Collaborative planning in the supply chain – CPFR (Part 1)

By Diego de Souza and Luciana Magalhães

It's hard to start an article on planning without falling into the good old cliché: the market is increasingly unstable and dynamic. Consumers are more demanding, portfolios are more numerous, entire markets are emerging overnight, and connectivity makes the waves of change propagate with ever-increasing speed. Greater uncertainty means that, more than ever, it is not enough to look only within the company's borders. You have to look further down the supply chain links to real end-consumer demand, and you have to look back, collaborating with suppliers to ensure that the future they envision and plan is the same as yours.

This uncertainty can be reduced with increased visibility in the chain and with internal planning processes (such as S&OP) and collaborative ones (such as CPFR), but it can never be eliminated. The uncertainty that remains after all our efforts to eliminate it can basically be compensated for in three ways: with stocks, with a quicker reaction, or with a lower level of customer service. Each of these forms of compensation has its respective costs, which can be balanced in order to reduce the total cost.

This article is the result of extensive research carried out in partnership between Plannera, ILOS and Fidelize, and experience in the design and implementation of planning processes. During the months that preceded this article, more than one hundred companies were interviewed, millions of data were analyzed, and an extensive bibliography was reviewed. A series of initiatives resulted from this effort looking at different aspects of the subject, including the development of tools to support the process, and a series of lectures and articles, of which this one forms part. Here, in particular, we will explore the Collaborative Planning, Forecasting and Replenishment, or CPFR process as one of the fronts to combat uncertainty.

In this first part, the CPFR concept and applicability criteria will be exposed. In the second part of the article, to be published in the next issue, we will explore the implementation of the process, exemplifying with some real cases.

Figure 1 – Which of the results justifies the investment in workforce development?
Source: The Economist Intelligence Unit (2014)

Brief history

The beginning of the 90s was marked by a boom in collaborative initiatives: In 1991, the company BOSE pioneered JIT II (Just in Time II), in which it brought strategic suppliers into its factory, working as part of its team. Another initiative came from the food industry, which started the ECR (Efficient Consumer Response) movement in the USA in 1993, when supermarkets and manufacturers started collaborating by sharing information in real time, managing categories, performing continuous replenishment, activity-based costing and standardization. Also in the US, the QR (Quick Response) appeared in the textile sector, in which suppliers began to receive data collected at the customer's points of sale and synchronized their production operations and inventories with the actual sales of the final customer (sell out). Another collaborative approach initiated in the 90s to optimize supply chain performance was VMI (Vendor Managed Inventory). In VMI, the supplier has access to the customer's stock levels and makes the decisions about replenishment.

None of the initiatives were implemented on a large scale as intended, mainly for two reasons: cultural difficulties related to collaborative management and lack of scalable software. Despite this, they were important in raising awareness of the benefits of visibility and collaboration in the supply chain. These collaboration movements were expanded and evolved naturally into the CPFR.

Concept

The CPFR practice has been adopted as a means of integrating all players, allowing a global view of the supply chain. Combining the intelligence of commercial partners in planning and meeting demand with an orientation focused on the final consumer and on the success of the value chain allows the creation of numerous win-win solutions. The process helps the participating companies to manage and share information, in order to balance the chain, controlling the stock in all links, reducing disruption and increasing the level of service delivered to customers.

The CPFR movement emerged in 1995 from a pilot project between Wal-Mart and one of its suppliers, the former Warner-Lambert, with the support of Benchmarking Partes, SAP and Manugistcs. The main objective of the initiative was to forecast sales and replenish stocks of Listerine brand products in a collaborative manner. The results presented in 1996 were satisfactory and the pilot was a success, with a reduction in lead times, an increase in sales and a decrease in product breakage rates.

Following the success of the pilot, VICS (Voluntary Inter-industry Commerce Standards) became involved in the program and helped in its evolution. In 1998, a nine-step model for implementing the program was published by the CPFR committee of VICS, composed of companies linked to retail, manufacturing companies, service providers and companies linked to the e-marketplace.

Although VICS is focused on the consumer goods and retail chain, the basic CPFR model can be adopted by industries in other sectors, and can be applied both to the relationship between industry and its suppliers, as well as to industries with distribution channels and retail.

The nine steps presented by the 1998 VICS model are:

1. Frontline deal development
2. Creating joint business plans
3. Creation of sales plans
4. Identification of exceptions in sales plans
5. Solving exceptions identified in sales plans
6. Purchasing plan creation
7. Identification of exceptions in purchasing plans
8. Solution of exceptions identified in the purchase plans
9. Purchase order generation

According to the VICS model, the first step towards implementing the CPFR should be the development of frontline agreements and a joint business plan. After this step, sales and order plans for the defined planning horizon must be periodically elaborated by consensus by the partners, as well as promotional actions and market information must be shared.

As each plan is developed, exceptions must be identified and addressed. Exceptions are all revisions to the sales plan or orders that exceed a certain pre-agreed threshold. They must be dealt with within the process and their impacts must be evaluated by the internal planning processes of each employee.

Efficient exception management is crucial to being able to scale the process to a large number of SKUs and stock points. Unlike previous collaborative initiatives, CPFR requires collaboration from both participants to resolve these exceptions. Software that helps detect and handle exceptions are also great allies at this stage of the process.

After initial agreements, shared sales and order plans, exception handling and exchange of strategic information, the final step in the process is the generation of replacement orders, ensuring the connection between planning and execution.

In 2004, VICS released a revised version of the 1998 model. The new version is more comprehensive than the previous one, encompassing 4 different macro steps: Strategy & Planning, Demand & Supply Management, Execution, and Analysis. These stages encompass a total of 8 collaborative tasks and also alternative roles in the process and alternatives for common scenarios in CPFR. The new model is simpler to understand and more easily executed. As it is more adaptable than the previous version, it responds better to the needs of different companies that wish to implement the process.

The main activities that must be carried out in each macro stage of the process are listed below:

1. Strategy and Planning: Establishment of agreements for the collaborative relationship.

– Definition of partnership objectives and roles.
– Selection of team members and assignment of roles and responsibilities.
– Determining the mix of products that will participate in the process.
– Identification of events that may affect demand and supply, such as: promotions, changes in inventory policy, opening and closing of stores, product launches and discontinuations.

2. Demand and Supply Management: Projections of consumer demand and orders over the planning horizon.

– Forecast of consumer demand for the defined planning horizon.
– Creation of plans for future orders based on the sales forecast, inventory policies and forecasted event information.
– Revisions of plans made in previous cycles.
– Treatment of exceptions in sales and purchase plans.

3. Execution: Transformation of order plans into real orders and their fulfillment.

– Generation of orders.
– Sales transactions and payments.
– Production, shipping, distribution and storage of products.

4. : Performance evaluation through indicators aimed at continuous improvement of results.

– Generation of indicators to evaluate the process.

Another very important point, also addressed by the new VICS model, is the alignment with the internal planning processes. Without previously developed internal alignment with a collaborative approach, the external collaboration effort will be greater and the benefits achieved will be limited. Therefore, it is crucial that the internal planning processes are robust and that the different areas work in an integrated manner. Companies that have a good integrated planning process for operations and sales (S&OP) are more likely to succeed with CPFR.  

Challenges and Benefits

The benefits of the CPFR emanate mainly from the reduction of uncertainties in the chain, which are amplified the further upstream we go through what became known as the “bullwhip effect”. This amplification of the demand variability perceived by each link is mainly caused by price fluctuations, consolidation of purchase lots, order logic and, finally, by the accumulation of forecasting errors in each internal planning process. This causes the chain as a whole to carry more stock, and suffer more from problems such as stockouts, backorders, write-offs, emergency shipments, and long resupply cycles.

Studies that list and quantify these benefits are abundant. We have included in the attached table the results of a survey carried out by AMR research, broken down by chain link. In addition to revenue-related gains, we highlight the significant impact on reducing inventory levels, generally used as the main defense against uncertainty. With the high cost of capital that we face in Brazil, this reduction can bring significant gains by reducing the cash-to-cash cycle.

As for the challenges, we can divide them into the three classic categories of People, Processes and Technologies. On the People front, the main challenge is cultural. Conceptual deficiencies regarding the process are easily resolved with training and consultancy, however, actually convincing all those involved of the win-win nature of the CPFR is not a simple task. The natural confrontational relationship between retail and industry makes the jump to a collaborative planning mentality the biggest challenge for the success of these projects. Success case studies in similar industries and small pilots help in the convincing process, and the constant measurement of results after implementation helps to mitigate the risk of a relapse.

In Processes, we highlight respect for the schedule as a key success factor. As it involves several teams, significantly affects other internal processes (such as S&OP, for example), and has to deal with a considerable volume of data, it is virtually impossible to run a CPFR process without sticking to a strict schedule. Exception parameters must be regulated so that the average number of exceptions generated can be dealt with in the time available for the process, information must be shared at the right time and format, and meetings must follow a well-defined agenda to ensure the good use of the time of the participants. involved. Order calculation methods based on sales plans (such as reaching a target stock at the end of the month, for example) must have their parameters well defined and agreed between the parties, in order to require the minimum of human intervention. In addition to the schedule, we can also emphasize the importance of defining responsibilities between the planning teams involved. Focal points must be established to avoid communication failures, and satellite processes must ensure that relevant information from relevant areas of the company (such as marketing actions, launches and price changes) flow into planning.

In the Technology category, the main difficulty is the collection and qualification of the data used in the process. CPFR is above all a joint decision-making process, and reliable decisions need to be based on reliable data. Having overcome the cultural barrier of obtaining access to information such as sales and inventories, the next challenge is to collect this information, which is found in different companies and in different systems. Added to this is the need for consistency with registrations (such as product codes), standardization of units, standardization of exchange file layouts, and alignment of concepts (for example, the definition of stock available for sale), among others. Cloud solutions facilitate the connection with the various links in the chain, and make collaboration on the same database simpler. Systems also assist in automatically generating exceptions, detecting unusual data, and managing workflow.

Applicability

It is common to hear cases of chains that were not successful with the implementation of the CPFR. This situation occurs mainly for three reasons: because the process is quite laborious, because retail forecasts are not good enough and because of the lack of integration with other company systems, such as ERP and APS.

Although cases of failure exist, they should not be generalized. The process is able to deliver what it promises and several success stories can serve as proof of this. The first issue that must be taken into account is whether the companies that wish to start the process have the necessary characteristics to be able to benefit from this endeavor.

But after all, what are the characteristics that a chain must present to have greater chances of success with the CPFR? According to Lora Cecere, in her 2010 article, the criteria are:

1. High volatility of demand: The greater the benefit of anticipating knowledge of variations in demand, the greater the value generated by the CPFR. Companies whose products have a short life cycle, seasonal patterns, strong climate dependence, and which belong to competitive categories, such as, for example, the segment of food and fashion objects. Chains that have stable and easy to predict demand will not have as many gains and possibly the investment will not be justified.
2. Strong partnerships: The use of CPFR is strongly linked to supply chain relationship management. Maturity and involvement of the partners is necessary for the process to show good results. Data needs to be reliable, accessible, and meaningful to both parties' goals. Partners must demonstrate planning and engagement skills for forecast accuracy.
3. Technological preparation: Companies participating in the CPFR need to be technologically prepared for collaboration. Without tools to help synchronize information, integrate sales and order plans, and handle plan exceptions, it will be very costly to move forward.
4. Significant presence in the channel: The sales volume for partners and/or items chosen to participate in the CPFR must be significant, representing at least 10% of sales in the channel. The more representative, the greater the potential benefits.
5. Direct link with replenishment: the planning process cannot live in a watertight state. It is necessary to ensure that the execution is connected, and that reality reflects as faithfully as possible what was agreed upon, with exceptions.

In some cases, companies have the characteristics presented above, but they are not mature enough to start a process like the CPFR and obtain value from it. Therefore, after concluding that your company can benefit from the process, two questions must be answered:

1. Does your company value cooperation and communication between departments and between business partners?
2. Has your company adopted other industry best practices such as EDI, Product Identification Standards (EAN), ECR, VMI, S&OP, etc.?

If the answer to the above questions is “no”, the recommendation is to take a step back before starting the pilot and resolve issues related to the company's culture. If the answer is “yes” to the questions above, go for it!

In the next part of this article, we'll delve deeper into the steps required for deployment.