Collaborative planning, forecasting and replenishment (CPFR) emerged from a relationship between Walmart and a major supplier, P&G, to better plan their Listerine mouthwash product. The steps were 1) information sharing, 2) joint demand forecasting, and 3) coordinated shipments.
It was a straightforward process with a very clear value-add but in the 1990s, as Lean methodology took hold, CPFR was ‘streamlined’ into more of pure order management process, and lost some of its essence. But the principles of CPFR are still golden and can be applied to great effect today. The transparency and collaboration it engenders with your supply chain partners can really take your planning to the next level, improving KPIs on both sides.
Internal Vs External Mindset
This ‘outside in’ type of planning where planning teams incorporate information from their customers and suppliers is the next evolution of not only demand planning, but supply chain management as well. Collaborative planning between companies is about sharing information (enabled with technology), and building relationships and trust to share information that benefits both parties’ ability to forecast and plan. In a nutshell, the goal is efficient and effective operations by enabling joint business processes across enterprise boundaries.
It takes from that inside-out thinking that most organizations are stuck in, to an outside-in thinking mindset. With inside-out thinking your view of demand and supply is based on information gleaned only from within your own four walls. We’re making decisions based on our own internal information and make a best estimate of what we think our customers will buy. There are of course a lot of demand drivers out there that are not necessarily captured in a demand forecast using historical data. Even with advanced modelling, it is driving looking in the rear view mirror.
Outside-in thinking incorporates information from the customer and the customer’s customer, the end-user. It allows us to know what they are looking for and why. Your retail partners have information about demand that you won’t get unless they tell you. Types of demand drivers include what you customers are doing in terms of pricing and promotions and other demand variables. By talking to them in a structured, cross-enterprise process like CPFR, we can get this information and update our forecasts accordingly, and subsequently manage our supply responses more efficiently.
Knowing what happening outside allows us to plan better inside. That’s what is so valuable about CPFR – visibility into demand drivers that you wouldn’t have otherwise.
Guiding Principles of CPFR
Collaboration, consensus, transparency. These are what enable the joint signal of “this is what we think is going to happen”. It means we can better serve our customer and their end users, while optimizing our supply responses. And guess what, this works with your suppliers as well. Joint collaboration with them, sharing forecasts, is valuable too. This transparency upstream allows your suppliers to plan better, which means more likelihood of getting what you need when you need it. Both sides benefit. It’s not trying to get one up on them or holding information back because you’re afraid they’re going to use it against you. Rather, the more transparency you have, the better the working relationship you’re going to end up with.
Benefits For You
- Reduce your forecast error
- Plan and manage uncertainty better
- Reduce your costs and optimize inventory
- Service customers better
- Fewer stockouts
Benefits For Your Customer
- Plan promotions better by knowing they have enough inventory
- Better commit to their end-users
- Reduce error
- Save money, do things more efficiently
- More robust supply plans
Committing to a Synergistic Relationship
You must truly believe there is value for your customer. That’s the reason why you want to share. It’s not a one-sided relationship. You both must see value in this process. Mutual benefit is the reason you’re doing the process.
However, I understand there’s a cultural mindset sometimes with executives whereby they’re scared to share information. Some people are scared that if they share information, they’re going to use it against us. And I get that. We need to start small, build a pilot, and work from there. Start with what you’re comfortable sharing and start building a relationship. It will take time to build the necessary confidence and trust on both sides because honestly that culture is you don’t trust the other company you’re not going to feel confident sharing your information and you won’t get the information you need. In essence, you’re dating – you’re getting to know each other, trying to establish long-term relationship. You can’t call someone up you’ve never met and expect them to tell you everything about them – you’ll scare them off.
An Example Of How CPFR Worked for Me
There was one company I worked with, we were building a collaborative relationship and the first they were represented of a good chunk of our business and we wanted to work with them so we actually went to their team and spent the day with them, learned how they do some metrics and found out the way they measure our service on time was different than the way we measured. Their perception of how we were delivering was different than our perception – that was just thing we found out by talking that day. We also found some challenges they had. We found out that they were committing to their customers based on when we were going to ship into them and that what we were doing was impacting their customers and how they were trying to do workarounds for that. We understood their planning a little bit better talking with them.
After that we said hey, why don’t you give us some POS data and some of your customer information sales information? That way we’re going to be able to improve your service. They started providing some sales data and their service did improve. They were a little bit vulnerable with us, we were a little bit vulnerable with them and both of us came through and helped each other.
We were then able to build on that relationship – we asked for their inventory position because if we knew their inventory position we can improve their service a little bit more. We found out they were ordering once a week. We had a truck doing deliveries by their locations twice times a week, and could easily move them to that route for a second delivery. We suggested that if they order twice a week we could meet their demand a bit better, getting closer to actual demand. In so doing we optimized our transportation and they lowered their inventory – the only thing they had to do was order twice a week instead of once a week. It was a win-win situation.
Within 18 months we were jointly launching a new product together. They had exclusivity for the first six months giving them a competitive advantage in the market while allowing us to plan demand effectively. It was the most successful launch in both organizations’ history, all because of the collaborative relationship. To get to that point took well over a year and both sides had to commit to the journey but it was well worth it.
This won’t be possible with all partners. One of the keys to success is choosing the right strategic partner, and it may not be the biggest. Rather it’s the one who shares your view of the core principles of transparency and collaboration.