CPFR: Supply chain redefined

Introduction to CPFR

A highly recognized collaboration initiative used in the retail industry is Collaborative Planning, Forecasting, and Replenishment (CPFR). CPFR’s underlying premise is that broad integration of firms within the supply chain will lead to a better focus on customers through the development of a single shared forecast of demand and a reduction of lead times. The benefits resulting from a successful application of CPFR include reductions in stock-outs, improved inventory management, shorter cycle times, increases in sales revenues, stronger relationships between trading partners, better overall system visibility and customer service, and improved cost structures.

CPFR originated in 1995 as an initiative co-led by Wal-Mart and consulting firm Benchmarking Partners. With assistance from Benchmarking Partners and IT firms such as IBM, SAP, i2, and Manugistics, Wal-Mart and Warner-Lambert implemented the first pilot of CFAR to increase sales, reduce inventory, and improve the in-stock position of Listerine, the project’s pilot product.Since this project, CPFR has evolved and is a strategic initiative implemented by many companies throughout North America and Europe.

In 2003, it was estimated that in the United States alone, more than $15 billion in the supply chain is managed by CPFR. VICS created guidelines for CPFR in 1998. Since the development and publication of these guidelines, over 300 companies have successfully implemented CPFR. The implementation of CPFR has also extended to industry sectors beyond retail, including high-tech industries. Rosettanet, a non-profit consortium of high-tech firms, has developed a collaborative forecasting standard for applying CPFR practices to that industry. Today, the VICS CPFR Committee works “to develop business guidelines and roadmaps for various collaborative scenarios, which include upstream suppliers, suppliers of finished goods and retailers, which integrate demand and supply planning and execution.

According to the Gartner Group, “Enterprises that collaboratively integrate disparate forecasting systems…will improve revenue predictability by 10 to 25 percent and decrease inventory carrying costs by more than 30 percent over a three-year period.”

Unfortunately, the dream of inter-firm collaboration leading to supply chain improvement has yet to be realized on a large-scale basis. According to the Voluntary Inter industry Commerce Solutions (VICS) Association, this lack of adoption is due to the following challenges: (1) selecting the right partners and products with which to implement CPFR, (2) establishing discipline for regular and periodic performance measurements, (3) committing to implement CPFR on a broad scale, (4) aligning corporate philosophies with CPFR philosophies and (5) managing organizational changes that may be required.

CPFR has been generally limited to collaboration between a retailer and only one major supplier, providing evidence that the broad integration of the CPFR initiative set out to achieve has been unrealized.

Predecessors to CPFR

There have been a number of widely known initiatives started with the goal of increasing collaboration and information sharing. It is also likely that countless initiatives have been undertaken within many companies with varying practices and mixed results. The following initiatives are fairly well known and are basis of CPFR.

Vendor-Managed Inventory (VMI), introduced by Kurt Solomon Associates in 1992 is perhaps the most widely known system for managing supply chains.Under VMI, the buyer authorizes the supplier (i.e., vendor) to manage the inventory of a set of stock-keeping units (SKUs) at the buyer's site(s) under agreed-upon parameters (e.g., minimum and maximum inventory targets). The buyer provides the supplier with sales and/or inventory-status information; and the supplier makes and implements decisions about replenishment quantities and timings. VMI reduces information distortion, which is one cause of the bull-whip effect. In addition, VMI provides the supplier with the opportunity to better manage its own production, inventory, and transportation costs. In exchange, the buyer typically receives price discounts or improved terms of payment from the supplier.

Efficient Consumer Response (ECR) is a consumer goods (primarily grocery) initiative aimed at improving responsiveness to consumer demand and reducing inefficient practices, costs, and waste in the supply chain. This is basically an application of JIT to retail distribution.The consumer products industry was in the midst of a fundamental shift in attitudes concerning traditional business practices among its participants, particularly as those practices relate to trade promotions and replenishment of products across the supply chain. Contributing to this shift were significant advancements in information technology, growing competition, and global business structures, and changes in consumer demand. This shift in attitude crystallized in the formation of an industry-wide working group and the issuance of a report in late 1992 that set the stage for what has come to be known as the Efficient Consumer Response (ECR).

Quick Response (QR) or Rapid Response comes primarily from the fashion and textiles industry. It was innovated by Milliken & Company in the early 1990's and subsequently codified by VICS,the same organization that oversees the codification and standardization of CPFR practices. QR in the simplest sense is a next generation, codified version of ECR. Central to the initiative is flexible and responsive production that relies on customers along the supply chain to define when, where, and how much of a given product is needed. The initiative has four levels of application and technology. Levels 1 and 2, for example, involve retailer inventory-status information-sharing and automatic order-processing between retailer and supplier. Levels 3 and 4 include VMI and cross docking warehouses.

Although VMI and QR might be the best-known management systems among both practitioners and academics, perhaps the most highly regarded systems are proprietary systems developed by large retailers, such as Wal-Mart's RetailLink, Kmart's Workbench, and Target's Partners Online. Although the detailed inner workings of these systems are closely guarded secrets, they all have two common characteristics: (1) The sharing of transactions-level data among partners and (2) The use of agreed-upon metrics (e.g., in-stock, inventory-turnover, and on-time delivery measures) and targets to assess partner performance. Both characteristics are central to CPFR.

CPFR Model

The CPFR model offers a general framework by which a buyer and seller can use collaborative planning, forecasting, and replenishing processes in order to meet customer demand. To increase performance, the buyer and seller are involved in four collaboration activities that are listed in logical order, but companies often engage in these activities simultaneously.

The first collaboration activity is Strategy and Planning. In this activity, the buyer and seller come to an understanding about their relationship and establish product and event plans. The second activity is Demand and Supply Management in which customer demand and shipping requirements are forecasted. Execution is the third collaboration activity and involves placing, receiving, and paying for orders, and also preparing, delivering, and recording sales on shipments. The fourth and final activity is Analysis.

1. Strategy and Planning

The first collaboration task under this activity is Collaboration Arrangement, which is a method for defining the relationship in terms of establishing business goals, defining the scope, and assigning checkpoints and escalation procedures, roles, and responsibilities. The retailer task related to this collaboration task is Vendor Management, and the manufacturer task is Account Planning. The second collaboration task is Joint Business Plan. This task pinpoints the major actions that affect supply and demand in the planning period. Examples of these are introducing new products, store openings and closings, changing inventory policy, and promotions. The retailer task associated with this is Category Management and the manufacturer task is Market Planning.

2. Demand and Supply Management

Sales Forecasting, which projects point-of-sale consumer demand, is one of the collaboration tasks associated with this activity. The retailer task here is POS Forecasting and the manufacturer task is Market Data Analysis. The other collaboration task is Order Planning/Forecasting which uses factors such as transit lead times, sales forecast, and inventory positions to determine future product ordering and requirements for delivery. The associated retailer task is Replenishment Planning, and Demand Planning is the associated manufacturer task.

3. Execution

The first collaboration task under the Execution activity is Order Generation. This task transitions forecasts to demand for the firm. The retailer task related to this collaboration task is Buying/Re-buying, and the manufacturer task is Production and Supply. The second collaboration task is Order Fulfillment and this is the preparation of products for customer purchase through the process of producing, shipping, delivery, and stocking. In this case, both the retailer and manufacturer task is Logistics/Distribution.

4. Analysis

Exception Management, which oversees the planning and operations for conditions that are out-of-bounds, is one of the collaboration tasks associated with this activity. The retailer task is Store Execution and the manufacturer task is Execution Monitoring. The other collaboration task is Performance Assessment which calculates important metrics in order to discover trends, develop other strategies, and assess the attainment of business goals. The retailer task here is Supplier Scorecard and the manufacturer task is Customer Scorecard.

The model described here is a two-tiered model. However, this model can be extended to include more than two layers in the supply chain. VICS calls this N-tier Collaboration, which is a relationship that develops from retailers through manufacturers/distributors to suppliers.

Drivers & Barriers of CPFR Implementation

Trust between supply chain partners

“Retailers and manufacturers believe there is a fundamental lack of trust between trading partners that stymies collaboration.” Should a partner leak price points, strategy, or tactics to a competitor, the effectiveness of promotions would surely be undermined. However, the collaborative opportunity will not likely be met with conspirators looking to take advantage of trusting partnerships.

Measuring value and financial results

Wary of making big investments and seeing little or no returns, some companies don’t see CPFR as an imperative for their enterprise right now. They feel there is no guarantee that they will see the financial results necessary to get company-wide buy-in.

Insufficient organization/ process enablement

CPFR’s process intensive nature and the need to synchronize changes between participants make internal cultures, organization, and processes important to the success of the collaboration.