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Int. J Sup. Chain. Mgt Vol. 3, No. 4, December 2014

Business Value from Closed-Loop Supply


Chains
Otto Koppius#1, Öznur Özdemir-Akyıldırım*2, Erwin van der Laan#3
#
Department of Technology and Operations Management,
Erasmus University, Rotterdam School of Management
Rotterdam, the Netherlands
1
okoppius@rsm.nl
3
elaan@rsm.nl
*
Faculty of Faculty of Economics and Administrative Sciences
Akdeniz University, Antalya, Turkey
2
oozdemirak@akdeniz.edu.tr

Abstract— This study provides a complete framework an important consideration nowadays, as


to define and classify the value that firms can attain governments, organizations and people aim to
by their closed-loop supply chains (CLSC) and make society more sustainable. For organizations,
analyzes the role of information systems (IS) in this this translates into a focus on the triple bottom line
process. We present a novel typology to identify the of people, planet and profit. While this aim is clear,
four value types a firm can generate in CLSCs, how organizations should achieve this aim is less
namely sourcing, environmental, customer, and clear, as many approaches exist. Historically,
informational value. Particularly the last two types society has moved from reactive approaches, such
have not been recognized in literature. We adopt a as pollution control, to more proactive approaches,
case methodology and analyze 8 cases to illustrate the such as product stewardship and sustainable
generation of each value type through CLSCs and
development [17]. From a production perspective
we are moving from cradle-to-grave practices,
highlight the role that IS play in this value generation.
where consumption and waste management is the
We ground our analysis on the integrative model of
norm, to cradle-to-cradle practices, where all
IT business value in [30] which considers the role of
outputs should either serve as biological or
external business partners, which is essential to
technical nutrients (“waste=food”, [29]). Consistent
CLSCs. We find 3 key results: (1) IS is an essential
with the latter is the approach of closed-loop supply
enabler for all value types, (2) while sourcing value chains: the integration of the traditional forward
and to some extent environmental value, can be supply chain with that of the reverse supply chain
created with IS internal to the firm, the novel value of recovered products. While past work has
types (customer and informational) can only be demonstrated that indeed closed-loop supply chains
created with extraorganizational IS, (3) the value are able to reduce waste of products and materials,
created by extraorganizational systems can only be this presents only a limited view. In particular, we
created if the appropriate intraorganizational systems believe that a focus on waste reduction obscures
are in place. Our findings show that substantial value two important aspects. First, more than just
can be gained from implementing IS in CLSCs but achieving the societal goal of waste reduction,
stakeholder collaboration is necessary to reap the full closed-loop supply chains create business value for
value. This is an important managerial insight for the the firm that goes beyond the cost reduction from
firms who still consider CLSC activities as costly and reducing waste [14]. Second, value creation does
do not notice all the benefits that they can obtain not only come from redesigning operational
from CLSCs. processes, but information systems play an integral
role in this. Therefore, in this paper we aim to
Keywords-sustainability, information systems, value answer the question of ‘how do information
from closed loop supply chains, case study
systems help to create value in closed-loop supply
chains?’ through analyzing some real-life cases.
1. Introduction After a short literature review on closed-loop
supply chains and the role of information systems,
There is no denying that sustainability has become we will describe a novel typology of value in
______________________________________________________________ closed-loop supply chains, consisting of sourcing
International Journal of Supply Chain Management value, environmental value, customer value and
IJSCM, ISSN: 2050-7399 (Online), 2051-3771 (Print) informational value, of which particularly the last
Copyright © ExcelingTech Pub, UK (http://excelingtech.co.uk/) two have not been previously recognized in the
literature. Then, using a re-analysis of 8 previously
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Int. J Sup. Chain. Mgt Vol. 3, No. 4, December 2014

published cases on closed-looploop supply chains; we


show that information systems in all cases are an
integral part of thee value that is being created. We
furthermore show that both intraorganizational and
extraorganizational systems (which include both
interorganizational systems to other supply chain
partners and customer-oriented oriented information
systems) help in creating sourcing cing value and
environmental value. Most importantly though we
show that customer value and informational value
can only be achieved through extraorganizational
systems. Thus, in order to reap the full benefits of
closed-loop
loop supply chains, firms should invest in
more in extraorganizational systems. We end with a Figure 1.. Key Processes of Closed Loop Supply Chains
discussion on the IT capabilities that firms need to
have to successfully do this. Acquisition processes provide the inputs for the
recovery processes, such as collection from the end
2. Closed-loop
loop Supply Chains user, sorting and grading, and possibly some
Instead of focusing on sustainability goals in the disassembly operations (see e.g. [33
[33]). Depending
forward supply chain (cleaner and less wasteful on the quality of the inputs and available markets
operations), a much more effective way of for the outputs, recovery may occur at the product
contributing to sustainability is to avoid the use of level (direct reuse, repair, refurbishing), at the
scarce resources and to avoid manufacturing component level (remanufacturing) or at the
operations altogether [18].. An effective way of material level (recycling) [39].. This very much
doing that is to integrate recovery practices into the depends on the type of product return [7], [21]. A
forward supply chain (“closing the loop”). An end- customer has the legal right to return a product
of-use or end-of-life
life product can be recovered in within a specified number of weeks after sale
different ways. One type of product recovery without any reason. Such returns, which are
occurs at the material level; discarded
arded products are generally referred to as ‘commercial returns’, are
collected, sorted, and reprocessed at the material typically of high
gh quality and can often simply be
level (recycled) in order to be reused as raw restocked [21].
materials in conventional manufacturing
operations. There are also more sophisticated forms Warranty returns occur if the customer perceives
of recovery that recover not only the material that there is a problem with the product. Repair is
value,
alue, but also the value from the resources that are common for warranty returns which mostly have
used in the production phase (energy, manpower, only minor defects. Such defects are repaired so
catalysers, fuel). Such recovery forms include reuse that thee product can be put back into working
at the product component level (car engines, spare condition and resold in secondary markets, possibly
parts) and at the product level (mobile phones, at a lower price. Refurbishing, on the other hand,
copier
ier machines). The management of these closed entails more elaborate operations: disassembly of
loops referred to as Closed Loop Supply Chain products into their modules, performing necessary
Management (CLSCM). In [12]] Geyer and Jackson inspections, component
omponent replacements and
identifies three types of processes that are key to reassembly of modules to form a refurbished
effective CLSCM: acquisition processes to ensure product [39]. Remanufacturing is regarded as
the right volume of product returns of the right recovery at the component level in which
quality, recovery processes to ensure that product components are rigorously tested, cleaned, and
returns are reused in a meaningful way, and reworked until they have at least the same quality
integration processes that ensure that reused as newly manufactured ones. Remanufactured
products and materials find nd a useful outlet (Figure components may be sold as spare parts or end up in
1). refurbished or even newly manufactured products.

‘After use returns’ are products that are still in


working condition but are discarded by the
consumer, because they
hey no longer meet his/her
needs. Such returns may be refurbished and resold
on a secondary market, or may be disassembled for
components to use for aftermarket services
(remanufacturing). End-of-life
life returns are products
that have surpassed the economic oor technical
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Int. J Sup. Chain. Mgt Vol. 3, No. 4, December 2014

lifetime; recycling at the material level is often the instance, recovery outputs can be sold in secondary
only available option. markets (e.g. as repaired/refurbished products or
cannibalized parts/components) and generate
Given an access to the right volume of collected additional revenue for the firm or they can be used
products and the appropriate reprocessing internally (e.g. as spare parts in maintenance or as
capabilities, it is essential that the firm has access input in production instead of virgin materials) and
to sufficient markets for the recovered reduce supply costs. Today, several companies
materials/components/products and possesses the such as IBM, Xerox, L’Oreal, HP, Ocѐ, Kodak, and
capabilities to integrate the recovery chain with the Volkswagen realized the embedded value in
forward chain (production and capacity planning, product returns and already started to reutilize them
redistribution). in various ways. For instance, HP remanufactures
the unsold printers returned by its retailers and uses
In the literature, business value from CLSC the good quality components as spare parts or in
practices has been mentioned in several studies but remanufactured products. Defective components
not directly analyzed in any of them. Most studies on the other hand, are recycled for materials [5].
focus on how the profit can be maximized and the
cost can be minimized by optimizing different In CLSCs, substituting virgin materials with
CLSC practices. For instance, in [20] acquisition recovered components or materials as production
decisions are optimised, in [34] optimal recovery inputs may also lead to substantial energy and
options are chosen to maximize the revenue from water savings. Furthermore, by minimizing waste,
the sales of recovery outputs and in [47] the CLSC processes can reduce land filling and waste
locations of distribution centres are decided to treatment costs and help to avoid legal fees and
minimize costs. Studies discussing the different taxes (e.g. emissions taxes, take-back fees paid for
value types to be gained from CLSCs are very rare. per unit end-of-life (EOL) product not taken-back).
In this respect, in [3] Bell and Mollenkopf argue We consider all these and similar direct financial
that given the scarcity of natural resources, CLSC benefits arising from CLSC practices under
strategies may enable firms to gain comparative sourcing value. According to [12] all the three
advantages in resources and lead to long-term CLSC process types of Section 2 (Figure 1) should
success. In [22] Krikke et al. mention sourcing be geared towards maximizing these benefits.
value, customer loyalty, and environmental savings
that can be gained from CLSC practices but do not Extra benefits which may not imply immediate
elaborate on these value types. Instead, the authors financial value but may increase the competitive
focus on the current return practices and provide a advantage of a manufacturer and lead to financial
comprehensive analysis of the drivers, volumes and improvement in the long-term are classified under
value of different returns along the life cycle and environmental vale, customer value, and
inefficiencies in the current return chains. In short, informational value which will be discussed next.
to the best of our knowledge, this study will be the
first in the literature which provides a Environmental value1 mainly refers to two types
comprehensive framework and in-depth analysis of of benefits of CLSC practices that result from
the value types to be provided by CLSC practices improved footprints: (1) ease of compliance and (2)
and illustrate them with real cases. improved green image. In the last decades, several
waste management regulations (e.g. Directive on
2.1 Value Creation in Closed-Loop Supply Waste Electronic and Electrical Equipment,
Chains Directive on End-of-Life Vehicles in EU, E-waste
regulations in 23 states of USA) have been enacted
In the literature, although mostly the financial gains
to hold manufacturers responsible for the take-back
from CLSC practices are discussed, we argue that
and proper treatment of their used or EOL
there is much more value to be leveraged in
products. These regulations imposed obligatory
CLSCs. We classify the value types that can be
take-back and recovery targets on manufacturers,
generated by means of CLSC practices into 4
which become more stringent over time. In this
categories: 1) sourcing value 2) environmental
respect, CLSCs can enable a manufacturer to take a
value1, 3) customer value, and 4) informational
proactive stance and ensure easy compliance with
value.
such regulations. Manufacturers who take steps to
set up a take-back system and start recovery
Sourcing value refers to all types of direct cost
operations ahead of legislation may also have a
reductions and savings that can arise from CLSC
practices. Through reprocessing strategies
discussed in the previous section (i.e. reuse, repair, 1 Here, it is important to note that both in this value type and in
refurbishing, remanufacturing, and recycling), the customer value, we take a manufacturer perspective and
product returns can be reutilized in some way in the refer to value as the value acquired by the manufacturer, not by
same or in an alternative forward supply chain. For the environment or the customers.
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chance to lobby for rules and regulations in line purchase only the right of use and get regular
with their practices. They get the opportunity to maintenance, and at the end of a certain period turn
shape the legislation in their favour. Furthermore, back and replace the old products with new models.
by the first mover advantage they can gain Lease or installed base contracts are generally used
expertise in recovery operations and capture a for large-size equipment such as copiers, press
bigger market share. A good example of this is equipment, etc. To illustrate, major digital press
Electronic Recycling Platform which is created by equipment manufacturers such as Oce, Xerox,
four big electronics firms to take-back and recycle Kodak, and Canon explicitly include returns in the
their products in anticipation of Waste Electrical sales contracts and offer special service agreements
and Electronics Equipment (WEEE) legislation in which provide leasing, trade-in upgrade,
Europe. After the legislation enacted, this proactive replacement and parts exchange [4], [21]. This
initiative provided 55% savings to its founders enables the firms to increase customer retention
compared to their competitors [32]. and prevent third parties to collect, recover, and
resell their products. As a final point, product take-
The second benefit under the environmental value back also helps manufacturers prevent third party
is improved green image. In the last decades, intervention (which may either reveal know-how or
several organizations (e.g. Greenpeace and hurt brand name due to poor reprocessing) and
Newsweek) and voluntary initiatives (e.g. Global protect know-how and brand credibility.
Reporting Initiative and Electronic Take Back
Coalition) started to publish environmental Finally, informational value refers to the valuable
performance rankings and reports for big data on common production or supply (input)
manufacturers and increased attention on defects/problems, failure rates, useful life-time of
environmentally malignant processes. Combined the product, consumer complaints, and consumer
with the increasing interest of the society to the usage patterns, which can be acquired more easily
environmental problems and a growing through the acquisition processes of CLSC
‘environmentally conscious’ customer segment, practices. For instance, common production defects
these developments increased the pressure on or consumer usage patterns can be revealed by
manufactures. Being able to calculate, record, and simply recording the defect types and problems
communicate the reductions in footprints (energy observed during grading/sorting and disassembly
and virgin material use, emissions, waste to processes. Similarly, consumer complaints can be
landfill, etc.) that result from closing the loop easily learned by applying a simple survey to
leverages the environmental value and becomes an consumers when they turn back their products.
important competitive weapon. Such kind of information can then be used to
improve different processes (e.g. product design,
Our third value type is customer value which refers production, etc.) in the value chain.
to increased customer loyalty, better customer
satisfaction, and superior brand and know-how
protection provided by CLSC activities. First of all,
Table 1. CLSC Value Matrix
a well organized product take-back system
(acquisition process as discussed in the previous Sourcing Value Environmental
section), which is a sine qua non for an efficient -Cheaper sourcing value
CLSC, can offer customers hassle free service for -Market extension -Market leader
warranty or commercial returns and this can through proactive
increase the willingness of consumers to purchase compliance
the firm’s products again to a great extent [35].
-Green image
Similarly, reprocessing activities such as
remanufacturing can increase the availability of Customer value Informational value
spare parts especially for the old models whose -Customer loyalty -Product design
parts are no longer produced or very infrequently -Customer improvement
produced. Improved spare parts management can satisfaction -Supply chain process
also enable the company to provide extended optimization
warranty and service agreements to its customers.
All these opportunities provided by CLSCs
substantially contribute to customer satisfaction
and customer loyalty. CLSCs may lay the ground 2.2 The Role of Information Systems in
for leasing and installed base contracts as well. Closed-Loop Supply Chains
Manufacturers who have started reprocessing The previous section described the four types of
activities and established remarketing channels are value that can be gained from CLSCs. Past research
more willing to offer lease or installed base (e.g. [40], [44], [45]) has shown that closed-loop
contracts. Under such contracts, customers supply chains has quite different informational
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requirements than forward supply chains, and that published cases through a common lens can help to
information systems are an important enabler for uncover patterns that would be hard to derive from
closed-loop supply chains. However, except for single studies. Although less common than
some studies (i.e. [40]), the focus of the literature collecting primary (case) data, the method has seen
thus far has been primarily on how information applications in the information systems literature
systems enable the overall environmental benefits. [25]-[11], as well as other fields such as marketing
To what extent, if at all, information systems create [27], leadership [37], and strategy [24]. Such a
value for the firm remains an open question. We method is deemed to be suitable particularly
ground our empirical analysis in the following “…when case studies dominate an area of research,
sections in the integrative model of IT business when the unit of analysis is the organization, when
value put forward by Melville et al. in [30], since a broad range of conditions is of interest [19]” [24]
that is one of the few IT business value models that (pp. 1516), because it “…overcomes the problem
takes into account the role of external business of generalizing from a single case study and at the
partners, which is essential to CLSCs. same time provides more in-depth analysis of
complex organizational phenomena than
In the model provided in [27], “IT business value is questionnaire surveys.” [24] (pp. 1516). These
generated by the deployment of IT and conditions fit our research: as empirical work we
complementary resources within business mostly have case studies in the field of CLSCs, our
processes” (p.293). IT resources are subdivided unit of analysis is a firm and a number of
into technological IT resources (IT infrastructure conditions (e.g. an active closed loop supply chain,
and business applications) and human IT resources use of IS in this network, involvement of SC
(technical and managerial expertise). partners, etc.) should exist for our analysis.
Complementary resources are comprised of non-IT Furthermore, since primary fieldwork is very
physical resources, non-IT human capital intensive, there are resource and practical
resources, and organizational capital. While these constraints that may prevent individual researchers
are the resources owned by the focal firm, its from doing cross-case analyses that can improve
ability to create value from these resources is theory-building, and using published cases can help
shaped also by the IT and non-IT resources of its to overcome such limitations [1].
business partners. As firms start to increasingly
compete network against network instead of firm We selected our cases through a number of steps:
against firm [42]-[26], the role of these business we started with identifying cases on closed-loop
partners is crucial for understanding the IT value in supply chain initiatives from two key published
a CLSC setting. volumes of closed-loop supply chain practices [15],
[10]. Since these two volumes contain some of the
This importance of external partners is also pioneering publications in closed-loop supply
highlighted in an alternative classification of IT chains, we used these as starting points for cases, as
resources that distinguishes between inside-out, well as subsequent articles that referred to these
outside-in, and spanning resources [6], [46]. Inside- volumes. We used a previous article on e-enabled
out resources are the internally focused IT closed-loop supply chains for a similar purpose
resources such as infrastructure, technical skills, [44] and we consulted some experts for additional
and development skills. Outside-in resources are cases. This resulted in 30 cases at the first step. In
those resources related to external business partners the second step, with the help of a research
and markets, such as the management of external assistant, we classified each case according to the
relations and responsiveness. Spanning resources value type (or types) that was/were being created in
are those resources needed to integrate inside-out the case, based on the descriptions of the business
and outside-in resources, such as aligning business benefits in each article. In virtually all cases, some
and IT as well as change management. We use form of sourcing value was created; the other three
these frameworks as our initial starting point for an value types were less common. Disagreements
inductive analysis of 8 cases of IT initiatives in were infrequent and when they occurred, they
closed-loop supply chains, which will be described revolved around a minor value type, i.e. a value
in the next section. type that had only a small overall importance
compared to the other value types. No
disagreements occurred around the major value
3 Methodology types in each case.
We study the role of information systems in closed-
loop supply chains by conducting a re-analysis of 8 In the third step, we then selected 2 cases from
published cases (2 for each value type) in the each value category for our final analysis based on
literature on closed-loop supply chains. Just like the extent of information about value creation that
meta-analysis helps to synthesize findings across was available for that type and whether or not some
series of experiments or surveys, re-analyzing form of information systems was mentioned in the
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article. No other criteria regarding IS types/IS outsourced to third parties. At T&R facility, all
usage/IS quality/IS success or similar concepts returns were rigorously tested and those with no
were used during case selection, only if mention defect were sent to the Shipping Depot while the
was made or not. Where necessary, we augmented defective ones were disassembled, their modules
the original source with additional secondary data were checked and after necessary repairs
from other sources (usually company websites and reassembled again (refurbishing). In case
sustainability reports of companies) and in some refurbishing was not possible, remanufacturing was
cases contacted the authors of the original case for preferred: individual parts were tested and repaired
more details. The final case selection with value to be used as spare parts. Irreparable parts, on the
types and corresponding literature sources can be other hand, were sent to recycling. From SD, after
found in Table 2. necessary repackaging products were sent to the
secondary markets to be sold with a 15-25% price
discount.
Table 2: Selected cases and sources
The primary value type HP sought to generate from
Value type Case Source this CLSC was sourcing value. Realizing the
substantial costs and value loss associated with
Sourcing Hewlett- [5]
Packard
returns, the company started to regard all the
activities associated with returns as a separate
Sourcing Heineken [41] business in itself and initiated a new strategy with
Environmental Schering [38] two main goals: reducing the returns volume and as
Environmental Xerox [28] a result the total cost of return business, and
increasing the revenue from the sale of returns.
Customer Wehkamp [8]
Main problems led to losses in this CLSC were
Customer OMRON [23] inefficiencies in the acquisition stage (i.e. long lead
Informational NEC [13] times, high return stocks at return depots and
T&R). HP sought to alleviate these problems by
Informational Retread [9]
collaborating with its value chain partners to
eliminate the causes of returns and by improving
4 Case Descriptions2 the returns handling process by some optimization
4.1 Sourcing Value: Hewlett-Packard tools. To maximize the value obtained from
(Imaging and Printing Solutions returns, on the other hand, the reprocessing stage
was improved. The company developed decision
Group) models to determine the best reprocessing
Imaging and Printing Solutions (IPS) group alternative and also encouraged common design
specialized in printers such as Liquid Inkjets, platforms among different products to boost
Laserjets, and other imaging equipment such as component reuse. Design engineers were
cameras and scanners was a large business unit in encouraged to ‘steal’ the design of previous
Hewlett Packard. products instead of inventing their own designs.
The decision models employed product life cycle
Returns were a major problem in IPS. Only in the analysis and info about the product value/condition.
U.S., 6.6% of sales dollars and 5.7% of all Improvements in the integration process were also
shipments were returned on average. The three made. To sell the recovered products, new markets
main return categories were overstock returns from such as online auctions were examined. To assess
resellers, customer returns (due to unfulfilled the returns on all these investments in CLSC
expectations), and defective product returns. In the practices, HP conducted an Economic Value Added
current closed loop supply chain, returns picked up (EVA) analysis. This showed that HP generated
from resellers were delivered to two returns depots. positive returns on its CLSC investments for
After the visual inspection at return depots, returns handling.
depending on their condition the returns were either
sent to recycling (obsolete products), to Testing &
Refurbishment (T&R) facility (returns in opened 4.2 Sourcing Value: Heineken (Chip in
boxes) or Shipping Depot (SD) (returns in closed
boxes). The operations both at T&R facility and the Returnable Packaging Materials)
returns depot as well as the recycling were Heineken, the third biggest brewery of the world,
operates all over the world with headquarters in the
Netherlands. The company has two corporate
2 Unless noted otherwise, descriptions in this section are taken
brands (Heineken and Amstel) and several national
from the corresponding source in Table 2. and regional ones.
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Heineken uses returnable packaging materials and reducing environmental impact of their
(RPM) (i.e. returnable bottles, crates, and kegs) for business (e.g. membership to the German Chemical
most of its products. In 2001, 47% of total beer Industry Federation’s voluntary initiative
sold was packaged in RPM which requires “Responsible Care”) were also key drivers.
substantial investments (replacement cost of RPM Recovery rate was high in solvents (some portion
is around 550 million EUR for Heineken Europe). was distilled for pure solvents and some low
RPM necessitate a reverse logistics chain as well. quality portion was used as fuel), however a small
Used containers should be collected, stored, and portion which could not be recovered in any way
cleaned before reuse. Determining the right number was disposed of as waste.
of RPM to be launched in the supply chain is an
important but difficult decision. Expected sales Integration of by-product recycling and solvent
amount and the circulation time (the time between reuse made the production planning complicated in
two entries of a crate at the production belt) of Schering, existing materials requirement planning
crates in the chain which is uncertain are used to (MRP) system was not sufficient to handle this
determine this number. Traditionally, Heineken has complication. To solve this problem the logistics
adopted a risk-averse policy and kept large department of the company developed a Mixed
amounts of RSM in use so that there was almost no Integer Programming (MIP) model and embedded
risk of stocking out and disrupting other activities this in the existing MRP system. This system
(i.e. production and bottling). However, large allowed planning employees to follow the
amounts of RPM also implied redundantly tying up procedure they were used to. The only input to be
large amounts money in RPM and incurring entered by the employees was the Bill of Materials
substantial operating costs (i.e. for storage). data and this data was automatically converted into
MIP formulation by a Decision Support System
In 2000, the company started a pilot project at the (DSS) again developed by the company. The IT
Brand brewery (a local brand of Heineken) which infrastructure helped to easily integrate the
involves baking chips into a certain portion of the recovery activities in the existing SC.
crates used by the company. The objective was to
measure the circulation time of the crates through The main motive for starting recovery activities
the reverse chain. Using the scanners located at the was profit, however, recovery activities helped the
entrance of the production belts and the unique company comply with several existing regulations
codes attached to the chips the two consecutive and ensure a leading position in environmental
entrances of the crates into the production were issues as well. As Bayer Schering AG, the
recorded. The project provided valuable company now publishes annual sustainability
information about the return patterns and the reports which are subject to external audit and
circulation times of crates, which can be used to available to all stakeholders (e.g. customers,
reduce the investment costs in RPM. The suppliers, shareholders, investors, etc.). As being
contribution of the project if implemented for all listed in the Carbon Disclosure Leadership Index
crates was not measured by Heineken, but by a and the Dow Jones Sustainability World Index, and
rough calculation chip technology reduces crate with its A+ rating reporting under the framework of
stocks by 1 million and saves €3.5 million for the Global Reporting Initiative (GRI) (a widely
company. These figures do not even include the accepted sustainability reporting system), the
additional benefits such as improvements in the company has gained public recognition in
reverse chain of the RPM. environmental issues [2].

4.3 Environmental Value: Schering AG 4.4 Environmental Value: Xerox


Schering AG was a German pharmaceutical In contrast to the traditional business definitions,
company founded in 1871 and taken over by Bayer Xerox defines itself as ‘a provider of document
in 2006. After the takeover the company was services across all aspects of document life-cycle
renamed as Bayer Schering Pharma AG. management, from creation to distribution,
There were two types of recovery activities in printing, and storage’ [28] (pp. 226). Xerox
Schering: (1) recycling of byproducts and (2) Europe is a part of Xerox Corporation with
recycling and reuse of solvents. Byproducts were headquarters in UK and with an average 25% of the
generated in various stages of production, whereas total business [16]. In this case description we will
solvents were needed in the production of most mainly focus on Xerox Europe’s activities.
active ingredients. Thus, profit was an important
driver for both recovery activities. Besides, A product stewardship program and waste-free
complying with the legislation (e.g. the EU business policy implemented by Xerox Europe led
Directive on Registration, Evaluation and to a closed loop supply chain (CLSC) for the
Authorization of Chemicals (REACH), The company’s products. The first step in this CLSC is
German Recycling and Waste Control Act, etc.) the take-back of products from customer locations
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and their transfer to return centres where they are electrical appliances, and furniture, household
inspected, tested, and classified under four grade products and leisure goods. It offers around
categories. For inspection, products are dismantled 100,000 product types and completes about five
to the base-unit level and each component is million orders every year [31]. With a turnover of
carefully inspected and its remaining life is 441 million Euros (excl. VAT) the company is the
determined. Grades depend on the physical market leader in online shopping in Netherlands.
conditions and the age of product as well as the Product returns are an important part of the
demand for the recovery output. Grades determine Wehkamp’s business. On average 28% of all sales
the reprocessing alternative for each product [16]. are returned and this percentage may rise to 40%
for fashion sales. For convenience, Wehkamp
Proactive leadership in environmental sustainability offers three options to its customers for returns:
has been one of the most important objectives of pick up from home in the afternoon, pick up from
Xerox Europe. The company’s internal home in the evening and service point drop-off.
environmental standards most of the time have When the products are picked up from home,
been stricter than the legislation and industry customers do not pay for transportation costs.
standards [16]. For instance, the company started Pickup and transportation of returns are partly
recovering its products and its waste free policy integrated with forward flows (delivery of new
ahead of WEEE Directive legislated in Europe in orders to customer locations). Same trucks are used
2003. In 1997, Xerox Europe collected 160000 for both the collection of returns and the delivery of
products and recovered about 3.8 million new orders. Upon arrival to the warehouses in
components from these products. To avoid Dedemsvaart and Maurik (in NL), returns are
products ending up in landfills, recycling symbols unpacked, checked for any problems (e.g. steins in
and reprocessing codes, which show the recovery garments), reconditioned (e.g. cleaned, ironed if
potential of products were placed on products. necessary), repacked, and relabelled.
Similarly, bar-coded labels were used in tracking
packaging materials. To ease recovery, a Both the acquisition stage (i.e. pickup,
completely modular and advanced technology identification, and grading) and the integration
product, Document Centre, with open architecture stage (remarketing) are quite fast and efficient so
that allows for any type of technological upgrades that after repacking returns can be immediately be
and component replacements, was developed. This put on market same as original before any value
product is compliant with Energy Star (USA EPA loss and hassle-free return service can be offered to
label for energy efficient machines) and European customers. Indeed, the company regards an easy
eco-labels (e.g. Blue Angel (Germany) and Nordic return policy as a business strategy. This policy
Swan (Scandinavia)) and allowed the technicians to increases the service levels for their customers and
use ‘SiXth Sense’ Diagnostic systems and diagnose generates competitive advantage for the company.
the product remotely and immediately solve the Returns pickup and handling are costly, however
problems. The company also used Total Quality Wehkamp achieved to ensure efficiency in these
Management tools to develop an environmental processes thanks to its IT infrastructure. A standard
management system (EMS) and to bring a truck routing software is employed to schedule
systematic approach to decrease the environmental delivery and pickup routes, and tailor-made
impact of the company. As a result of all these software is used to identify and grade returns, and
activities, the company got European refund the customers when needed. Integration of
Environmental Award for Industry from the this software into a standard warehouse
European Commission and the United Nations management system (Locus) enabled to gather
Environment Programme, UK Packaging Industry immediate information about whether the client
Award, Eco management and Audit Scheme should be refunded or not (based on whether or not
certification for all of its products and this product category may be returned), the
manufacturing sites, and ISO 14001 certification condition of the product, the payments were made,
for its waste free approach. Xerox is aware of the and the date of original purchase. Return tickets
importance of external recognition for its given to customers at the time of purchase further
environmental achievements. Hence, the company facilitated tracing the number and frequency of
uses its environmental credentials in its marketing returns in each product category.
campaigns to build a green image and attract
environmentally conscious customers. Wehkamp achieved to generate customer value
through its CLSC practices for returns. The
4.5 Customer Value: Wehkamp company’s return policy has increased customer
Wehkamp is a catalogue order/online retailer satisfaction and enabled to establish sustainable
company operating in the Netherlands. It receives customer relations. Supporting this conclusion, the
orders from its customers via catalogue or online company has one of the largest customer base in
for a broad range of products such as clothing, Netherlands and in a survey conducted to reveal
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customer satisfaction, outperformed all of its centre which did not have quality assurance and
competitors in all dimensions. provided low quality repairs that hurt the brand
name of Omron.
Returns also serve as a key supply source for the
company. Wehkamp receives its orders from OEE has undertaken a series of structural changes
suppliers only twice a season. However, for in its CLSC design to reduce this delay and provide
seasonal products, which constitute a major portion a better repair service to its customers. First
in Wehkamp sales, demand estimation in far creating a partnership with DHL, the customer was
advance is difficult. Returns, which arrive enabled to contact directly with DHL for the pick-
throughout the season and are immediately up and the transfer of the defective product to ERC.
reprocessed, are used as reserves to stabilize any In this process After Sales Application (a database
fluctuations in demand within the season. running in the Omron intranet and accessible by
NSCs) was used to create RMAs by NSCs. This IT
4.6 Customer Value: OMRON system allowed NSCs to track the status of repair
Omron is an international manufacturer and service instantaneously. These changes reduced the delays
provider in the industries of industrial automation, substantially (up to 5 days) but still there were
medical health care, automating services, and discrepancies between NSCs repair requests to
information processing with products such as card ERC and actual products sent by customers to ERC
readers, connectors, and sensors. Omron is a B2B for repair due to the last minute changes in the
business and sells its products to companies such as decisions of customers about sending the product
system builders and Original Equipment for repair. To solve these, in the second phase of
Manufacturers (OEM) who use Omron products to the structural design change, European Repair
build larger technical systems. Omron Electronics Database (ERDB) and European EDI gateway of
Europe (OEE) operates in Europe, former Soviet DHL were used to generate automatic pick-up
Union, the Middle East, and Africa markets. This requests to the local DHL office, a confirmation to
case description will mainly focus on the activities NSC and an airway bill to the customer
of OEE. OEE has National Sales Companies simultaneously. The EDI gateway also informed
(NSCs) managing the sales in each European the customers electronically about the pick-up in
country and a European Logistic Centre (ELC) and advance. These information systems improved the
a European Repair Centre (ERC). repair chain to a great extent. Long delays causing
interruptions in customers’ operations were
Since Omron products are used by other companies substantially reduced, unofficial repairs which hurt
as a part of the larger technical systems, the failure the brand name were minimized, and economies of
of these products hamper the important processes scale in ERC was ensured and this helped to make
of product users and create serious problems for new investments which can further speed up and
them, thus such failures should be solved in short improve the repair service (e.g. specialized
time. The initial closed loop supply chain for diagnostic equipment). As a result customer
product repairs in OEE operated as follows: the satisfaction was improved which led to an increase
user of the technical system including the Omron in repair demand to ERC (repairs generate revenue
product informed its supplier (mostly an OEM) to Omron).
about the failures and the supplier investigated
which component caused the failure in the 4.7 Informational Value: NEC Computers
technical system. If an Omron product caused the NEC Computers International (NEC-CI) founded
failure, NSC was contacted and depending on the in France as a subsidiary by NEC Corporation of
nature of the problem and warranty conditions NSC Japan to unite PC and server business outside
proposed a solution. Sometimes the supplier itself the US and Japan, manufactures desktops,
dealt with simple problems. If a defective notebooks, and servers and distributes them
component or product should be changed, NSC did throughout Europe, Africa, and the Middle East.
the replacement and the defective product was sent The company experienced lots of inefficiencies in
to ERC for repair with a Repair Material handling customer and production returns. Due to
Authorization (RMA) issued by NSC via the shortening life cycle of computer equipment and
channel of NSC and ELC. After repair the product risk of obsolescence the company should process
was transported to the user through the same its returns faster and in the best possible way, and
channel (via ELC, NSC, and then the supplier). minimize the returns stock. However, this was not
Each step in this flow took approximately one week possible with the existing reverse chain. To solve
and in total getting back a repaired product from these problems, the company created Notebook
ERC took about 6 weeks of the user. This was a Server Recovery (NSR) as an independent unit.
substantial delay for users which inhibit their NSR started to handle customer and production
operations. Due to such a big delay NSCs returns separately. After checked whether they
sometimes prefer to use an unofficial local repair were turned back in sealed boxes or not (returns in
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unsealed boxes were immediately sent to conduct the tire management of big fleets, collect
serviceable inventory), customer returns in sealed used tires from each fleet, mark them with the fleet
boxes went through a testing/grading process which code, and send the batch from each fleet separately
determines the best possible reprocessing option for to RetreadCo. By this means after the retreading
the return. After testing/grading stage depending on process each fleet gets back its own tires. The
whether they were still in the sales catalogue, customer system, on the other hand, involves
customer returns were either refurbished to be sold collection from small fleets or individual vehicle
as refurbished product or disassembled for owners. Such tire users leave their old tires at the
components (to be used in regular production) or dealers and pay a disposal fee. These used tires are
spare parts inventory (to be used in refurbished then collected by a tire collector in turn for a fee
products). Production returns, on the other hand, paid by the dealer. Tire collectors separate and
were directly disassembled, components were dispose of the non-retreadable tires and sell the
diagnosed and the components under warranty retreadable ones to RetreadCo.
were sent back to their suppliers while the others
were repaired for spare parts inventory and if not Retreading consists of inspection of casing,
repairable directly disposed of. buffing, moulding or procure and final inspection
stages. First the casing of the used tire is inspected.
The main contribution of these two processes was By using a special technology steel cords in the
the information collected in the acquisition casing are tested without destroying the tire. This
processes (i.e. collection, testing, grading and procedure which is called non-destructive testing
disassembly). NSR asked each customer turned provides crucial information about the eligibility of
back a product under warranty to fill out a the tire for retreading. The second stage, buffing,
questionnaire about the problems s/he experienced involves peeling off the old tread by means of
in the product. This enabled the company to collect computer controlled machines for precision. After
valuable information about the type and frequency buffing, the new tread is affixed to the casing by
of problems in customer returns and convey this two alternative procedures: moulding and precure.
information to the concerned parties to improve the Buffing and moulding/procure stages correspond to
related processes (e.g. production). Similarly, data the disassembly and reprocessing processes
was collected for production returns as well. NSR mentioned in Section 2, respectively. To make
built up a database on common production failures ready for sale, the tires undergo one final
and defects in supplied components. The company inspection.
used the database to closely monitor the quality of
production processes and supplies. The database Especially for commercial vehicle owners tires
made the company and NSR an important constitute a substantial cost item (on average 11%
information hub in the supply chain. Based on the of all operating costs). Hence, good tire
information obtained from the database, the management is very important for such businesses.
company contacted and coordinated with the other Different factors such as pressure, temperature,
parties in the supply chain (e.g. component driving behaviour, tire rotation, tread depth and
suppliers and buyers) to solve the inefficiencies pattern, and geographic conditions determine the
and problems in the whole supply chain. cost performance of a tire. Retreading, which uses
high technology especially in inspection stage, can
4.8 Informational Value: RetreadCo Case provide useful information to vehicle owners in this
RetreadCo is a subsidiary of NewTireCo which is a respect. Based on this information, sometimes tire
large European-based tire manufacturer. Retreading consulting service is provided by retreaders to fleet
involves replacing the worn rubber outer part operators. Being aware of common problems that
(tread) of a tire with a new tread. The worn tread is reduce the life-time of their tires and increase the
taken away (through a procedure called buffing) associated costs (e.g. maintenance, retread, and
and by the application of heat and pressure a new downtime costs), fleet operators can cut their
tread is affixed to the tire body which is called operating costs substantially.
casing. Retreaded tires offer approximately 30-50%
price reductions to tire users. RetreadCo is a large- 5 Case Analysis
scale tire retreader (4500 tires/day) and processes Case analysis resulted in three main findings that
used tires of almost all brands in addition to will be described further down below. Cases were
NewTireCo’s. initially analyzed by classifying the information
systems in each case according to the frameworks
RetreadCo has an extensive network including tire provided in [30]-[46] and described in the theory
dealers and fleet operators. RetreadCo acquires the section, to see if a pattern emerged and where
used tires through two types of reverse channels: necessary by re-reading the case for additional
(1) the Nominative system and (2) the Customer details. The original case descriptions focused
system. In the nominative system tire dealers that primarily on the technical functionalities of the
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system and its result, much less was said about the made the environmental costs of activities
development of the system, the implementation measurable. Once this was in place, this value
process itself or the technical and managerial could then be further leveraged into better
expertise needed; hence an assessment of human IT compliance, for which both companies received
resources is difficult to make. We therefore focus awards and helped them to build an
our results primarily on the technological IT environmentally-conscious reputation in the
resources in the findings that follow. Although a marketplace.
strict interpretation along the inside-out/outside-
in/spanning classification in [46] was difficult due However, the previously unrecognized value types
to similar reasons as with the human IT resources, customer value and informational value can only be
we found that we could draw on their inside/outside created by extraorganizational IS. For instance in
distinction to usefully sub-classify the the NEC case, the value comes from collecting the
technological IT resources in the cases. Specifically information from customers and supply chain
for our second and third finding, we distinguish partners and also sharing this information back
between intraorganizational IS (information with them. Similarly in the Wehkamp case, the
systems that support processes that are purely customer value comes from deploying information
internal to the firm) and extraorganizational IS systems that on one hand make the return process
(information systems that support processes that are very easy for the customer and on the other hand
external to firm, i.e. processes where customers or from information systems that enable better
supply chain partners are involved). coordination with warehousing and logistics
The first finding from the cases described above partners, such that the customer not only
experiences a hassle-free return process, but also a
Table 3. Value Types and Type of Information System
fast one. Put differently, the sources of these newer
Sourcing Environ- Customer Informa- value types lie external to the firm in better
Value mental Value tional connections with customers, more information
Value Value
about their usage patterns and product wear-and-
Intra- HP Schering -- --
tear, better integration and coordination with
organizat Heineken Xerox
ional supply chain partners and so on, and this value
Extra- HP Xerox Wehkamp NEC
cannot be tapped into if the focus of the
organizat Heineken OMRON ReTread information systems remains internal to the firm.
ional
related to the role of IS in general: while the cases
were simply selected based on the mentioning of Our third finding revolves around the relation
information systems in the case, the role of between the intraorganizational and
information systems in creating value for the extraorganizational IS. The companies that had
companies was substantial in all the cases. While effective extraorganizational IS in their closed-loop
strictly speaking the value comes from the supply chain initiatives also had effective
improved acquisition, reprocessing, and integration intraorganizational IS. The Wehkamp case
processes, the process improvements in all cases illustrates this best: while it is the
would have been very difficult, if not impossible to extraorganizational information system that creates
achieve without extensive investment in the customer value, fully obtaining this value
information systems. would have been impossible if the internal IT
Our second finding relates to the differential role platform had not been advanced enough to enable
that IS plays in creating the different value types. If the successful development and deployment of the
we classify the information systems in each case as extraorganizational system. This suggests that
being intraorganizational and/or while intraorganizational IS do not directly create
extraorganizational (some cases had both), an customer or informational value, they are a
interesting pattern emerges, which can be found in necessary condition for the extraorganizational IS
Table 3. It shows that sourcing value and to be able to create these value types.
environmental value can be created by both
intraorganizational and extraorganizational IS. In 5.1 Discussion: IT Capabilities Necessary
the HP case, part of the value came from better for Value Creation
decision support for reprocessing decisions once The results from the case analysis suggest an
the returned products arrived (an interesting insight as to what IT capabilities in
intraorganizational application) and part of the general are needed for value creation in a closed-
value came from optimization software loop supply chain setting. Past work on IT
applications joint with supply chain partners. capabilities from the resource-based perspective
Similarly, for environmental value in the Schering proposed that the IT capabilities that are
and Xerox cases, a substantial part of the value particularly valuable, are the capabilities that
came from environmental reporting systems that involve external stakeholders [27] or capabilities
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that are outside-in [43]. Our results validate this extraorganizational systems is not possible without
proposition by showing that it is precisely those the necessary internal IT systems being in place.
types of capabilities that are needed to develop and
successfully deploy the extraorganizational IT Overall, these results carry a positive message for
systems that are essential to creating the most companies: effective management of CLSC
value. Effectively developing systems that involve processes using information systems does not only
external stakeholders (whether it is tracking and lead to cost and waste reduction but it can also
tracing systems that span multiple parties in the create new business value. Thus, focusing on
supply chain or collection systems that are able to sustainability can lead to competitive advantage in
handle a wide variety of customer returns) requires the future. At the same time, they place companies
a different set of capabilities than ‘classical’ in a quandary: the value types that are the most
internal IT capabilities. This is not to say that those novel (customer value and informational value) and
‘classical’ internal IT capabilities are not valuable therefore offer the most possibility for competitive
anymore, they certainly are. Especially for sourcing advantage, are also the value types that are the most
value, it would be quite difficult to do good difficult to obtain, since they require that a firm has
reprocessing without effective IT behind it, or their intraorganizational IT systems in order before
achieve seamless integration between the forward moving on to extraorganizational IT. As many
and the reverse processes if the firm does not have firms are still struggling for instance with business-
the capability to effectively align business and IT. IT alignment issues internal to the firm, this may
In combination with our third finding on the prevent them from even thinking about
relation between the intraorganizational and extraorganizational systems. However, it does not
extraorganizational IS, our results suggest that the have to be an all-or-nothing situation: not all
role of green IS in closed-loop supply chains can extraorganizational information systems are equally
fruitfully be seen through the lens of digital options advanced and hence do not require similarly
[36]. As can be seen in the cases, the information advanced intraorganizational information systems.
systems that were deployed substantially increased For instance, while tracking-and-tracing systems
the process reach (the extent to which business based on barcodes or GPS may not offer the same
processes are common, integrated and connected) amount of detailed information as an RFID-based
and process richness (the quality and transparency system, barcodes and GPS are established proven
of the information collected about the processes). technologies that should be comparatively easy to
The internal IT systems created a digital platform deploy for most firms. And while a fully
that gave the firms valuable options for developing transparent supply chain may not be feasible for all
extraorganizational IT systems that could create firms, just integrating forecasts and inventory
value that would be difficult to obtain otherwise. In systems across supply chain partners can already
that sense, the combination of the closed-loop yield substantial benefits. Such first steps in turn
supply chain processes and the information systems will help to develop the necessary human IT
that support them can also be seen as a dynamic capabilities for firms to further expand in this
capability. In addition to creating one or more of direction, and also help to build a digital platform
the value types in our value matrix (Table 1), it that enables them to do so. In a nutshell: the
enables strategic renewal for firms by developing opportunities for combining sustainability with
entirely new business areas. value creation are available, and taking it step-by-
step will get the companies there.
6 Conclusion
The goals of this paper were (i) to identify and
classify the business value from closed-loop supply
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