authors

The main motivation to select measures (quality, time, flexibility and cost) that
reflect the new competitive priority of firms is because through the utilization of this
set of measures we can assess the logistics responsiveness of firms to the changes
that are taking place in firms’ environment. The factors taken into consideration in
selecting the measures proposed in this study are presented in Figure 1.

Predominance of Competitive priorities

operational measures of firms
8 LOGISTICS PERFORMANCE MEASUREMENT

Figure 1. Logistics Performance Measures Proposed Coment

flexibility
correct.
5. Methodology
5.1 Design
A survey instrument was used to gather data to test the relationships proposed. The
study was carried out in Portugal. A pilot test of the survey was conducted in order
to assess content validity and the internal consistency of the instrument (Nunally,
1978). The instrument was pre-tested in six firms. Suggestions were incorporated
into a second version of the questionnaire in order to reduce response bias. The
sectors that constitute our sample are showed in the Table 3.

Table 3 Sample Research

SIC Nº Firms % Firms
Food , beverage and tobacco 39 14,7
Textile, Apparel and Leather 77 29,4
Wood and Cork 18 6,9
Paper, Printing and related support activities 13 4,9
Petroleum and coal products; Chemicals; Plastics and
28 10,8
rubber products
Nonmetallic Mineral Product Manufacturing 26 9,8
Metal Products, machinery and transportation equipment 62 23,5
Total 263 100

A random sample of 1775 Portuguese manufacturing firms was selected from a

purchased mailing list. The demographic profile of the list respects the overall
profile of Portuguese firms. To improve the external validity of this study, the
sample was randomly selected from the list. To increase internal validity, the
sample was stratified by industrial sector. As a result, we attained 263 answered
questionnaires. It represents a response rate of 14,8%.

5.2 Research Hypotheses

In the present research the following logistics activities were studied: warehousing,
handling, picking, packaging, and inventory control. According to the literature
about logistics activities and firm performance a set of relationships and research
hypotheses were formulated. In the literature where warehousing is focused this
logistics activity seems to have an impact on the following performance measures:
time, flexibility and cost. An impact on time because the regular availability of
stocks on warehouses allows firms to decrease their lead times (Kaplan, 1983). The
AZEVEDO, FERREIRA 9

consequence of this is an increase on customer satisfaction. Warehousing is also

associated with flexibility since the storage of products allows firms, not only to
increase their operational flexibility, but also its responsiveness to customers’
requirements. However, from the point of view of Prince (1998) the way warehouses
are managed will contribute to a decrease on costs and time. Being so, these authors
defend the use of integrated warehousing management systems as a way of
increasing the accuracy and speed of information flows. The hypotheses formulated
about warehousing and performance are:
H 01a) : There is a positive relationship between warehousing activity and time.
H 01b) : There is a positive relationship between warehousing activity and
flexibility.
H 01c) : There is a positive relationship between warehousing activity and costs.
As regards inventory control activity, it seems to influence the following
performance measures: cost, flexibility, time and quality. According to Burman
(1995) this activity influences costs because inventory control contributes not only
to keep a low level of inventory but also to remove all sources of waste, contributing
to a decrease on costs. Moreover, a good inventory control allows firms to keep an
adequate level of products in order to: (i) increase firm responsiveness to the
market; (ii) decrease the gap of time between suppliers and consumers; and (iii)
support Just-in-time programs between suppliers, sellers, and customers (Lambert
and Stock, 1999). Beyond that the quality of logistics service seems also to be
influenced by inventory control and, more precisely, by the level of inventory (Closs
and Thompson, 1992). This is because, according to the same authors, the delivery
of products and services to customers, “better, quicker and cheaper” depend on the
inventory level. The research hypotheses are:
H 02a) : There is a positive relationship between inventory control activity and
costs.
H 02b) : There is a positive relationship between inventory control activity and
flexibility.
H 02c) : There is a positive relationship between inventory control activity and
time.
H 02d) : There is a positive relationship between inventory control activity and
quality.
The way the handling activity is performed seems to have an impact on costs,
time, and quality. Some authors (Tersine, 1985; Goldratt and Cox, 1993) consider
handling as a non added-value activity that should be kept at a minimum. In this
perspective and according to Tersine (1985), firms should adopt the following
practices in order to decrease costs associated with handlings: (i) eliminate
handlings not necessary; (ii) minimize distances; (iii) set up a uniform flow of
products. These types of practices will contribute to a decrease on losses and
consequently to increase the speed and the quality of customer service. In this sense
the research hypotheses are:
H 03a) : There is a positive relationship between handling activity and costs.
H 03b) : There is a positive relationship between handling activity and time.
10 LOGISTICS PERFORMANCE MEASUREMENT

H 03c) : There is a positive relationship between handling activity and quality.

As regards packaging activity, and according to the literature, it seems to impact
quality and time. Packaging is very important because it could make it easier to
handle products and also to protect them against damage (Bowersox, 1978; Johnson
and Wood, 1993). Thus, and according to Tracey (1998), this activity contributes to
increase the quality of the logistics service since products are delivered in the best
conditions and consequently customers will be more satisfied (Lancioni and
Chandran, 1990). From Bowersox’s (1978) point of view, the kind of package used
should be adequate not only to the handling equipment but also to the trucks’
characteristics; otherwise it will contribute to an increase in time. In order to
overcome this possible problem Bowersox and Closs (1996) suggest the use of
packages with the same height, width and depth. The research hypotheses are:
H 04a) : There is a positive relationship between packaging activity and quality.
H 04b) : There is a positive relationship between packaging activity and time.
As regards picking activity the way this activity is performed, seems to have an
impact on time. From Coyle et al. (1996) standpoint, the picking activity, when
performed with automatic and adequate equipment, could contribute to a decrease
in time. The hypothesis proposed is:
H 05a) : There is a positive relationship between picking activity and time.
In order to illustrate the relationships between logistics activities and firms’
performance we propose the following model (Figure 2).

Warehousing (WH) H01c

H01a Cost (CT)
H02a
Inventory control (IC) H03a
H02
H02d c
Time (TM)
H03b
Handling (HD)
H04b H03c
Quality (QL)
Packaging (PG)
H04 H01b
H05a
a H02b
Picking (PK) Flexibility (FX)

Figure 2 Conceptual Model Proposed Coment

Now is co
5.3 Measurement
A survey instrument was used to gather data to test the relationships shown in the
research. Questionnaire items exploring the main characteristics of firms, the
different logistics activities and performance indicators were included.
The following nine constructs were measured in the data collection instruments:
(i) warehousing activity; (ii) inventory control activity; (iii) handling activity; (iv)
packaging activity; (v) picking activity; (vi) cost; (vii) time; (viii) quality; and; (ix)
flexibility. The first five indicators are considered reflective (Table 4).
AZEVEDO, FERREIRA 11

Indicators used to translate each performance measure variable were chosen from
the literature and they are considered formative indicators (Table 5).
6. Results
A Structural Equation Modelling (SEM) is proposed in order to assess the
relationships among all the constructs. Inside the SEM we used the non-parametric
approach named Partial Least Squares (PLS) technique because of the sample size.
A PLS model is analysed and interpreted in two stages: (i) the assessment of the
reliability and validity of the measurement model, and (ii) the assessment of the
structural model. This sequence ensures that the constructs’ measures are valid and
reliable before attempting to draw conclusions regarding relationships among
constructs (Barclay et al., 1995). The measurement model is assessed in terms of
individual item reliability and constructs reliability.
Table 4 Constructs and Reflective Indicators
Constructs Reflective Indicators Authors

 WH1 – Reception of products/orders Lieb (1992); Cilliers

Warehousing  WH2 – Space utilization and Nagel (1994),
WH  WH3 – Orders’ delivery Halley and Guilhon
 WH4 – Fit of information and (1997), Razzaque and
management technologies used Sheng, (1998)

 HD1 – Operations flow in order to

optimize products flow
Handling
HD  HD2 – Elimination of unnecessary Williamson et al. (1990)
handlings
 HD3 – Fit of technologies and systems
used
 PK1 – Products identification
Picking Cos and Navascués
PK
 PK2 – Items aggregation by customers (2001)
requirements
 PK3 – Fit of equipment used
Packaging  PG1 – Fit of materials used on pack
Samaras (2000); Fawcett
PG  PG2 – Fit of packs to handling equipment (1990)
 PG3 – Fit of packs to products transport
 IC1.– Management of products in Ratliff and Nulty (1996);
Inventory
warehouses Gibson and Mundy
Control
IC  IC2 – Control of inventory levels (1997); Quayle and
 IC3 – Use of adjusted tools according to Jones (1999); Cos and
inventory management Navascués (2001)

Individual item reliability is considered adequate when has a factor loading greater
than 0.7 on its respective constructs (Carmines and Zeller, 1979). This is applicable
to variables with reflective indicators (warehousing, inventory control, handling,
packaging and picking). When the constructs are measured by formative indicators
12 LOGISTICS PERFORMANCE MEASUREMENT

(the constructs named by: cost, time, quality and flexibility), the loadings are
misleading because the joint correlations for each block were never taken into
account in the estimation process. The interpretation of constructs with formative
indicators should be based on the weights (Chin, 1998). Like the canonical
correlation analysis, weights allow us to understand the make-up of each construct,
that is, it provides information about how each indicator contributes to each own
construct. Table 6 shows the individual item weights and loadings for the variables.
Loadings for logistics activities (WH, HD, PK, PG and IC) are all above 0.7.

Construct reliability - After the analysis of the individual item reliability, it is

important also to study the reliability and convergent validity of the constructs. The
measures for construct reliability and convergent validity represent measures of
internal consistency and, as discussed earlier, these are only applicable for
constructs with reflective indicators, that is, logistics activities. Construct reliability
is assessed using a measure of internal consistency, named composite reliability
(Chin, 1998). We interpret this value using the guidelines offered by Nunnally
(1978) who suggests 0.7 as a benchmark for a “modest” reliability. In our research
all the constructs associated with logistics activities are reliable since they have
values higher than 0.7 (WH=0.936; HD=0.941; PK=0.986; PG=0.955 and,
IC=0.938). To assess convergent validity we examine the Average Variance
Extracted (AVE) measure, which was proposed by Fornell and Larcker (1981).
According to the same authors, AVE values should be higher than 0.5. In our study
all the AVE values related with logistics activities are above the reference value
(Table 7). We can say that the indicators used to translate logistics activities are
reliable.

Table 5 Constructs and Formative Indicators

Constructs Formatives Indicators
 CT1 – Costs to satisfy customers Keebler et al. (1999);
requirements on time Lambert and Stock
Cost
 CT2 – Costs with the improvement of the (1999); Bloemen and
CT
philosophy of continuous improvement Petrov (1994); Neely and
 CT3 – Costs with safety stocks Wilson (1992); Fernie
 CT4 – Costs with reverse logistics and Sparks (2004).
Fawcett and Cooper
Time (1998); Bowersox, et al
 T1 – Order-cycle lead time
T (1999); Dias (1999);
 T2 – Delivery Lead time Carvalho et al. (2001);
Keebler, et al. (1999).
 QL1 – Order fulfilment Chow et al. 1994);
Keebler, et al. (1999);
 QL2 – Rigorousness of information
Garvin (1987); Fawcett
Quality available
and Cooper (1998);
QL  QL3 – Level of stock out Bowersox, et al.(1999);
 QL4 – Percentage of orders satisfied at the Sohal, et al.(1999);
first delivery Garver and Mentzer
 QL5 – Percentage of orders without quality (1999); Sohal, et al.
AZEVEDO, FERREIRA 13

problems (1999); Bowersox and

 QL6 – Good invoicing Closs (1996); Sohal, et
al. (1999)
 FX1 – Number of changes in orders
without delivery problems Nevem-workgroup
(1989); Fawcett and
 FX2 – Responsiveness to customers
Flexibility Smith (1995); Stalk
requirements
FX (1988); LaLonde and
 FX3 – Logistics systems responsiveness to Masters (1994); Beamon
especial orders (1999)
 FX4 - Logistics systems responsiveness to
environmental changes

Once analysed the reliability of the measurement model, it is also important to study
its validity. Thus, to assess discriminant validity, AVE values should be higher than
the variance shared between the construct and the other constructs in the model (i.e.
the squared correlation between two constructs). For satisfactory discriminant
validity, the diagonal elements should be significantly higher than the off-diagonal
elements in the corresponding rows and columns (Barclay et al., 1995). As we can
see in Table 8, this condition is satisfied for all variables associated with the
logistics activities.
Table 6 Individual items weights and loadings
Indicator Weight Loading Indicator Weight Loading
WH1* 0.2479 0.8846 CT1** -0.1073 0.0089
WH 2* 0.2765 0.8955 CT2** -0.2880 0.0478
WH 3* 0.3144 0.9105 CT3** 0.5984 0.6336
WH 4* 0.2901 0.8508 CT4** 0.7501 0.8472
HD1* 0.3219 0.9053 QL1** 0.2843 0.6418
HD 2* 0.3591 0.9312 QL2** -0.0344 0.3606
HD 3* 0.4086 0.9159 QL3** 0.6981 0.9349
PK1* 0.3453 0.9776 QL4** 0.0197 0.5229
PK2* 0.3373 0.9876 QL5** 0.2487 0.6407
PK3* 0.3374 0.9758 QL6** 0.0295 0.2599
PG1* 0.3069 0.8958 FX1** 0.0056 0.3287
PG 2* 0.3861 0.9607 FX2** 0.7918 0.9650
PG 3* 0.3729 0.9497 FX3** 0.2580 0.7266
IC1* 0.3794 0.8862 FX4** 0.0840 0.5553
IC 2* 0.3746 0.9450 TM1** -0.4884 -0.8871
IC 3* 0.3399 0.9113 TM2** -0.6099 -0.9992
 Reflective indicators / ** Formative indicators

Table 7 Construct Reliability and Convergent Validity Coefficients

Construct Composite reliability AVE
Warehousing (WH) 0.936 0.873
Handling (HD) 0.941 0.842
Picking (PK) 0.986 0.961
14 LOGISTICS PERFORMANCE MEASUREMENT

Packaging (PG) 0.955 0.876

Inventory Control 0.938 0.836

Table 8 Discriminant Validity Coefficients

WH HD PK PG IC
WH 0.934
HD 0.345 0.918
PK 0.423 0.258 0.980
PG 0.050 0.207 0.291 0.936
IC 0.658 0.438 0.421 0.302 0.914
Note: Diagonal elements are the square root of the variance shared between the constructs and their measures
(AVE). Off-diagonal elements are the correlations among constructs. For discriminant validity, diagonal
elements should be larger than off-diagonal elements.
The reliability and validity of the measurement model analysed, allow us to
recognize that the indicators used to translate the constructs associated with the
logistics activities and the performance measures are reliable and valid. The
structural model analysis consists of the following statistics: (i) the variance
explained (R2) related with the dependent constructs; (ii) the strength of the
different paths coefficients; and (iii) the statistical significance of the path
coefficients.
According to Barclays et al. (1995) the reference value to analyse the reliability of
the structural model is related directly with the variance explained which is 0.25.
This means that the structural model should explain more than 25 % of the variance
associated with the different dependent constructs. Also, according to Chin (1998)
the path coefficients should be higher than 0.20 in order to guarantee some
robustness to hypotheses formulated. Also, as a way of making sure that the
hypotheses formulated are not rejected, it is important that the paths coefficients
will be statistically significant (Chin, 1998). The statistical significance of path
coefficients is assessed by the Jackknife technique (Chin, 1998). Both the variance
explained (R2) and the paths coefficients values can be observed in figure 3.
The model proposed in this study is reliable, since it explains more than 25% of
the variance associated with almost all the dependent constructs (Barclay et al.,
1995). That is, the research model seems to have an adequate predictive power.
More precisely, it permits explaining 31.26% of the variance associated with the
construct time (TM), 36.04% of the variance associated with the construct quality
(QL) and 37.57% of the variance associated with the flexibility (FX). Regarding the
construct cost, the model proposed seems to be weaker in explaining the variance
associated with it.

WH 0.010*
R2=0.2289
0.148* CT
0.342
IC
0.214
R2=0.3126
AZEVEDO, FERREIRA 15

Figure 3 Structural model: variance explained and paths coefficients

Regarding the path coefficients and according to the reference value that should be
considered (0.20) there are some relationships that are not so robust. These relations
are the following: (i) warehousing and cost (0,010); (ii) warehousing and time
(0,148); (iii) warehousing and flexibility (0,193); (iv) handling and cost (0.061); (v)
handling and time (0.033); (vi) packaging and quality (0.015) and; (vii) packaging
and time (0.074). Analysing the statistical significance associated with the path
coefficients, as we can observe in Table 9, only two path coefficients seem not to be
statistically significant. They are the ones associated with the relationship between
warehousing and flexibility and also between inventory control and quality.

Table 9 Statistical Significance of Path Coefficients

Paths - hypotheses Path t-Student Sig.
coefficients
Warehousing → time (H01a) 0.148 -9.36 0.00*
Warehousing → flexibility (H01b) 0.193 0.658 0.51
Warehousing → cost (H01c) 0.010 8.75 0.00*
Inventory control → cost (H02a) 0.342 10.06 0.00*
Inventory control → flexibility 0.283 7.53 0.00*
(H02b)
Inventory control → time (H02 c) 0.214 14.7 0.00*
Inventory control → quality (H02d) 0.228 -0.59 0.56
Handling → cost (H03a) 0.061 -15.52 0.00*
Handling → time (H03b) 0.033 5.02 0.00*
Handling → quality (H03c) 0.373 4.25 0.00*
Packaging → quality (H04a) 0.015 -6.54 0.00*
Packaging → time (H04b) 0.074 12.78 0.00*
Picking → time (H05a) 0.278 31.87 0.00*
* Statistically significant considering t (0.05; 50) = 2.01.
16 LOGISTICS PERFORMANCE MEASUREMENT

As a result, two hypotheses were not supported (H01.b, H02.d), which allow us to
conclude that for the research sample warehousing seems not to have an impact on
flexibility and inventory control on quality. Inventory control (IC) has a significant
positive influence on the performance of firms in terms of costs (CT), time (TM)
and flexibility (FX). All the other logistics activities have a smaller influence on
performance.

7. Conclusions
The literature offers few empirically consolidated findings that suggest guidance on
the kind of activities to choose and the form of the performance measurement and
management process that should be evaluated in the logistics context. In this paper
we discussed some contributions about the selection of performance measures and
respective indicators that reflect the new competitive priorities of the firms. Also we
found that almost all logistics activities had impact on firms’ performance with
particular evidence on inventory control. According to the results obtained, the
firms must have special attention on warehousing, particularly on the way products
are managed and also with the inventory’ controls.
The findings indicate also that the warehousing, the inventory control, and the
handling activities have a positive influence on costs. This could be explained
because through a better management of these activities firms could reach a better
space utilization, an optimization of products flows and a lower level of inventory.
All the logistics activities analysed have an influence on firms’ performance in
terms of time. This can be justified because through a set of logistics practices,
performed under a criterion of optimization, firms can minimize the order cycle and
also the delivery lead time making possible that customers have access to products
in advance.
The way handling and packaging activities are performed seems to have an
important impact on quality which is also understandable. The type of material
used on pack, and the way products are handling in warehouses could jeopardize
the products’ aspect on the racks’ conducting to a decrease on customer
satisfaction. In sum and according to the main consistent results it is possible to
conclude that inventory control activity seems to be very important in terms of
firms’ responsiveness. The way products are managed in warehousing, the use of
adjusted tools to inventory management and control has an important impact on
firms’ performance.
There are two limitations that need to be acknowledged and addressed regarding the
present study. The first limitation concerns the response rate. The sample used in
this research, of only 263 firms (response rate of 14,8%) it is not representative of
the total population. This limited the statistics analysis used. Instead of the
covariance-based SEM and ML/GLS/bootstrap estimation we were obliged to use a
non-parametric approach named Partial Least Squares (PLS) which could lead to a
lack of consistency in the analysis of the reliability of the indicators. The second one
is related by the fact that the study covers manufacturing firms localised only in a
single country. This does not allow the extrapolation of the conclusions.
 AZEVEDO, FERREIRA 17

Being in mind these limitations of the study, we propose the replication of the study
in other countries and with a bigger sample. Future studies should therefore take
into consideration the processual perspective adopted more recently in logistics
context, on the evaluation process of performance. Also, we believe that alternative
variables could be included in the theoretical model proposed specially the resources
and capabilities of firms with a particular highlight on information and
communication resources. Another interesting aspect is the view of the performance
measurement system — the connection between logistics’ objectives, measures and
strategies of firms. It will be interesting to study the impact of the processes that are
simultaneous cross-functional and cross-firms on performance. We think that
qualitative, case-based studies provide the best route to this.

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