CPFR (Collaboration, Planning, Forecast and Replenishment), is a business model that has received significant attention in the Supply Chain over the years. A noticeable percentage of the old VICS website was dedicated to it. Dozens of papers have been written on the subject. You as an individual could take classes and become certified and so on. I first read the VICS CPFR content back in ’05 trying to learn more about VMI processes. Just as a person learns the difference between a boat and a ship, CPFR didn’t tell me much of anything about VMI, but we keep coming back to it, in part because so much of it relates so very well.
Collaboration is something our mothers taught us when they first set us into a sandbox with other children. We all mutually benefited by sharing toys, and while helping someone build a sand castle can be rewarding, even fun, being in the sandbox with trading partners, working to improve margins, inventory turns, or reduce stock-outs is better.
This paper’s goal was initially to briefly describe in simple terms the methodologies, technology and objectives at the heart of CPFR. Looking at several case studies on CPFR, the hope was to produce a document identifying what CPFR is, potential benefits and shed light on what CPFR doesn’t require in terms of technology. We believe more companies would undertake the process if they understood you don’t need a massive IT budget to enter and build a CPFR relationship.
While trying to figure out how to better articulate all of it, Supply Chain Brain caught up to Mr. Andraski in February and did an interview with him (Find it here on way back). Reading (And watching) the piece changed my focus somewhat. The interview contends people have given CPFR a bad rap in terms of it living up to expectations, but Mr. Andraski points to Trust as the primary challenge faced by companies looking at CPFR. The silos of information within our departments and companies, is something we all too often keep close to ourselves. Mom would have been a good CEO.
Keeping it simple will improve adoption. And realistic expectations will keep the model evolving to a better place. From Model T to McLaren.
The Meat of CPFR
Definition of CPFR: A shared process of creation between two or more parties with diverse skills and knowledge delivering a unified approach that provides the optimal framework for customer satisfaction.
Voluntary InterIndustry Commerce Standards (VICS) (Now GS1.org)
Collaborative Planning, Forecasting, and Replenishment (CPFR) is a business model developed and trademarked by the Voluntary Interindustry Commerce Standards (VICS) association which works to reduce the differences between supply and demand (What is needed by consumers vs. what is in the supply chain). VICS outlines CPFR in four basic steps, which are shown below. CPFR provides retailers and suppliers with a method for sharing key supply chain information and coordinating efforts. Using CPFR, trading partners form one comprehensive forecast relating to specific items. Suppliers and retailers form this one forecast either by working collaboratively or by first developing their own individual forecasts, which are then used to create a single forecast. This coordination and information sharing allow retailers and suppliers to optimize their supply chain activities. Production schedules are set based on demand at the retailer. As part of CPFR, companies implement processes which enable problem identification and resolution. What this provides is a business model which includes the basic tools necessary to work together (Collaborate) on planning, forecasting, executing, then measuring and making corrections.
CPFR is a four step concentric process model consisting of:
- Strategy and Planning
- Demand and Supply Management
The collaborative nature of CPFR leads to better forecasting of demand and product requirements. The improved forecast, in turn, helps to increase supplier fill rates, improve in-stock levels, and reduce buffer stock. The primary desired outcome of CPFR is to increase sales while reducing inventories. To accomplish this goal efficiently, however, CPFR requires data-sharing technology and a solid business partnership.
Take a look at most of the relationships you see between retailer/customer and supplier. You will probably see the following:
- Arms-lengths relationships
- Little or no joint planning (Even in VMI scenarios)
- Relationships are often adversarial.
The lack of information sharing makes these relationships more costly than they needed to be. Ordering patterns are not cost effective, one or the other trading partner is stuck with excessive inventory. Lack of information sharing can also catch one or both parties unprepared leading to service failures.
CPFR is seen as a complicated business model when it is really a collection of processes most companies already perform to some extent. Performing it with stakeholders e.g. clients or suppliers improves results. CPFR could be described as the joint development, execution and monitoring of business planning and forecasting between trading partners. There is an opportunity for buyers and sellers to both participate in this process and for both to walk away profiting with better sales, improved margin, reduced risk and better relationships. The results expected could include: improved sales, reduced inventory, and greater profitability. The key to this is collaboration.
There are really four types of information in CPFR which play a critical role, including: planning, forecasting, execution and metrics related information. Successful collaboration depends on groups being able to share required information in order to be effective.
Collaboration yields results by fostering innovation and continual improvement. Too often, organizations solely look at collaborating in terms of furthering distribution: “Get as many sold as possible”. In looking at CPFR, we are stopping and saying: “We have a client, let’s work with them, put a system in place to continually address and improve how we are getting products to them so we can ultimately sell more products, more profitably while improving customer service.”
It’s important to point out again: CPFR is not a technology play, nor is it reliant on a specific set of technologies. CPFR is a business model where technology can help enable or facilitate various operations within the process, but in no case can you go and “buy” a CPFR system. For example: creating forecasts, sharing forecasts, sharing POS data and communication of orders, etc. are examples of events which take place but are not required to be performed using one specific type of software. In other words, if you are using hosted EDI and your retailer is not, it’s not a problem (Provided the provider supports the agreed processes). Nor do you as a team, need to use a central company to store all communications, reports etc. The same data should be used for analytics.
When CPFR was introduced EDI was not as widespread as it currently is. It is the one technology most pilots and production CPFR-supporting systems seem to have in common. Why is EDI good news? Historically, EDI has been viewed by many (Particularly smaller suppliers) as an expense they can’t recoup or see ROI on. Companies that engage in CPFR use their EDI more fully and see greater ROI on their technology investment because they have an opportunity to apply EDI to more than simply sending and receiving order related information. Even if you currently use the 852 or other documents for optimization or sales and inventory insight, – you still have other uses for that data.
“A 5% reduction in operation/program costs has the same impact as a 30% increase in sales.” – Gartner
Companies like Procter & Gamble, Wal-Mart, Sara Lee, Hewlett Packard [And so on] all experienced positive results. Not to say that it happens often. Walmart created CFR (VICS added the Planning). CPFR has proven itself to be a system which works in every documented case while not requiring a one-size-fits-all approach to implementation. What you must take away from the case studies is everyone went looking for improvements – but everyone used different methods and technologies in applying their version of CPFR.
The business benefits stakeholders were able to gain by embracing CPFR include:
- Enhanced relationship,
- Increased sales revenues,
- Better category management,
- Improved product offering,
- More reliable and accurate order forecasts,
- Reduction in inventories, and
- Improved technology return on investment
I intentionally didn’t include a table of improvements gained in each of the case studies as each had different goals, and therefore metrics in many cases. You can find more information here on GS1.
Trust is required between companies as well as between internal departments of the participants. Trust the process will be prioritized, trust in the process itself, and trust in the use and distribution of information could all be at the top of the list. So many relationships are asynchronous or one-sided. CPFR is designed as a ‘win-win’ process. While so many of the relationships currently in place are adversarial or have clearly developed as ‘win-lose’ or “win vs. win a little less scenarios”. Transforming the way we do business and how we work with clients or vendors is difficult. There are issues around internal alignment, and a ‘we don’t do it that way’ mentality which also should be examined.
Specific relationship areas which need change or to be transformed include: alliance guidelines, willingness to share information, shared risks and rewards, and inconsistent goals to name a few. An example of this could include a retailer and supplier team realizing that based on existing forecasts additional product will need to be held in inventory by the supplier. The risk at this point is high for the supplier and greater benefit is shifted to the retailer. In an ideal process, the supplier could be compensated to share the increased risk. The alignment and understanding of each group’s goals need to be examined and considered in order to remove barriers and align goals of both organizations within the process.
As seen from the case studies, and other CPFR documents, the technologies used are already at play commonly throughout the industry. API-friendly architectures and other advantages accelerate and should improve not only accuracy, but responsiveness. Not to dismiss the costs, but rather to say, if you’re already supporting an automated or semi-automated OTC program with that same customer, you’ve got significantly more options to keep costs low when implementing a CPFR-like relationship around CMI/VMI, and to an extent SMI. The expense of getting educated, trained, and coordinating meetings for planning are real. They’re nothing compared to the trust you’ve probably built in that relationship.
Improving relationships on an inter / intra company basis in addition to putting a system in place to help continually improve the ability to deliver the ‘right’ amount of product where, and when needed is awesome. The value proposition of reduced inventory waiting to be sold within the value chain along with improved sales, and improved service levels is too enticing to ignore without some investigation.