CPFR: Considering the Options, Advantages and Pitfalls

A Collaborative Planning, Forecasting and Replenishment primer


Early-stage supply chain models are characterized by low levels of both internal and external collaboration, the use of simple tools like spreadsheets for developing forecasts and ad hoc processes for developing inventory targets and replenishment plans. Organizations with mature supply chains use advanced planning software systems, have well-defined processes, employ cross-functional teams and collaborate at some level with suppliers and/or customers. These late-stage organizations are often characterized by robust processes for internal collaboration, including consensus-based forecasting that utilizes input from sales, marketing and supply chain operational groups. Such practices are often part of a well-defined sales and operations planning (S&OP) process, which is also characteristic of late-stage supply chains.

Key Financial Benefits of CPFR

  • Forecast accuracy improvements
  • Smoother ordering patterns
  • Increased sales revenues
  • Higher order fill rates
  • Decrease in coupling inventory levels (i.e., safety stock)
  • Reduction in cost of goods sold (COGS) based on better insight into end consumer demand, more accurate forecasts, less disruption in/more stable production schedules

The Supply-Chain Council, a supply chain advisory organization comprised of individuals from various voluntary member companies, publishes its Supply-Chain Operations Reference-model (SCOR), which many consider a de facto industry model for supply chain organizations. SCOR is a helpful framework for identifying best practices, designing supply chain processes and selecting appropriate software solutions. SCOR can also be used to provide a roadmap for continuous improvement by helping you benchmark how your own supply chain practices and processes measure up along the maturity continuum.

Decision-makers with early-stage supply chain organizations will face an uphill climb if they hope to engage in CPFR. Success typically requires advanced planning systems, proven ability to manage internal collaboration and similar characteristics of late-stage supply chains. To save time, money and resources, all these attributes should be in place and entrenched within your organization before you begin pursuing or considering external collaboration opportunities.

Scale or Critical Mass

Despite the infrastructure requirements needed to sustain partner operations, CPFR offers the promise of distinct, measurable financial returns that can be quite appealing. Frequently cited benefits include increased sales due to improved service levels and responsiveness to promoted demand, reductions in manufacturing and distribution costs due to more stable forecasts, and reduced inventory based on the tighter coupling of trading partners' supply chains.

Tightly woven supply chains reduce the need for safety stock, also called coupling inventory, which is used to hedge against variability in both demand and supply. There are also intangible benefits to be gained from effective CPFR alliances, principally improvements in relations between trading partners. For example, partners that can prove their capabilities to consistently meet mutually agreed goals for their CPFR customers are likely to receive preferences in terms of shelf space allocation or distribution. (See sidebar "Key Financial Benefits of CPFR.")

Of course, offsetting any potential rewards that may arise from CPFR is the corresponding set of financial costs that may be necessary to establish and maintain such an arrangement. If your goal is to develop a CPFR initiative primarily to achieve greater forecast accuracy, your effort won't be economically feasible if it isn't scalable enough to yield significant financial savings, at least equal to an appreciable percentage of one trading partners' total revenue. Many business leaders presume incorrectly that they can overcome the requirement of CPFR to provide scalable savings simply by replicating their CPFR process among numerous trading partners. This expectation will likely fail — in part because of one-time start-up costs, but more likely because of customizations that are necessary to accommodate each additional trading partner.

For this reason, CPFR is most likely viable only for your top-tier trading partners. For your smaller customers or suppliers, it makes better economic sense to manage relationships based on more conventional, order-based transactional processes.

Other Considerations

While CPFR may seem to be a good bet, based on the size of your business and the strength of your existing infrastructure, it may not be well-suited to your industry. Highly promoted products, new products and high-fashion products (seasonal items or those with a very short lifecycle) are all good candidates for CPFR.

  • Enhance Your Experience.

    When you register for SDCExec.com you stay connected to the pulse of the industry by signing up for topic-based e-newsletters and information. Registering also allows you to quickly comment on content and request more infomation.

Already have an account? Click here to Log in.

Enhance Your Experience.

When you register for SDCExec.com you stay connected to the pulse of the industry by signing up for topic-based e-newsletters and information. Registering also allows you to quickly comment on content and request more infomation.

OR

Complete the registration form.

Required
Required
Required
Required
Required
Required
Required
Required
Required
Required
Required