What is Collaborative Planning, Forecasting and Replenishment (CPFR)?
Collaborative Planning, Forecasting and Replenishment (CFPR) is a business model that takes a holistic approach to supply chain management and combines the intelligence of multiple trading partners in planning and fulfilling customer demand by using common metrics, language and firm agreements to improve efficiency for all participants. CFPR links sales and marketing best practices – category management, supply chain planning and execution processes to increase availability while reducing inventory, merchandizing, transportation and logistics costs.
The CPFR Model
The CPFR model provides a basic framework for the flow of information, goods and services. The center of the model is represented as the customer, followed by middle ring of the retailer (buyer) and the outside ring the manufacturer (seller). The consumer drives demand for goods and services while the retailer is the provider of these goods and services. The manufacturer supplies the retail channels/stores with the products as demand for products is pulled through the supply chain by the end user, i.e. consumer.
The diagram below shows the relationships of the three main players along with the four phases:
Strategy & Planning: establishes the ground rules for the collaborative relationship such as business goals, scope of collaboration, assignment of roles, responsibilities, checkpoints and escalation procedures.
Demand & Supply Management: consists of sales forecasting, order planning/forecasting, inventory positions, and transit lead times.
Execution: consists of Order Generation, i.e. transitions forecasts to firm demand, and order fulfillment, i.e. the process of producing, shipping and delivering and stocking products for consumer purchase.
Analysis: tasks include Exception management and Performance assessment. Exception management is actively monitoring planning and operations for out of bound conditions, while performance assessment is evaluating the achievement of business goals to uncover trends or develop alternative strategies.
Steps in the CPFR Model
The Voluntary Interindustry Commerce Standards (VICS) developed a 9 step approach to guideline businesses to develop agreements for collaboration.
VICS 9-Step Approach
- Develop the Front End Agreement
- Create the Joint Business Plan
- Create the Sales Forecast
- Identify Exceptions for Sales Forecast
- Resolve/Collaborate on Exception Items
- Create Order Forecast
- Identify Exceptions for Order Forecast
- Resolve/Collaborate on Exception Items
- Order Generation
Challenges with CPFR
CPFR may be a simple concept, however turning it into practice is a difficult task. Since it involves collaboration with several trading partners, cultural challenges with each organization are realized and requires an across the board buy-in. A change in business processes is required, along with an inward focus to develop a broad multi-enterprise view. Several challenges faced by organizations implementing CPFR are:
- Selection of CPFR partners – trading partners who wish to collaborate with each other need to assess the potential relationship according to anticipated, realistic benefits, pertinent to common business goals, organizations and cultural issues.
- Senior Management Buy In – senior management must sponsor each of the trading partners and get involvement from necessary resources, e.g. Human resources, technical infrastructure, time and project budget etc.
- Confidentiality – Sharing sensitive data reinforces the need to define rules around confidentiality.
- Cultural Change – Internal and external collaboration requires a mindset of change and capable to be flexible in adapting a collaborative approach.
Benefits of CPFR
The key benefits of CFPR falls within five major categories:
Improved customer service trough better forecasting techniques – More reliable forecasting allows a more effective way to anticipate consumer demand across the entire supply chain and therefore allow the business to plan production capacity accordingly. Risks for stock-outs is reduced which improves customer fulfillment orders which thereby increases revenue, delivery and improved customer service.
Lower Inventories for higher profits – accurate predictions of demand as mentioned before will reduce stock-outs and provide a more efficient understanding of production needs. Safety stock inventory for over production would be reduced which decreases carrying costs, storage space and potential spoilage/obsolescence. Additionally, there is improved material flow and release of working capital that can be used in other areas of the production instead of being tied up in inventory.
Improved ROI on Technology investment – effective CPFR technology solutions benefit both manufacturers and retailers from reduced overhead costs because several inefficiencies are eliminated, i.e., antiquated manual processes, custom integrations of different partner IT systems and information searching of multiple sources/systems.
Improved relationships between trading partners – develop when collaboration takes place. Trading partners gain a better understanding of respective businesses by regularly exchanging information and establishing direct communication on channels and create a win-win situation.
Cost reduction – will occur when production schedule and agreed forecasts are aligned. Costs are reduced by decreasing set-up times, effort duplication and variations. There is also efficient production capacity utilization since planning information is more reliable.
Practical Application of CPFR
A world’s leading manufacturer of major home appliances, Whirlpool, was facing forecast accuracy and demand variability challenges. The desired state was to have Whirlpool or trade partners host a collaboration hub that would act as a single point of storage for all forecast related data which is shared between both companies within a very secure environment. A prerequisite for launching this project was executive buy-in. Two approaches were used for both internal and external stakeholders. A cost-benefits business case with baselines and targets for key metrics targeted for improvements was developed, in addition to the financial gains that would be achieved. For external stakeholders, Whirlpool recognized the value of existing collaborative processes with the trade partner.
Incremental value and benefits of sharpening the focus of existing collaborative processes through a formal CPFR process and technology was projected. Once receiving executive buy-in, a technology called “i2 Supply Chain Collaborator” was utilized for its simple functionality, UI interface and strategic partnership with i2.
Before the implementation of CPFR, the forecast error was 70% which dropped down to 11%. Whirlpool and its trade partners saw a reduction in weekly order variability due to improved forecasting and a less reactive stance by trade partners to take corrective action in order variability. A forecast mismatch alert system was set up which allowed improved accuracy by analyzing the causes and making creative action plans.
Many intangible benefits were realized such as the one-to-one relationships between collaborating parties in both companies. A culture of collaboration was developed which put together process improvement techniques into action. Regular CPFR process reviews were also conducted to better understand each other’s problems and investigate corrective actions
CPFR is a great concept that has revolutionized business practices by integrating the organization with its trade partners more effectively to realize mutual benefits. Buyers benefit from reduced prices, better forecasting, collaborative relationships to get better service levels and synchronized operations. There is a longer term collaboration which the two businesses can share risks and rewards. CPFR models require commitment, true collaboration and executive buy-in from both sides. Additionally, concerns over the appropriate technology that integrates with legacy systems have been an issue which has caused many organizations to proceed cautiously.