CPFR - The first link in a chain of collaboration€¦ · November 2001 and will finish in August 2002. It will be a joint project between Baan and Deloitte&Touche Bakkenist. Ending

Hans Moonen CPFR – The first link in a chain of collaboration

Table of abbreviations

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Table of abbreviations APS Advanced Planning and Scheduling ATP Available To Promise B2B Business To Business CPFR Collaborative Planning, Forecasting and Replenishment CPG Consumer Packaged Goods CPR Continuous Replenishment Planning CTP Capable To Promise DBM Demand Based Management EAI Enterprise Application Integration ECR Efficient Consumer Response EDI Electronic Data Interchange ERP Enterprise Resource Planning JIT Just In Time JMI Joint Managed Inventory KPI Key Performance Indicator MRP Material Requirements Planning POS Point of Sale ROI Return On Investment SCE Supply Chain Execution SCEM Supply Chain Event Management SCM Supply Chain Management SCOR Supply Chain Operational Reference SCP Supply Chain Planning SKU Stock Keeping Unit VAN Value Added Network VMI Vendor Managed Inventory XML Extended Markup Language Y2K Year 2000 (problem)

Details graduation project Student

Hans Moonen, [email protected] Eindhoven University of Technology, The Netherlands Tel: +31 (6) 14768861 Student number: 427565 www.hansmoonen.com

Baan – company coach / mentor Luuk Kornelius, [email protected] Tel: +31 (342) 477565 Director Product Marketing, Baan Deloitte&Touche Bakkenist – company coach / mentor Fred Tusveld, [email protected] Tel: +31 (20) 4952323 Senior Manager, Deloitte&Touche Bakkenist University coach / mentor Piet van der Vlist, [email protected] Tel: +31 (40) 2473750/ 2472290 Professor in the field of Logistics and Information Systems Eindhoven University of Technology

Preface

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Preface This report is the result of a four-week literature research done as a preparation for the start of my graduation project. The graduation project will start in the second half of November 2001 and will finish in August 2002. It will be a joint project between Baan and Deloitte&Touche Bakkenist. Ending this project with a positive result, will result in the finish of my masters study ‘Industrial Engineering & Management Science’ at Eindhoven University of Technology in The Netherlands. The subject of this report is CPFR, a subject chosen together with my university coach professor Piet van der Vlist. It takes a detailed look at CPFR, and some of the best practices in the field of collaborative planning and CPFR. It is not only about software, but also about all kind of related aspects like standardization, organizational aspects, inter-organizational aspects, and strategy related decisions. As it does not look at CPFR solely, but also at collaborative planning in general and other logistical concepts closely related. The main target of this report is to use it as a reference base, and starting point, in my graduation project. That project will be related to the subject of this report. Furthermore, employees at Baan and Deloitte&Touche Bakkenist can use it to get a better understanding of all the aspects of CPFR and collaborative planning. I would like to thank everyone that contributed to this result, and in particular: Fred Tusveld, Luuk Kornelius, Sipke Baarsma, and Piet van der Vlist. Barneveld, 28 November 2001 Hans Moonen

Table of contents

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Table of contents Table of abbreviations......................................................................................................2 Details graduation project ................................................................................................2 Preface.............................................................................................................................3 Table of contents..............................................................................................................4 Executive summary..........................................................................................................5 Chapter 1 – CPFR explained..............................................................................................6 Chapter 2 – Collaboration.................................................................................................9 Chapter 3 – CPFR in more detail.....................................................................................12 Chapter 4 – Academic insights........................................................................................17 Chapter 5 – Other logistical initiatives compared.............................................................19 Chapter 6 – Best practices..............................................................................................22 Chapter 7 – The software landscape ...............................................................................28 Chapter 8 – Software solutions.......................................................................................33 Chapter 9 – Organizational impact..................................................................................35 Chapter 10 – Standards .................................................................................................38 Chapter 11 – Strategic choices.......................................................................................40 Chapter 12 – The next years ..........................................................................................43 Reference list.................................................................................................................46

Executive summary

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Executive summary CPFR is the abbreviation for collaborative planning, forecasting and replenishment, and the subject of this report. It is a supply chain management initiative that links different players in a supply chain. Sharing planning and forecasting information is the basis for stronger collaboration. Exception handling is one of the important aspects made possible by CPFR technologies. Chapter 1, 2 and 3 explain CPFR and collaboration in more detail. The history is pointed out, as are some negative and positive implications of CPFR. A value proposition for doing CPFR is given, and it is explained how CPFR fits in the total supply chain management picture. The example of the semiconductor industry shows how a collaboration solution might look like: CPFR in one direction (to share forecasts and planning information) and CTP information in the other direction. Chapter 4 takes a look at different recent academic journal articles in the field of collaborative planning, and forecasting. In chapter 5 a comparison is made with some other supply chain improvement initiatives. Special attention goes to ECR, VMI, and EDI. Some examples of ‘best practices’ as described in the literature are given in chapter 6. Especially examples from the consumer packaged goods (CPG) and the electronics/high-tech industry are present, as is one example of an enterprise operating in the automotive industry. Interesting is to notice that the CPG examples are generally more basic than the ones in the electronics industry. The technology used to do CPFR in the CPG examples is quite often a simple spreadsheet that gets distributed by e -mail or EDI. These companies generally plan to move forward to a more advanced software solution when moving behind the pilot phase. Not at least because it will not longer be possible to manage the amount of data to exchange manually or semi-manually. Chapter 7 takes a close look at the total software landscape where CPFR has its impact. Special attention goes to B2B exchanges, exception handling, enterprise application integration (EAI), enterprise resource planning (ERP) and supply chain management (SCM) software. A combination of these last two chapters, which results in different looks on how to apply CPFR software in an enterprise, is provided in chapter 8. There does not seem to be one ‘one-size-fits-all’ software solution for the whole field of collaboration. Good news for software vendors, but it does not make it much clearer for companies planning to move towards CPFR. Chapter 9 describes the different aspects of CPFR that have an impact on the organization, other than installing software. Some major constraints are detailed, and the difference and relation between internal and external collaboration is explained. Furthermore some attention goes to inter-organizational aspects, network organizations and changes in existing processes. Everything related to B2B standards is discussed in chapter 10. The problem with these standards is that it will at least take some years before one single standard will achieve widespread industry adoption, due to the immaturity of the current standards. This hinders, unfortunately, the adoption of collaboration. The importance of strategy in the competitive battleground of tomorrow’s economy is the basis of chapter 11. This chapter tries to address the importance of strategy in the Internet-enabled economy. Do companies need to adopt CPFR as part of their strategy? The answer is yes, but very integrated and as part of more supply chain improvements. Chapter 12 is the concluding chapter that takes a look at the next years. Some expectations from the Gartner Group and Stanford University professor Hau Lee are the basis for this nearby future ‘forecast’.

Chapter 1 – CPFR explained

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Chapter 1 – CPFR explained CPFR stands for Collaborative Planning, Forecasting and Replenishment. It is a standard developed over the past ten years to help retailers and their suppliers communicate more effectively throughout the demand planning and replenishment process [63]. The 1996 decision of Wal-Mart (large retailer) and Warner Lambert (pharmaceutical manufacturer) to work together to improve the replenishment processes was the unofficial start of CPFR [15]. Electronic Data Interchange (EDI) and spreadsheets were used to generate together a shared forecast. The new forecast turned out to be much more accurate which meant that the companies could work with lower inventory levels in the supply chain and a higher service-rate in the Wal-Mart stores. Wal-Mart and Warner Lambert wanted to make it an open public initiative, and so they took it to the Uniform Code Council (UCC). In January 1997, a CPFR committee was formed under the auspices of the Voluntary Inter-Industry Commerce Standards (VICS) association. Members of that committee included Wal-Mart, Kmart, Procter & Gamble, Nabisco and Hewlett Packard. The committee worked out a business model and developed a website, located at www.cpfr.org. Finally, the first official CPFR guidelines were approved and published, by the VICS, in June 1998 [68].

The CPFR process CPFR helps trading partners generate the most accurate forecast possible and set highly effective replenishment plans. Practioners report major benefits in higher service levels, decreased inventories, and increased sales [5]. Collaboration is more than messaging. The process begins with an agreement between trading partners to share information with each other and to collaborate on planning, with the ultimate goal of delivering products based on true market demand [2] [27] [68]. The VICS defined nine steps in the CPFR process. See figure 1.

Figure 1: The VICS nine-step CPFR model [58]


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It is directly clear that the joint development of forecasts, and collaboration on exceptions items are very important in this framework. The ‘Roadmap to CPFR’ details that the sales and order forecast are based on event dates, historical sales data analysis, and Point-of-Sale (POS) information, from both the buyer as the seller. In the order forecast step, actual POS data, causal information, and inventory strategies are combined to generate a specific order forecast that supports the shared sales forecast and the joint business plan. The question around who has the lead in this process – the buyer or the seller – depends on the business case and specific situation. It is not unthinkable that a supplier makes the initial forecast for its customer, which reacts on that and sta rts a negotiation process to realize the optimal forecast. Important in CPFR are a front-end agreement with business partners, to define what constitutes a successful program, and a joint business plan. When the partners agree on these aspects, consumer-demand forecasts can be shared, and collaborated upon (in case there is a mismatch between the different plans of the trading partners). Once initial sales are made, retailers and suppliers draw up replenishment plans. These plans should include a process to resolve exceptions – instances in which actual orders are far from expected demand. Orders more or less in line with the replenishment plan’s targets can be handled automatically. In addition (by sharing data like point-of-sale, orders, shipments, and on-hand inventory) forecast accuracy problems, overstock or understock conditions, and execution issues are identified and resolved [74]. An additional element of CPFR concerns mining and analyzing historical data based on past demand for raw materials and products [71]. CPFR technology analyzes the shared data, and in case the forecasts do not match up, it notifies planners at each company of the exceptions. The two parties work together – by using technology – to resolve these exceptions. The final plan, agreed to by both, describes what is going to be sold and how it will be merchandised and promoted [68]. The result is a better match between supply and demand through the use of realistic, informed, and detailed estimates [77]. Mark Samuelian, partner at Accenture, says that CPFR technologies let companies improve the relationship they have with their trading partners. VICS CPFR committee co -chair Joe Andraski makes clear that the main focus of CPFR is not reducing inventory, but increasing sales [25]. It is generally believed that collaboration among supply chain participants leads to lower total cost and enhanced service performance [77]. More-accurate, up-to-date information on customer demands can allow products to be delivered in the most direct way, thereby lowering cost and improving efficiency [47]. The benefits of CPFR ripple throughout the supply chain. By expanding and systemizing the communication of critical data among trading partners they can improve their forecasting and replenishment. But the benefits actually run far deeper. Distributors for example can carry less stock, manufacturers can shift from a make -to-stock discipline to make -to-manufacturing, underwhile dramatically reducing inventory and netting cost savings on the production side [68].

The supply chain management picture CPFR nowadays is seen as a subset of the larger supply chain management picture and is “about much more than data exchange”, according to IBM’s John Sharman [71]. The rise of attention for supply chain management marked a departure from a one-firm perspective to the recognition that value is more often than not created and delivered through horizontally as well as vertically connected “value webs” [56]. Logistics is now bound more closely and overtly than ever before with the disciplines of strategic management and the inter-organizational application of relationship marketing. Copacino [77] highlights the importance of integration is his definition of supply chain management (SCM): “The new vision of supply chain management links all the players and activities involved in converting raw materials into products and delivering those products to consumers at the right time and at the right place in the most efficient manner.” Figure 2 gives a clear overview of the complete supply chain management picture. Realize that the real picture is


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never this easy. Companies do not only have one supplier, and/or one buyer, it is a real network of companies1 [41].

Figure 2: The complete supply chain management picture [32]

1 For example 1990 figures of the Japanese manufacturing industry as a whole show, that only 17% of subcontracting firms deal with a single buyer, 20% of them have two customers, 26% have three to five customers and 36% have six or more customers.

AddvalueBuy Sell

Supplier'ssupplier

Supplier'ssupplier

Supplier'ssupplier

Customer'scustomer

Customer'scustomer

Customer'scustomer

Supplier Customer

Customer'scustomer

Customer'scustomer

Supplier'ssupplier

Supplier'ssupplier Traditional SCM

Extended SCM

Intranet

Extranet

InternetDigital value webs Digital marketplaces

Chapter 2 – Collaboration

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Chapter 2 – Collaboration The essence of collaboration is illustrated quite clear by Mark Shaver, who is manager at Joy Mining. “You want to buy a part from our company. You know what it costs, you have made the purchase. Now, how about telling me why you want to buy the part?” [28]. Wortmann and Szirbik explain that the concept of collaboration does not only apply to collaboration between different companies. The same development can be observed in single enterprises working with different business units or even when working in different locations [83].

Models for enterprise collaboration Edwards, Peters and Sharman, make clear that in order to gain supply chain advantages, companies need to exchange large amounts of planning and operational data. The emergence of the Internet and new software applications has provided an opportunity for some companies to move towards an extended enterprise business model – one that enhances value across traditional corporate boundaries [26]. Unfortunately the terms supply chain collaboration, extended enterprise and virtual enterprise aren’t used properly quite often. Jagdev and Thoben introduce a continuum where any collaborative relationship can be placed in [38]. This is illustrated in figure 3. Within enterprise networks they identify three types of collaboration architectures. This is shown in figure 4.

Figure 3: Continuum of enterprise collaborations [38]

Figure 4: Types of collaborations within enterprise networks [38] The virtual enterprise differs quite a lot from the other types of collaboration. Some authors define virtual enterprises as a temporary network of independent companies engaged in providing a product or service. Or even appearing as a supplier of goods and services to its customers, but with no internal production activities [22]. It might be better to define a virtual enterprise as a network of independent organizations that jointly form an entity committed to provide a product or service [38]. In case a virtual enterprise will only be based on short term interactions, the emphasis is not on regulating stock policies


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and overall logistic management, but on the need to allocate fast the resources, monitor the execution of the order and take the necessary steps if disturbance occur [83]. Stanford University researchers Hau Lee and Seungjin Whang, define three different models of information sharing in more traditional supply chains [45]: (1) the transfer model, (2) the third party model, and (3) the information hub model.

Supply chain integration dimensions The Stanford Global Supply Chain Management Forum lists four dimensions of supply chain integration [50]. These four key dimensions are:

1. Information integration 2. Synchronized planning – identifies ‘what’ is to be done with the information that is

shared 3. Workflow coordination – one step further by not only identifying ‘what’, but also

‘how’ to handle the shared information 4. New business models – use supply chain integration for whole new ways of doing

business Eindhoven University specialists Wortmann and Szirbik show the different levels of interaction complexity. Their model is more -or-less in line with the model as shown by Stanford. More information can be found in [83].

Types of information to share Lee and Whang identify different sources of information that may be beneficial to share in a supply chain context [45]. It may be clear that this details the first point from the list above:

1. Inventory level 2. Sales data 3. Order status for tracking/tracing 4. Sales forecast 5. Production/delivery schedule 6. Performance metrics 7. Capacity information

Collaboration Collaborative planning is a part of the collaborative commerce concept as introduced by the analysts of Gartner Group. Companies work together with their suppliers and customers to improve the competitive position of the total supply chain, instead of improving the position of only one company within this chain [11]. David Anderson and Hau Lee [8] say more or less the same. “At the heart of the matters are customers’ ever increasing demands. Customers – whether they are business customers or individuals – are looking beyond cost as the sole arbiter of value”. The supply chain activities of the different partners must be tightly synchronized with the demands of the market place. Not only the ability to communicate is required, but also the capability to manage the complexity and immediacy of this synchronization. Anderson and Lee distinguish four key areas where the new Internet-enabled supply chain differs from the traditional supply chain. The first three areas relate to major management processes shifting to or leveraging the Internet. The last area concerns upgrading the performance of physical processes to match the speed and virtual capabilities of the new supply chain. The four areas are:

1. eDesign – Product innovation on the web 2. eMediaries and Exchanges – Using online markets to revolutionize buying and

selling 3. Web-based Collaborative Planning – The virtualization of the supply chain 4. eFulfillment

It shows that collaborative planning is not the only aspect that brings a company – or supply chain – up to Internet speed, but it is definitely important.


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Joe Cothrel, VP for Participate.com, distinguishes two kinds of collaboration. Structured and unstructured collaboration. He defines structured collaboration as rigid transaction-focused cooperation that allows supply chain partners to share inventory forecasts and pricing information. Unstructured collaboration, he says, involves streamlining supply chain communications and processes through next-generation workflow tools. It may be clear that CPFR is mostly about structured collaboration [53].

Chapter 3 – CPFR in more detail

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Chapter 3 – CPFR in more detail This chapter gives an overview of some of the negative and positive sides of CPFR initiatives. The main negative aspects are long-term agreements, and inaccurate point-of-sales (POS) data. Higher customer satisfaction turns out to be the basis for CPFR. A more accurate forecast, results in a much smaller bullwhip effect, and some in-stock improvements. Inventory reduction, less work-in-progress and a better customer service turn out to be the results of that. Sales growth is an overall result. Furthermore this chapter provides the value proposition for doing CPFR, and as an example the use of collaborative planning in the semiconductor industry.

Negative implications of CPFR A negative side of CPFR is that (large) trading partners can be locked into long-term CPFR agreements, what can have a negative effect for small suppliers. In the retail branche shelf space will be even less flexible than it is now, and making room for new start-ups will be very difficult [68]. This phenomenon is not only caused by CPFR, while buyers more and more seem to favor longer-term relationships in their value chain the last years [14]. For CPFR, just as for other initiatives that use POS data, inaccurate scan data is a nightmare, particularly in supermarkets. It is very common for a cashier who sees three packs of juice boxes, or four boxes of pasta to scan one, the process the multiple key. This way the scan data does not correctly reflect the actual sales and what is left on the shelves [68]. POS data in general is a problem, according to ‘The Industry Standard’ [24]. Dominant forces in consumer products, like Proctor & Gamble (P&G), get their data a lot faster than most other companies, but they still have to wait an average of four days. The smaller, less dominant, companies wait an average of 20 to 30 days. It is very hard to turn data that comes with such a delay into useful information that can be used for planning, forecasting and replenishment processes. P&G wants to cut this interval down to hours, while it believes it can do a better job of manufacturing what is selling right now. One of the ideas for doing this is a very high-tech one: product packages get small and very cheap chips attached [23], and wired shelves record everything what is happening with the products. If a product is picked up the system records that, and if a customer puts it back (even if it will be put back on the wrong s pot) that will be recorded as well. This can be a solution to grow to more accurate scan data, but it is definitely not a cheap solution and it will take lots of years before it can be really used. Smart chips like this, integrated in products, will have a major impact on many more logistical processes. It makes it for example a lot easier to track and trace products, to check the tenability, to do checks at customs, etcetera.

Positive implications of CPFR Customer satisfaction is at the heart of CPFR, and it makes a sales lift possible. Accenture’s Smith explains this by saying that “CPFR gives retailers the chance to raise sales by having the product on the shelf when shoppers want to buy it” [68]. One of the problems companies like P&G currently have is that they “typically miss when they have a promotion”, says P&G’s Roy LeClair. That is because retailers typically do not tell the company when its products are going to be put on sale [24]. Collaboration can do a lot here. Kmart has started to share with P&G its plans for discounts on P&G tissues and other paper products. The demand curve for some of those products “looks like someone having a heart attack”, says Rone Luczynski from Kmart. By sharing the plans for discounts the two companies have come up with more accurate figures for sales. It definitely helps to avoid the situation of putting items on sale and as a result not having enough of it on hand [24].


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A reduction in Work-in-Process across the supply chain can be a result of collaboration as well [85]. Stanford University professors Hau Lee and Seungjin Whang make clear that in a non-collaborative supply chain the bullwhip effect is a real problem [45] [54]. The making of forecasts and sales estimates, independently of actual demand information farther upstream in the supply chain, is one reason for the bullwhip effect. But there are three others as well: gaming, promotions and batching. Gaming2 requires a manufacturer to be presented with a false picture of actual consumer demand. Promotions change demand patters because they require manufacturers to stockpile products for retailers. Batch processing tends to distance a product or company from the marketplace, when it is used without a marketplace orientation. It also exacerbates relatively small upstream changes in quantity. CPFR gives management better visibility into what is occurring in the supply chain, letting them consider alternatives sooner, says Karen Peterson, a Gartner Group analyst [43]. Gartner Groups’s Enslow explains that the real opportunities for collaboration depend on different characteristics of the enterprise and its supply chain environment. Companies considering collaboration need to be aware of this [27]. McKinsey’s Agrawal and Pak also speak about the characteristics of the supply chain the company operates in, they say that these must be the leading driver for collaboration strategies. “It is understandable that companies want to cut their inventories by improving forecasts, for example, but no statistical model can predict the day-to-day demand for a product with a three-month life cycle and thus what levels of safety stock to maintain. In industries such as fashion apparel or personal computers, shorter lead times and response cycles are therefore more likely to generate real improvements in the supply chain” [6].

Value proposition The value proposition to participate in CPFR is compelling [12]. An April 2001 retail research report from AMR Research titled “Beyond CPFR: Retail collaboration comes of age” included table 1, with results “actually achieved by early adopters of CPFR” [39], [78]. Table 1: Typical CPFR benefits Retailer Benefits Typical Improvement Better Store Shelf Stock Rates 2% to 8 % Lower Inventory Levels 10% to 40% Higher Sales 5% to 20% Lower Logis tics Costs 3% to 4% Manufacturer Benefits Typical Improvement Lower Inventory Levels 10% to 40% Faster Replenishment Cycles 12% to 30% Higher Sales 2% to 10% Better Customer Service 5% to 10% Roland Berger Strategy Consultants expects that consumer goods manufacturers can reduce inventory costs to produce cost savings of as much as 15% to 30% and sales improvements of 5% to 7% [13]. Their numbers are in the same range as the findings of AMR Research. The same applies for some of the findings of the VICS, some published CPFR pilots (as showed in chapter 6) and Transora member company results [12]. Financial benefits come from five areas of improvement [39]:

1. Inventory reductions 2. Increased sales 3. Reduced warehousing, transportation and logistics costs 4. Reduced returns, markdowns and charge backs 5. Gross margin improvements from better supplier contract terms and other

efficiencies 2 An example of gaming is a situation in which a retailer expects to sell 50 pieces, but expects to receive only half of the pieces it orders from its supplier. In that case the retailer orders 100 pieces, to receive 50. It might be clear that this can work very disturbing.


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Not all the improvements are the direct result of using the CPFR principles and technology. Some of the larger increases in sales can be attributed to the greater attention on participants’ brands that the CPFR joint business planning process brings. Early adopters have been able to leverage collaboration to win better product placement, product mix and promotional timing, with dramatic effects [39].

Number of participating partners Raghunathan [64] shows the very interesting findings that the more supply chain partners participate in a CPFR project, the higher the benefits will be. CPFR always decreases the cost of the participant retailer and the manufacturer. However the cost of a non-participant retailer can decrease, in case the manufacturer allocates the shortage equally between retailers, or increase, when the manufacturer guarantees the order quantity for the participant. The manufacturer’s risk of excess inventory and shortage, which is proportional to the standard deviation of the demand faced by it, and the retailers’ risk of shortage are schematically shown in figure 4 for a two-retailer situation. As the graph shows, CPFR helps to decrease the risks while the demand uncertainty is reduced. The manufacturer’s risk is related to the number of retailers, because of the “pooling effect”. The pooling effect occurs when there are two or more retailers, because a higher demand at one site can be offset by a lower demand at another site. When the number of retailers is large, this effect is even more pronounced because there are more ways by which offsetting of demands can occur. Consequently, when retailers share their demand information, the reduction in the manufacturer risk (and cost) is convex in the number of retailers participating in CPFR. Hence, the manufacturer realizes more cost savings when the second retailer also participates in CPFR.

Figure 4: The risk structure with and without CPFR [64] Mathematical analysis shows not only that the manufacturer cost is lower with CPFR than without, but also that the incremental reduction in the manufacturer’s cost, because of CPFR, is higher when the second retailer participates as well, even when the retailers are independent and non-competing. This habit can be easily explained by the fact that in situation 0, when the manufacturer is uncertain about the demands from both retailers, the standard deviation of the demand at the manufacturer end, which determines the production quantity and the shortage, excess inventory, and the manufacturer cost, is less than twice the standard deviation of demand from each retailer. Note that the standard

deviation of total demand at the manufacturer end without CPFR is σσ 22 < , where σ is


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the standard deviation of the demand of each retailer. In other words, when there are two retailers, the manufacturer’s risk is partially offset because it can compensate the underproduction with respect to one retailer with overproduction for the other retailer. It might be clear that this behavior will result in a push, by the manufacturer, towards universal participation by all retailers. For retailers it may be beneficial to be the only retailer who is doing CPFR with a manufacturer, while that can provide a strategic benefit because of lower costs and better delivery facilities, and more important an increase in costs for non-participants. However, such a proprietary system may not susta in over a long term because the manufacturer can indeed develop similar proprietary systems with other retailers. Raghunathan makes clear that power relationships in the supply chain context are very important as well, and that the impact of power is significant. Power may be very important in the determination of the CPFR structure.

Two-way process Childe [22], from the University of Plymouth, explains that it always needs to be a two-way process. Not only forecast and demand information need to be shared from the customer to the supplier (upstream), the suppliers also needs to provide their customers (downstream) with details around its own schedules, so these customers will be able to co-ordinate the requirements they place. Rather than asking “When can you deliver x?”, discussion will be at the level of the master production schedule. Closely linked suppliers are like subcontractors – they are effectively selling their time and their capabilities rather than their products. The different partners really collaborate and share information at the level of schedules.

Semiconductor example Any industry will benefit from better balancing of supply and demand, but the need is intensified for semiconductor vendors and their trading partners [70]. Especially because of long manufacturing lead times, the ‘push approach’ that manufacturers use (because of costs involved), and rapid price reductions for semiconductor products. Currently customers often exaggerate demand forecasts, when supplies are tight, to improve their chances of getting required quantities. As a result of this, many manufacturers do not pay that much attention to their customers demand data. Lee and Whang [45] add that this is caused by multiple factors including business cycle, double forecasting, shortage gaming and third-party speculation. As a result, industry sales data and market prices are so noisy that estimating real market demand becomes a major challenge. To tackle this kind of problems, manufacturers and customers need to work with realistic demand forecasts, and visibility in each other’s systems. Information sharing is the key, to mitigate the information distortion [45], and each manufacturer can better estimate the market demand and make better production, capacity and inventory planning decisions. This is where collaborative tools can play an important role. Gartner Group [70] suggest a two way approach (as shown in figure 5): (1) Manufacturers need to share Capable To Promise (CTP) information with their customers, and (2) Collaborative planning (CPFR) needs to be used to calibrate the accuracy of the forecast, and reduce the overproduction that leads to excess inventories. This figure also illustrates the two-way process as explained in the last paragraph. Manufacturers must be aware that in the cyclical semiconductor industry, even small improvements to the capacity planning and order-book reconciliation processes will reduce inventory obsolescence risks, generating significant bottom-line savings. Vendors can also improve customer service without increasing inventory risk. Better visibility of customers’ changing demand patterns will not only reduce overproduction when demand falls off but also improve allocation accuracy in times of constrained supply. Results of collaboration shall be an increase in profitability, higher customer service levels, and reduced inventory risk.


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Figure 5: Collaboration between vendors and customers: linking capacity to demand [58]

Chapter 4 – Academic insights

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Chapter 4 – Academic insights This chapter gives an overview of some recent state -of-the-art research done in different fields that are closely related to collaborative planning. Information sharing is discussed, as is the quality of forecasts, the setting of safety stock levels and the use of smaller batch sizes.

Information sharing Sharing sales information has been viewed as a major strategy to counter the so-called “bullwhip effect”. The bullwhip effect is essentially the phenomenon of demand variability amplification along a supply chain, from the retailers, distributors, manufacturer, and the manufacturers’ suppliers, and so on. Lee, So and Tang [46] point out that information sharing alone could provide significant inventory reduction and cost savings to the manufacturer. The benefit of information sharing lies in the manufacturer’s capability to react to the retailer’s needs via the knowledge of the retailer’s inventory level to help reduce uncertainties in the demand process faced by the manufacturer. Mathematical they prove that information sharing provides benefits to the manufacturer in two ways: (1) inventory reduction; and (2) expected cost reduction (especially shortage costs). Their results indicate that the manufacturer would experience great savings when: (a) the demand correlation (ρ) over time is high; (b) the demand variance (σ) within each time period is high; or (c) the lead times are long. These conditions seem to fit the profile of most high-tech products. Therefore, their results suggest that information sharing would be especially useful for improving the efficiency of the supply chains in the high-tech industry. The grocery industry is another industry that may benefit significantly from information sharing, especially because the demands of consumer products are often correlated over time. These benefits are there for the manufacturer. To entice the retailer to share its demand information with the manufacturer, the manufacturer needs to provide incentives to the retailer. Generally speaking there are two ways to do so. The first incentive is a financial scheme that aims to reduce the retailer’s variable cost – like price reductions, better return policies, better payment terms, etc. The second incentive is an operational scheme that aims to reduce retailer’s overhead, processing and inventory costs. Simulation shows that especially leadtime reduction turns out to be very beneficial for the retailer. Their conclusion is that information sharing alone will benefit the manufacturer only and leadtime reduction alone will benefit the retailer primarily. However, both partners may obtain benefits when information sharing and leadtime reduction are implemented together. Raghunathan [65] describes that the model as used by Lee, So and Tang is not the right one to use. Their results depend on the critical assumption that the manufacturer uses only the most recent order from the retailer to forecast the future orders. They overestimate the benefits of demand information sharing, compared with the case of no-information sharing. The assumption is that the manufacturer only uses the current period’s retailer order quantity to forecast the next period’s retailer order quantity. Raghunathan’s conclusion is that when manufacturers make use of already available internal information (i.e. order history), there is no need to invest in inter-organizational systems for information sharing purposes. For the simple reason that, a manufacturer can reduce the variance of its forecast, by using the entire order history to which it has access. Cachon and Fisher [16] show that there is an upper bound on the value of information sharing within the context of a stationary demand supply chain, and that accelerating the physical flow of goods through a supply chain is significantly more valuable than expanding the flow of information. On the contrary, Raghunathan [65] explains that demand sharing can indeed be very useful in case that (1) the demand process changes over time; and when (2) disturbances in the demand process influences the demand in other time -periods (like for example retailer actions such as promotion, price reduction, advertising, etc.).

Chapter 4 – Academic insights

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Quality of the forecast Cachon and Lariviere [17] show that it often happens that supply chain partners who share their forecasts, do not share these completely honest. There is an incentive to inflate the forecast to induce the supplier to build more capacity. This seems to be a real problem, especially, in the personal computer industry. Distributors frequently have better demand information than the manufacturers because they are closer to the customers. Manufacturers would prefer the best information possible, to better manage their inventories, but they often suspect their distributors of submitting “phantom orders”, forecasts of high future demand that do not materialize. Two University of Notre Dame (Notre Dame, IN, USA) researchers, Wei and Krajewski [81], explain that currently a lot of companies that share forecasts with their supply chain partners actually share future production schedules, based on planned orders. The result of this is that this ‘forecast’ changes a lot – the expected numbers rise – when the delivery date approaches. Important findings from their study include that increased forecast effectiveness does help reduce total system cost. In addition it mitigates the shortcomings of lower levels of integration. Their research shows that when companies start to share forecasts with their suppliers the ‘critical path’ method is more cost effective than the tier-1 approach. The critical path integration approach argues that instead of spending efforts on schedule integration for many tier-1 suppliers, it would be more cost effective to focus on the suppliers on the critical path.

Safety stock levels Zhao, Lai and Lee [84] demonstrate that using safety s tock can help to reduce total cost, schedule instability and improve service levels in MRP systems. They show that the best method to use is the assumption that the safety stock should be used to protect against demand uncertainty from the period in which the last order is received and the period in which the current order is to be received. It might be clear that the safety stock method as they suggest it – and prove by using simulation and mathematical formulas – is not a fixed number, but is variable depending on the current situation. This is quite logical, while the safety stock needed in the planning for each future order only needs to protect against uncertainties in the periods that the order covers. Use of data about the historical forecast accuracy seems to be important as well.

Batch sizes Jung et al. [41] explain that it has been believed, traditionally, that a reduction of order lot sizes is beneficial to the buyer while it imposes burdens on the supplier in terms of demand uncertainties, risks, etc. Their recent study shows that this may not always be the case if the demand correlation is taken into consideration. Positive correlation means that when demand rises for article P1, it also rises for P2. Negative correlation means that when demand rises for P1, it falls for P2. Suppliers with positively correlated demands suffer seriously on frequent orders with smaller lots, this is even the case for flexible suppliers. According to them, supply chain managers should keep in mind that the changes of their order lot size influence the mean and variance of the supplier’s capacity utilization in the opposite direction depending on the sign of demand correlation, which might affect the cost of the price of that part. Childe [22] explains that it might be better to order only the quantities needed, rather than fixed batch sizes or standard ordering quantities. He explains that in organizations that use control systems like MRP, the use of safety stocks and safety leadtimes adds to the variability of demand for low level items in the value chain.

Chapter 5 – Other logistical initiatives compared

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Chapter 5 – Other logistical initiatives compared Where the Eskimos have a dozen words to describe snow, corporations have almost as many definitions and visions of collaborative logistics [52]. This chapter provides an overview of some other logistical improvement initiatives, and tries to make a comparison with CPFR. Special attention goes out to EDI and some initiatives that mainly started in the Consumer Packaged Goods (CPG) and retail industry.

CPFR compared with other initiatives CPFR is unique in its ability to provide both suppliers and retailers mutual sales increases and inventory decreases. As Proctor & Gamble says in the ‘Roadmap to CPFR’, “Our primary CPFR output concentrates on improving inventory and reducing out-of-stocks. Traditional SCM decreased one but forced the other to increase; trade-offs were made to deal with the lesser evil” [5]. The supply chain operational reference (SCOR) model is a standard that has been developed over time to d efine the processes around the plan-source-make-deliver-return cycle, as the cross-industry standard for supply chain management [3], [4]. The SCOR model incorporates a number of specific processes across the core activities mentioned. It provides a standard methodology for managing supply chain projects [51]. CPFR and SCOR have similar goals: to improve logistics performance at a lower cost, reduce or balance inventory, improve information accuracy, optimize fill rates and minimize administrative overhead [63]. Other initiatives like Efficient Consumer Response (ECR), Continuous Replenishment Planning (CPR) and Vendor Managed Inventory (VMI) had the same objectives as CPFR: reduce the costs related to production and inventory, and grow to a higher service level. Accenture’s Gerry Rogers explains that one of the big differences with other supply chain improvement initiatives is that the right technology comes finally available. Electronic marketplaces and advanced software make it possible to negotiate between partners in real-time, something that was much harder to achieve with EDI [11]. CPFR has close ties to earlier efforts such as ECR and VMI. CPFR includes both supply and demand activities, however. AMR Research reports that manufacturers in CPFR pilots indicated most benefits were accruing from the generation of a joint business plan and standard category management business practices [54]. An Industry Directions survey [5] shows that VMI is used in 47% of the companies that surveyed. However, of these, almost none has taken it to the next stage of shared responsibility or Joint Managed Inventory (JMI). This is where CPFR communication can facilitate the next step. CPFR is also an enabling process for all other supply chain management improvement initiatives. To quote the VICS Roadmap, “CPFR is about setting common goals for organizations and builds on and extends other ECR successes, such as category management and CPR. It pulls them into a cohesive plan, supports better execution of the plan, and invites improved planning in the next business cycle.”

Electronic Data Interchange (EDI) Electronic Data Interchange (EDI) is the exchange of structured business data between the computer systems of trading partners in an agreed standard format. It has been around for the last two decades [67], and nowadays industries like retail distribution, automotive manufacturing and international logistics are totally dependent on EDI-driven processes [79]. EDI is especially popular among companies in the automotive industry because of its inherent ability to facilitate just-in-time (JIT) practices that are widely used by automakers [66]. The ‘best-practices’ chapter shall demonstrate that EDI is used in quite a lot of CPFR pilots as the vehicle to share the data. Ford Australia started to use EDI in the mid-1980’s, for applications that transmit forecast information to suppliers on material requirements and provide detailed instructions to suppliers on the daily shipments of materials required [67]. Although forecast information is shared upstream in the supply chain, this does not seem to be an example of CPFR,


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based on the information provided. There is no interaction cycle between the trading partners. Some of the benefits EDI brought include strategic benefits like a faster trading cycle, JIT manufacturing, and sometimes a competitive advantage. Operational benefits are reduced costs, an improved cash flow, and error reduction [79]. Reduced costs are not only due to the use of automated systems (what for example impacts the costs related to parts procurement), but next to that, the closer relationships fostered by EDI can result in innovations and higher corporate performance due to lowering costs in the product development cycle. Lynne Bukovic from Syncra Systems adds that “EDI has allowed for more efficient transaction processing” [12]. While EDI helped automate the largest trading partners in a supply chain, it never fulfilled the promise of true collaboration, especially among small and medium sized enterprises (SME’s) [63]. Different experts agree that some of the disadvantages of the use of EDI technology are: high costs for implementation, low flexibility, and the concept of point-to-point connections [12], [30], [79]. As a result the scope and scale of implementation are limited. Hans Wortmann and Nick Szirbik, from Eindhoven University [83], state that EDI is, in fact, a weak form of integration between companies. In essence, EDI provides the means to exchange standard messages in logistics and commerce between two partners with excellent contractual arrangements. In itself, the existence of EDI is a major step forward towards collaborative systems between enterprises. However, it has the limitations of batch-mode messaging for data exchange, and no application or workflow integration. Vanderbilt University, (Nashville, TN), has done research around the performance of EDI in the automotive supply chain in the US [66]. Some of the conclusions from there analyses show that (1) the size of a firm does not affe ct the degree of EDI integration, (2) firms with high corporate performance have a high level of EDI integration and information sharing, (3) EDI integration mainly exists between automakers and the first-tier suppliers. The researchers define the ‘level of a firm’s EDI integration’ as the extent to which data is automatically fed forward into other business applications such as Material Requirements Planning (MRP), Enterprise Resource Planning (ERP), accounting, production scheduling, purchasing, shipping and receiving. Their research shows that a high percentage (almost 80%) of companies (in the automotive supply chain) uses functional acknowledgement messages. This suggests that the suppliers do not always trust the data from the automakers. The strong players in the chain mainly enforce the use of EDI, in this case the car manufacturers. Another interesting thing they point out is that there is a lot of confusion around the standard to use. Even GM, Ford, and Chrysler have not agreed on the same set of rules. Hau Lee and Seungjin Whang, Stanford University, list different drawbacks of EDI [45]:

1. The problem of multiple industry-specific standards 2. One-fits-all spirit, it may not exactly meet the special needs of a supply chain. 3. Primarily designed for transaction processing, it has some severe limitations for

information sharing. 4. Batch-oriented 5. High cost of installing

XML (extended markup language) is seen as the future for Business To Business (B2B) interactions, mainly because it seems to be less expensive, and more flexible. There are two important differences [76] between EDI and XML. First XML has the advantage of shipping universally accepted ‘meta -data’ (data about the data) with each message. Translation is no longer protocol dependent, as the technology is now the translation protocol. Another important difference between the two technologies is that EDI standards are content driven, while XML standards are format driven. For example: The EDI 850 transaction set is the 850, and it may never change. Worse yet, trading partners cannot communicate anything that does not have an equivalent transaction set. Migrating the concepts embodied by EDI to the Internet provides a simple way to increase the number of collaborative participants because the technology and cost barriers to entry


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are minimized [63]. Internet-based communication eliminates the expense of using a VAN (value-added network), which is required for EDI systems [73]. On the other hand, this new technology must not just be the replacement of EDI. The full benefits of collaborative commerce cannot be obtained without transforming cross-enterprise processes and workflows [29]. So, XML is – just as EDI was and still is – a good enabler, but for true collaboration a change in the processes is needed as well.

The next step A Forrester survey from April 2001 reports that only 6% of more than 500 participants indicated that their installed Enterprise Resource Planning (ERP) systems are very effective at helping them collaborate with partners, while 79% said that their ERP systems were not effective or only somewhat effective [21]. The companies that do collaborate share data like purchase orders, invoices, and fund transfers by using EDI and XML that directly links into the trading partners ERP system. Collaborative planning is not the ultimate step, but just a phase in the logistical integration process of companies working together in a supply chain. It is in fact the next step after VMI. Collaborative planning adds interaction: a customer creates a forecast, sends it out to the supplier, the supplier adjusts it, sends it back, and so on. A negotiating process is happening [11].

The big differences Looking at everything said so far, it is clear that CPFR is not completely new. Companies are (thinking about) working together for years already, with sometimes very good results. CPFR and collaborative planning is a new step in the optimization of supply chain activities. Really new – in comparison with former initiatives – is that it now really becomes collaborative. Companies really involve their suppliers and customers in there own internal processes. Together they work on excellent forecasts, make their planning and the results can be very impressive as showed. It is shown that it is not only about pushing forecast information one way (upstream), but also about getting capacity information (like there is CTP) downstream. Realize that it is a relatively young field, and that, as chapter 4 demonstrates, there are still a lot of things to keep in mind when working out collaborative pilots. On the other hand, almost everybody agrees that stronger collaboration along the value chain is definitely the way to go!

Chapter 6 – Best practices

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Chapter 6 – Best practices The strange thing with CPFR is clearly illustrated by Steve Banke r of the ARC Advisory Group: “ There are a lot of pilots, but you would be hard -pressed to find a major manufacturer or retailer using it for forecasting along all products and promotions for all major manufacturers” [10]. Another interesting aspect is that so far all efforts where on integrating with suppliers, or customers. Not on integrating both at the same time (cross-directional collaborative efforts) [43]. This chapter looks in more detail at different ‘best practices’ of CPFR that can be found in up-to-date literature. CPFR pilots seem to be present in three industries: CPG, High-tech / Electronics and Automotive, although they are not always named CPFR, the basic ideas behind it are comparable. The abbreviation CPFR is mainly used in the CPG industry, most probably because of its origin in that industry. Some of the examples from especially the High-tech/Electronics industry are not documented as CPFR, but are included in this ‘best practices’ chapter.

Various CPFR examples in the CPG industry Wal-Mart was the first to start CPFR – as the first chapter showed. In a pilot, started in July 1998, with Sara Lee they focused more on identifying exceptions and resolving the exceptions than on creating a common sales forecast. The data vehicle used was the VICS-EDI 830-transaction set, next to that they built a collaboration site, within the Wal-Mart Internet-based vendor communications system. People from many areas in both organizations participated in the pilot, with a clear focus and commitment on win-win actions. The results were impressive: after 24 weeks a 2% improvement in retail store in-stock, a reduction of 14% in store -level inventory compared to a 32% increase in sales, and an increase of 17% in retail turns on the pilot items, were reached. Not only improved external collaboration took place, internal collaboration improved as well [2]. Heineken makes use of software from Logility since 1996, to let their sales representatives work with their customer’s sales reps (e.g. the retailers) to generate more business for Heineken. Heineken experiences more revenue because end-customers do not run into empty shelves anymore. Logility’s White makes clear that it can be done for very little money, thus making it available for smaller businesses. The last couple of Heineken distributors that implemented CPFR – not surprisingly the smaller ones – did so with a simple Internet connection and a webbrowser [15]. Campina, a dairy company based in The Netherlands, started a collaborative pilot together with package material supplier VPK. In the old situation Campina ordered each Thursday or Friday the shipment for the next week. To fulfill these orders with the requested service level, VPK held a huge amount of customer specific packaging material in stock. Nowadays Campina provides VPK every week an Excel spreadsheet with the forecast for the different products on a 13-week basis, output from their ERP system. A very simple solution, but the results are impressive. The Campina specific stock at VPK decreased with 60%, and the service level increased at the same time from 75% to 98% [11]. One large and very successful supply chain management pioneer is Proctor & Gamble. Using such CPFR approaches as category management and point-of-sale data to determine when to replenish product, P&G has doubled warehouse inventory turns, increased factory utilization, and dropped overall costs [54]. Henkel and Eroski, food retail industry leader in Spain, set up a pilot CPFR program starting in the second half of 1999. The Henkel detergent category products were part of this project between the central warehouses of both companies [40]. The companies used software from Manugistics to collaborate on forecasts, and react on alerts when unexpected shifts due to sudden optimism of the sales forecaster or potential errors in the positioning of a promotion appeared. Important in the initiation phase was the establishment of the co-operation agreement that consisted out of definitions of both parties’ expectations, Key Performance Indicators (KPI’s), and rules for running the new process. The two companies moved forward at the end of 2000 by the integration of the


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first sales-points in the process, to get an even better visibility on the real demand of consumers.

Nabisco Nabisco – a major international manufacturer of biscuits, snacks, and premium grocery products – initiated a CPFR pilot together with Wegmans Food Markets, a 58-store supermarket chain in the eastern part of the US [2]. The approach used was based on four phases. 1. Training and education. 2. Preparing the joint business plan. 3. Sales and order forecast generation. 4. Execution of shipments. E-mail and spreadsheets were the instruments used, together with the EDI backbone already in use, with impressive results. An increase in category sales by 13% vs. 8% decline for other retailers in the market. Service level to stores increased from 93% to 97%, and days of inventory declined 2.5 days (18%). An improved understanding of the other trading partner’s business processes was another – not totally unexpected – benefit. Based on these positive results, both companies believe that CPFR can have a very large impact in their business. The simple solution as used in this pilot already showed enormous improvements, and it only covered 22 stock keeping items (SKU’s). Both companies plan to move forward with commercially available collaboration software solutions. In the second part of the pilot Manugistics participated as a software partner. The Manugistics products helped to manage the CPFR processes that now moved into a production mode with multiple trading partners and a broad base of products.

Kimberly-Clark Kimberly-Clark did its first steps into CPFR together with Kmart. The first pilot used forecast comparison spreadsheets, which were communicated by e -mail. Although there was no net change in inventory turns, they enabled a 14% increase in retail sales, and the in-stock rate went up from 86.5% to 93.4% [2]. Kimberly-Clark is now using Syncra Ct software from Syncra Systems Inc. to develop collaborative forecasts with Kmart and other trading partners in the US and abroad. The software is used to automatically compare forecasts for specific stock codes and individual retail locations with customer volume forecasts. CPFR gave Kimberly-Clark the tools to maintain tighter customer inventory so the manufacturer could increase inventory turns and record double -digit increases in its in-stock percentage figures. As a result it lowered its costs and increased revenues [13].

Transora Transora is an e -marketplace for the consumer packaged goods market, which claims to be the first to offer CPFR applications across the supply chain. It is trying to lower the estimated $1 trillion3 of just-in-case inventory and safety stock in the consumer goods industry pipeline [53]. The architecture of Transora is that it does not use one-to-one connections like used in EDI implementations, or function as a private marketplace. Transora is a public marketplace that has connections to other marketplaces (exchange-to-exchange interoperability). The advantages for its participants are that they only need one connection to connect to the entire supply chain. Transora takes care for the functionality, like for example CPFR technology, and the connections to other exchanges and trading partners [12]. Transora was created in June 2000. Its investors include: Coca-Cola, Diageo PLC, The Earthgrains Company, Kraft Foods, Procter & Gamble, Sara Lee Corporation, and Unilever. Some of the values Transora has to offer include: low cost of entry into CPFR; linkage to many companies by only having one connection; quickly reaching scale seems to be assured; demand visibility.

Manco/Ace Hardware Another case described by Gartner Group [58], [19] is about Manco Hardware, a manufacturer that supplies products for retailer Ace Hardware. It shifted from a traditional 3 U.S. Department of Commerce reports indicate that there is more than $ 1 trillion in finished goods inventory in U.S.-based stores, distribution centers and manufacturing plants. Much of this inventory is ‘just in case’ merchandise that would not be necessary if trading partners had better visibility to each other’s plans [39].


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VMI system based on EDI and optimization technologies to a collaborative forecasting, replenishment and ordering process with positive results for both trading partners. Manco, which was searching for an Y2K (year 2000 problem) compatible replacement of its VMI implementation, seized an opportunity to drive collaborative replenishment with a key retail trading partner. Manco realized that this new approach would enable interactive replenishment (throughout the day with improved visibility), as opposed to iterative planning (data based on nightly batch loading of EDI data). Manco accessed the E3 software that Ace used internally as a remote user. Manco was modeled in the system as a location that was implementing agreed VMI replenishment rules. The planners from both companies worked collaboratively on orders and replenishment plans, based on promotional and seasonal demand. Manco had to adjust the forecasting system it used. Instead of planning on item/geography level, the system would have to be reconfigured for an item/customer level to enable integration. The project was a success for both companies. Within 30 days, Manco went live on the E3 system, and it achieved a positive Return On Investment (ROI) within two months. Based on the E3 replenishment logic to formulate orders, Manco moved from placing four orders per week to a consolidated, more accurate order for each 10-day cycle. With increased visibility and order replenishment logic, Manco achieved a 10 percent improvement in forecast accuracy, a 28 percent operational improvement for warehousing picking and replenishment, and a 20 percent reduction in freight costs. The Ace/Manco deployment was a relatively easy one, capitalizing on existing relationships and business processes from a successful VMI project that each party considered important. The establishment of these key business relationships and processes for successful VMI deployment remains the challenge for this type of project — technology deployments are far easier than the development of these underlying processes [19]!

CPFR in the UK brewing industry The brewing industry is one of the UK’s oldest and most heavily regulated industries. The last decades the shift in the sales channel is more -and-more towards the take -home trade, although the traditional ‘on-trade’ outlets (licensed pubs, clubs and restaurants) continue to account for approximately 80% of all beer consumed in the UK. This is one of the aspects that let some of the more farsighted brewers start to rethink their supply chain strategies and the industry’s long-standing competitive norms [56]. The efforts initially focused on CPFR initiatives between the brewers and the retail outlets, or between brewers and suppliers. The Whitbread Beer Company was the first to introduce CPFR, in 19964. While it believed that it could improve stock availability and effect a step change in lead-time and order cycle reduction while at the same time reducing Whitbread’s own costs. Setting up the system for the seven top suppliers5, would achieve a one-off stock reduction of $1.4 million. The CPFR programs were developed between the respective logistics and IT systems specialists. EDI was used as facilitator for the communication, and Whitbread offered extended supply chain contracts to the companies involved to justify their investments. Whitbread found out that a substantial investment was needed to integrate and upgrade forecasting and planning systems. Although e-commerce brought a lot of advantages, its financial implications cut both ways. It eliminated the excuses for habitually late payments. Whitbread declined the opportunity to give suppliers warning of forthcoming promotions on competing brands. Another British brewer, Guinness GB, was first introduced into CPFR at Whitbread’s invitation (because it was one the top suppliers). Management came to see supply chain collaboration as an important part of its strategy and a major contribution to delive ring outstanding customer service, low cost supply and superb quality. At Guinness, planning and logistics professionals, led the customer development program. The program was 4 That means: they introduced CPFR, before it was officially recognized as CPFR. 5 These 7 suppliers are 10% of the total suppliers, accounting for 50% of Whitbread’s inventory costs and 60% of sales by volume [56].


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initially met with a mixture of disinterest an suspicion from the commercial side of the business. However sales staff who became involved in the project became some of its strongest supporters. Collaboration on CPFR involved shared sales data, which most of the larger grocers were either unable or unwilling to share at this point in time. On the systems integration front Guinness encountered severe complications due to the absence of industry standards. Notwithstanding the complexity of the issues and the costs involved, the results of the CPFR program were encouraging enough to warrant further investment. An analysis of customer stock holdings showed that CPFR had reduced stock with the customers concerned by about 30%, with a further 10% reduction the following year, while customer service levels had been maintained and in some instances improved. Furthermore, Bass, another major estate owning brewer, played an active role in the implementation of both strategies. Taking part in Whitbread’s initial supplier integration program and in Guinness’ customer development project. From a bird’s -eye view, these cases show that within the brewing industry domains of competition and cooperation coexist, but are clearly delineated. The leading market players are cooperating to mutually reinforce their own positions in their supply chains. Between these supply chains however, competition prevails. The cases showed that collective strategies have important implications for internal as well as external relationships.

Various CPFR examples in the high-tech / electronics industry Compaq is doing purchase planning over the Internet with 850 of its trading partners. Thompson Electronics is doing CPFR with 50 of its retailers. Kmart announced in 1999 that it would be working collaboratively with 225 partners at the end of 2000 [25]. SMTC, a contract manufacturer in electronics/specialty products, created a single browser interface [58] that allows suppliers to analyze, in real time, multiple fulfillment scenarios in synch with SMTC’s production plan. This production plan, in turn, is optimized by a flexible demand plan, driven by input from both internal and customer-driven data. In this collaborative environment, SMTC enables suppliers to be integrated into a collaborative network that ensures customer delivery commitments within days or hours, rather than weeks. This enables greater customer satisfaction and manufacturing flexibility throughout the supply chain. The collaborative environment ensures synchronized planning and execution across SMTC’s manufacturing environment. The Hewlett-Packard KeyChain trading exchange is not exactly an example of CPFR, but it is definitely related, it goes probably even further than CPFR alone. Sockeye Solutions helped HP to realize a collaboration platform for the whole value chain, with HP in the center. HP now shares demand figures with its value chain, which result into fast development of plans (2 days compared to 7 previously). Compared with the old situation only 30% of the instances require direct involvement by the buyers. Inventory turns in the extended supply network have been improved on average from 11 to 24 per year, a major improvement that free up a huge amount of working capital [1]. Next to this the collaborative effort has greatly reduced fax and phone communications among internal divisions and ultimately made the project possible [82].


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Cisco’s eHub According to Edwards, Peters and Sharman [26], Cisco is the best example of the Extended Enterprise model. An extended enterprise is a highly collaborative company, with global reach and that operates seamlessly across traditional corporate boundaries. Such companies also make extensive use of technology to link the organizations that form their supply chain. The information passes between trading partners in real time and project benefits are shared among parties. Cisco, for example, has grown dramatically, over the last five years, without expanding its internal staffing levels proportionally. Cisco has really restructured its supply chain. For example, 55% of Cisco’s sales are shipped directly from the subcontract manufacturers to the customers, without stopping at Cisco’s distribution centers [50]. At Cisco systems, the latest supply chain innovation is eHub. A private trading e-marketplace that provides a central point for planning and executing tasks across the company’s extended manufacturing supply chain [34]. eHub promises to deliver a host of benefits – end-to-end visibility, event alerting, and cost and inventory reductions among them. Ultimately, eHub will embrace more than 2,000 of Cisco’s supply chain partners. The eHub will also help identify potential supply and demand problems early, give proper warning to the appropriate parties, and permitting prompt resolution, all over the Internet [50]. One of the most contentious problems across the board was the linear, transactional nature of connections among the wide, traditionally disconnected layers of extended manufacturing supply chain partners. A basic example is that Cisco had no visibility to inventory availability information at the component level, because the contract manufacturer places the order for component parts. Cisco makes use of the supply chain optimization software platforms from Manugistics, a provider which combines SCM with pricing and revenue optimization. Several manufacturing partners, like Altera, Arrow Electronics, Flextronics, IBM Microelectronics, Motorola, and Solectron, were invited to participate in defining the scope and focus of the eHub initiative. Cisco chose to migrate to a highly innovative framework: a hub-and-spoke model of information flow and collaboration. This model has a central repository of supply chain information, which incorporates standard data models and workflows. As a result the eHub effectively removes transaction-dependent bottlenecks. It made the choice for a private e -marketplace. Strongly influencing this decision was the need for robust security and open collaboration with their selected supply chain partners. The goal was to create a manufacturing supply chain network focused on win-win manufacturing partnerships – not on beating down suppliers for better prices through public auctions and automated supplier searches. eHub follows RosettaNet’s framework for B2B transactions. And Cisco is planning to link its order management and production configuration systems to provide customers with real-time Available To Promise (ATP) information and leadtime information. Just four months after deployment, eHub has resulted in improved information access, end-to-end visibility, alerting, better exception management, and improved performance reporting. Some of the important lessons learned by Cisco are: Executive sponsorship is an essential foundation, as it is, to have a vision and the passion to achieve it. Two aspects embedded in the Cisco culture, but nevertheless aspects to be aware of. Open communicating and collaboration are the project’s lifeblood, is another lesson. Cisco conducted information and training sessions to articulate the project’s benefits clearly and actively encourage everyone’s involvement and buy-in. Further, companies need to realize that the eHub is only as good as the information within the hub, together with its partners Cisco found out that everyone had lots of bad data in their systems. They worked together to get that fixed.


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North American automotive manufacturer Gartner Group describes [58] a case study of a major North American automotive manufacturer chose to bolster its brick-and-mortar network to directly compete with online purchasing, while also reducing costs and improving profitability. Using technology for better visibility, the company made an effort to streamline the extended distribution network and improve the buying experience in the dealer showroom. By using an Internet-based collaboration system for forecasting and dealer car ordering, the manufacturer was able to improve supply chain visibility and reduce process variability through better ordering systems. The system was built using Manugistics software, an Supply Chain Planning (SCP) solution for demand collaboration and forecasting. To simplify the ordering process, as well as the complex combinations of car models, colors and attributes, the options were packaged into predefined selections for standard communication with the extended supply chain of 526 third-party dealers. The software aggregates all dealer data, and planners work with exceptions in the system to reach consensus with the dealers. The dealer is given control for the final order. The results are impressive: Over a six-month period, 40,000 units of inventory were reduced from the distribution network by using demand planning and collaboration tools for dealer ordering. This reduced the average number of days that vehicles spent in the pipeline from 166 to 38. ROI was achieved in less than three months. The company attributes 15 percent revenue growth during the last seven months of 1999 to the success of this project.

Chapter 7 – The software landscape

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Chapter 7 – The software landscape Although the collaboration process in some of the pilots involved an exchange of relatively low-tech spreadsheets, that is not where this business process headed [68]. This chapter demonstrates all the different development streams going on in the software landscape where CPFR has its impact. Special attention goes to B2B exchanges, exception handling, Enterprise Application Integration (EAI) and ERP, and SCM software. The focus in this chapter is on describing the different software solutions currently available that impact CPFR. The next chapter will evaluate these solutions a nd some conclusions are presented.

CPFR technology Broad adoption of CPFR technology is still about two years away (2H 2003), according to AMR Research, which recently forecast the market for collaboration tools, including CPFR, to reach $540 million by 2004 [53]. “CPFR is the first step toward developing a broader collaborative relationship with suppliers,” says Janet Suleski, a senior AMR analyst, adding, “The bottom line is that the benefits of CPFR and collaboration far outweigh any initial investment of time and resources made to maintain these processes.” Today, with the VICS guidelines as the foundation, several companies have developed CPFR-enabling software applications, including Syncra Systems, Logility, Manugistics, and i2 Technologies [68]. The ‘Supply Chain Technology News’ adds the names of Entomo, SAP, Oracle, J.D. Edwards, SCT and Invensys to this list [43].

B2B exchanges An McKinsey B2B research makes clear that B2B exchanges can help companies realize certain purchasing and transaction processing benefits in the short term, broader improvements – particularly reductions in inventory, improved service levels, faster time to market – are harder to achieve [6]. Integrating B2B exchanges with ERP and decision support systems, especially in industries with complex and segmented supply chains, in hard to pull off or even inappropriate. McKinsey’s research makes clear that the failure of the first generation of B2B exchanges is the result of a combination of different factors. These are:

• An exchange cannot wring huge efficiencies out of all elements of the supply chain. On some of them it does not have impact at all, such as the physical flow of goods.

• The exchanges failed to recognize that the same supply chain element in different industries, and different supply chains (or segments thereof) in the same industry, may require different improvement levers.

• Many companies that own information think it gives them a crucial competitive advantage and therefore fear sharing it freely, though companies up and down the supply chain would benefit it they did.

David Anderson and Hau Lee [8] describe a critical role for marketplaces (private or public) for the future of collaborative planning. Especially because it enables business partners to collaborate across a common technical platform, using common applications. This will alleviate many of the issues of version control, standards and confusion. An initiative like RosettaNet6 works as an enabler for collaboration processes, it is there to set standards for collaborative planning processes for companies in the electronics industry. Deloitte Research believes that private networks will become the primary collaborative commerce model. They can be tailored specifically to companies’ unique value chain needs and opportunities, can be built rapidly, and can allow companies to retain uniqueness and competitive advantage in collaborative commerce [29]. Michael Porter agrees with this and he expects a move back away from open marketplaces, with the focus on building close, proprietary relationships with fewer suppliers, using Internet technologies to gain efficiency

6 RosettaNet, is a consortium of more than 400 electronics companies, each with its own role and its own agenda. Nevertheless RosettaNet’s success in developing industry-based standards is significant [36].


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improvement in various aspects of those relationships [62]. Private exchanges generally provide functionality like joint planning and synchronized production processes The market turns to private e -markets because they offer three important advantages: greater privacy and security, superior collaborative capabilities, and the opportunity to extend or establish a competitive advantage [82]. Gartner Group’s Karen Petersen adds: “the public e-marketplace concept was originally endorsed by large players, but it is more appropriate for small players that need to aggregate buying power” [60]. Accenture [36] describes the eHub concept as something that will grow importantly the coming years. eHubs have the possibility to connect different marketplaces and standards within or outside industries with each other. Figure 6 gives an overview of these ideas.

Figure 6: B2B integration will rely mainly on a combination of standards within industries and eHubs across standards. [36] A critical remark comes from Caskey, Hunt and Browne, who make clear that virtual markets address some customer-supplier relationships, but they need many enhancements before they really can support fully integrated supply chains [18].


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Exception handling EDI can be used to share forecast data in a static way. When the situation asks for more dynamical interactions (e.g. with negotiation possibilities) special software needs to be used. This software can compare forecasts with each other and can alert the user when deviations are found [11]. Design collaboration, another aspect of collaboration, but out of the focus of this paper, can also not be supported by EDI [59]. A part of CPFR, that is critical to its success, is “exception” managing as Matt Katz illustrates very clearly [42]. Exceptions typically are identified by retail and manufacturing partners with the use of Internet enabled software tools that manipulate historic and actual point-of-sale (POS) data, promotional schedules and forecast plans. These tools generally enable retailers and manufacturers to: 1) review actual sales performance; and 2) review and compare the historical performance of forecasts against sales. Exception-based management allows trading partners in a supply chain to identify and respond to business issues that were previously as elusive as a needle in a haystack. CPFR tools work as metal detectors to identify business issues that need immediate attention. Gus Pagonis, VP at Sears, illustrates this clearly by saying: “Visibility does not mean, all of the information for all the people, all of the time” [43], [52]. After an exception is identified the exception should start a series of discussions, fact-finding missions and business change initiatives that can profoundly impact the way a company operates. Resolving exceptions requires a detective’s analytical abilities, a desire to partner, savvy communication skills and a persistent will to succeed [42]. Important in exception managing processes is that both parties do their homework, and that customer expectations and demands remain central all the time. The most successful pilots have achieved improvements by varying the parameters of exception generation a cross the planning time horizon based on product characteristics and order processing requirements. Varying the criteria during four different periods in the planning process – strategic, tactical, operational and executional (see Table 2) – reduces the “noise” (i.e. insignificant exceptions) and increases the visibility of important deviations [58]. Table 2: Exception variation by planning time horizon [58] Time Horizon Strategic Tactical Operational Executional Duration Begins anywhere

from 24 months to three months prior — and ends three weeks prior — to order placement

From three weeks prior to the order to the start or the order duration period

From placement of the order or release until order execution

Actual execution of order (i.e., shipment)

Exception Action

Target large exceptions to minimize noise, with exception alerts based on 35-60 percent variance in value.

Employ tighter comparisons of exceptions, based on variances of 10-15 percent. Highlight critical component shortages.

During this “frozen period,” institute alerts based on variances of 1-5 percent.

Highlight all exceptions, and assess penalties for deviation.


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ERP and EAI AMR research explains that the last years a great deal of money has been spent on building data bridges and gateways using Enterprise Application Integration (EAI) tools. But what is lacking is a business process infrastructure that can use these gateways to business advantage. Too much e-commerce, and too little collaboration? Companies should understand the real drivers for their e-commerce strategy. It could be driven by tactical goals of cost efficiency or by the strategic objective of creating a competitive time -to-market advantage. Having clear objectives will avoid the common pitfall of automating the existing processes that are based on old technology with newer e-commerce technology. Then, the e -commerce strategy will not be just another alternative to EDI, but will truly be a new process model creating a strategic business advantage for the company [9]. An Internet enabled EDI gateway is one alternative that utilizes the Internet to extend the reach and value of existing EDI implementations [63]. It is not completely about CPFR, but definitely related: internal collaboration. As the Forrester research ‘Making ERP Work’ makes clear: especially large enterprises with multiple locations, and multiple instances of ERP running have big problems to connect everything, and to have an eagle -eye overview over their own facilities. They cannot retrieve outward -facing information from ERP. When moving towards (or even before) more close collaboration with partners, this must be a point of attention. Central view on location of orders, status of inventory and constraints on capacity are hard needed [21]. Figure 7 provides an illustration.

Figure 7: Firms can’t retrieve outward facing information from ERP [21]


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Changes in SCM software Gartner Group analysts Lora Cecere and Karen Peterson predict that the SCM software landscape will change radically the next years, with two different paths towards c-commerce. On one side you will find four-wall applications with an enterprise-centric look, providing optimization, collaboration and interoperability among enterprises and their identified key trading partners. To put it simple: the ‘traditional’ SCM applications, which grow to more collaboration, by adding all kind of extensions. On the other side B2B c-commerce solutions can be found, which are architected for the extended supply chain community [20]. The four-wall SCM suites provide collaborative planning and execution capabilities, bringing together optimization, analytics and transaction processing. To meet unique requirements, these will continue to be industry-specific offerings. B2B c-commerce applications are e volving first in procurement execution, shared inventory replenishment, promotion management collaboration and transportation management. Especially, for enterprises that have a focus on multiparty trading processes, for the extended supply chain. Gartner Group thinks that the landscape has place for both kind of solutions, but is quite sure that software vendors will have to choose one path or the other, while they will not be successful at both. Supply Chain Management expert Eliyahu Goldratt [33] speaks in his newest novel ‘Necessary but not sufficient’ about the strange situation caused by four-wall SCM software implementations, were it quite often happens that can be spoken about island-optimization. Not only island-optimization facing external partie s (like supply chain partners), but also collaboration inside the own enterprise can be far away. A clear understanding of the problem, some common sense, and a joint problem solving approach can be the tools to tackle these problems, and to get the most out of existing or new SCM implementations. As a result of all this SCM software vendors and companies that are searching for supply chain solutions, face the complex problem that it becomes clear that optimizing the entire process will yield better results than optimizing parts of the process [52]. A new functionality called Supply Chain Event Management (SCEM) is likely to be part of every SCM application in the future, because of its ability to improve the Supply Chain Execution (SCE) and SCP applications and how they work together [44]. SCEM provides visibility into the supply chain at a very granular level. The intent is to highlight events that require additional attention by people, not to fully automate the resolution. SCEM also recognizes the need for urgency and prioritization when resolving variations in supply chain events, either unwanted events or change events.

Chapter 8 – Software solutions

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Chapter 6 demonstrated the different ‘best practices’ and chapter 7 took a look at different developments going on in software development. This chapter combines both chapters and looks at different options to apply CPFR by using software in an enterprise. The chapter starts to look at some basic CPFR solutions, explains the differences with more advanced solutions, and makes clear that software never can be seen separate from a lot of other aspects as described in this report.

Basic software solutions A lot of the pilot projects as presented in chapter 6 make a very basic use of software tools. Especially the initiatives in the CPG industry often made use of an exchange of spreadsheets, by e -mail or EDI. Sometimes the spreadsheet was filled with data complete manually, and sometimes data from Advanced Planning and Scheduling (APS) or ERP software suites was used. There was hardly any integration of systems, but the proof-of-concept was delivered. The benefits for the companies that did the projects were impressive, but the collaboration only took place for a small amount of SKU’s, and with not too much different locations. However, companies that want to start with CPFR can start small by using basic software solution initiatives as showed in the different cases. There is a lower risk of investing money in software, and the companies involved can jointly grow to a new step where the collaboration will intensify.

Advanced software solutions Not all the ‘best practices’ are very basic. The literature pays a lot of attention to the phenomenon of the private exchange. Cisco with its eHub, and Hewlett-Packard with its KeyChain project, are both exploring this field. Collaboration – mainly on planning information – with partners through private e -marketplaces is the path they have chosen. The private e-markets are in both cases controlled by their initiators, and the companies have planned to connect hundreds, or even thousands, of suppliers and customers to the system. Exception handling is an important aspect in their initiatives. It is possible to conduct advanced CPFR through (private) e-Marketplaces o r by using point-to-point initiatives. Specific collaborative planning software makes it possible, by automating routine tasks, to collaborate on thousands of SKU’s, at several locations, at the same time. An important aspect of this kind of software solutions seems to be exception handling. This makes it possible to pick the needles out of the haystack, to really help a planner focus on the important disturbing factors. As the semiconductor example in chapter 5 demonstrates, a real solution is more than only sharing forecast and planning information. Providing CTP information downstream, combined with collaborative planning upstream, can help to move towards a real collaborating value chain. Figure 8 gives a high-level view, of how a collaborative commerce infrastructure architecture can look like, according to researchers of Deloitte Research. It shall be clear that collaboration technology has a major impact on the existing software.


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Figure 8: High-Level view of collaborative commerce infrastructure architecture [29]

Other aspects Burges and Gules make clear that even relatively hard technologies (like software implementations) require important softer organizational adjustments if the technologies are to be implemented succesfully [14]. That is a general statement, not specifically about CPFR implementations. The Supply Chain Management Review thinks that a successful introduction of CPFR across multiple business units is 80 percent process, and 20 percent technology [51]. Maybe the first number is not that high, and the last number not that low, but it is clear that a successful collaboration implementation in a value chain is much more than software. It can never be seen separate from the other important aspects as described in this report. Organizational-, inter-organizational-, strategy-aspects, standardization, etc.: they all have their impact. Many companies used a consultant or system integrator for their ERP and SCM software implementations, these firms have gained knowledge of the company’s issues and IT infrastructure, and so including them in a CPFR implementation may make sense [5].

Chapter 9 – Organizational impact

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Chapter 9 – Organizational impact Do not use the Internet to blindly formalize a process designed around outdated system capabilities [76]. Otherwise the ‘old enterprise’ does not change in a ‘new enterprise’, but just in a ‘very expensive old enterprise’. This chapter takes a look at different aspects that have an impact on the organization when starting CPFR. It starts with an overview of some major constraints, where trust seems to be constraint number one. After that the difference and relation between internal and external collaboration will be explained, before some inter-organizational aspects are presented. Special attention goes to network organizations, and process change that might be needed.

Collaboration constraints While the benefits of CPFR are impressive, implementation has its challenges. Especially around what VICS calls the ‘Organizational shift to a consumer-centric, inter-enterprise orientation’ [5]. Important issues in the process of implementing CPFR are internal process change, lack of trust with partners, and cost of implementation [5]. The absence of clear standards is another critical issue (see the next chapter for more details) [58]. And Joe Cothrel, VP of research for Participate.com adds: “Ultimately e-business and collaboration are not about information or technology, but about changing how people work” [53]. The European chapter of the Supply Chain Council [61] identified recently the following key collaboration constraints:

1. Management buy-in 2. Clearly understood ROI 3. Conflicting and competing priorities

Collaboration starts at home, is another important conclusion they draw. The enterprise has to be fully supportive before trying to go beyond the four walls.

Internal and external collaboration Before a company can reap the rewards of collaboration and the corresponding better visibility, it must get their own house in order, according to different experts from IBM, Accenture and AnswerThink [71]. Gartner Group adds: “For many manufacturers, however, the least visible link in their supply chain are their own facilities” [85]. The literature suggests that firms must achieve a relatively high degree of collaboration among internal processes before initiating supply chain arrangements [77]. Line56.com author Jim Ericson already notices that companies that have torn down walls of inefficiencies within their own organizations are now looking for better ways to streamline processes between trading partners [28]. Findings from a collaboration study – focusing on internal and external collaboration – done by researchers from Michigan State University and The University of Oklahoma [77] reveal that internal collaboration significantly influences logistical service performance, which implies that firms should promote cooperation and collaboration across internal processes to achieve logistical effectiveness. The lack of support for a direct link between collaboration and service performance is interesting and, on the surface, suggests that collaboration with customers and suppliers will not improve performance. Further investigation revealed, however, that collaboration with external supply chain entities influences increased internal collaboration, which in turn improves logistical service. Therefore, best practice firms focus on both. In other words, if firms want to improve service performance through collaboration with external customers and suppliers, they need to enhance internal collaboration. A research conducted by a team from the University of Toledo, (Toledo, OH), concludes that firms should focus first on integration and innovation across the (internal and external) value chain, and once this has occurred they should automate the a ctivities which add value to the customers [80].


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Inter organizational aspects Collaboration is a mindset that must be adopted by all members of a trading community before true benefits can be achieved [53]. Trust is the greatest inhibitor to (and enabler of) collaboration – it is essential for overall success [85]. And as Edwards, Peters and Sharman explain it [26]: “The paradox of this new technology-enabled business model is that its success relies, more than ever, on people’s ability to build relationships based on mutual trust.” Lee and Whang add that “trust and cooperation become critical ingredients in a supply chain partnership.” Furthermore they explain that trust needs to be rationalized by a relevant economic return [45]. Firms must be willing to work together, but that is not enough to ensure integration. Investment in the relationship and/or resource sharing may be required as well. It has been suggested that effective integration involves mutual understanding, a common vision, shared resources, and achievement of collective goals [77]. When the dependency on integration technology rises, companies need to be aware, and tackle in advance, uncertainties regarding trading partner responses to future events [67]. Important to realize is that the different trading partners in the supply chain that are joining forces have to synchronize their strategies as well. And that is not always an easy task, especially also because most companies do not only operate in one supply chain, but are part of several chains [56]. Not only strategies need to be synchronized. In nearly all cases, this will be the first IT project to be developed for individuals in another company to use. Considering the fact that companies have experienced difficulty in getting their own employees to adopt new tools or processes, imagine trying to drive adoption by your customers’ employees! [57] A significant challenge for the industry is to overcome cultural barriers [12]. Retailer, manufacturer, and supplier trading partners need to become comfortable sharing data for everyone’s benefit. Finally, any trading partner implementing CPFR must transform its business processes and build new skills to support CPFR. For example, CPFR places much more focus on planning and execution against forecasts and exceptions rather than back-end data analysis and reaction.

Network organizations The benefits that network initiatives bring (like CPFR) need to be shared by all the partners. An extreme example is Cisco, which never splits its revenue 50-50 with partners, but instead divides it in their favor. Next to that the company also provides non-financial incentives, such as free on-line training, marketing, and sales support, to those distributors that have generated high sales volumes or shown superior technical expertise [35]. Adding value does not necessary mean that the company itself carries out the activities of its core competencies. Dell Computer Corp., for example, does not manufacture computers. Instead, it uses the Internet to trigger activities among its suppliers and trading partners that do make components and parts. Dell’s core competency is managing the build-to-order process [32]. Networks give their organizers competitive scale, which they achieve not by taking the expensive route of mergers and acquisitions but by turning their suppliers, subcontractors, and, sometimes, their competitors into close collaborators [35]. One of the keys for successful collaboration strategies will be a clear understanding of the roles, relationships and balance of power involved drives decisions for the appropriate deployment methodology for collaboration [58], [60]. For example: A consumer products enterprise needs to adapt to, rather than drive, collaborative processes with retailers, because of the power structure in the extended value chain. It is clear that companies need to re -check their business strategy, also in cooperation with their (key-) supply chain partners [61]. Quite a lot of times the initiative for supply chain integration initiatives comes from the final company at the high-value, High Street, big name end of the supply chain, the point


37

where the money flows in. University of Plymouth’s Childe explains that it may be difficult for a struggling manufacturer of castings or machined parts to initiate a supply chain strategy from a position many stages removed from the final customer [22]. Most of the successful alliances, such as Toyota and Nike, are the result of a dominating principal company that effectively controls its partners.

Changing processes The literature [26], [58] suggests that companies that simplify their sales processes, either through strong segmentation, by selling to a narrow band of customers, or by reducing the number of options, appear to better positioned to operate more collaboratively. The large manufacturers in the ‘high-tech’ industry are more and more adopting the build-to-order model, in which inventory is kept as long as possible at the supplier. The risk of redundant inventory is completely for the supplier. To compensate the risks for the suppliers, and to smooth the supply chain processes, collaboration in the form of shared forecasts (from the manufacturer) is critical for the operations of the total supply chain [11]. Companies that operate with an assemble-to-order business model must aggregate data or forecasts at the family level to be more successful, according to basic statistical laws [54]. A paradox is that companies need to be aware that the small- and medium-sized trading partners, quite o ften, generate the greatest inefficiencies and costs for their organization. While pilots mostly focus on the large trading partners. These relationships are mostly already relatively efficient through process integration or even EDI [57]. Furthermore, large enterprises have invested substantial sums over the decades to build an EDI infrastructure, and they are not likely to walk away from that investment when they do not see the benefits.

Chapter 10 – Standards

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Chapter 10 – Standards ‘Sharing the standard’ has become a revered new-economy precept, according to specialists from McKinsey: winning companies (such as Microsoft) do it; losing companies (Apple) do not [35]. This chapter provides a framework describing different types of standards, and takes a look at the nearby future of standards.

Different types of standards Standards for c-commerce and extended trading relationships are immature, and many are still in development. Until the technology exists to make supply chain integration a seamless effort, standardization will continue to play a critical role [36]. This hurdle is a stark reality for enterprises racing to reap the acknowledged benefits of extended supply chain relationships. According to the Gartner Group there are four categories of standards evolving for collaborative SCM, each at different rates [59]:

1. Content: The content category of specifications addresses the business payload of trading partner interactions. Specifications focus on the definition of data elements that express the business entities being conveyed7.

2. Framework/registry: The framework category contains services used to locate and identify e-business trading partners8.

3. Technology-Based (i.e., Marketplace and Technology Providers): Several technology providers (e.g., Ariba, Commerce One, i2 Technologies and Microsoft) have actively developed internal/external integration standards as a part of their offerings. Enterprises should recognize these standards for what they are — a way to enable data integration without process integration.

4. Industry-specific: Standards developed by enterprises that band together. The standard lays out the accepted way to structure data, a common nomenclature and the trading partner business process9.

The future of standards Gartner Group says that through 2005, no single process standard will achieve widespread cross-industry adoption. Especially enterprises that serve more than one industry should prioritize initiatives based on ROI and standards adoption. In the absence of consortia -driven standards, channel master standards will drive collaboration. Realize that the standards that are developed for specific industry requirements, are going to be the most effective in supply chain collaboration scenarios [59]. “Each partner needs to be retrofitted with different technologies.” No single technology or vendor package can address this dispartity at this time, David Smith, analyst with Gartner Group, says [55]. Although it is clear that there will not be a clear leading standard within the next years, it does not mean that enterprises in industries with existing standards initiatives shouldn’t become early adopters for competitive advantage, but they need to realize that incremental rework will be required as they mature. Enterprises in industries with no standards initiative s should work with trading partners and competitors to begin standards development immediately [59]. Until consolidation of public standards occurs, though, companies are advised to select applications from vendors that support as many of the prominent standards as possible [7]. A company’s technical infrastructure needs to be ‘open’ to accommodate changing structural requirements and the transfer of information between trading partners [26]. The lack of standards hinders the rapid adoption of collaboration; Gartner Group does not expect that these technologies will be widely adopted until the second half of 2003 (0.8 probability) [58]. Everyone wants to choose the new standard that everyone else has

7 Examples are XML.org (sponsored by OASIS), BizTalk.org (sponsored by Microsoft) and Open-Applications.org (a consortium). 8 Probably the best example is UDDI, see www-3.ibm.com/services/uddi/find and uddi.microsoft.com/search.aspx 9 CPFR (by the VICS) and RosettaNet are examples of this kind of standards. The same applies for UCCnet, CIDX, AIAG, Bolero.net and OFSportal.net.

Chapter 10 – Standards

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already chosen. For a standard to attract users, it has to have users [7]. Gartner’s analysts add: “The success (…) depends largely on the adoption of such standards” [69]. Specialists from Accenture’s Institute for Strategic Change add that: it is important that companies get behind the standards initiatives that benefit them, while relying on eHub-based technology to connect systems that are based on disparate standards [36]. The way for enterprises to move forward on this is, according to Gartner, by increasing the number of resources devoted to following the development of industry-specific and general commerce bodies [69].

Chapter 11 – Strategic choices

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Chapter 11 – Strategic choices The special focus in this chapter is on the question ‘How can CPFR fit in the enterprise’s strategy?’ Harvard Business School professor Michael Porter’s vision on strategy in the Internet-age is the basis for a discussion around CPFR. Multi-tier CPFR brings tremendous strategic advantages to companies that master that, above companies that do not. Unfortunately the technology still has a long way to go and the organizations need to change their way of working as well, so it is not easy to reach [29]. Important lessons, for companies that want to start CPFR, as described by the Gartner Group [58], are:

1. Not all supply chain partners are equal 2. Rethink enterprise demand planning 3. Integrating supplier demand goes beyond collaboration software 4. Align revenue recognition and production processes 5. Planning is not enough, the CPFR process steps need to be extended with order

execution 6. Not all exceptions are created equal 7. Test for scalability 8. Consider hosting

The basics McKinsey is quite clear when speaking about all kind of supply chain hypes and buzzwords. “Companies should not let the hype and excitement (…) make them neglect their off-line supply chain operations – from demand planning algorithms to logistics management. It they focus their attention on these basics, the benefits will surely follow” [6]. In their article over the ‘Internet-enabled supply chain’ [8], David Anderson and Hau Lee describe a new business model for the supply chain of the nearby future. Different collaborative processes are becoming critical, but it is not only about that. Companies must remember that economics count in overall supply chain design. Electronic commerce will allow competitors to quickly access cheaper products and delivery methods. Consequently, low cost supply chain operations remain critical. In other words: do not only focus on developing a good information infrastructure, but upgrade the non-virtual world as well! The winners in the emerging Internet-enabled supply chain competition will be those companies that discard the traditional rules of doing business while working collaboratively with their customers and supply chain partners to create the future.

The new economy supply chain Deloitte Research points out that the expectations of the most companies that start collaborative commerce initiatives are that they will deliver strategic benefits such as greater speed, higher revenues and enhanced competitive advantage [29]. The Supply Chain Management Review shows the differences between a supply chain in the old-economy and the new-economy. According to them is collaboration, with the use of Internet technologies, the basis for the supply chain of the future [76]. Figure 9 makes their ideas more clear.


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Figure 9: Old-Economy vs. New-Economy Supply Chains [76]. By allowing participants to operate supply chains at ‘eSpeed’, through the sharing of production, inventory, product and shipment status, companies can gain competitive advantage by beating others to new customers and markets [8].

Strategy: the basis of Internet competition – Michael Porter Michael Porter published a very critical article in the Harvard Business Review of March 2001, with the name ‘Strategy and the Internet’ [62]. The leading line in his article is that strategy – in the new Internet economy – is still very important, the Internet actually makes strategy even more essential than ever. While a new means of conducting business has become available, the fundamentals of competition remained unchanged. Some of the examples he gives are about companies that have used Internet technology to shift the basis of competition away from quality, features and service toward price, making it harder for anyone in their industries to turn a profit. The old rules regain their currency. The creation of true economic value once again becomes the final arbiter of business success. He explains that whether an industry is new or old, its structural attractiveness is determined by five underlying forces of competition: the intensity of rivalry among existing competitors, the barriers to entry for new competitors, the threat of substitute products or services, the bargaining power of suppliers, and the bargaining power of buyers. One of the negative sides of Internet technologies is that they tend to reduce variable costs and tilt cost structures toward fixed cost, creating significantly greater pressure for companies to engage in destructive price competition. Another significant effect is that switching costs are likely to be lower than they were ever before, especially also in line with the ongoing standardization (of products and components, as well as the technical communication standards). Once a company establishes a new best practice, its rivals tend to copy it quickly, based on the declined fixed cost to develop information systems, and the fast implementation. The resulting improvements in operational effectiveness will be broadly shared, as companies converge on the same applications with the same benefits. Very rarely will individual companies be able to gain durable advantages from the deployment of “best-of-breed” applications. The great paradox of the Internet is that its very benefits – making information widely available; reducing the difficulty of purchasing, marketing and distribution; allowing buyers and sellers to find and transact business with one another more easily – also make it more difficult for companies to capture those benefits as profits. Cost effectiveness is highly desirable and is a building block in gaining competitive advantage. Business success derived from cost orientation, however, is usually short-term at best. The managerial tools and techniques used to achieve lower costs are typically easy

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to imitate, which means that performance differences gained from such programs are difficult to sustain [77]. There are two ways to achieve cost and price advantages. One is operational effectiveness – doing the same things your competitors do, but doing them better. The other way is strategic positioning – doing things differently from competitors, in a way that delivers a unique type of value to customers. The Internet itself will be neutralized as a source of advantage in the nearby future. The more robust competitive advantages will arise instead from traditional strengths such as unique products, proprietary content, distinctive physical activities, support product knowledge, and strong personal service and relationships.

Implications for today’s business Does all this mean that there will not be a change to make profits in the future? Of course not, one approach to be defensible is to have a highly integrated value chain. When a company’s activities fit together as a self-reinforcing system, any competitor wishing to imitate a strategy must replicate the whole system rather than copy just one or two discrete product features or ways of performing particular activities. Implementing CPFR can bring strategic benefits depending on the way it is implemented. As the basic CPFR pilot examples showed, it is not really hard to get enormous benefits. The more advanced examples demonstrated that it seems a little harder to adopt CPFR as a real lifestyle and to integrate it as an overall strategy of doing business. The easy implementations are not that hard to imitate by competitors, while restructuring a supply chain and creating a chain of collaboration is much harder too imitate, that takes a lot more. It can take years of coordination with value chain partners to establish something, like the examples of Cisco and Hewlett-Packard illustrate. Nevertheless collaboration can bring tremendous benefits and all companies can better be aware of that and start thinking about piloting and restructuring their supply chain. To prepare for the new customer centric competitive battleground [48]. Progressive firms that build private exchanges to develop deep collaborative capabilities – due to an absence of such capabilities in their industries – will seize competitive advantage [82]. Companies that own exclusive products, processes, or a dominant market position are clear candidates to develop private e-markets. Sellers and buyers with dominant capabilities, such as shortest cycle time or flexible manufacturing capabilities, should also consider private exchanges. On the other hand, those companies that can build a strong capability in delivering information technology to meet the strategic needs of the business have already gained a lead on those that have not. The challenge for many companies in the future will be to build upon these capabilities and extend them across traditional corporate boundaries [26]. Supply Chain Management Review authors Peter Fingar and Ronald Aronica add to Porter’s words, that “the capability to add value is at the very essence of being a successful business and constitutes an enterprise’s core competencies” [32]. Shapiro and Varian wrote an interesting book [75] around almost the same ideas. In essence the message is: “Technology changes, economic laws do not.” And keep on realizing that the following words of Cisco Systems’ CEO and President John Chambers [37] might still have some value: “In the Internet Economy the big won’t beat the small – the fast will beat the slow.” Not by only focusing on getting new customers, but probably more by focusing on redesigning the companies value chain, for example by applying CPFR.

Chapter 12 – The next years

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Chapter 12 – The next years Until now e -commerce initiatives (including EDI) only brought savings on invoice processing, resolving exceptions and transaction costs. The real opportunities are much larger. For retailers these opportunities include: reducing inventory levels and associated costs; increasing inventory turns; reducing or eliminating out of stocks; maximizing the profitability of the product mix; and purchasing at the lowest cost [73]. This report showed that CPFR could be an important element in companies’ strategies for the future. Working with partners in the value chain can bring enormous benefits, and helps to reach the ultimate goal: higher customer satisfaction. This concluding chapter makes clear that CPFR is only the beginning, and that there will change a lot on the technology side the coming years. It is always hard to predict what will change exactly, what will happen when, which strategies will be winning, etcetera. But it might be clear that it is time to think about the next steps!

CPFR is only the beginning According to Stanford professor Hau Lee, CPFR is only the beginning of the new customer centric competitive battleground [48]. Not so long from now, it will go a lot further than only synchronized demand: It will be managing to demand for the total value maximization of the enterprise and the supply chains. Managing to demand involves ca refully selecting marketing instruments and working closely with customers so that the overall incoming demand for the enterprise and the supply chain will give rise to maximum values for all parties concerned. Ideally, all these instruments will eventually lead to higher consumer satisfaction. The acronym Hau Lee uses for all this is: Demand Based Management (DBM). It is – for example – very important for a company to recognize that demands are always manipulated by the sales and marketing group of the company [49]. Incorporating the true costs, and linking the DBM decisions to the SCP and SCE decisions to make sure that the company can profitably met the promised order. Nevertheless, collaboration with customers will become important according to his visio n. This is where there will be an integration of the planning and sales functions. Edwards, Peters and Sharman, look at CPFR as just as one element of the extended enterprise model they describe. “It is a beginning, but to create a real extended enterprise more is needed [26]”.

The technology will change “The technology is immature,” says Lora Cecere, research director at the Gartner Group. At best, it will be a couple of years before CPFR is used widely enough to have an impact on financial results [24]. ERP II10 is the next version of ERP, a natural evolution made possible by the Internet and the virtual enterprise. ERP II will be important in future c-commerce initiatives, and to be useful in a changing landscape as c-commerce will bring, it must allow changes in business processes without re-implementation of the product. Workflow tools and enterprise portals are a first step in the right direction from ERP solutions towards ERP II solutions, and the first steps towards real collaboration possibilities [31]. Another thing the analysts from Gartner Group make clear [58] is that supply chain collaboration is on its way to become a standard SCM business practice, and that it will play a key role in B2B technologies. Public e-marketplaces will account fo r a small part of SCM activity, while the majority of SCM collaboration will occur through private e -marketplaces and B2B c-commerce solution providers. Completely in line with predictions from other supply chain experts as shown throughout this report, and especially in chapter 5 and 6. Gartner Group thinks that during this period, collaborative technologies will evolve from a transaction focus to incorporate content, time -phased data standards, analytics (i.e., measurement) and workflow technologies. Gartner Group expects this transition to be a progressive one, with three distinct phases, as shown in figure 10. 10 ERP II is, just as ERP, introduced by Gartner Group, and now more-or-less in use as the general accepted acronym.


44

The three phases are:

1. Pilot Phase (2000-2001): Pilots are formed to synchronize data for singular processes (early pilots have developed around buy or sell functions) using batch integration. The focus is mainly on sales forecast and component supplier requirements in response to user-defined exceptions.

2. Initial Deployment Phase (2002-2003): Collaboration technologies are adopted for a process focus across a trading community. The CPFR standard is combined with the RosettaNet standard for forecasting, becoming an on-ramp for larger B2B solutions. Time-phased collaboration technologies begin to be merged with workflow technologies in a many-to-many environment. Collaboration technologies still depend on batch processes, and hosted B2B c-commerce solutions proliferate.

3. Maturity Phase (2003-2005): Collaboration processes mature and real-time SCM software supports collaborative marketplaces. Offerings emerge that cover all the strategic, tactical, operational and executional time horizons. Solutions for industry-specific communities develop, with the ability to plan and execute data, documents, exceptions and transactions.

Figure 10: Supply chain collaboration timeline [58].

Market for different solutions Baan’s VP of Marketing, Henk de Ruiter, makes use of figure 11 [72] to explain the different sub-markets in the total market of collaboration software. This figure does not only present Baan’s marketing efforts, but also some of the important ideas incorporated in this report. It reflects, for example, the difference between enterprise-centric applications and B2B c-commerce solutions for the entire value chain [20]. The important findings about the different kinds of e-marketplaces are shown here as well. The ‘network collaboration’ typology does in that case more closely fit to the public e-marketplace, while ‘strategic partner collaboration’ fits better in a private e -marketplace. It might be clear that there are a wide variety of businesses, and that each business or company (and do not forget their value chains) needs a different kind of solution. A value chain with a strong channel master, for example, expects a complete other solution than a value chain with all partners equal. Further research is needed to get a better understanding and sharper view.


45

Figure 11: The fit of different software solutions for collaboration [72]

The conclusion This report has tried to shown that CPFR can bring enormous benefits to companies that incorporate it in their business processes with partners in their value chain(s). CPFR is definitely not only about software, or only about new processes, it is a combination. Both are important and companies that plan on enrolling collaborative planning solutions or pilots must be aware of this. Collaborative planning and forecasting is a field that has a lot of aspects. Chapter 4 makes clear that there are different things that have their impact. Think for example about o rder frequency, use of historical data (from for example the forecast accuracy), the safety stock levels to use, and etcetera. The technology is not mature currently, and there are a lot of developments going on in different directions that will impact each other. One technology example is the problem there is with standards, as shown in chapter 10. Trust between partners seems to be one of the largest obstacles when moving to collaborative planning. Starting small, and sharing the benefits can be of help here. Furthermore companies need start to rethink their value chain strategy. Only by having a unique competitive value, companies can win in tomorrow’s competitive marketplace. Starting with CPFR pilots can be a starting point for a company to evolve into the company it needs to be tomorrow. A customer-centric company, working with its partners, in an agile and responsive value chain.

StrategicStrategicPartnerPartner

CollaborationCollaboration

Customer SupplierEnterprise

NetworkNetworkCollaborationCollaboration

TransactionTransactionCollaborationCollaboration

InternalInternalCollaborationCollaboration









TransactionTransactionCollaborationCollaborationTransactionTransaction

CollaborationCollaborationInternalInternal

CollaborationCollaborationInternalInternal


Impact onfinancialresults

Supply riskHigh

High

Low

Low

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CPFR - The first link in a chain of collaboration€¦ · November 2001 and will finish in August 2002. It will be a joint project between Baan and Deloitte&Touche Bakkenist. Ending

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