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In manufacturing and retail, poor inventory control can lead to overstocking as a result of bad forecasting, this over stocking is called buffer inventory or safety stock which can lead to waste and inefficiency. "In 1996 about $700 of the $2.3 trillion retail supply chain inventory was in safety stock. That is, almost 30% was tied up due to waste and inefficiency."(Lambert, Stock, 2001)
Collaborative Planning, Forecasting and Replenishment (CPFR), is a business process using an internet based business model, as shown in figure 1.
This model takes a holistic approach to information exchange and supply chain management between trading partners, by using a standard set of business processes in order to improve supply chain efficiencies, and is seen as a replacement to the old approach of electronic data interchange (EDI) (Fliedner, 2003). The objective of CPFR is to share data on a central web server that all of the trading partners can access to enable a more reliable forecast for long term future demand in the supply chain, this eliminates the problems associated with EDI such as: supply partners manually entering identical data in their records (Joachim, 1998), and the EDI process typically being done in batch transfers which can further add to delays in information (Cooke, 1998) etc.
History of CPFR
CPFR began in 1995 with the company Wal-Mart and was originally called C-FAR for collaborative forecasting and replenishment. The acronym has evolved into CPFR - standing for collaborative planning, forecasting and replenishment.
Wal-Mart found that the pharmaceutical company Warner-Lambert's in-stock averages were not up to par with Wal-Mart's vendor performance standards. Wal-Mart, along with Warner-Lambert, Surgency (formerly Benchmarking Partners), and two software companies, SAP and Manugistics, launched an effort to define a process that would link customer demand with replenishment needs through the entire supply chain.
The pilot focused on stock of Listerine mouthwash kept in stores. The group first tested the collaborative concept on paper, and then demonstrated in a computer lab that the Internet could be used for the information exchange. The results of the test were: Warner-Lambert's in-stock averages rose from 87% to 98%. Lead times dropped from 21 to 11 days, and sales increased by $8.5 million over the test period-even though the pilot was limited to one Warner-Lambert manufacturing plant and three Wal-Mart distribution centres. (free-logistics.com, 2010)
Case study: West Marine
Today West Marine is the largest boating-supply retail chain in the United States, with a product range of more than 50,000 products selling throughout more than 400 company owned retail stores, as well as their retail catalogue, generating annual average sales of $690 million. The company was founded in 1968 by Randy Repass as a mail-order firm selling to boating enthusiasts, and opened its first retail store in Palo Alto, California in 1975, three years later, the company created a separate sales channel to commercial customers such as boat yards and boat dealers. In 1997 West Marine a 73 store operation at the time acquired one of their East Coast competitors, E&B Marine a 63 store operation. The consequences of the acquisition became quickly apparent: Sales fell by almost 8 percent, and peak-season out-of-stock levels raised more than 12 percent compared to the prior year, and after six years of steady growth, net income dropped from $15 million in 1997 to just over $1 million in 1998. (Highbeam Research, 2006)
The main contributing factor of this was that following the transaction, West Marine discovered that internal E&B operations were in worse condition than expected. The investment group that had been running E&B had let the company's infrastructure deteriorate and inventories dwindle. This further compounded the acquisition by adding to the problem that it took six months to implement the most basic of systems integration due to the poor infrastructure, leading to stock outs within the stores.
West Marines first impulsive reaction was to rebrand all the E&B stores convert them to West Marines products and pricing, West Marines CEO John Edmondson (who was brought in after the acquisition to execute a company turn around) said regarding the acquisition, "West Marine bought E&B because it was different and unique. Then, they turned all the stores into West Marine stores and locked out the customer base." Adding to this Bruce Edwards (West Marines senior VP of store operations) said, "We created a lot of damage to both chains, as well as losing ground on comparable sales as a combined organization". (Standford, Graduate School of Business, 2005)
How West Marine Turned the Company Around
In order to turn the company around after the acquisition Edmondson identified four supply chain problem areas: the distribution centres (DCs), transportation, replenishment, and the systems supporting these operations; his solution to these problems was to implement a CPFR programme.
The first thing as part of West Marines CPFR programme was implement an aggregate ordering or "multi-echelon" replenishment process. A "multi-echelon" system is defined as " A series of two or more production or supply facilities where any change in policy parameters of one facility affects the other facilities, either directly or indirectly".(Gopalakrishnan, 2004). According to (Standford, Graduate School of Business, 2005) prior to the implementing of the multi echelon system West Marine were using JDA's Merchandise Management System (MMS). The MMS was interfaced with the company's point-of-sale system in the stores (also provided by JDA) to keep track of basic inventory levels and product sales at the store level. West Marine also used JDA's Warehouse Management System (WMS) as the software engine for its distribution centre (DC) operations. As well as these systems West Marine also made use of JDA's advanced forecasting tools, both Advanced Store Replenishment (ASR) and Advanced Warehouse Replenishment (AWR). The problem with these systems was that while they were good on their own, none of the systems had the ability to directly interact with each other leading to extensive duplicate work and maintenance. At the time no software provider offered a fully integrated solution, it was left to West Marine as well as Matt Henderson a systems engineer and integrator from the San-Francisco based software company Amigo Inc. to design a system that integrated linkages between the point of sale systems to the DC systems. The system they designed was the first true multi echelon system in the retail sector. (bisg.org, 2005)The way in which West Marine implemented their multi echelon replenishment solution was to integrate data from the retail stores and warehouses with relation to seasonal forecasts, promotions and stock levels, enabling suppliers to deliver more accurate, on time orders to satisfied customer demands.
"West Marine's multi-echelon replenishment solution resolves the store-warehouse disconnect. Warehouse replenishment immediately responds to all store-level overstocks and understocks. Similarly, all promotions and store level assortment changes are planned in the store system, and warehouse replenishment immediately responds to them. The solution eliminates duplicate forecasting tasks and creates more accurate supplier-order forecasts". (Reed Business Information, 2006) The West Marine multi echelon system is shown in figure 2.
The next problem that West Marine encountered was to get its suppliers to buy into the idea of CPFR. In order to address this problem West Marine introduced a pilot program with 12 handpicked companies that were major suppliers to West Marine, that all had previous issues with their supply chains in some form. To these companies West Marine laid out specific performance levels and expected goals, although no formal written agreements were created each company was expected to comply to the performance standards.
For the suppliers that joined West Marines supply pilot there was no capital investment outlay in technology, they were only required to designate recourses to act as counterparts to West Marines supply chain merchandise planners.
With this set in place West Marine began sharing its forecasts on a weekly basis with its vendors, as a weekly update report on vendor performance. There was also the introduction of weekly meetings with cross functional teams made up of members from all the organisations involved, in order to discuss potential improvements as well as to maintain a holistic integrated perspective on each vendor relationship.
The results of the CPFR programme were; "in stock rates at the stores came close to the goal of 96 percent in every store, even during peak season. Forecast accuracy climbed to approximately 85 percent. On-time shipments, on the other hand, were improving but only reached 30 percent against a stated goal of 90 percent in 2002. However, West Marine expected them to climb to at least 50 percent by the end of 2003." (Standford, Graduate School of Business, 2005).
Even after the pilot programme with the evidence to back up that CPFR works, West Marine still had problems getting supplies to buy into the CPFR programme, West Marines solution to this was to offer its suppliers an incentive in the form of a guarantee. This guarantee was that based on the forecasts, West Marine promised to purchase one hundred percent of the forecasted stock. This meant that if there were any error's in the system, then West Marine would bear the brunt as a result. It was this action that was responsible for convincing and instilling vendor trust in West Marines CPFR forecasts.
The knock on effects of having the suppliers buy into West Marines CPFR programme were that the company were able to use their demand forecasts to stream line their shipping and receiving activities. The forecasts enabled West Marine to maximise efficiency in its inbound and out bound shipments and to use its dock space more effectively, in turn allowing West Marine to smooth demand spikes.
In conclusion as the evidence shows in both the Wal-Mart pilot programme and the West Marine case study CPFR is a powerful logistics stock forecasting tool
Gopalakrishnan, P., 2004. Handbook of Materials Management, Prentice-Hall of India Pvt.Ltd