Continuous Replenishment

Table of Content

1 Introduction

2 General Aspects of Continuous Replenishment

3 Definitions and explanation of framework

4 Possible models of CRP in practice

5 Benefits and Costs of CRP

6 Determinants of CRP outcome

7 Conclusion

8 Pictures and Graphs

9 Glossary

10 References

1 Introduction

This paper is to explain the concept of Continuous Replenishment (CR) which will be considered in a framework of an understanding of Supply Chain Management (SCM). A more extensive approach was chosen to ensure that the considerations contain the necessary information for a thorough understanding of the method.

Initially, the general background of Continuous Replenishment will be introduced, followed by the definitions of the necessary terms. Then the approach of CR will be analysed in its components. Having explained the general concept, further determinants to the model will be introduced, e.g. regarding the size and the conduct of the related enterprises. From there, the conclusion that the success of CR depends mostly on high level managerial support will be deduced. All abbreviations will be introduced within the text and can be looked up in the glossary at the end of this paper, pictures and graphs are displayed in the appendix.

2 General Aspects of Continuous Replenishment

Continuous Replenishment was established 1992 as a concept after a study on retailers initiated by the sector itself because of a current crisis (Harris et al, 1999, p. 25) which resulted from increasingly fierce competition, i.e. quicker product life cycles and increasing difficulties in matching inventories and customer needs (Daugherty et al, 1999, p. 63). This aspect can be applied globally, as global economic integration proceeds continuously in the course of the phenomenon of “globalization” (Nolan et al, 2002, p. 91) and competition occurs rather between supply chains than between enterprises (Towill and Christopher, 2002, p. 299). Additionally, order information by retailers may often not match real market demand (Smaros et al, 2003, p. 336), this process creates inefficiencies through too high or too low inventories while due to the processes explained before competition pressure makes efficient inventory more important and harder to achieve.

According to a survey of Daugherty et al from 1999, about two thirds of enterprises from a sample in the relevant market of the US integrated, albeit at differing levels, some kind of Automatic Replenishment System (ARS) which includes CR (See Daugherty et al, 1999, p. 67).

The intent of CR is to simultaneously decrease stock levels and enhance availability at all stages within a supply chain (EAN International, 2000, p. 4) and therefore enhance overall efficiency by substituting inventory with information and therefore cooperation. A more detailed consideration of the potential benefits of CR will follow in a later part. Generally speaking, the concept of CR aims to improve cooperation between a retailer and its supplier. It has to be considered that this needs to be regarded within the context of the entire distribution channel which is considered the flow of goods and information between initial producer and final consumer (Caputo et al, 1996, p. 64).

It can be summarized for the general view that CR is a result from enhanced competition, trying to improve cooperation and subsequently operational efficiency. From here, definitions and the framework in which to consider the concept of CRP will be examined.

3 Definitions and explanation of framework

As explained before, CR is part of the competition of supply chains. The overall concept to consider is that of Efficient Consumer Response (ECR) which is the wholistic, process-oriented managerial approach for a product from initial production to the Point Of Sale (POS) (Arnold et al, 2004, p. B 2 – 22). The customer and its needs as well as its resulting behaviour are the focus of this approach with the general principle to “buy what you sell”, seen from the retailers` perspectives (Ritter, 1998, p. 204), meaning that the purchase of inventories in induced though a sale to a customer.

The system of ECR consists of two components, supply chain management (SCM) and category management (CM), where the first component refers to logistic and the second to marketing aspects (Gleißner, 2002, p. 200).

For this paper the focus will be with the logistic component of ECR because, as will be shown later, CRP is a part of SCM. However, it should be noted that ECR refers mostly to branded goods (Caputo et al, 1996, p. 64) albeit not necessarily as a logistic model can be applied to any good fitting the requirements of the model.

SCM in turn can be defined as “the management of all activities associated with the flow and transformation of goods from raw materials stage (…) through the end user as well as the associated information flow” (Handfield et al, 1999 in Lo, 2005, p. 37). Within the understanding of the principle of ECR (“Buy what you sell”) SCM implies that enterprises cooperate beyond formal border lines of ownership in a process orientated cooperation chain. This key characteristic that differentiates ECR and its components from the classical logistical solution (without the depicted wholistic approach) is displayed in picture 1 and shows that the classical approach does not involve cooperation throughout the chain but only between the individual stages.

The logistic side of ECR, SCM, has several components.

These are: efficient administration, efficient operative logistics and efficient replenishment (Lo, 2005, p. 47). It should be noted that the categorization in this paper does not claim to be complete, there are other approaches to how ECR and SCM interact, e.g. as explained by Martin Green in 2004 and Prater et al in 2005. However, this papers intention is not to develop this discussion. For now, the understanding, that ECR consists of SCM and CM, while SCM contains three components of which one is efficient replenishment suffices.

CR in turn can be considered as part of efficient replenishment (Gleißner, 2002, p. 200).

Continuous Replenishment (CR) or a Continuous Replenishment Programme (CRP) can be defined as the involvement of the producer in the planning of orders and distribution based on sales data from retailers (Ritter, 1998, p. 206). Its intent is to cope with demand uncertainties by producing joint demand forecast for both producer and retailer (Ragunathan et al, 2001, p. 406).

Up to here it can be summarized that CR is part of SCM which in turn is next to CM one of the two components of the concept of ECR.

This understanding may differ from other perspectives in detail, the general aspect of CR as component to a general, wholistic management approach can be seen in all theoretical approaches to the relation between the concepts of CR and ECR as well as SCM. From here, we will introduce two general models of CRP.

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