Logistics and Supply Chain Management, 4th Edition

LOGISTIC S & SUPPLY CHAIN MANAGEMENT

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Collaborative planning, forecasting and

replenishment

Over the last 25 years or so, a number of breakthroughs have occurred in collab-

orative working in supply chains. Many of these initiatives have originated in the

retail sector but the ideas have universal application. The underpinning logic of all

these collaborative initiatives has been the idea that through sharing information

and by working together to create joint plans and forecasts, both the supply side

and the demand side of the supply chain can benefit.

Collaborative planning, forecasting and replenishment (CPFR) is the name

given to a partnership-based approach to managing the buyer/supplier interfaces

across the supply chain. The idea is a development of vendor managed inven-

tory (VMI). VMI is a process through which the supplier rather than the customer

manages the flow of product into the customer’s operations. This flow is driven

by frequent exchanges of information about the actual off-take or usage of the

product by the customer. With this information the supplier is able to take account

of current inventories at each level in the chain, as well as goods in transit, when

determining what quantity to ship and when to ship it. The supplier is in effect man-

aging the customer’s inventory on the customer’s behalf. In a VMI environment

there are no customer orders; instead the supplier makes decisions on shipping

quantities based upon the information it receives direct from the point-of-use or

the point-of-sale, or more usually from off-take data at the customer’s distribution

centre. The supplier can use this information to forecast future requirements and

hence to utilise their own production and logistics capacity better.

Under conventional replenishment systems both sides need to carry safety

stock as a buffer against the uncertainty that is inevitable when there is no visibil-

ity or exchange of information. With VMI the need to carry safety stock is greatly

reduced as a result of ‘substituting information for inventory’.

CPFR is in effect an extension of VMI in that it takes the idea of collaboration

amongst supply chain partners a step further. Underpinning CPFR is the creation

of an agreed framework for how information will be shared between partners and

how decisions on replenishment will be taken. A key element of CPFR is the gen-

eration of a joint forecast which is agreed and signed off by both the supplier and

the customer.

Figure 4.10 presents a nine-step model for the implementation of CPFR pro-

grammes developed by the US-based organisation VICS (Voluntary Inter-Industry

Commerce Standards).

Whilst many of the early CPFR pilot implementation exercises were in retail envi-

ronments, there is no doubt that these principles can be applied successfully in

most industries. A study by Accenture

1

highlights a number of significant benefits

that can flow from successful CPFR (see box below).

MATC H I N G SUP P LY AND DEMAND

95

Develop collaboration

agreement

Proposal

Retailer Supplier

Planning Forecasting Replenishment

Create joint

business plan

Campaign/seasonal

attributes

Identify sales forecast

exception

Campaign/seasonal

attributes

POS

Create sales forecast

Exception items

Resolve/collaborate on

sales forecast

exception

Exception items

POS

Create grocery store

sales forecast

Create order forecast

Supplier

Delivery

Central Order

Proposal

1

2

3

4

5

6

7

8 9

Figure 4.10 VICS-ECR nine-step CPFR model

Source: ECR Europe/Accenture, European CPFR Insights, 2002

LOGISTIC S & SUPPLY CHAIN MANAGEMENT

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Benefits of CPFR Until now, most CPFR initiatives focused on reducing variable

costs, such as decreasing inventory levels. However, there are further benefits to be

gained for companies that integrate CPFR into their standard operational procedure

and scale to critical mass (see Figure 4.11).



Reduce capital investment

Companies reaching critical mass with their CPFR initiatives may also harvest

additional benefits from a reduction in capital investment. Reducing warehousing

capacity is possible for the collaboration partners in the long term through the

increased supply chain visibility and a reduction in uncertainty. Increased forecast

accuracy alongside collaborative long-term planning reduces the need to

build

up inventories or production capacity to cover unexpected changes in demand.

Reduce

capital

invested

Optimise

production

Reduce

storage

capacity

• Higher utilisation of production

capacity

• Greater supply chain visibility

allows inventory and storage

capacity reduction

Increase

revenue

Better

availability

Improved

consumer

satisfaction

• Reduced out-of-stocks

• Improved consumer

satisfaction ratings

Decrease

costs

Benefits

Wastage

Inventory

Transportation

cost

Overtime

• 20–25% reduction inventory

carrying cost

• Improved forecast accuracy

• 50% reduction in unplanned

overtime

• Up to 500% ROI on promotions

• Reduced excess and obsolete

inventory

• Reduction in lead time

Figure 4.11