Tempe, AZ February 5, 2003 Enterprises that have not adopted collaborative planning, forecasting and replenishment (CPFR) by late 2004 will be at a competitive disadvantage, argues a new report from technology consultancy Yankee Group.
But while Yankee asserted that the benefits of CPFR are clear, including reduced inventory, increased sales and shorter cycle times, the consultancy warned that enterprises must follow a structured process for implementing demand collaboration with their supply chain partners.
The Yankee report, authored by Michael Dominy, focuses on a joint CPFR implementation by retailer Sears, Roebuck and Co. and tire manufacturer Michelin to improve demand forecasting, replenishment and inventory management.
Like many retailers and manufacturers, Sears and Michelin once carried high levels of inventory and spent considerable amounts on distribution and transportation. Uncoordinated plans and inaccurate forecasts led to inefficiencies in the combined Michelin-Sears supply chain.
Both companies had exchanged information for years; for example, Michelin shared production plans and sales forecasts with Sears. But the companies lacked a formal process to ensure that all functions incorporated relevant information into operating plans. Moreover, a web of more than 31 systems tangled the flow of information. Inventory and demand plans often lacked information about promotions, causing logistics and manufacturing to scramble when demand fluctuated. Michelin, lacking visibility into Sears' demand forecasts, needed to carry extra inventory to maintain high service levels.
Dominy wrote that, beginning in November 2001, Sears and Michelin established a structured collaborative planning program to combat inventory excesses and shortages caused by inaccurate forecasting. The companies agreed to embrace the nine-step Voluntary Interindustry Commerce Standard (VICS) CPFR process. They agreed to use a hosted collaboration solution from GlobalNetXchange (GNX), a retail-focused exchange supported by software from Manugistics Group.
Members of the information technology and supply chain departments at Michelin and Sears worked with GNX to develop and implement the CPFR solution. Michelin's account team, which managed the relationship between Michelin and Sears, also played a key role.
The solution created an online collaboration area where both companies could view customer demand and agree on sales forecasts. After Michelin and Sears agreed, the sales forecast was fed into Sears' planning systems. Next, the demand information flowed into Michelin's distribution systems. Lastly, Michelin's manufacturing planning systems received the demand information. The companies hoped to reduce inventories and improve order fulfillment percentages by using customer demand to drive the planning and replenishment processes.
The CPFR implementation included four stages: First, GNX trained the cross-functional team and provided advice regarding best practices in CPFR. (GNX has 20 companies using its exchange for CPFR.) Second, the IT departments mapped information flows and documented data formats for extraction, including sales history, forecasts and inventory. Third, Sears and Michelin began collaborating on private-label tire sales in January 2002, and, finally, the companies worked throughout 2002 to expand CPFR to include all Michelin products.
As a result of the project, Dominy wrote that Sears and Michelin have enjoyed several supply chain benefits. Sears' distribution center-level inventory dropped by 9.5 percent, while Michelin gained advanced visibility into promotions and other demand-changing events, enabling the company to change operating schedules more effectively. Monthly sales, inventory and marketing meetings between Sears and Michelin improved since the meetings are now fact-based and leverage a structured collaborative process.
The Yankee report cited key success factors for the Sears-Michelin implementation, including securing buy-in from all affected departments at both companies. Both the IT and supply chain operations departments at Sears and Michelin contributed to the success of the CPFR initiative. IT provided the data feeds and operations modified behaviors, business practices and processes.
In addition, establishing trust between the manufacturer and retailer before initiating CPFR was critical. Dominy noted that implementing CPFR requires partners to share a great deal of information, such as sales history, inventory levels, and promotional plans. Without mutual trust, the initiative would have been extremely difficult, if not impossible, to implement.
Finally, the two companies developed a front-end agreement that aligned everybody around business goals. The front-end agreement, step two of the CPFR process, documented the objectives of the program, and it established a benefit-tracking process and outlined whether (and how) both companies would benefit from the collaboration.
Dominy offered several "lessons learned" from the Sears-Michelin project, including that collaboration is a long-term initiative that involves significant process change, and that CPFR must match the supply chain model of a particular company and industry so that the collaboration meets the unique business requirements of the trading partners involved.
Yankee also urged companies to use the nine-step CPFR process as a framework. "Enterprises must follow a structured process for instituting inter-enterprise demand collaboration," Dominy wrote. "The nine-step CPFR process works best because it is standards-based and comprehensive."
The analyst added, however, that enterprises must accommodate unique aspects of their collaborative relationships within the context of the overall CPFR process. "In some instances, partners will want to define additional process flows and rules," Dominy noted.
In conclusion, Dominy argued that now is the time to implement and ramp-up CPFR. "The benefits are clear inventory goes down, sales increase and cycle times shrink," the analyst wrote. "CPFR enables companies to improve existing supply chains and discover ways to plan and replenish products more effectively. Enterprises not embracing collaborative demand planning will be at a cost and service disadvantage by late 2004."