COMMENT: Advantage of CPFR in dyadic supply chains
Collaborative planning, forecasting and replenishment (CPFR) is a business practice that combines the operations of partners in terms of planning and the fulfilment of customer demand. CPFR undertakes a bridge role among partners’ sales and marketing, demand planning, and supply operations to enhance product availability and to reduce inventory and logistics costs.
The history of CPFR dates back to the 1990s, when Wal-Mart and Warner-Lambert in the USA incorporated three sub-stages of planning, forecasting, and replenishment in a joint project. The CPFR framework appeals to buyer-supplier relations in multiple industries, such as retail, textiles, pharmaceutical, consumer goods, and food and beverages. Since CPFR is an idiosyncratic practice between two companies, it is a key driver of gaining a competitive advantage through improved forecast accuracy, aligned supply and demand operations, and met consumer demand in a timely manner.
Hundreds of companies have executed CPFR across the world, and they benefited from CPFR with inventory reduction of 10-40% and increased product availability at stores by 2-8%. Partnerships between Unilever and Sainsbury’s, Nabisco and Wegmans, Wal-Mart and Sara Lee Branded Apparel, as well as Kraft and Sainsbury’s along with Lowes Home Improvement and Whirlpool are only a number of examples from practice.
For instance, Wal-Mart and Sara Lee Branded Apparel collaboration led to increased sales by 45% and market share by 12% via CPFR while the Nabisco and Wegmans partnership led to sales growth by 32% and inventory reduction by 18%. Implementation of CPFR in practice consists of three processes of planning, forecasting, and replenishment.
These processes involve four important activities to improve the collaborative performance of partners:
• Strategy & Planning: Identify baseline rules for collaboration, and select product or product-groups merchandised by developing a joint business plan for a particular period
• Demand & Supply Management: Share point-of-sales data and additional sources to fulfil the forecasting and shipment requirements over the period
• Execution: Set orders, share delivery plans and consider the number of products in stock and on retail shelves. Then, record sales and make payment
• Analysis: Track the joint business plan in comparison with the execution progress made. Then, aggregate the results to measure performance parameters. Accordingly, share perceptions to improve the previously developed plan for continuous improvement in collaboration
Steps of CPFR:
The CPFR processes of planning, forecasting, and replenishment link with each other, and each process needs to be adopted by partners to gain a competitive advantage in supply chains. This achievement relies on the nine consecutive steps of CPFR, in which I summarise below;
STEP 1: Develop a collaboration agreement
First step of CPFR is to establish a common rationale for cooperation, trust and availability of sources between partners. Identifying sustainable and measurable objectives will be a significant part of agreement to evaluate collaboration performance. Whilst extent of collaboration and responsibilities for both parties are identified, types of information that will be exchanged during collaboration needs clarification. For instance, both parties need to know how frequently and in which way information sharing will be conducted. Clarifying acceptable response time before the request for information, and what forecasting methods are the base of forecasting will bring further transparency to partners’ relation.
Structure of ordering and delivery commitments are also addressed for efficient order management and delivery operations while sources that will be available through CPFR process are identified (e.g. time and number of employees devoted to collaboration). In addition to partners’ agreement to continuously improve operations, potential disagreements should be solved by consulting pre-established rules. When both parties align on the collaboration rules, front-end agreement is published, with continuously updating objectives and reviewing performance.
STEP 2: Create a joint business plan
Corporate strategies are engaged in a single business plan for CPFR. The support of top-management is crucial to pave the way for associating partners’ different strategies. Considering the experience of category management and business planning to identify roles and objectives in collaboration will help partners, whilst requirements of continuous information exchange process clearly addressed in the business plan (e.g. minimum order, required lead-time for orders, order frequency and timing, shipment plan, etc.).
STEP 3: Create sales forecasts
Supplier employs buyer’s point-of-sales data and promotional plan to generate sales forecasts in addition to historical sales data. This not only improves the reliability of forecasts but also ease partners’ agreement on forecasts.
STEP 4: Identify exceptions for sales forecasts
Partners define products that were accepted as exceptions to sales forecasts to have an agreement on forecasts. It is important to identify exception criteria for each product in STEP 1.
STEP 5: Resolve / collaborate on exception items
Exceptions are jointly identified in an effective time period for stronger forecasts
STEP 6: Create order forecasts
Buyer’s point-of-sales data is linked to supplier’s inventory strategy for separately estimated order forecasts. Order quantity needs to be estimated based on “inventory target per product” and/or “the destination of product”. Partners then respond to the questions of “how much advance notice is necessary to transport the product to its destination?” and “does the order information reflect temporal differences?". Applying short-term forecasts for actual orders, and long-term forecasts for tracking the joint business plan will provide better visibility during order management.
STEP 7: Identify exceptions for order forecasts
Partners then identify the products entailing exceptions to ease agreement on a single order forecast.
STEP 8: Resolve / collaborate on exception items
Efficient communication is key for commonly identifying and clarifying exceptions in a timely manner. While potential changes are reflected to forecast, the speed of information sharing between partners needs to be enhanced to make timely decisions for a reliable order forecast.
STEP 9: Generate Order
Order generation can be managed by either parties. However, the process needs to be managed based on partners’ forecasting skills, available information and access to information exchanged via appropriate IT systems. Finally, partner’s collaboratively agreed order forecast is considered as the order of the buyer.
It should not be forgotten that through the implementation of CPFR, partners should follow a same vision determined by partners’ top-management. Different organisational cultures are likely to harm agreement on a single business plan. Partners may also confront difficulties connected with building trust in and commitment to each other, which in turn prevent them from proceeding with their agreements in CPFR. Building trust and implementing long-term collaborations rely heavily upon their effective information sharing and continuous willingness given to build a positive memory/experience in the partner’s mind.
About the author: Can is responsible for demand planning operations at Transmed Overseas