CPFR: Moving Beyond VMI

Bobbin, May, 2000 by Matthew Katz, Amy Klaris, Caitlin Scorpio

Collaborative planning, forecasting and replenishment (CPFR) is an attractive initiative for players at all points all points in the sewn products supply complex.

In the past, manufacturers designed and made products and retailers distributed those products, typically with little communication between one another. But today relationships are no longer defined by age-old labels and standard linear flow Many retailers develop products and many manufacturers operate stores. In short, the traditional supply chain model has evolved into the concept of the supply complex.

Empowered consumers are driving this supply complex evolution, by demanding greater value, better new products and more individualization. And the survivors in this challenging new environment will be those that have developed multifunctional networks for communication and collaboration.

Basic retailer-supplier cooperative strategies, such as vendor-managed inventory (VMI), are limited in this environment. While VMI was a thought-leading concept in its day, retailers and vendors clamored for more. VMI has an inherent flaw: It is a one-way process. Vendors pull information from retailers -- information that often fails to consider last minute changes driven by promotions, multiple inventory sources and seasonality. Another concern is that warehouse withdrawal is the primary focus of VMI planning. This high-level forecasting results in store-level stock-outs among retailers and dissatisfied consumers. Among the retailers who have pulled the plug on VMI programs, many cited a lack of active communication, which caused hiccups in the supply chain.

The push/pull aspect of VMI proved inadequate to handle the varying demands of retailers, and VMI vendors often found themselves on the losing end of an inventory imbalance. One probable cause of these imbalances is the absence of a shared business plan between retailer and supplier.

Now it is time to look beyond basic retailer-supplier cooperative strategies to a process that takes supply complex relationship management to a new level -- one of shared action and responsibility between retailer and supplier.

What is CPFR?

Collaborative planning, forecasting and replenishment (CPFR) is a supply chain initiative that can result in a simultaneous reduction in inventory levels and an increase in sales for both retailers and suppliers. Using similar principles as VMI, CPFR can be thought of as a super-evolved version of that industry initiative. VMI began as a way for retailers to reduce the cost of planning and forecasting and provided suppliers with more visibility to consumer demand. Suppliers were given the responsibility of maintaining appropriate inventory levels at a retailer's warehouse and often stores, in an effort to get the right products to the right locations at the right times. In some cases, VMI initiatives resulted in sales increases and improved service. But as noted, VMI was not without its flaws.

Enter CPFR, which successfully addresses the main shortcomings of VMI. CPFR can be simply defined as the use of available technology to achieve a well-defined business philosophy. The CPFR process begins with collaboration. Traditionally, suppliers and retailers developed their own independent forecasts. Using CPFR, retailers and suppliers submit their own individual forecasts, then both evolve into one shared, agreed-upon forecast. The joint forecast is created through the sharing of point-of-sale (POS) information, existing inventory, stock-out information, promotions and supplier production constraints.

The business philosophy underlying CPFR requires its participants to:

* Obtain strong, sustained, highly visible sponsorship and internal commitment;

* Develop a solid forecasting approach with assigned roles and responsibilities; and

* Match cycle changes to production and order quantities.

Key Success Drivers

1 The success of a CPFR initiative depends on strong, sustained, highly visible sponsorship. In order to cre and implement a successful CPFR process, the management team must be ready to commit both personnel and resources. Management must be a strong sponsor of the effort and ensure that those involved have other responsibilities at least partially removed in order to focus on the CPFR effort. Having dedicated resources assigned to CPFR will ensure smoother implementation and better results. Additionally, as roles and responsibilities in the organization will change, management must make its commitment to CPFR known, thereby instilling the same commitment throughout the organization. CPFR demands a solid forecasting

2 CPFR demands a solid forecasting approach. Ensuring that forecasts are accurate and up to date will help to avoid unnecessary discrepancies and allow the parties to focus on core issues identified. Simply having a forecast in place, however, does not guarantee success. The organizational structure of the relevant departments may need to change in order to meet the requirements of collaboration. The organization must align roles, responsibilities, measurements and incentives to have successful communication and the ability to respond to their needs.