Going toward a better production by CPFR

Going toward a better production by CPFR

Seyed-Mahmoud Aghazadeh

ABSTRACT

This paper will show the CPFR (Collaborative, Planning, Forecasting, and Replenishment) concept and how it benefits companies in present day America. We will test the effectiveness of CPFR by performing analyses of several case studies involving suppliers and retailers that have employed the supply chain management technique

1. INTRODUCTION

CPFR is the initial step in a multi-step process towards full “Value Chain Collaboration” and competitive Transformation. CPFR is the joint planning between retailers and their supplierson the key elements of the demand and supply chain processes. 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. CPFR is a core transformational strategy, which takes business process, people and technology to a higher level of performance by promoting openness, information sharing, data exchange, visibility and joint decisions. The goal of CPFR is total value chain collaboration among all trading partners who touch, or have an effect on, the value of the product to the end-consumer.

2. THE PHASES OF CPFR PROCESS MODEL

The CPFR process model is divided into 9 phases. These phases are:

2.1 STEP 1: DEVELOP FRONT-END AGREEMENT

The retailer/distributor and the manufacturer in this step set the guidelines and rules for the pilot in the making. This is a beginning agreement of brainstorming ideas of collaboration. Objectives, resources and confidentiality agreements are all discussed in these initial plans. The agreement includes these guidelines:

* Develop CPFR Agreement & Statement

* Determine CPFR Goals & Objectives

* Discuss Competencies Resources & Systems

* Define Collaboration Points & Responsible Business Functions

* Determine Information Sharing Needs

* Define Service & Ordering Commitments

* Determine Resource Involvement & Commitments

* Determine How to Resolve CPFR Disagreements

* Determine Review Cycle for the CPFR Agreement

After all of these guidelines are reviewed, the Front End Agreement can be published.

2.2 STEP 2: CREATE JOINT BUSINESS PLAN

In this step, the collaborating companies discuss current strategies etc. From the meetings between the company’s new strategies plans etc. are established. Communication is very important when it comes to collaboration and creating a joint business plan. Creating a joint business plan follows these inputs:

I. Identify Corporate Strategies(Develop Partnership Strategy)

II. Develop Category Roles, Objectives, Goals

III. Develop Joint Category Strategies/Tactics

IV. Develop Item Management Profile

V. Develop Business Plans

VI. Agree to Joint Business Plan

2.3 STEP 3: CREATE SALES FORECAST

Using Point of Sale (POS) data and many types of information a sales forecast is created that follows along the joint business plan.

I. Analyze Current Joint Business Plan

II. Analyze Causal Information

III. Collect & Analyze Point of Sale Data

IV. Identify Planned Events

V. Generate Sales Forecast

2.4 STEP 4: IDENTIFY EXCEPTIONS FOR SALES FORECAST

The exceptions for the sales forecast are created in the front-end agreement. This is usually just a list of exception items.

I. Retrieve Exception Criteria Established by the Front End Agreement

II. Identify Distributor and Manufacturer Changes/Updates

III. Compare Order Forecast to Supply/Capacity/Determine Impact on Sales Forecast and Apply Constraints

IV. Item Value Outside of Limits Set by Exception Criteria Value?

If Yes is the answer, Item identified as an Exception Item.

If No is the answer, Item not identified as an Exception Item.

2.5 STEP 5: RESOLVE/COLLABORATE ON EXCEPTION ITEMS

The exceptions for sales forecast lists are crucial for this next step. After the item is identified as an exception item, the following should be completed:

I. Retrieve Exception Items & Decision Support Data

II. Select Desired Exception Criteria/Values

III. Research Exceptions Using Calendar and Support Information

IV. Does Research Yield Forecast Changes/Resolve Exceptions?

If No, Heighten Collaboration

If Yes, Submit Changes to Sales Forecast

2.6 STEP 6: CREATE ORDER FORECAST

All information is gathered together in this step to create an order forecast. The forecast is generated in this order:

I. Provide Sales Forecast

II. Provide POS Data

III. Provide Order Forecast Impact Events

IV. Provide Inventory Strategies/Seasonality’s

V. Provide Current Inventory Position

VI. Analyze/Provide Manufacturer’s Historical Demand & Shipments

VII. Analyze/Provide Capacity Limitations

VIII. Retrieve Additional Item Management Data

IX. Gather Order Filling/Shipment Execution Data

X. Gather Exception Resolution Data

XI. Create Order Forecast

2.7 STEP 7: IDENTIFY EXCEPTIONS FOR ORDER FORECAST

Identification of exception items that fall outside the order forecast. The process starts like the following:

I. Retrieve Exception Criteria

II. Identify Distributor/Manufacturer Changes Updates

III. Compare Order Forecast to Supply/Capacity and Determine Impact on Order Forecast and Apply Constraints

IV. Item Value Outside of Limits Set by Exception Criteria?

If Yes is the answer, Item identified as an Exception item.

If No is the answer, Item not identified as an Exception item.

2.8 STEP 8: RESOLVE/COLLABORATE ON EXCEPTION ITEMS

The exceptions for order forecast lists are crucial for this next step. This step is just like step 5, but instead of sales forecasts, order forecasts are the concern. After the item is identified as an exception item, the following should be accomplished:

V. Retrieve Exception Items & Decision Support Data

VI. Select Desired Exception Criteria/Values

VII. Research Exceptions Using Calendar and Support Information

VIII. Does Research Yield Forecast Changes/Resolve Exceptions?

If No, Heighten Collaboration

If Yes, Submit Changes to Order Forecast

2.9 STEP 9: ORDER GENERATION

After all guidelines and all responsibilities have been met, order generation takes place. The manufacturer or the distributor is in charge of this task. The process is as follows:

I. Extract Frozen Forecast based on Time Fence

II. Deploy Frozen Forecast to Order Generation

III. Create Order

IV. Transmit Order Acknowledgement

3. THE BENEFITS OF CPFR

CPFR benefits retailers, their suppliers, and their customers. The advantages of CPFR are countless, some of the major benefits are: decreased transportation costs, reduction in cycle times, decrease in forecast errors, reduction of inventory, increase in fill rates, reduction in stock outs, increased merchandise turns, improvement in customer service levels, increased revenues. Trading partners can collaborate on business planning, merchandising direction, promotional planning, and new-item/category development (Ireland, R. and Bruce, R., 2000). A strong collaborative merchandising-planning program can be as followed:

Focuses team goals and objectives on sales, revenue, margin, and profit development.

* Creates a team structure and alignment that reflects cross-functional members from merchandising, finance, supply chain management, inventory management, distribution/logistics, and transportation.

* Measures and tracks team performance functionally and by total company/account.

* incorporates team performance into each member’s performance-evaluation process.

4. CASE STUDIES

Any collaboration between two companies uses this generic CPFR model for the most part. Some companies feel a 9-Step process model as too tedious and unnecessary, instead of nine steps, only four are chosen and used. These four include creation of a front-end agreement, collaborative demand forecasting, order forecasting, and long-range unconstrained forecasting in support of a sales plan. Both techniques have been considered successful.

4.1 WEGMANS FOOD MARKETS INC. AND NABISCO

In this case, the supplier, Nabisco, is an enormous company that in the year 2000 was acquired by Kraft Foods Inc. To give you an idea of the size of Kraft, here are some of their numbers. In the year 2002 Kraft’s “Net Revenue was $7,216,000,000, and their Cost of Sales was $4,245,000,000, resulting in a gross profit of $2,971,000,000” (Kraft, 2002). The retailer in this example is also a company of significant size. Wegmans’ currently operates 65 supermarkets in New York, Pennsylvania and New Jersey with plans for new stores in Maryland and Virginia. Wegmans has always embraced new technologies and the opportunity for improvement. “Wegmans was one of the first supermarkets to introduce electronic discounts in 1990 and bar-code scanning, way back in 1974” (Wegmans, 2002). Accordingly, the supermarket chain was willing to invest time and money into CPFR because of its promising benefits. The pilot used was a 4-step process of collaboration. First step was to train the employees and participants about CPFR. This phase is where the front-end agreement is established. This defines the pilot’s roles, responsibilities, and timeliness. In Step 2 Wegmans and Nabisco prepared the joint business plan for the pilot. This involves:

Identify categories susceptible to major competitive erosion.

* Select strategic categories to defend.

* Understand competitive trade marketing strategies.

* Review viability of current category trade marketing plans.

* Consider alternative trade marketing category solutions.

After this criterion was analyzed, the 22 Planters nut items were chosen. Now in Step 3 the Sales and Order Forecast Generation take part. Each manager from each company met and developed a sales forecast. This forecast was a base forecast and a promotional one. Finally, Step 4 is the Execution of Shipments. Wegmans and Nabisco used collaboration software to help with the monitoring of the pilot. Nabisco was one of the first companies to show interest in CPFR. Nabisco was so enthused with CPFR in fact, that in 1998 they decided to perform a test pilot. This pilot “involved stores in the Wegmans grocery chain and a Nabisco Distribution center. The two companies shared data on 22 items. Manugistics furnished the application and hosted the server where the data was stored. The Nabisco sales force developed a forecast for the items, which was then compared with Wegmans’ own forecast for its stores” (Kakkar, S., 2002). The pilot was successful. “Nabisco’s sales of 22 Planters nut products grew by 31%, while Wegmans’ dollar sales of nuts increased by 16%, with a surprising 18% decrease in inventory” (Kakkar, S., 2002). Senior Editor of the web site storesonline.com Susan Reda reported the following on the collaboration between Wegmans and Nabisco. “Wegman’s was successful in increasing private label nut sales by 16.3 percent compared to the rest of the market, which declined by 7.2 percent. Sales of Nabisco’s Planters Nuts were up 53.9 percent while the rest of the market went down 9.4 percent” (storesonline, 2002). This is an excellent example of how Collaborative Planning Forecasting and Replenishment benefits both the supplier and the retailer. This is also a good example of how CPFR has already been effective, and how, if the technique was applied across the board, it could be even more effective. If Wegmans was to utilize CPFR with all of its suppliers, it could potentially increase its sales on all of its products while at the same cutting cost by decreasing inventory. If Kraft, with their enormous production capacity, were to adopt CPFR with each company they supplying for all of the products they produce, the financial rewards would be staggering. That same “31% sales increase” witnessed by Planters in the test pilot would, in accordance with Kraft’s 2002 numbers, result in an increase of $2,236,960,000 in Net Revenue.

4.2 ACE HARDWARE AND MANCO INC.

Ace Hardware, a $2.9 billion dollar company teamed up with Manco Inc. using the CPFR guidelines. This pilot has increased sales by 12% (that’s $200 Million) for the products involved in the pilot. Scott Smith, who leads Ace’s CPFR program states, “By following the CPFR guidelines to define parameters that make the best economic sense for both parties and manage by exception, we’ve removed the blind spots in our demand chain so everyone can see what the customer is saying. By creating a win-win demand chain, we’ve built incredible momentum in our program” (computerworld.com). Today, this billion-dollar hardware giant has 51 vendors using the CPFR collaboration model. The pilot Ace Hardware used is the four-step CPFR process model (JDA, 2002).

1. Begins with a front-end agreement to establish goals (sales, turns, in-stock levels and resources)

2. Sales data is gathered to develop a sales forecast

3. Now either side can now point out any exceptions (exceptions list)

4. Finally, the forecast is generated.

Greg Lenard is the director of inventory control for Ace Hardware and states, “It requires a deep commitment to the process. It’s very tedious, but the results can be magnificent” (JDA, 2002).

Benefits of using CPFR pilot for Ace Hardware with Manco:

[check] Improved forecast accuracy (less than 10 percent off actual)

[check] Average order weight increase (number of pallets)

[check] Freight cost dropped

[check] Improved inventory turns and order fill rates

[check] In 2001, suppliers saw 10% increase in sales

Since the Manco pilot with Ace Hardware was so successful, 14 other suppliers are now in the process of starting CPFR pilots with Ace Hardware.

4.3 TRUE VALUE AND DELTA FAUCET

Implementation of CPFR between True Value, a billion-dollar hardware retailer, and Delta Faucet was deemed a success. The technique was used in True Value’s 18 distribution centers. Since the use of the replenishment software called E3TRIM, True Value reduced inventory levels from $700 to $300 million and at the same time improved service levels. The supplier partners involved, which included 1,700 participants, inventory positions on products lines improved 11%, doubled the corporate average on inventory turn performance, reduced lost sales by 22% and overstocks by 23% and improved sales by 10-20% (logistics, 2002). True Value’s director of the supply chain states, “CPFR helps us gain more value out of our processes by working at a new level with our vendors” (logistics, 2002).

4.4 KIMBERLY CLARK AND KMART

The collaboration between Kmart and Kimberly Clark proved to be a proof positive partnership aiding in the use of CPFR. Kmart’s CPFR project started around the end of 1998, giving suppliers a big opportunity in its demand forecast, strengthening order fulfillment by improving both Kmart and its supplier’s forecasts, and reducing its excess inventory. Soon after in the start of 1999, Kimberly-Clark joined alongside Kmart to become a part of Kmart’s CPFR project. To begin the CPFR-based collaboration, the aid of the Internet-based software called Syncra Ct. enabled its trading partners to input existing forecasts, and to promote and replenish plans in order to compare reports to see if any changes in existing data occurred. Before CPFR’S project took off, Kmart and its suppliers originally shared data by sending spreadsheets back and forth. Kmart spent a year putting this operation into affect all to see if CPFR could adapt to the ongoing changes in retail markets. CPFR quickly responded to these changes, below are the benefits CPFR brought (CPFR, 2002):

* The improved use of counter stock for its Depend product line, increasing three-piece in-stock rate from 86.5% to 93.4% and a 14% increase in retail sales with no net change in inventory turns.

* The focus on specific business goals and retail improved in its Front-End Agreement.

* Locating and correcting any promotional event calendar discrepancies to avoid significant production and deployment cost.

* Improved seasonal forecasting

* In-stock improved through the adjustment of the stock levels, getting store-level sales forecast to match similar stock code sales patterns, and forecasting models and profiles based upon detailed sales analysis. Overall, to better the preliminary retail sales forecasts as well as ordering forecasts for new products.

* CPFR revised Kmart’s operational plans to improve in-stock percentages and lowered promotional quantities to improve inventory turns and promotional analysis.

* It located specific stores with significant overstocks for recounts and to replenish any parameter changes.

CPFR improved the quality and partnership between Kmart and Kimberly-Clark. Trust and commitment on both sides have to be in effect for CPFR to work. Both must understand one another’s goals and not waste any time going back and forth fixing up the supply chain.

4.5 HENKEL AND EROSKI

Implementation of the CPFR process model does not just happen in the United States. A CPFR pilot took place in Spain when two European companies collaborated. The companies are Henkel and Eroski. Henkel is a Germany headquartered founded in 1876 company having 57,000 employees with subsidiaries in 70 countries. Henkel is a worldwide manufacturer of adhesive, consumer brand name products, and industrial specialties. Henkel produces 10,000 products including cosmetics, detergents, hygiene, and chemical products. Eroski is a food retailer giant in Spain founded in 1969 responsible for 44 hypermarkets, 800 Consume supermarkets and 2023 Charter mini-markets. Eroski is Spain’s largest food distributor.

Problems with these companies included:

* Out-of-stocks

* Customer service

* Punctuality of deliveries

* Lack of visibility

* Reduction of order cycle

Most manufacturers at the time the CPFR pilot was put in place for Henkel were under pressure. Henkel showed an 11.5% increase in profits. In just the first 5 months, from October 1999-March 2000 forecast errors were down 50%. The forecast rate error overall was less than 20%. The company also showed:

* 98% customer service level

* 5 days of supply

* 2% stock outs

* better than 85% forecast reliability

* 98% truck fill rates

* 99% pallet fills

4.6 WAL-MARTAND SARA LEE

Wal-Mart Stores, Inc. is the world’s largest retailer, with $218 billion in sales in the fiscal year ending Jan. 31, 2002. The company employs more than 1.3 million associates worldwide through more than 3,200 facilities in the United States and more than 1,100 units in Mexico, Puerto Rico, Canada, Argentina, Brazil, China, Korea, Germany and the United Kingdom. More than 100 million customers per week visit Wal-Mart stores worldwide (Walmart. 2002). Sara Lee Corporation is a global manufacturer and marketer of high-quality, brand ‘name products for consumers throughout the world. With headquarters in Chicago, Sara Lee has operations in 55 countries and markets products in nearly 200 nations. The corporation employs 154,900 people worldwide. Sara Lee’s Intimates and Underwear business is one of the largest and most profitable apparel businesses in the world. It includes intimate apparel, knit products and leg-wear, marketed through the most powerful brand names in the apparel industry (Saralee, 2002). Recently, Wal-Mart and Sara Lee went forward with a pilot to test the benefits of Collaborative Planning Forecasting and Replenishment, and try to determine whether employment of this strategy would be shrewd. The pilot between Wal-Mart and Sara Lee yielded double-digit sales increases, improved retail turn and lessened on-hand inventory. The collaborative effort was based on 23 branded underwear items distributed to nearly 2,400 stores. The underwear was replaced by sales history by store. Working in concert, the trading partners achieved sales gains of 45 percent, with comparable sales increasing 35 percent over a 41-week period. Inventory levels improved by 12 percent and market share rose 10 percent. Merchandise turns, typically seasonal in a commodity like underwear, climbed 30 percent, while the amount of product on hand at the store, level was trimmed 23 percent. Overall, GMROI was up 49 percent (storesonline, 2002). The success of the partnership between Wal-Mart and Sara Lee is yet another example of the payback of implementing CPFR. Wal-Mart and Sara Lee both benefited from working together, seeing a dramatic increase in sales, while at the same time improving inventory levels and cutting costs.

4.7 SAKS INC.

Saks Incorporated is the parent company of Saks Fifth Avenue; a high-end retailer that operates 62 stores in 24 states and employs approximately 15,000 people. Saks Fifth Avenue today is renowned for its superlative selling services and merchandise offerings. The best of European and American designers for men and women are sold throughout its 62 stores. On September 17, 1998, Saks Holding, Inc. completed a merger transaction whereby Saks Fifth Avenue became a division of Proffitt’s, Inc. (Saks lnc, 2002). Through implementation of CPFR Saks Inc. has improved inventory turns at its Proffitts and Parisian stores by 3% on basic replenishment products … and has gone from an average double-digit out-of-stock position to 95% in stock (Hirschkind, 2002). According to vice president of replenishment Marty Abercrombie, the solution has allowed Saks to be able to balance inventory productivity with customer service levels (Hirschkind, 2002). Additional results credited to CPFR include:

* A 30% decrease in transportation costs

* A 67% reduction in cycle times

* A 60% decrease in forecast error

* A 40% reduction in inventory

* A whopping 70% increase in revenues

* A 22% increase in fill rates

Just like Wal-Mart, Wegman’s, and many others, Saks Inc. is a retailer reaping the benefits of CPFR. The partnership they have created with their suppliers is reducing operating costs, increasing revenue, and allowing the company to better serve its customers.

4.8 RITE-AID AND JOHNSON & JOHNSON

The Rite Aid Corporation is one of the nation’s leading drugstore chains. They currently operate more than 3,600 stores in 30 states and the District of Columbia, reporting total sales of $14.491 billion at the end of its 2001 fiscal year. The company employs approximately 77,000 full and part time employees. Johnson and Johnson was founded in 1886 in New Brunswick, NJ. They produce a wide variety of pharmaceuticals and employ approximately 107,000, over 40,000 in the United States. Johnson and Johnson’s commitment to excellence has earned them the “47th spot on the 2002 Fortune 500. Fortune also ranks Johnson and Johnson as the 7th Most Admired Company in the world and the third among pharmaceutical companies” (JNJ, 2002). Utilizing the collaboration tools of Scottsdale, Arizona based JDA Software Group Inc., Rite-Aid and Johnson and Johnson launched a pilot to test the potential of Collaborative Planning Forecasting and Replenishment. The effort … involved more than 48,000 SKUs and product locations at all Rite Aid warehouses. The result: a 65-percent reduction in stock outs, and a 4.2-percent improvement in customer service levels. Rite Aid also saw drops of 15 percent in average lines per order, 33 percent in cases per line, and 6 percent in weeks of supply (Glcs, 2002). Vice President of Rite-Aid, Paul Henko, expressed his delight with CPFR saying, “Inventory is down from when we started the program. That was one of our top objectives” (JDA, 2002). With the right initiative, these dramatic improvements should only be the beginning for Rite-Aid. Reducing stock outs and improving customer service levels are a top priority of all retailers. Couple the progress with Rite-Aid’s massive size, over 3,600 stores, and CPFR could increase their total sales by the billions of dollars.

5. SUMMARY

CPFR is clearly a brilliant strategy that should be implemented by all suppliers and retailers that wish to better their company’s performance. Suppliers and retailers share sales and logistics information and co-manage processes to strengthen their relationships. CPFR truly delivers decreased transportation costs, a reduction in cycle times, a decrease in forecast errors, a reduction of inventory, increase in fill rates, a reduction in stock outs, increased merchandise turns, improvement in customer service levels, and increased revenues. The nine case studies listed above are solid proof of that. In each scenario, the company or companies involved observed dramatic improvements in their performance.

6. REFERENCES

CPFR.com Page, Top 10, December 2002; CPFR., www.cpfr.info.

GLCS.com Page, Archives, November 2002; GLCS., www.glcs.com.

Hirschkind, Max, Saks Collaboration, November 2002.; TechExchange., www.teckexchange.com.

Ireland, R. and Bruce R., “CPFR only the Beginning of Collaboration”, Supply Chain Management Review, September 2000, Vol. 4 (i4), September 2000, 80.

JDA.com Page, Display Press Release, October 2002; JDA., www.jda.com.

J & J.com Page, December 2002, Johnson & Johnson., www.jnj.com.

Kakkar, Sunil, Prekshana, August 2002; Prekshana., www.prekshana.com.

Kraft.com Page, October 2002, Kraft; www.kraft.com.

Logistics.com Page, November 2002, Logistics; Logistics.about.com.

Saks Inc.com Page, August 2002, Saks Fifth Avenue; www.saksfifthavenue.com.

Saralee.com Page, July 2002, Sara & Lee; www.saralee.com.

Storeonline.com Page, December 2002, Store on Line; www.storeonline.com.

Walmart.com Page, November 2002, Walmart; www.walmart.com.

Wegmans.com Page, December, 2002 Wegmans; www.wegmans.com.

Seyed-Mahmoud Aghazadeh, State University of New York at Fredonia

Author Profile

Dr. Seyed-Mahmoud Aghazadeh earned his Pd.D. at University of Nebraska-Lincoln in 1983, Currently he is a professor of Production and Operations Management at State University of New York–Fredonia.

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