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Faced with a declining industry for appliances, Lowe's and Whirlpool needed to leverage their resources to maximize profitable growth. Recognizing the importance of establishing a relationship, Lowe's and Whirlpool's chose to use the Collaborative Planning, Forecasting and Replenishment process designed by the Voluntary Inter-industry Commerce Standards (VICS) association. The strategy involved processes to drive the execution of Lowe's and Whirlpool's supply chain based upon end customer demand.
Initial focus was placed on implementing a joint Sales & Operations Planning process. A second initiative resulted in the development and implementation of a structured Merchandising and Operations Planning process for their sales and marketing teams. They also leveraged core principals from best practice models developed within the VICS association. They also improved communications and conduct monthly integrated planning meetings.
While Lowe's and Whirlpool are making strides forward, Home Depot has been scrambling to catch up. After nearly three decades of operation, Home Depot had little in the way of a formal distribution network. Major problems began to appear, and customers began looking for other retailers. So while Home Depot is building internal supply chain infrastructure, Lowe's continues to reach out to suppliers and trade partners to refine what is already in place.
Perhaps as Lowe's and Whirlpool become industry champions by adopting the best practice processes endorsed by VICS and significantly enhancing these processes through on-going collaborative efforts, Home Depot and the rest of the home improvement industry can benefit from their joint experiences.
Over the past several years both Lowe's and Whirlpool have been faced with industry pressures relative to declining industry demand for appliances, increasing competitive pressures across retailers and manufacturers and increased cost structures within their independent operations. Fundamentality their relationship made it difficult to consistently stay aligned on objectives, shared business processes and overall category management. This lack of consistency often led to mis-aligned business plans between the companies and disconnects within their own operational plans. Such disconnects were preventing them from leveraging their joint resources to maximize profitable growth.
Each company desired to achieve their business objectives, so they quickly recognized the importance of establishing a relationship that would allow them to manage an integrated business planning process across all levels and functions of their organizations. Lowe's and Whirlpool's relationship was challenged with gaps in communication, lack of trust in sharing confidential information, and a lack of visibility to independent business plans leading to instances of conflicting objectives and a lack of forward planning beyond the near-term planning horizon.
The opportunity presented by the Collaborative Planning, Forecasting and Replenishment process designed by the Voluntary Inter-industry Commerce Standards (VICS) association was difficult to ignore. Collaborative Planning, Forecasting and Replenishment (CPFR) is a business practice that combines the intelligence of multiple trading partners in the planning and fulfillment of customer demand. By linking sales and marketing best practices such as category management to supply chain planning and execution processes, CPFR increases availability while reducing inventory, transportation and logistics costs(Andreski, 1999).
The strategy for improving supply chain efficiency and effectiveness is making demand transparent and drive the execution of Lowe's and Whirlpool to maximize value for the end-customer. Fundamentally, the aim of CPFR is to convert the supply chain from a disjointed, ineffective and inefficient "push" system to a coordinated "pull" system based upon end customer demand.
Initial focus was placed on implementing a joint Sales & Operations Planning process with Lowe's and Whirlpool that was consistent across all product categories supported with direct involvement by their sales/merchandising, forecasting and supply chain organizations (Diefendorf, 2004). This integrated S&OP process was driven by monthly planning meetings managed by a common set of performance management reports with documented action plans originating from the business review discussions. The monthly meetings leveraged their CPFR demand forecasting process and their sales planning activities were merged with supply chain planning.
A second initiative resulted in the development and implementation of a structured Merchandising and Operations Planning process for their sales and marketing teams. This process was designed to provide clarity in their independent sales plans and promotional calendars, but the end goal was to create joint sales and marketing plans. This new process also extended their planning horizon and provided value-added inputs into an existing CPFR process which drove improved operational efficiencies within their supply chains.
Lowes and Whirlpool leveraged core principals from best practice models developed within the VICS industry body (Andreski, 1999). These included:
1) Establishment of a Trading partner framework. Lowes and Whirlpool have different competencies based on their strategies and investments. They also have different information and views of the marketplace. Lowes and Whirlpool leveraged the strengths of their respective companies to optimize joint performance.
2) Single shared forecast of demand. Lowes and Whirlpool worked together to develop a single forecast of consumer demand. The forecast leverages the knowledge and competency from each company and is superior to a forecast developed in isolation. The final demand plan is used as the foundation for all internal planning activities related to their respective businesses.
3) Removal of Supply Process Constraints. A core principal of CPFR is to leverage the collaborative demand plan to gain significant efficiencies in the supply chain and remove and ease constraints that would not be possible by working in isolation. Lowe's and Whirlpool embraced this principal and were able to accomplish break through benefits as a result.
The most fundamental change within Lowe's and Whirlpool's relationship over the past 3 years has been improved communications and the broadening of their collaborative relationship across different functions. Their monthly integrated planning process strengthened their collaborative relationships across all organizational levels.
The joint planning process has also directly addressed critical planning gaps at three different levels:
1) Executive Management - strategic plans are now jointly developed and measured thru scheduled monthly reviews;
2) Sales & Marketing Management - merchandising and sales plans are now measured monthly against aligned strategic objectives as defined by executive management;
3) Supply Chain / Operations Teams - a closed loop CPFR planning process has been implemented for demand and supply planning which connected their sales functions with their operations teams.
They are now in a position to drive specific planning activities towards a common set of aligned goals and objectives. Through such aligned objectives they are able to drive clarity through-out their organizations and across all business functions to deliver against targeted results.
While Lowe's and their trade partner Whirlpool are making strides forward in sharpening the use of their existing supply chain frameworks, Home Depot has been scrambling to catch up. For its first 30 years, Home Depot set all kinds of retail growth records, but virtually ignored its supply chain. In 2006, Home Depot realized it could no longer afford to ignore the logistics side of the business. After nearly three decades of operation, Home Depot had little in the way of a formal distribution network. Vendors and suppliers shipped merchandise directly to the retailer's cavernous warehouse stores, which served as their own distribution centers. At an average of more than 100,000 square feet, the facilities were easily able to accommodate vast inventories of building materials and supplies (Gilmore, 2009).
But as the business and the home improvement industry have evolved, the model is falling apart. Over the years, Home Depot, which had saturated the major metropolitan markets, has turned its sights on secondary markets, where it had begun building smaller stores that were more in keeping with the markets they served. But the smaller stores lacked the space to house vast inventories, making them particularly vulnerable to stock-outs and other forecasting errors. Eventually, customers began to notice that items weren't always available and began looking for them at other retailers.
After conducting a distribution network study, Home Depot came up with a strategy for rebuilding their distribution process and reining in costs by centralizing operations. The new strategy is construction of 24 rapid deployment centers (RDCs). The RDCs, which will be strategically located throughout the country, will each serve approximately 100 stores (Gilmore, 2009). These will be flow-through distribution facilities engineered for the swift cross-docking of large volumes of merchandise, so very little will be stored in them.
So, while Home Depot continues to build internal supply chain infrastructure, Lowe's continues to reach out to suppliers and trade partners to refine what is already in place. And while Home Depot lags behind in supply chain management, Lowes and Whirlpool are discovering significant process innovation opportunities through their deployment. Perhaps as both Lowe's and Whirlpool are becoming industry champions by adopting the best practice processes endorsed by VICS and significantly enhancing these processes through on-going collaborative efforts, Home Depot and the rest of the home improvement industry can benefit from their joint experiences.