Collaborative Planning, Forecasting, and Replenishment (CPFR)

Table of Contents

1 Introduction

2 Supply Chain Collaboration Initiatives
2.1 JIT II – A purchasing-related application
2.2 ECR, CR, and QR
2.3 Vendor Managed Inventory (VMI)

3 Collaborative Planning, Forecasting, and Replenishment
3.1 Definition
3.2 The nine-step process model
3.3 Revision of the original nine steps
3.4 Benefits and Challenges
3.5 The Value of CPFR

4 Insights from selected Case Studies
4.1 CPFR Pioneers: Wal-Mart and Warner-Lambert
4.2 European CPFR Insights: Henkel KGaA

5 Conclusion and Future Outlook

References

Table of Figures

Figure 1: Supply Chain with Retail Activities

Figure 2: VICS Original nine-step CPFR Process Model

Figure 3: Revised CPFR Model - Manufacturer and Retailer Tasks

Figure 4: Key Differences between Supply Chain Methods

Table of Tables

Table 1: Benefits of CPFR

Table 2: Typical CPFR Improvements

Table 3: Real World ROI Examples

Table 4: Results of Henkel's CPFR pilot

1 Introduction

Today’s business environment is facing more challenges than it has ever faced before. Whether it be globalization, shorter product life cycles, industry-wide consolidations, or the rapid advancements that have been made in information technology – all these factors have contributed to a steady increase in competitive pressure on domestic and foreign markets. In an economy that is increasingly becoming more volatile, organizations find it more difficult to achieve or maintain their competitive advantage. Moreover, this is exacerbated by a currently deteriorating U.S. economy, which, according to Federal Reserve’s influential Beige Book, is not expected to improve until late 2009 or early 2010 (BBC News, 2009).

A way of overcoming these challenges and establishing advantages has been through optimization of the supply chain. Initially, these improvement efforts were limited to areas within the organization, such as inventory, quality, or the manufacturing process itself. In the early nineties, however, when the American retail and consumer goods industry was experiencing stagnating revenues and, at the same time, rising costs, an increase in productivity was hardly to be realized. At that time, aggressive pricing policies were seen as the only approach to gain market share, but the consequences, mainly a negative impact on margins and profits, made it an unsustainable business practice (Seifert, 2003). This led the retail industry to recognize that real gains could only be realized through open cooperative partnerships between retailers and manufacturers.

As the supply chain improvement initiatives progressed, they began to include collaboration between the manufacturer, its suppliers, and clients. Although collaboration between trading partners was known as an efficient method for improving forecast accuracy, increasing service, and reducing costs, it was not until then that supply chain partners systematically devised processes that would move the information to where it could add value and, thereby, facilitate supply chain coordination. In the late nineties, the first guidelines for collaborative planning, forecasting, and replenishment (CPFR) were published, and the first pilot projects following these guidelines were completed in 1999 (Saha, 2004). Since then, collaboration has been referred to as the driving force behind effective supply chain management (Horvath, 2001).

One of the latest trends in supply chain management, CPFR is advertized by many authors, consultants, and software vendors as one of the most promising practices of collaboration so far (Ireland & Crum, 2005). The purpose of this paper is to examine the validity of this statement. In doing so, it will analyze the success potential associated with CPFR and evaluate the benefits and challenges that arise with its implementation.

The paper is organized as follows. While the first section serves as an introduction to CPFR, the second section will provide an overview of the predecessors to CPFR as well as an evaluation of their individual successes and how they influenced CPFR. In the third section, the CPFR process will be presented along with the benefits and barriers that can be expected with implementation. In addition, several pilot results will be examined to assess the real-world value of CPFR. The fourth section will then analyze two selected CPFR case studies in more detail to exemplify the benefits realized, the approaches chosen, and the lessons learned by the participating companies. The fifth section will conclude the paper, while providing an outlook for CPFR and identifying opportunities for further research.

2 Supply Chain Collaboration Initiatives

2.1 JIT II – A purchasing-related application

In the nineties, a series of collaboration initiatives preceded what is now called CPFR, the most promising practice so far, as some people believe (Attaran & Attaran, 2007). In their book JIT II Revolution in Buying & Selling, Dixon and Porter (1994) already describe a purchasing-related application of the JIT strategy with implications for marketers. Lance Dixon, purchasing executive for the BOSE Corporation, employed this strategy at BOSE to minimize purchasing costs as sales decreased. BOSE integrated personnel of its key suppliers into its planning and purchasing system, allowing them to perform essential functions and better anticipate BOSE’s changing needs. While there are multiple anecdotal examples of enhanced organizational performance resulting from JIT II implementations, this strategy was never adopted industry-wide, since many companies were not willing to engage in partnerships that required long-term commitment and an openness about sharing information with their vendors.

2.2 ECR, CR, and QR

Around the same time, 14 trade association sponsors in the United States created a group named “Efficient Consumer Response Movement” (ECR), which issued a report containing optimum business practices for the management of supply chains. The report suggested that by excelling in four core strategies, namely efficient promotions, replenishment, store assortment, and product introductions, supply chain benefits could be achieved. Development of a trust-based relationship between manufacturers and retailers and sharing of strategic information aimed at optimizing overall supply chain results (Barratt & Oliveira, 2001). Along with ECR, Continuous Replenishment (CR) is often mentioned as one of the steps towards implementation. Whereas the establishment of effective channel relationships drives ECR, CR is driven by actual withdrawals of inventory from a retailer warehouse. Instead of the retailer replenishing the inventory, the manufacturer or wholesaler replenishes the retailer based on point-of-sale (POS) data (Attaran & Attaran, 2007). While ECR and CR originated in the grocery industry, the American apparel industry, threatened by offshore competition, started a set of initiatives known as Quick Response (QR) already in the late 1980s. QR aimed at meeting the changing requirements of a competitive marketplace, promoting responsiveness to consumer demand through supply chain partnerships (Neale, Tomlin, & Willems, 2004). Although these practices were successful in creating the understanding that companies would from now on have to look outside of their own organization to achieve supply chain advantages, the aforementioned initiatives were only slowly adopted, mainly due to the same reasons that already prevented JIT II from being adopted on a large scale. In addition, there exist indications that the positive results, which were suggested by ECR proponents, were only seldom realized (Brown & Bukovinsky, 2001).

2.3 Vendor Managed Inventory (VMI)

One last practice needs to be mentioned here, since it significantly influenced CPFR. In the mid 1980s, Wal-Mart and Procter & Gamble popularized a system very similar to CR – Vendor Managed Inventory (VMI) or Supplier Managed Inventory (SMI). While there are similarities to CR, in a VMI program the supplier has more complete control over the determination of the distributor’s inventory levels and replenishment frequencies (Neale, Tomlin, & Willems, 2004). The main benefit of this system is that the supplier receives an undistorted demand signal (i.e., information on sales and inventory levels) from the retailer. In addition, the supplier or manufacturer, who then controls the entire cycle of sales and order forecasts, including order placement and replenishment, is able to pull the forecasting risk across all its customers. With demand being more predictable, the supplier is able to reduce its inventory levels and improve service to the retailer, and, in turn, the retailer is able to reduce its own inventory and increase service, which results in increased sales over the whole supply chain. Upon launch of the ECR movement, many companies predicted that VMI, if properly managed, would lead them to success in the four areas that were mentioned earlier. However, a significant amount of companies seems to have abandoned this practice and adopted other supply chain strategies (Katz M. , 2000), primarily because of VMI’s main weaknesses: an impaired visibility of the whole supply chain (Cooke, 1998) and the negligence of POS data as well as backroom inventory level data (Barratt & Oliveira, 2001).

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