Cost reduction has become a preeminent goal for businesses (Denison, 2003). As a result, firms are “seeking ways to minimize overhead costs, to eliminate intermediate production steps, to reduce transaction and other “friction” costs, and to optimize business processes across functional and organizational boundaries” (Treacy and Wiersma, 1993, p. 85). Since 30–70% of a firm's annual revenues are expended on acquiring an array of goods and services (Killen and Kamauff, 1995), firms are pursuing such initiatives as enterprise resource planning (Trent and Monczka, 1998), just-in-time sourcing (Frazier et al., 1988), electronic catalogs (Pierson, 2002), reverse auctions (Jap, 2002), and global sourcing (Venkatraman, 2004) in an attempt to remove nonvalue-adding costs from the in-bound supply chain.
While research in marketing has been preoccupied with investigating factors that can affect top-line revenues, relatively little attention has been devoted to understanding how managing the middle line (i.e., cost of goods sold) can also contribute to driving the bottom line. Since reducing costs in the inbound supply chain is yet another means to enhance cash flows (Srivastava et al., 1999), this research examines issues pertaining to customer firm transaction costs within an industrial purchasing context. More specifically, the main research questions investigated include: (1) what factors can influence customer firm transaction cost savings in a buyer–supplier relationship? and (2) what is the effect of customer firm transaction cost advantage on customer satisfaction and future purchase intentions?
The answers to these questions are important for both theory and practice. Regarding the former, academics have called for examination into the factors affecting firm transaction costs (Rindfleisch and Heide, 1997 and Dahlstrom and Nygaard, 1999) as well as into the relationship between customer firm transaction costs and future intentions (Cannon and Homburg, 2001). This article extends current marketing knowledge by taking a novel approach to explore how a seller's performance along the order management cycle as well as trust can influence customer firm transaction costs, which in turn, affect such customer-related outcomes as customer satisfaction and future purchase intentions. Given that firms devote significant resources to procurement and that transaction costs often exceed actual invoice costs (Noordewier et al., 1990), this research also provides managers with insight into the factors that can introduce nonvalue-added costs into their firm's procurement activity.
This manuscript has implications for both academics
and practitioners. As far as the former, the theoretical
contributions are three-fold. For one, this research is to
the best of our knowledge the first to operationalize the
order management cycle construct and formally test it in
empirical research. This is an important contribution as
the activities from the time that an order is placed
through post-sales assistance offer firms a fertile oppor-
tunity to secure a competitive advantage (
Shapiro, 1997
).
Second, this article adds to our understanding of trust.
Although trust has been cited as an important social
consideration (
Morgan and Hunt, 1994
), some authors
contend that relatively little research has examined the
role of trust in supplier selection decisions (
Doney and
Cannon, 1997
). This manuscript reasserts that trust must
be studied as a domain-specific variable as a firm may
have confidence in the reliability and integrity of the
vendor along the lines of OMC performance, but may not
trust the vendor in other areas (e.g., dedicating specific
assets towards new product development). In addition to
identifying a previously neglected antecedent of trust (i.e.,
trust emanates from a vendor’s demonstrated capability
and credibility along the order management cycle), this
effort offers that trust in a vendor’s OMC performance
has a direct, tangible outcome sought by buying firms:
customer firm transaction cost savings. Lastly, this manuscript empirically investigates a normative prescrip-
tion of transaction cost theory: to examine factors that
can give rise to costs caused by imperfect coordination in
buyer–supplier relationships (i.e., transaction costs).
Although transaction cost theory claims that higher levels
of behavioral uncertainty increase the costs of monitoring
and evaluating the performance of exchange partners, that
proposition has not been formally tested. Our research
suggests that effective OMC performance can lead to
trust as the buying firm believes that the given exchange
partner is reliable and is not likely to act opportunisti-
cally in its order fulfillment, billing, and post-sales
activities, thereby reducing the need to closely scrutinize
that facet of the exchange relationship.
As transaction costs can exceed actual invoice costs in a
buyer–supplier relationship (
Noordewier et al., 1990
) and
problems associated with the OMC are much more likely to
force customer firms to switch vendors than are product-
related issues (
Shapiro, 1997
), this research also has
important implications for business practice. In particular,
customer firms can develop objective operational metrics
coinciding with the OMC to assess supplier performance as
the information gathered can assist buying firms in
identifying areas of efficiency and effectiveness improve-
ment in each supplier interface (
Day, 1994; Smeltzer and
Manship, 2003
). This research suggests that a customer firm
engaged in an exchange relationship with a supplier that
performs well along the OMC is likely to improve the
efficiency of the procurement process. Dell, for instance,
serves as an exemplar as its business model mandates
attending to such items as a supplier’s order cycle time,
accuracy in filling orders, accuracy in billing processes, on-
time delivery performance, ability to fill emergency orders,
and condition of products on arrival (
Treacy and Wiersma,
1993
). Thus, Dell has been able to lower acquisition costs
by requiring its suppliers to become intimately familiar with
its requirements and tolerances, and possession costs by
replacing inventory with information. It is, therefore,
advisable that firms develop tangible operational metrics,
and then critically evaluate their suppliers along those
metrics, and remain engaged with high performers that can
deliver such instrumental benefits as transaction cost
advantage.
Although the results are theoretically and practically
meaningful, we conclude by offering the limitations of
this study and as well as directions for future research.
For one, the data secured are cross-sectional in nature.
Future research can undertake a longitudinal approach to
better understand the relationship developmental processes
(
Narayandas and Rangan, 2004
) that can lead to a
reduction in transaction costs. Second, this study relies
upon one individual within the organization to serve as
the key informant. As some researchers have raised issue
with the ability of one individual to comment upon
global, organizational-level phenomenon (
Kumar et al.,
1993
), future studies ought to secure perceptions from multiple informants within the customer firm, and ideally,
be verified with objective measures. Third, it is necessary
to more fully examine the concept of customer firm
costs. One possibility is to identify and integrate the
totality of acquisition, possession and direct product costs
involved with using and subsequently disposing of a
good or service from a vendor (
Ellram, 1995
). Lastly, the
measures that were used in the empirical tests were
highly correlated. Specifically, given the limited evidence
of discriminant validity between order management cycle
performance and satisfaction in this study and task-related
performance and satisfaction in previous inter-organiza-
tional research (e.g.,
Kumar et al., 1992
), researchers may
wish to critically consider using one or the other in
future research. As the order management cycle provides a viable basis to secure a competitive advantage, we
encourage researchers to build upon the operationalization
of order management cycle performance offered here and
to further explore the nomological network in which the
construct is embedded.
