Determinants of successful vendor managed inventory and strategic supply chain relationships in the New Zealand food industry

Supply chain initiatives are growing in popularity throughout the food industry, as organisations seek to reduce costs, to improve profitability in an increasingly competitive environment. As Whipple and Frankel (2000, p.21) suggest " ... firms seeking competitive advantages are participating in cooperative supply chain arrangements, such as strategic alliances, which combine their individual strengths and unique resources." Kurt Salmon Associates (1993) estimated that in the US, continuous replenishment processes (CRP), a form of vendor managed inventory (VMI), would provide annual savings of approximately 5% of sales, with the majority of savings realised by retailers. In support of this, Clark and Hammond (1997) found that, in the UK, supplier inventory turns increased 50 to 100% when electronic data interchange (EDI) was implemented in conjunction with CRP. In order to assist organisations in the New Zealand food industry benefit from these initiatives, this research seeks to answer the primary research question: "What are the key determinants of successful vendor managed inventory and strategic supply chain relationships in the New Zealand food industry?" In addition, a number of secondary research questions are asked including: "Why has the New Zealand food industry been slow to adopt VMI practices?" and "What supply chain efficiencies can be realised in New Zealand through VMI without EDI?'' An action research case study between a large supermarket retailer and a large food manufacturer in New Zealand was undertaken to answer these questions. Underpinning this is a literature review, which provided theoretical insights into global VMI and supply chain best practices. The output of this research is a series of three integrated frameworks covering industry, organisation and managementlevel aspects of VMI and strategic supply chain relationships. These frameworks, which have been justified and triangulated with the literature, are practical, working models, particularly relevant to organisations in highly concentrated food industries. The Industry-level framework concentrates on understanding the industry, analysing the competitive environment and developing long-term relationships to facilitate adoption of global best practice supply chain initiatives. These practices lay the foundations for the organisation and Management-level frameworks. The Organisation-level research demonstrates that successful supply chain relationships are formed between organisations which are relatively important to each other and have strong management buy-in to a shared vision. To be successful, the relationship must be supported by a number of factors including a win-win attitude, a high degree of trust, and open communication. These factors must be continuously developed and nurtured to ensure the relationship delivers the expected benefits. Documenting agreed goals and objectives, establishing formal communication channels, and reporting progress against the agreed goals and objectives can help organisations establish and develop these factors. This research investigates how these were achieved. Further, in New Zealand, it was found that these practices tend to be informal and based on verbal arrangements. This contrasts with the UK, which has formal relationships based on documented agreements and contracts (Siemienuich, Waddell, Sinclair, 1999). The Management-level framework demonstrates that both suppliers and retailers in the New Zealand food industry can realise supply chain benefits, including higher sales, improved customer service and reduced inventory levels, by establishing VMI and supply chain relationships. The Management-level research shows how organisations can minimise the impact of the 'bullwhip' effect (Lee, Padmanabhan and Whang, 1997) through VMI practices. In this research these benefits were realised by adopting VMI practices without EDI. The extent of the VMI benefits was limited to a few key product categories because of the limited resource available to manage the process manually; however, indirect benefits were realised by other product categories as a result of system and process changes in both organisations. These findings are consistent with the international findings by Clark and Hammond (1997). In conjunction with developing the frameworks, the research explains why the New Zealand food industry has been slow to adopt global supply chain initiatives, particularly distribution centres (DCs), EDI and VMI. The main reason identified was the power the supermarket retailers have over the industry. Until the supermarket retailers were ready to implement supply chain initiatives, manufacturers had limited opportunity to initiate supply chain relationships. It was found that countries, such as New Zealand, with small regional populations are likely to experience industry consolidation in order to establish and operate efficient and effective DCs. This is due to the high fixed costs associated with operating DCs and the ability of larger organisations to exert their power over other industry participants, forcing them to utilise their DCs. This finding is consistent with the Australian food industry which has experienced increased usage of DCs by the two dominant supermarket retailers (Wright and Lund, 2003). Finally this research shows how action research methods, supported by soft systems methodology, can be applied in a New Zealand VMI and supply chain relationship environment to develop general theory. Action research methods were judged appropriate to maximise the flexibility and responsiveness of the research to the rapidly changing food industry and supply chain environment, while allowing the researcher to fully participate in the study. Initial research findings were justified and applied through further action research cycles, using multiple case studies within the main case study. Critical reflection was a key component of each action research cycle and resulted in the identification of factors, such as trust and openness, which may have continued to be taken for granted rather than nurtured and developed. In summary, this research provides the opportunity for organisations in the New Zealand food industry to move along the continuum from interdependent partnerships to strategic partnerships, and from competitive parity to sustainable competitive advantage (Mentzer, Min and Zacharia, 2000). Practitioners should consider adopting these findings to improve their supply chain relationships and increase profitability and shareholder returns. Academics should consider applying these findings to other industries and countries displaying similar characteristics to the New Zealand food industry