Exploring the impact of VMI on sustainability: a Triple Bottom Line perspective

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Exploring the impact of VMI on sustainability:

a Triple Bottom Line perspective

Master thesis MSc Supply Chain Management/SCM

University of Groningen

Faculty of Management and Organization

June 19, 2016

Marten van Delden S2095831

m.g.van.delden@student.rug.nl

First supervisor dr. ir. P. (Paul) Buijs

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Abstract

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1 Introduction

In comparison to traditional inventory systems, in which buyers regularly order on their own responsibility, vendor-managed inventory programs (hereafter referred to as VMI) shift the responsibility of buyers’ inventory to suppliers. Regardless of operational and relational outcomes of VMI, little is known about the relationship between inventory models and sustainability in general (Bouchery, Ghaffari, Jemai, & Dallery, 2012; Johnsen, Howard, & Miemczyk, 2014) and between VMI and sustainability in particular.

Although the majority of the VMI body of knowledge presents VMI as solely beneficial for the parties involved, VMI appears to be deceiving from a sustainability perspective because VMI outcomes might differ between suppliers and buyers. Empirical literature often highlights the positive aspects of VMI and especially how VMI attributes to direct cost reductions (e.g. Claassen, Van Weele, & Van Raaij, 2008; Holmström, 1998) and reductions in inventory or stock out levels (e.g. De Toni & Zamolo, 2005; Vergin & Barr, 1999). However, empirical studies pay little attention to potential downsides of VMI, such as additional suppliers’ tasks in administration and replenishment (Holmström, 1998; Kauremaa, Småros, & Holmström, 2009).

Sustainability focuses on supply chain or organizational attempts to meet the needs of stakeholders today as well as in the future without compromising the needs of future generations (Dyllick & Hockerts, 2002) and is often defined into an economic, environmental and social dimension - the so-called Triple Bottom Line (hereafter referred to as TBL). It is rather unclear how VMI affects these dimensions. In literature, evidence is currently lacking if, and how, VMI can realize improved sustainability. Nevertheless, the relationship between VMI and sustainability is important to study because humanity is more aware of its impact on the world and as a consequence the topic of sustainability gains increasing interest (Dyllick & Hockerts, 2002; Hutchins & Sutherland, 2008). Societal and industrial pressures point more and more towards the need for collaborative practices, such as VMI, that are not only environmentally conscious but also benign for global, regional and local stakeholders (Sarkis, 2001).

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realizing improved sustainability, considering a Triple Bottom Line (TBL) perspective. In order to reach this research objective, three research questions are formulated:

 What outcomes of VMI are mentioned in existing empirical literature and do these outcomes differ for suppliers and buyers?

 What relevant aspects of economic, environmental and social sustainability can be distinguished in relation to VMI?

 How can the relation between VMI and sustainability be conceptualized by linking the outcomes of VMI to relevant aspects of the TBL dimensions?

This research will construct a framework whereby VMI outcomes, found in empirical literature, are conceptually linked to sustainability. The configuration of this framework is completed by additional evidences that are gathered from a series of interviews. Hereby, VMI research experts and retail experts from a Dutch grocery retailer, that implemented VMI with sustainability as a (sub) goal, are interviewed.

The contribution of this thesis is threefold. First, our framework is the first attempt to explicitly link VMI to a broad notion of sustainability. Second, this thesis adds knowledge whether VMI is truly beneficial for all parties involved as existing VMI literature frequently declares. Third, from a managerial perspective, this thesis indicates several prerequisites that influence VMI’ role in realizing improved sustainability. Managers that would like to implement VMI, or already implemented VMI, can use these key insights to study their VMI program from a sustainable perspective.

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2 Theoretical background

2.1 The program of VMI

This thesis adapts the following definition of VMI as proposed in the paper of Marquès, Thierry, Lamothe, & Gourc (2010: p. 554): “VMI is a replenishment pull system where the supplier is responsible for the buyer’s inventory replenishment, inside a collaborative pre-established medium/long-term scope”. The benefit of using this definition is twofold. Firstly, the collaborative aspect of this definition can be used in order to analyze a wider stream of empirical operations management literature. In doing so, empirical papers that originally describe interchangeable VMI umbrella terms, such as Continuous Replenishment Processes (CRP) or Automatic Replenishment Processes (ARP), can be taken into account. Secondly, the collaborative perspective of this definition can be more easily linked to the body of knowledge that considers sustainability from an inter-organizational TBL perspective (e.g. Gimenez, Sierra, & Rodon, 2012; Hutchins & Sutherland, 2008).

As above-mentioned definition shows, VMI implies a responsibility shift from buyer to supplier and due to this more demand visibility is generated via information sharing (Elvander, Sarpola, & Mattsson, 2007; Marquès et al., 2010). Although VMI depends on collaboration between supplier and buyer within a pre-defined and agreed framework, individual and supply chain objectives are identifiable (Marquès et al., 2010, p. 550). Consequently, three different perspectives with regard to VMI can be observed and this thesis will elaborate on these perspectives separately. On one hand, individual objectives can be separated in a supplier and buyer perspective because the parties involved often define different VMI objectives (Marquès et al., 2010). On the other hand, supply chain objectives concern shared objectives that permit enhanced collaboration between partners (Marquès et al., 2010).

2.2 Sustainability considered from a TBL perspective

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sustainability mainly depends on the sustainability of the natural case (Sarkis, 2001, p. 682). Sustainability practices should prioritize the environment first, followed by society and economy (Markman & Krause, 2016, p. 9). Taking this classification into consideration, the next section sheds more light on the relevant aspects of economic, environmental and social sustainability.

2.2.1 Aspects of economic sustainability

Companies are economically sustainable when they are able to ensure cash flows above average to the shareholders at any time (Dyllick & Hockerts, 2002; Skjott-Larsen, 2007). The paper of Govindan, Azevedo, Carvalho, & Cruz-Machado (2014, p. 223) uses a supply chain point of view in order to define the economic dimensions as “the profits earned by the supply chain members”. This is in line with Dyllick & Hockerts (2002) who argue that economic sustainability is not only short-term oriented, i.e. cost reductions, but also takes into account the long-term of economic capital. Therefore, this thesis refers to economic sustainability as VMI’ ability of to earn profits by the supplier and buyer. In doing so, the outcomes of VMI can be related to the economic needs of all supply chain partners today as well as in the future (Dyllick & Hockerts, 2002).

2.2.2 Aspects of environmental sustainability

The definition of environmental sustainability is used in literature interchangeably with ecological sustainability (Dyllick & Hockerts, 2002) or ecology/planet (Skjott-Larsen, 2007). From a supply chain perspective, environmental sustainability focuses on reducing the ecological footprint of the supply chain (Govindan et al., 2014, p. 223). In other words, environmental sustainable organizations use fewer natural resources for their own consumption than nature’s capacity to reproduce these resources (Dyllick & Hockerts, 2002, p. 133). In general, three environmental sustainability aspects can be distinguished:

 Resource usage (Singh, Murty, Gupta, & Dikshit, 2009) in terms of emissions of energy, air, land and water (Hutchins & Sutherland, 2008; Pullman, Maloni, & Carter, 2009).

 Elimination of waste (Govindan et al., 2014) or the ability to recycle or reuse food and packaging material (Pullman et al., 2009).

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herbicides, pesticides, soil erosion and overall habitat damage” (Pullman et al., 2009, p. 41).

2.2.3 Aspects of social sustainability

Social sustainable organizations develop and focus on value added-practices for human capital and health and labor (Dyllick & Hockerts, 2002; Singh et al., 2009). In order to cover the full set of social sustainability principles, different ways of interpreting social sustainability are used (Hutchins & Sutherland, 2008). These different perspectives often deviate from an internal and external social sustainability component (Pullman et al., 2009). Internal social sustainability has a ‘within firm’ focus and is related to the development of human resource elements, such as education, training or worker participation practices (Pullman et al., 2009, p. 42). External social sustainability can be studied from a community perspective (Pullman et al., 2009) and focuses on projects that enhance the reputation of the company (Gimenez et al., 2012) by taking into account accountable governance structures (Elkington, 1994). Organizations often define corporate social responsibility (CSR) strategies that acknowledge the importance of social sustainability (Hutchins & Sutherland, 2008). Similarly, CSRs explain how organizations attempt to balance the needs of different stakeholders (Markman & Krause, 2016, p. 5). CSR strategies are important because a foundation for guiding principles with regard to norms and values is presented but CSRs are insufficient when organizations attempt to qualify operations as sustainable (Markman & Krause, 2016, p. 5). Therefore, this thesis will consider social sustainability as the ability of VMI to develop and focus on value-added practices with regard to labor, health and education for supplier and buyer individually and for the supply chain as a whole.

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9 TABLE 2.1

Relevant aspects of sustainability

TBL dimensions Aspects The ability of VMI to

Economic sustainability  Cost reductions

 Shared profits

Earn profits by the supplier and buyer

Environmental sustainability  Resource usage

 Waste elimination

 Land management

Eliminate waste and reduce the use of resource and land management practices

Social sustainability  Labor

 Health

 Education

Develop and focus on internal social sustainable value-added practices (in labor, health and education)

2.3 Conceptual model

This paragraph establishes possible links between VMI and sustainability by making use of existing evidences presented in sustainability and supply chain collaboration literature.

The resource-based view (hereafter referred to as RBV) expanded to an inter-organizational level1 shows that collaboration is classified as a competitive advantage if it is valuable, unique and hard to replicate (Gold, Seuring, & Beske, 2010; Soosay & Hyland, 2015). When supply chain partners combine resources, mutual advantages can be obtained via collaboration and as a consequence a competitive advantage is developed (Dyer & Singh, 1998). Additionally, collaboration can positively impact performance, either market-related or financially (Adams, Richey, Autry, Morgan, & Gabler, 2014). Taking this into account, VMI might contribute to economic sustainability because advantages that are mutually shared between suppliers and buyers can lead to profit earnings for all parties involved.

In general, empirical evidence, presented in the sustainability literature, shows that the implementation of collaborative programs enhance environmental performance (Gimenez et al., 2012). VMI is associated with better demand visibility and this might contribute to Lean and its ability to reduce resource and capacity requirements (Govindan et al., 2014, p. 214). For suppliers and buyers, this might go hand in hand with contributions to the environment

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via reductions in waste and resources together with better land management techniques (Hutchins & Sutherland, 2008; Pullman et al., 2009).

Organizations with a goal towards a more social responsible supply chain implement collaboration activities with suppliers (Gimenez et al., 2012, p. 152). To make collaboration happen between suppliers and buyers, several internal social sustainability practices in the form of educational programs are useful (Pullman et al., 2009). These educational programs can be set up to divide the responsibilities and activities of suppliers and buyers and their personnel. In doing so, both parties know, within the pre-defined and agreed framework of VMI, what to do, how to act and whom to communicate to.

As described above, evidences in supply chain collaboration and sustainability literature propose hints if, and how, VMI can contribute to sustainability or might realize improved sustainability. Figure 2.1 presents our conceptual model by showing the possible links between outcomes of VMI and sustainability, using a TBL approach.

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3 Methodology

The goal of this thesis is to investigate the role of VMI in realizing improved sustainability by using a TBL perspective. In order to do so, a literature review is conducted together with a series of interviews. Both research methods will be discussed consecutively.

3.1 Literature review

Firstly, a literature review was conducted whereby empirical papers were studied that discuss outcomes of (implemented) VMI programs from a supplier, buyer or supply chain perspective. In contrast to the modeling VMI literature, the number of empirical studies related to VMI is less extensive (Kauremaa et al., 2009). Nonetheless, empirical evidence is important to study because it helps to understand industry-specific operations management practices (Scudder & Hill, 1998, p. 91) and provides information from actual practices (Flynn, Sakakibara, Schroeder, Bates, & Flynn, 1990, p. 251). Reviewing empirical VMI literature fits our research objective because either benefits or intended/unintended downsides of VMI programs can hence be discovered. The term ‘outcomes of VMI’ was chosen, instead of benefits or results of VMI, because the implementation of VMI does not solely have positive impacts for suppliers, buyers or the supply chain.

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12 TABLE 3.1

Criteria for literature review # Criteria

1 Empirical VMI papers have to discuss outcomes VMI systems from a supplier, buyer or supply chain perspective. Empirical papers that VMI success factors or discuss VMI determinants for adoption/implementation are excluded.

2 If VMI papers torn a combination of modelling, conceptual and empirical VMI content (Elvander et al., 2007; Waller, Johnson, & Davis, 1999), only outcomes discussed in the empirical parts of these papers are selected.

3 If papers use an interchangeable expression or term for VMI (e.g. CRP, ARP), the papers are selected because these terms also focus on the collaborative aspect between supplier and buyer (Marquès et al., 2010)

Step 3 was a detailed backward and forward tracking search in Google Scholar in order to trail empirical papers that are published recently or are overlooked by the above-mentioned review papers. Consequently, the order size of the literature review was increased and this will enhance reliability. The papers discovered in step 3 were also tested upon the literature review criteria as pointed out in Table 3.1.

Our literature review consisted of seventeen empirical papers that satisfied above-mentioned pre-determined conditions. Out of these seventeen papers, thirteen papers discuss outcomes of VMI, three papers address outcomes of CRP (Clark & Stoddard, 1996; Lee, Clark, & Tam, 1999; Vergin & Barr, 1999) and one paper studies ARP outcomes (Daugherty, Myers, & Autry, 1999). Table 3.2, on the next page, presents a detailed overview of the papers selected for the literature review.

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13 TABLE 3.2

Literature review empirical operations management literature

Study Research method(s) Type of industry Studied organization(s) Clark & Stoddard (1996) Case study Grocery 2 retailers, 2 manufacturers

Survey Grocery 2 retailers, 2 manufacturers

Holmström (1998) Case study Grocery 1 wholesaler, 1 vendor

Daugherty et al. (1999) Interview Retail 2 retailers, 3 manufacturers

Survey Retail 23 retailers, 75 manufacturers

Lee et al. (1999) Data analysis Grocery 31 retail chains Vergin & Barr (1999) Interview Grocery 10 manufacturers

Waller et al. (1999)2 Data analysis IT 1 manufacturer

Aichlmayr (2000) Data analysis Retail 2 retailers, 2 manufacturers Tyan & Wee (2003) Case study Grocery 1 retailer, 1 manufacturer

Kuk (2004) Survey Electronics 94 electronic companies

Kulp et al. (2004) Survey F&CPG3 54 manufacturers

De Toni & Zamolo (2005) Case study Electrical appliance 1 home appliance company Elvander et al. (2007) Case study (interview) Different industries 9 suppliers, 6 buyers

Focus group Different industries 9 different companies

Vigtil (2007) Case study (interviews) Different industries 5 suppliers

Claassen et al. (2008) Interview Different industries 3 suppliers, 3 buyers

Survey Different industries 64 companies

Kauremaa et al. (2009) Case study (interviews, data analysis)

Different industries 5 single implemented VMI systems - 5 suppliers, 5 buyers Guimarães et al. (2013) Case study (interviews,

data analysis)

Healthcare 1 hospital (buyer) Dresner & Yao (2014) Case study (data

analysis)

Electronic 1 VMI system - 1 supplier, 30 buyers

3.2 Interviews

Secondly, a series of interviews were conducted to gather additional evidences for links between VMI and sustainability because the empirical VMI literature does not provide consistent evidences if, and how, VMI outcomes contribute to sustainability. Consequently, uncertainties still remain about the relationship between VMI and sustainability. Interviews were held to unravel these uncertainties because interviews are a valuable tool for gaining more insights and understanding about a specific topic (Rowley, 2012). Research experts and retail experts in the field of VMI were interviewed and the remainder of this chapter will elaborate on this.

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This thesis classifies Waller et al. (1999) as an empirical paper because it uses real-life organizational data

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3.2.1 Interviews VMI research experts

The leading authors of the empirical papers included in our literature review were contacted. Hereby, prior work of the author, whether or not related to VMI, and the content presented in the selected empirical paper was taken into account. Based on this, a preference list with authors was composed and subsequently approached by means of a mailing. A research protocol was set up that includes the procedures and rules for the interview together with the questions to be asked to enhance reliability and validity (Karlsson, 2010; Voss, Tsikriktsis, & Frohlich, 2002).

Seven VMI research experts were approached via the mailing and in the end three experts agreed to conduct an interview within time constraints. The other experts had contrasting reasons for rejection: no reply at all (1), no commitment to contribute (1), a transfer to a job in the business world (1), and no update in the VMI literature since 2007 (1). Two research expert interviews focused on the authors’ view of VMI in general and how specific VMI outcomes can be interpreted from a sustainable perspective. One interview focused on the differences between empirical VMI outcomes and modeling VMI outcomes in order to map out and reveal additional evidences presented in both research streams.

A framework in the form of a table was used in order to conduct the interviews with the VMI research experts. Appendix B presents our initial framework as proposed to the interviewees. The research expert interviews had a semi-structured character: a pre-determined set of questions was prepared but flexibility in the (order of the) questions asked was used (Rowley, 2012, p. 262).

The goal of these interviews was twofold. First, additional evidence or remarks were proposed to the framework by the VMI research experts because an overview was presented where the empirical VMI literature provides ‘consistent’, ‘contradictory’ or ‘little or no’ evidence for links between VMI outcomes and sustainability. Second, the VMI outcomes and the possible links to sustainability obtained from the VMI papers, written by the research experts themselves, were checked and completed directly from the source.

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of the research experts and analyzed whether the interview met the study objectives (Karlsson, 2010). Based on the results of this pilot interview, minor adaptations to the interview approach were made. These adaptations were mainly related to the structure of the interview and how to insert a logic flow from introduction questions to content-related questions. Hereby, the funnel format was used whereby first broad and open questions were asked followed by more detailed questions (Karlsson, 2010; Voss et al., 2002). In doing so, the table presented to the interviewees (see Appendix B) served as a prompt and as checklist for the interviewer in order to assure that the prepared topics were covered (Karlsson, 2010; Voss et al., 2002).

The research expert interviews were recorded and transcribed afterwards. The transcribed versions were sent to the interviewees for verification. Appendix C shows the main results that were obtained in the research experts interviews.

3.2.2 Interviews VMI retail experts

The retail experts have knowledge about a VMI program implemented at a Dutch grocery retailer and they shared, from a more practical point of view, their knowledge. During these interviews, attention was paid to the possible links between VMI and sustainability that were either not covered in the empirical VMI literature or not addressed during the research expert interviews. In doing so, additional evidence was gathered with regard to missing links between VMI and sustainability by gaining understanding of how VMI in a real-life context links to aspects of the TBL dimensions.

The structure of the retail expert interviews was highly open: a pre-determined set of topics was discussed during the interviews in the form of a dialogue. This provided opportunities for the interviewee to talk around a theme and in doing so interviewees were able to share their knowledge in relation to a specific theme (Rowley, 2012, p. 262).

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Two interviews were conducted with a PhD student that guides the program of VMI on behalf of the Dutch grocery retailer. In the first interview, emphasize was on how the VMI program of the Dutch grocery retailer was generally structured and how the transports of suppliers to the buyer were designed. The second interview focused on educational programs and the configuration of these educational programs within the Dutch grocery retailers’ VMI.

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4 Findings and discussion

This section starts with the outcomes of VMI presented in empirical literature, followed by a discussion where the empirical literature provides consistent, contradictory or little or no evidence for specific links between VMI outcomes and sustainability. Hereafter, the role of VMI in realizing improved sustainability is discussed.

4.1 VMI outcomes

As shown in section 2, VMI in general and outcomes of VMI in particular can be analyzed from a supplier, buyer or supply chain perspective. On the next page, Table 4.1 summarizes the VMI outcomes per perspective.

From a supplier point of view, VMI can lead to cost reductions in different areas (e.g. Claassen et al., 2008; Tyan & Wee, 2003; Waller et al., 1999). Moreover, empirical evidence suggests that suppliers are able to align production with demand (Claassen et al., 2008; Daugherty et al., 1999; Tyan & Wee, 2003; Waller et al., 1999). In line with this, VMI can reduce variabilities in suppliers’ inventory and demand (Dresner & Yao, 2014; Holmström, 1998) and suppliers are able to schedule their physical distribution capacities more efficiently (De Toni & Zamolo, 2005; Waller et al., 1999). On the other hand, VMI comes together with increased suppliers’ work in replenishment and administration (Holmström, 1998; Kauremaa et al., 2009) because VMI programs will change the existing working structure between partners or the suppliers’ organization itself (Holmström, 1998).

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18 TABLE 4.1

Empirical VMI outcomes per perspective

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4.2 Linking VMI to sustainability

The empirical VMI body of knowledge does not explicitly address links between VMI and sustainability. Consequently, the VMI outcomes presented in Table 4.1 are not straightforward linkable to sustainability without a debate whether empirical VMI literature provides consistent, contradictory or little or no evidence for possible links between VMI and sustainability. Based on this debate and the additional evidence that was gathered in the interviews, our framework that conceptually links VMI outcomes to sustainability is presented together with a discussion of VMI’s role in realizing improved sustainability.

4.2.1 Consistent evidence

The empirical VMI literature provides consistent evidence for three links between grouped VMI outcomes and sustainability.

Firstly, the cornerstone of VMI is a (tighter) collaborative relationship between supplier and buyer (e.g. Kauremaa et al., 2009; Kuk, 2004; Tyan & Wee, 2003). The quality of a supplier-buyer relationship via trust and commitment will increase the likelihood of a successful VMI implementation (Claassen et al., 2008, p. 411). Similarly, the interviewees pose that without trust, the implementation of a collaborative program such as VMI, will not work out because VMI is a long-term proposition4. To enhance collaboration by means of trust and commitment between supplier and buyer, internal social sustainability practices in the form of educational programs can be set up (Pullman et al., 2009). Empirical literature implicitly addresses the need for these educational programs within VMI (e.g. Holmström, 1998; Kauremaa et al., 2009; Tyan & Wee, 2003) and this is strengthened by evidences obtained at the Dutch grocery retailer. Hereby, suppliers are educated about the process of VMI and suppliers’ employees are informed and developed in the VMI way of thinking5. Information meetings were planned to roll out VMI and to educate suppliers with regard to the basics of VMI6. Moreover, the Dutch grocery retailer uses evaluation and monitoring in consultation with their suppliers to elevate VMI to a higher level7. This contributes to learning from experiences and the improvement of firms performance and repeated tasks in a VMI program over time (Dong & Dresner, 2012, p. 980).

4_{Interview Martin Dresner (research expert). May 19, 2016.} 5_{Interview Roel Post (retail expert). May 19, 2016.}

6_{Interview Roel Post (retail expert). June 10, 2016.} 7

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Secondly, empirical evidence consistently shows that VMI is based on a certain degree of integration and information/data sharing between partners. The paper of Dresner & Yao (2014) classifies information sharing together with the transfer of decisions as the two main components of VMI8. This VMI outcome can be linked to economic sustainability by referring to the RBV. Integration and information/data sharing may form a basis for VMI as a sustainable competitive advantage if it has a valuable, unique or hard to replicate character (Gold et al., 2010; Soosay & Hyland, 2015), especially when integration and information/data sharing between suppliers and buyers are based on an iterative process of long-term interactions (Gold et al., 2010). The degree of the VMI technologies itself will strengthen this effect: suppliers and buyers with a strategic logistic partnership will benefit more from the added values of VMI than less integrated logistics partners (Kuk, 2004, p. 652).

Thirdly, several grouped VMI outcomes, with a focus on the alignment of suppliers’ production with buyers demand, link to the aspects of environmental sustainability. Suppliers can contribute to environmental sustainability by reduced inventory and demand variabilities (Dresner & Yao, 2014; Kauremaa et al., 2009). Similarly, many cases show that buyers benefit from reductions in inventory and stock outs due to VMI (e.g. Clark & Stoddard, 1996; Dresner & Yao, 2014; Lee et al., 1999).

4.2.2 Contradictory evidence

The empirical literature provides contradictory evidence whether VMI is socially sustainable for suppliers and buyer. Due to the responsibility/decision shift in VMI programs, suppliers have to deal with additional replenishment and administration tasks (Holmström, 1998; Kauremaa et al., 2009). Simultaneously, buyers have less work in replenishment (Kauremaa et al., 2009). To some extent, suppliers have to cope with these additional tasks and this might not necessarily enhance social sustainability because the development and focus on value-added practices for the individual partners is neglected. This especially holds for two specific VMI situations. First, buyers that force supplier to join VMI and push work to the supplier because the buyer formulated a goal to reduce inventories9 . Second, buyers that use their supply chain power to shift less value-added tasks in the process of replenishment or administration to the supplier, under the heading of VMI.

8_{Interview Martin Dresner (research expert). May 19, 2016.} 9

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4.2.3 Little or no evidence

The empirical VMI literature provides little or no evidence for two possible links. Firstly, in contrast to the modelling VMI research stream10, little or no evidence is available that VMI actually leads to more efficient transport schedules via suppliers’ increased replenishment freedom. The modelling VMI literature extensively studies suppliers frequency decisions (Marquès et al., 2010) by determining when and in what quantities suppliers need to replenish11, but from an empirical point of view only Waller et al. (1999) examined the possibilities for more efficient transport schedules. Therefore, it is highly unclear whether VMI suppliers contribute to environmental sustainability via reductions of transports and emissions.

Secondly, empirical evidence presents undetermined results if, and how, suppliers and buyers earn profit as a result of VMI. Although empirical evidence consistently shows that VMI can lead to cost reductions for all parties involved, only Kulp et al. (2004) suggests that VMI leads to higher overall margins.

4.3 Prerequisites per VMI perspective

The above-mentioned classification shows that for specific possible links empirical literature provides consistent evidence, whereas for other possible links contradictory or little or no evidence exist. As a consequence, the role of VMI in realizing improved sustainability is not solely frame able without any ifs and buts. Therefore, we will address prerequisites that influence the role of VMI in realizing improved sustainability. Next to this, our framework that conceptually links VMI outcomes to sustainability is presented. Hereby, a continuum is used that classifies links between VMI outcomes and sustainability based on their explicit, implicit or far-fetched character.

4.3.1 Supplier perspective

The degree of perishability of a product can strengthen a supplier’s contribution to environmental sustainability. The more perishable the product, the more likely the waste question12 and subsequently VMI suppliers could realize improved environmental sustainability via reductions of waste and better land management practices. Especially in VMI situations with highly perishable products, waste can be reduced because in general

10_{Interview Roel Post (retail expert). May 18, 2016.} 11_{Interview Roel Post (retail expert). May 18, 2016.} 12

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fresh foods supply chains have to deal with large volumes of product waste (Kaipia, Dukovska-Popovska, & Loikkanen, 2013). Suppliers can set up leaner production schedules as a result of reduced variabilities in inventory and demand. In doing so, suppliers are able to reduce waste and subsequently use less pollution and toxicity mechanisms, which will benefit land management. However, Kauremaa et al. (2009) suggests that these internal planning benefits only occur in a synchronized VMI because then suppliers have better order visibility when a significant amount of orders comes from the VMI model and not from other buyers13. In a synchronized VMI or synchronized relational mood suppliers will actually achieve benefits from their internal planning (Kauremaa et al., 2009) and as a result the possibilities for leaner production schedule open up for suppliers.

Although no clear empirical evidence is available that VMI suppliers benefit from the replenishment freedom, reductions of emissions could potentially be achieved if more efficient transports can be scheduled by the supplier. However, this can be the case if suppliers do not have to meet strict upper and lower inventory levels as set by the buyer. If not, VMI suppliers cannot fully benefit from the replenishment freedom because they have to replenish inventory within a specific inventory level range and this will not necessarily lead to efficient transport schedules and thus fewer transport emissions. Moreover, in practice suppliers are more likely to schedule one additional transport in order to increase the likelihood that service levels are met because fewer gains can be achieved by transports14.

Educational programs contribute to social sustainability via the development of suppliers’ human resource elements. Among others, information meetings and evaluation/monitoring practices can be set up by VMI suppliers and buyers. However, VMI will not necessarily contribute to social sustainability because suppliers (have to) cope with additional replenishment and administration tasks. Labor differences might occur and suppliers and buyers then do not develop and focus on value-added practices that arise due to VMI. Even though labor differences between suppliers and buyers can exist and might not realize improved sustainability, remarks can be made that address why and how VMI can have a positive impact on social sustainability.

13_{Interview Jouni Kauremaa (research expert). May 19, 2016.} 14

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When suppliers are able to find ways to leverage the additional amount of work with other VMI related benefits, VM can contribute to social sustainability. Although situations can be mentioned whereby suppliers do not always have possibilities to leverage, especially suppliers that are responsible for smaller volumes15, leveraging a suppliers’ additional amount of work develops the value-added practices between VMI partners. This is strengthened by VMI programs that move towards a synchronized VMI or more synchronized relational mood (Kauremaa et al., 2009) because then suppliers are more likely to find ways for leveraging their additional amount of work16. This is in accordance with literature that extends the RBV with an inter-organizational perspective: within-firm resources can be used beyond organizational boundaries (Dyer & Singh, 1998, p. 660) and in this way leverage possibilities occur that do not belong to the firm itself (Lorenzoni & Lipparini, 1999, p. 334). So, suppliers have to cope with more replenishment or administrative work but this can possibly be leveraged with other VMI related benefits. As a consequence, VMI can contribute to social sustainability. Figure 4.1 visually presents the above-mentioned links between VMI outcomes and sustainability.

FIGURE 4.1

Supplier VMI outcomes linked to sustainability

4.3.2 Buyer perspective

As Figure 4.2 on the next page shows, buyers can realize improved environmental and social sustainability. However, two prerequisites should be taken into account. First, the perishable character of a product needs to be considered and will determine in what way VMI buyers can contribute to environmental sustainability. Fresh food supply chains, or grocery retail supply chains in general, have to deal with lots of waste because of product perishability (Kaipia et

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al., 2013). In these situations, the ability of VMI to reduce inventory and stock out levels together with better service levels can reinforce waste reductions at a buyer’s side. Similarly, this potentially goes hand in hand with energy, land and water emission reductions in a buyers’ distribution center because less square meters of storage are needed.

Second, from a buyer point of view, educational programs can contribute to social sustainability because they enhance human resource elements of the buyer. Especially evaluation and monitoring tools can develop buyers’ value-added practices in terms of education and labor because suppliers and buyers mutually share their VMI experiences in order to, for example, attempt to enhance the performance of VMI17.

FIGURE 4.2

Buyer VMI outcomes linked to sustainability

4.3.3 Supply chain perspective

Supplementary to the supplier and buyer perspectives, VMI outcomes related to the supply chain can realize improved environmental sustainability. According to the degree of perishability of the product, supply chains can benefit from better land management practices and reductions in waste/resources via the ability of VMI to reduce the bullwhip effect and improve supply chain control and effiency.

Outcomes of VMI related to the collaborative relationship between supplier and buyer will not by definition contribute to improved social sustainability. On one hand, mutual educational programs focus on the development and value-added practices for VMI partners individually and this will educate and develop human resource elements. On the other hand, VMI partners have to seek opportunities to leverage a suppliers’ additional work. If VMI situations exist whereby suppliers have to cope with additional tasks and suppliers’ leverage

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possibilities are not feasible, supply chain VMI outcomes will not necessarily realize improved social sustainability18. The same holds for buyers with high supply chain power that shift less value-added tasks to suppliers, under the heading of VMI, or, in the most exaggerated cases, buyers that force their suppliers to join VMI in order to reduce inventories19. This runs counter to the topic of sustainability because VMI will meet the needs of buyers’ stakeholders but neglects the needs of suppliers’ stakeholder.

Empirical evidence consistently shows that VMI can lead to cost reductions for all parties involved. From an economic sustainable point of view, these savings will at least benefit suppliers and buyers today because direct saving can be achieved. Although uncertainties exist how VMI contributes to long-term economic sustainability by earning profits for suppliers and buyers, several VMI outcomes address VMI’s ability to develop to a competitive advantage (when referring to the RBV):

 VMI can be seen as valuable if better service levels are realized because value is created for the marketplace by the direct increase of buyer’s benefits (Gold et al., 2010, p. 238). The right products are on the shelves and this is beneficial for the customer (Attaran & Attaran, 2007, p. 231). Moreover, reductions in costs, inventory and stock out levels are valuable because it directly creates value to suppliers and buyers (Gold et al., 2010)

 VMI can be seen as unique if suppliers and buyers mutually achieve higher margins or enhanced (cost-efficient) sales because it is rare/scarce to achieve for competitors (Gold et al., 2010)

 VMI can be seen as hard to replicate if the collaborative relationship relies on mutual trust and if integration and information/data sharing between suppliers and buyers are based on an iterative process with long-term interactions that cannot be traded or duplicated (Gold et al., 2010).

Taking this into account, Figure 4.3 on the next page classifies the supply chain links on a continuum.

18_{Interview Jouni Kauremaa (research expert). May 19, 2016.} 19

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Supply chain VMI outcomes linked to sustainability

4.4 The role of VMI in realizing improved sustainability

The VMI body of knowledge and VMI research experts are not entirely in agreement with the pros and cons of VMI, let alone if outcomes of VMI lead to positive contributions in sustainability. As one of the VMI experts argued during the interviews: “It is indeed a quite naive way to think that VMI is all beneficial and all sustainable”20. Considering a TBL perspective, economic capital needs to be simultaneously managed with environmental and social aspects (Dyllick & Hockerts, 2002) but VMI will not jointly realize improved economic, environmental and social sustainability. Although the RBV theory provides insights how various outcomes of VMI can be seen as a starting point for VMI as a competitive advantage, it is rather unclear from an empirical point of view how suppliers and buyers are able to earn profits via VMI.

In addition to this, a recent debate shows that the environment should be prioritized first, followed by society and economics (Markman & Krause, 2016). The role of VMI regularly focusses on aspects that can be attributed to environmental and social sustainability but VMI not necessarily places the environment beyond and above society and economy. Dependent on the waste question, VMI programs can realize improved environmental sustainability but suppliers and buyers attempt to put emphasize on improving social sustainability as well. Especially when VMI is based on a strategic partnership or a highly synchronized relational mood, suppliers and buyers will pay attention to the status of the collaborative relationship itself (Kauremaa et al., 2009; Kuk, 2004). In doing so, VMI’ role is more concerned in

20

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improving social sustainability and how supplier and buyer develop and focus on mutual value-added practices via educational programs and leveraging.

Taking the continuums of the different VMI perspectives into account, Figure 4.4 conceptualizes the links between VMI outcomes and sustainability.

FIGURE 4.4

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5 Conclusion and future research

This thesis enriches the VMI body of knowledge by showing if, and how VMI, contributes to sustainability. A framework is presented that combines VMI outcomes presented in empirical literature with the identified aspects of the TBL dimensions. VMI is analyzed from a supplier, buyer and supply chain perspective and this leads to the conclusion that outcomes related to suppliers and buyers differ. Consequently, several prerequisites, either in relation to the program itself or to a supplier-buyer relational mood, determine the role of VMI in realizing improved sustainability. VMI may contribute to the environment and society but VMI does not instantly meet economic sustainable standards. Moreover, VMI not necessarily prioritizes aspects of environmental sustainability above social sustainability or economic sustainability.

The contributions to theory are twofold. First, this thesis contributes to existing literature by showing a thorough picture of empirical outcomes of VMI. Until now, the main focus in literature is on benefits and advantages that arise as a result of VMI. However, from a sustainable point of view, VMI is not always beneficial for all parties involved. Second, this thesis forms the first attempt in building knowledge whether VMI is classifiable as a supply chain and organizational attempt that meets the need of stakeholders today as well as in the future without comprising the needs of future stakeholders (Dyllick & Hockerts, 2002, p. 131). In doing so, it starts a debate whether VMI can be classified as a sustainable inventory management method. The framework contributes to this by showing how VMI outcomes are explicitly, implicitly or even more far-fetched linked to sustainability, using a TBL perspective.

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35 Where the empirical VMI literature provides consistent evidence

Social sustainability

Collaborative relationship supplier and buyer

Educational programs (e.g. training, assessment and experience sharing) can contribute to a better collaborative relationship by gaining trust and by developing a VMI partnership. Mutual educational programs focus on the development and value-added practices for VMI partners individually and enhance social sustainability in terms of better human resource elements within the VMI parties involved.

How do educational programs enhance the collaborative relationship between supplier and buyer?

Economic sustainability

Integration and

information/data sharing

Empirical evidence shows that integrating IT systems between partners is often perceived as a process that is hard to trade, duplicate or inimitable by competitors. In this way, this VMI outcome can be seen as a starting point for VMI as a (sustainable) competitive advantage for supplier and buyer and for the supply chain as a whole.

When implementing VMI, information and data sharing integration between partners is the key process if supplier and buyer have the mutual goal to develop a strategic partnership via VMI.

Economic

sustainability Cost reductions

VMI is associated with supplier and buyer cost reductions (e.g. inventory, transport), whereby more attention is paid to cost reductions from a buyer perspective. These savings will benefit supplier and buyer stakeholders at least today and, when the cost reductions are long-term oriented, also in the future.

Cost reductions that arise due to

implementation of VMI can be seen as a first step to VMI as a shared-profit model.

Environmental sustainability

Alignment supplier production

with buyer demand These outcomes are often linked to the bullwhip effect: (demand) variability reductions for the supplier and/or the supply chain. The alignment of production and demand is for suppliers beneficial because a leaner production schedule (waste elimination) and less pollution and toxicity mechanisms (stewardship techniques) are used. Reductions in inventory/stock out will reduce waste and positively affect a buyers’ resource usage because less square meters of storage are needed.

VMI enhances the ecological footprint of the supply chain because suppliers contribute to the environment by reductions of waste and harmful substances, whereas buyers contribute to the environment by reductions of waste and emissions within their distribution centers.

Buyer inventory level and stock out reduction

Better service levels for buyer

Where the empirical VMI literature provides contradictory evidence

Social sustainability

Decreased buyers’ work in replenishment

The amount of work with regard to replenishment and administration increases for suppliers and this can cause labor difference between VMI partners. Suppliers have to deal with more work, whereas the buyer can use his power to easily shift less value-added tasks in the process of replenishment, under the heading of VMI, to the supplier.

Is VMI really beneficial for both partners in terms of equality?

How do suppliers perceive and deal with the additional VMI tasks?

Increased suppliers’ work in replenishment/administration

Empirical VMI literature provides little or noevidence

Environmental sustainability

Replenishment freedom More efficient transport can be achieved (and thus reduction of emissions and resource usage) if suppliers do not have to meet strict upper and lower inventory levels as set by the buyer. If not, VMI suppliers cannot fully benefit from the replenishment freedom because they have to replenish inventory within a specific range and this will not necessarily lead to efficient transport schedules.

A specific VMI system contributes to the environment if no strict upper/lower limits are set by the buyer.

More efficient transport schedules

Higher overall margin VMI partners obtain benefits that help them stay competitive. Suppliers benefit financially (sales increase/grow) and because they ensure themselves from long-term buyer demand, whereas buyers will benefit from VMI by aligning the total supply chain in such a way that they go in front of their competitors.

VMI is valuable for supplier and buyer, each in his own way, because it provides

company and supply chain-benefits for being competitive in the (near) future. Order/delivery lead time reduced

Increased competitiveness retailer supply chain Triple Bottom Line

Appendix B: Interview protocol VMI experts

Environmental sustainability Questions/statements about relationship

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Appendix C: Interview findings

Research experts interviews Retail expert interviews

Who? Roel Post Jouni Kauremaa Martin Dresner Roel Post Johan van der Veer Roel Post

When? May 18th, 2016 May 19th, 2016 May 19th, 2016 May 18th, 2016 June 1st, 2016 June 10th, 2016

T

o

p

ics

d

is

cu

ss

ed

Empirical literature vs. _{Modelling literature}

1) Transport related 2) Bullwhip effect 3) Higher margins 4) General differences 1) Collaborative relationship supplier/buyer 2) Operational efficiency benefits 3) Increased works in replenishment for suppliers vs. decreased works for buyer

1) Information sharing 2) Transfer inventory decision making

Transport 1) Freshness levels for a specific supplier* 2) Dock-to-stock time 3) Let-ups 1) Dock-to-stock time and let-up 2) Educational programs

Imp

o

rt

an

t fi

n

d

in

g

s

1) “Modelling literature mainly focusses on when and in what quantity to replenish”; “Inventory modelling part of

literature focusses on how to approach different inventory points and routings”

2) “Simulations mainly focus on bullwhip effect” 3) “Modelling literature studies higher margins but it depends on the numbers you have put in. In general, little empirical evidence for that”

1) “VMI really needs to be a joint effort.”; “One point is that the

collaborative mood is also about listening to the other party.”

2) “The more perishable a product is the more likely the waste question is” 3) “this comes to a bigger question of supply chain power”; “So the tradeoff between increased work for supplier and decreased work for buyers comes back to this relational mood (basic/synchronized/ cooperative VMI)”

1) “With information sharing alone, partners do not have to transfer decision making authority over to the supplier. Information is just shared between buyer and supplier.”

2) “There are some resource savings from the buyer’s side but extra resources required by the supplier”; “From the buyer’s perspective, there is also some loss of expertise with VMI”; “VMI is a risky

proposition for the buyer; the buyer really needs to trust its supplier and both of firms have to look at this at a long-term proposition”

“From a practical perspective, little transport gains are achieved because the performance it rather important for the supplier”’

“Balancing risk by adding an additional transport ride leads to more certainty that service levels are met” “Fewer inventories are cheaper than one transport ride less”

2) “You will leave it up to your suppliers to control your inbound. So you make it harder for them to get an easier inflow”; “The main problem is in production: receiving products, do the right scanning’s, problems in the fast-buffer.”

3) “What we do see is that the let-ups increase”; “It is especially interesting to look at [supplier] and the results of [retailer] because they were really extreme. “It fluctuates a lot but there is an increase in let-ups in [retailer]”

1) “The decision is transferred from the supplier to the buyer if it is downed, whereas let-up transfers the

responsibility back to the supplier”.

2) “Information meetings inform VMI suppliers about processes and streams of information”; “Educate suppliers in order to elevate VMI to a higher level”; “Suppliers do not receive any training, only information meetings plus evaluating and monitoring practices”

Exploring the impact of VMI on sustainability: a Triple Bottom Line perspective