CHALLENGES FOR IMPLEMENTING COLLABORATION INITIATIVES IN THE DEMAND PLANNING PROCESS – PART 2

In the first part of this text, the main motivators for the implementation of collaboration initiatives in the demand planning process were presented, highlighting the enormous benefits intended with these practices. However, companies that intend to incorporate these initiatives need to be aware of the great challenges in implementing and managing collaborative demand planning.

As described in part I of this text, collaborative demand planning is understood as the different forms of interdepartmental cooperation and between companies in a supply chain, through the intensive exchange of information and organizational, structural and technological changes, to increase efficiency of the process and decisions related to meeting the demand.

Collaborative demand planning initiatives can be divided into internal, when they occur between functional areas of a company, and external, when they involve different companies. Key collaboration/integration initiatives in demand planning are the S&OP – Sales and Operations Planning(internal integration) and the CPFR – Collaborative Planning, Forecasting and Replenishment (external integration). In this text, these two initiatives will be briefly described and then the challenges to implement and manage them will be presented.

Sales and Operations Planning (S&OP)

The S&OP initiative seeks to improve the demand planning process through vertical integration between different decision levels – strategic and operational – and horizontal integration between decisions at the same level, but from different areas of the company, such as commercial, marketing, production and logistics. Figure 1 presents the different levels of integration sought by the S&OP initiative:

Figure 1 – Integration between decision levels and areas of the company

The interaction between the different functional areas seeks to integrate decisions at the same hierarchical level, ensuring that all available information will be shared and used in demand planning, as well as seeking to ensure that the operational efforts of the areas will be directed towards meeting the planned objectives. In S&OP, top management involvement is necessary to resolve conflicts between areas and address divergences in the demand planning process.

The S&OP process is generally divided into five stages, as shown in Figure 2:

Figure 2 – Stages of the Sales & Operations Planning process

The first step is to update the reports with actual sales and production data. This step should take place immediately after the close of the sales tracking period, which is generally one month. Based on this information, preparatory statistical analyzes are carried out to carry out the sales forecast in the next step.

In the demand planning stage, statistical analyzes are evaluated by functional areas that incorporate market information and tacit knowledge of demand fulfillment activities. As this step strongly depends on knowledge of the market and proximity to customers, the participation of the Marketing and Sales areas is fundamental.

The next step consists of carrying out, based on the forecasts generated, the production plan, which should objectively identify the capacity constraints to meet the forecast demand. Next, there is the Pre-S&OP Meeting, which confronts the analyzes carried out in the previous stages independently by the company's functional areas. At this stage, divergences must be highlighted and the agenda for the Executive S&OP Meeting prepared.

This meeting, which should involve the company's senior management, is the decision-making stage and serves to resolve disagreements, closing sales, production and financial plans for the next period. So the Sales and Operations Planning seeks, through the sharing of analyzes and information from the functional areas, an improvement in the interpretation of market information and integration of decisions to better meet demand.

Collaborative Planning, Forecasting and Replenishment (CPFR)

CPFR is a collaborative demand planning initiative between companies in a supply chain, which seek greater assertiveness in demand planning through the sharing of sales forecasts and joint management of inventories, resulting in improved service levels and reduced costs. operating and inventory costs.

Figure 3 – Stages of the Collaborative Planning, Forecasting and Replenishment process

Figure 3 shows the stages of the CPFR process, according to the configuration traditionally presented in the specialized literature. The first stage consists of drawing up an agreement in which the companies involved define the norms for collaboration, as well as the expectations, responsibilities and resources used in the process.

After the corporate alignment, it is necessary to draw up a business plan, defining which products will participate in the initiative and what their management parameters are, that is, minimum and maximum orders, lead time and frequency of delivery and all other parameters that influence the management of meeting demand.

In the next stage, when the CPFR is operationalized, the companies involved independently generate sales forecasts. It should be noted that companies carry out sales forecast analyzes with the same information, that is, actual sales at POS (points of sale), promotions calendar and marketing actions by all involved. These predictions are then compared to identify differences. The comparison between the forecasts is made based on convergence parameters, that is, limits are set for the difference between the forecast values ​​and, if the real difference is greater than the stipulated value, there is a divergence that must be treated.

The treatment of divergences in forecasts is, in general, carried out jointly by the companies involved in the process, which seek to identify their possible causes. Among the main ones are different expectations in relation to the competition's action and promotions/marketing actions not communicated to the partners. Once the differences are resolved, resupply planning is carried out based on joint forecasts.

The following steps consist of identifying and dealing with capacity constraints to meet the requests proposed in the resupply plan. Restrictions must be negotiated between the companies involved and, once resolved, orders are generated.

Collaborative planning between companies provides increased visibility of real demand, reducing, or even eliminating, the “whiplash” effect, as information from the end of the chain is passed on to other links and stocks in companies are managed together. In addition, the CPFR favors the building of partnerships, making it possible to draw up contracts to reduce double marginalization.

Challenges and limitations of collaborative demand planning

Despite the enormous benefits intended with collaborative practices, the implementation of cooperation policies presents enormous challenges for companies. The main difficulties are listed below.

cultural barriers

Traditional relationships between companies are based, in general, on trying to maximize the margin to be absorbed in the transaction, that is, each company tries to negotiate in the best way possible to get the highest margin in the commercial transaction. Price haggling, “arm wrestling” at the end of the month and the need to meet sales quotas/goals are commonplace issues when trying to analyze commercial relationships between companies.

This type of relationship generates a series of friction and wear and tear on both parts over time. In addition, the pressure for immediate results means that the change from a relationship of competition and margin negotiation (short-term gains) to one of sharing information and joint decisions (long-term gains) faces great resistance. Cultural barriers to changing relationships are often the main determining factor for failure to implement collaborative planning.

Lack of top management involvement in the process

The involvement of top management in the collaborative planning process is fundamental, as it is internally responsible for eliminating divergences between areas and for ensuring alignment between functional strategies. Externally, it is responsible for commercial agreements with partner companies. However, the initiative to implement a collaborative planning policy, in general, arises in operational areas, such as production and logistics. As a result, top management's commitment to the process is not always guaranteed.

An internal convincing effort is needed for top management to get involved in this type of initiative. In addition, it is necessary that the collaborative planning process be structured in such a way as to minimize the time required for senior management involvement, that is, there must be prior preparation so that this time is used in the best possible way, avoiding waste and ensuring the everyone's involvement. Depending on the organizational structure and size, top management involvement can be the main constraint to the success of a collaborative demand planning process.

Limitations of customers and product types

The adoption of a collaboration policy, internal or external, requires a great effort to generate forecasts, obtain consensus and prepare orders. Therefore, it is not possible to adopt this type of initiative for all products and all companies with which we have commercial relations. It is necessary to select the most representative products and the key customers for carrying out this type of initiative.

This selection, however, is not always trivial. The existence of many interrelationships between companies and the high number of SKUs can represent a huge barrier for the establishment of a limited number of partners for this type of initiative. Therefore, a categorization should be developed to list the main commercial partners and which products will participate in the collaborative planning process. Inadequate selection of commercial partners and/or products can lead to the failure of the collaborative planning process and the abandonment of this practice.

scale limitations

The effort involved in generating a sales forecast through a collaborative planning process is much greater than in the process traditionally adopted by companies. This is because there is a need for interaction, exchange of information and elimination of divergences in analyzes between the different functional areas and between different companies.

Depending on the complexity of the interrelationships (number of products, points of sale, substitutes, competitors, companies and/or functional areas involved), this process can demand a very large number of man/hours to carry out the sales forecast, which can make the execution of collaborative planning unfeasible. In addition, a period of time is generally required to develop skills and competencies for managing exceptions and handling disagreements. As companies generally work close to their capacity limit, this initial learning period can make it difficult to implement collaborative demand planning.

Problems with databases

Cooperation and collaboration initiatives require a large investment in information technology, whether in sophisticated transactional systems or in reliable databases. This occurs because it is necessary to work with sales data closer to the final consumer and these need to be shared by all links in the supply chain. However, about two-thirds of companies use data aggregated by distribution centers or factory warehouses rather than points of sale.

The inadequate use of systems and databases can make the job of carrying out a collaborative planning of demand enormously difficult and, many times, lead to errors and problems that make the method inadequate.

CONCLUSION

Box 1 summarizes the main drivers and challenges for collaborative demand planning.

Table 1 – Summary of main drivers and challenges

The motivators are related, as described in the first part of this text, to the difficulties and failures in the traditional process of demand planning, which lead to loss of service level (supply interruptions) and/or excessive inventory costs. The challenges, in turn, stem from the traditional form of organization of companies and the format of their commercial relationships, which, as a rule, seek short-term gains.

More and more corporations are seeking the cost-reduction and service-level benefits promised by collaborative demand planning initiatives. Despite the motivations for implementing these initiatives being quite clear and the benefits promising, it is essential that companies are alert to the challenges and the investment that must be made for the success of this endeavor.

BIBLIOGRAPHY

AROZO, RODRIGO. CPFR – collaborative planning: seeking to reduce costs and increase the level of service in supply chains. Tecnologística Magazine, November/2000, 60, pp.60-66.

CRUM, C. AND PALMATIER, G. Demand collaboration: what's holding us back? Supply Chain Management Review, January/February 2004, 8(1), pp.54-61.

FLIEDNER, G. CPFR: an emerging supply chain tool. Industrial Management + Data Systems, 2003, 103 (1/2), pp.14-21.

GROCERY MANUFACTURERS OF AMERICA (GMA). CPFR Baseline Study – Manufacturer Profile. KJR Consulting: Washington/2002, 57 pages.

LAPIDE, L. Sales and operations planning part I: the process. The Journal of Business Forecasting Methods & Systems, Fall 2004, 23(3), pp.17-20.

MENTZER, J., AND MOON, M. Understanding demand. Supply Chain Management Review, May/June 2004, 8(4), pp.38-44.

RIBEIRO, A. The CPFR as a supply chain integration mechanism: implementation experiences in Brazil and worldwide. Tecnologística Magazine, July/2004, 104, pp.78-87.

ROBERTS, S. CPFR can work – but don't get hung up on the dogma. Frontline Solutions, June 2003, pp.24-25.

WALLACE, T F. Sales & Operations Planning: The 'how-to' Handbook. New York: 1998.

Wanke, P. A review of rapid response programs: ECR, CRP, VMI, CPFR, JIT II. Tecnologística Magazine, June/2004, 103, pp.128-132.