SIZING UP CPFR

Michael Garry

Like many things in the retail supply chain/technology arena, CPFR (collaborative planning, forecasting and replenishment), now one of the industry's more recognized acronyms, started with Wal-Mart.

In 1993, the Bentonville Behemoth decided that, despite its considerable clout, it still needed the help of suppliers to do something that was inherently difficult -- forecast consumer demand. "If we could create a more accurate forecast of demand," wrote Ron Ireland, one of the key drivers behind Wal-Mart's original CFAR (no "planning" part), in a recent white paper, "and actually execute replenishment [using] this more accurate demand forecast, then we could take costs out of the entire value chain." In addition, better in-stock positions would boost sales.

So, using its famed RetailLink Web portal, Wal-Mart gave its suppliers "access and visibility to a single forecast number" so they could "contribute their knowledge of causal factors," said Ireland, now a principal for Oliver Wight Americas, New London, New Hampshire. He called it "nothing more than plain old common sense."

Fast forward to the present, and Wal-Mart now boasts an operating expense-to-sales ratio of 16.5%, compared to traditional retailers' ratios of around 25%, noted Jack Haedicke, president, ArenaCG, Eden Prairie, Minn., who attributes the difference in part to CPFR.

Realizing that critical mass was needed to make its collaborative vision really effective, Wal-Mart turned to the VICS (Voluntary Inter-Industry Commerce Standards) body to develop standard guidelines for CPFR that any company could follow. Supported now by the Uniform Code Council, VICS' nine-step CPFR program has become the de facto standard for anyone interested in CPFR (see www.cpfr.org).

But who is interested in CPFR? That remains the question, or conundrum, regarding this business process. There is evidence, however, that CPFR activity is growing, in the CPG/retail industry and others -- high-tech, transportation, defense, healthcare and automotive, for example. VICS is exploring applications of CPFR to transportation and other supply chain areas.

Certainly, many CPG manufacturers are eagerly exploring if not embracing CPFR. At the Logicon conference in Miami in March, a veritable parade of CPG companies marched up to the podium to describe and praise their CPFR programs, including Dr. Pepper/Seven Up, Unilever, Tropicana, Masterfoods USA, Kimberly-Clark and Johnson & Johnson. Other notable adherents are Procter & Gamble, Kraft, Nabisco, Gillette and Sara Lee. A few of these manufacturers now require retailers to provide item-level forecasts (a CPFR requirement) to qualify for cost-to-serve pricing brackets, said Haedicke. Hundreds more manufacturers practice CPFR with Wal-Mart.

Among retailers, the names that pop up tend to be outside the mainstream food distribution business: Wal-Mart (the only retailer who uses CPFR for basic merchandise at the store level, said Ireland), Kmart, Target and Staples. Notably, VICS has given its last two "Best in VCS CPFR Implementation" awards, presented at the annual Retail Systems show in Chicago, to two drug retailers, Rite Aid and CVS, and their partners, J&J and Gillette, respectively. (See "Describing a Winner," this page.) Another druggist, Walgreens, gave a major CPFR presentation at the U Connect conference in Orlando, Fla., in May.

Among grocers, the picture is less clear. Certainly Wegmans was a pioneer in CPFR via its well-known pilot with Nabisco. On the VICS CPFR Committee are such chains as H.E. Butt, Safeway, Schnuck Markets and Meijer (cited by Ireland as a CPFR player).

But CPFR still tends to fall under the radar at most supermarket chains. In SN's Ninth Annual Supermarket Technology Report (SN, Feb. 10, 2003), just 6% of respondents put CPFR on its list of high IT priorities for 2003, up from 2% who did so in 2002.

In his presentation at the Grocery Manufacturers of America's IS/LD conference in Tampa, Fla., in March, Schnuck Markets' chief information officer, Bob Drury, made a point of saying that CPFR is "not the answer to out-of-stocks." With all the myriad factors that influence forecasts, including such imponderables as weather and demographics, "you can't expect forecasts to be accurate," he said.

Ireland said that many food retailers are not equipped at the store level with automated replenishment systems, or at the corporate level with data warehouses, both required for CPFR. Many remain unconvinced that they need CPFR at all, he said.

Still, Ireland and Haedicke say they see more interest from grocers in collaboration. Again, the specter of Wal-Mart is persuading many that they need to use better supply chain practices to remain competitive, he said. That has led many companies to engage in pilots with manufacturers, if not full-scale rollouts.

Some companies may be waiting for item data synchronization projects to get rolling before engaging in CPFR. "Until we reach significant scale on the collaboration of item information, CPFR will never reach its full potential," said Haedicke.

Several retail and CPG companies are entering into collaborative relationships through the business-to-business exchanges, WorldWide Retail Exchange, GlobalNetXchange and Transora.

For example, Food Lion has been leveraging WWRE for CPFR. WWRE, which employs software from Syncra, said it is currently supporting 12 live trading partner relationships, including nine of its members; nine of the relationships (with five members) are in implementation. WWRE is about to announce a CPFR interoperability project whereby trading partners can collaborate with WWRE via their own CPFR solution.

GNX announced in June that Australian retailer Coles Myer is using GNX's collaboration suite, powered by Manugistics, to engage in CPFR with P&G and Unilever to manage promotions. Metro AG in Germany is pursuing a similar program. Currently, 29 trading partners, including six retailers (no U.S. food retailers) are practicing CPFR via GNX, half of them beginning this year, said Nick Miller, director of supply chain services, GNX. He said companies are going "beyond the nine steps" established by VICS in developing promotions.

Ireland said the exchanges offer retailers a way to secure their data while sharing it with trading partners, who pay a fee for the opportunity. Wal-Mart, by contrast, gives vendors access to their data but requires that they look at it behind their firewalls.

Companies can pursue a do-it-yourself approach by employing applications from seven vendors that have been certified by UCC and the Drummond Group as having interoperable systems that work seamlessly with each other: Syncra, Manugistics, i2, IPNet Solutions, JDA Software Group, Logility and SAP. Some of these companies will also host the solution for a retailer or manufacturer.

According to AMR Research, Boston, a typical CPFR project can cost anywhere from $300,000 to $3 million for licenses alone, not including services and business process change costs -- not trivial amounts during a tight economy, observers noted.

But CPFR transcends just cost issues. "The decision on which software solution or portal you use comes in a very distant second to your own understanding of CPFR and having the corporate will and trust to make it happen between you and your trading partner," said Haedicke.

DESCRIBING A WINNER

At the Retail Systems conference in June, Leo Hartnett, vice president, efficient consumer response, CVS, Woonsocket, R.I., described the chain's CPFR program, which had just been named "Best in VCS CPFR Implementation" by the Voluntary Inter-Industry Commerce (VICS) organization. Last year at the same conference, the VICS CPFR award winner, Rite Aid, gave a similar presentation.

Using software from JDA, Scottsdale, Ariz., CVS deployed its CPFR program in April of last year to drive replenishment across its nine distribution centers. Today, the chain has 11 suppliers on the program, and more than 30% of its dollar volume is processed through CPFR. The program encompasses 30 product categories -- all in the CPG and OTC areas -- covering between 5% and 75% of the stockkeeping units in those categories. Demand data are aggregated weekly for the chain's 4,100 stores, with more than 800 stores processed nightly.

In one five-month case study involving two suppliers described by Hartnett, out-of-stocks were reduced by 7.5% and sales forecast accuracy grew by 8.2%; the suppliers reduced days of inventory for CVS by 39% and overstocks by 18%, while fill rates were above average.

During the first half of this year, suppliers in the CPFR program at CVS improved their service levels by three percentage points, said Hartnett.

In describing CVS' approach to CPFR, Hartnett stressed, "We were not interested in having a supplier and CVS build a forecast and magically bringing these together to argue about why the forecasts were different. [Instead,] we were interested in collaborating on all the input so the forecast would be the sole output. Once we got all the details right, the forecast would be based on that."

In collaborating with CVS, suppliers need only a PC with Internet connectivity, or they can leverage their current EDI infrastructure. Suppliers access the JDA Marketplace portal, which "allows the supplier to see the same exact activity in real time that my staff sees on a daily basis," said Hartnett. The process includes exception-based processing, demand forecasting (using JDA software), seasonal planning, promotional visibility, order review and release, service level analysis and scorecard benchmarking.

Hartnett said that CVS is currently engaged in "base-level collaboration," including the front-end agreement, creation of the strategic business plan and demand forecast collaboration and order generation. The next phase, now under way, includes order forecast collaboration and order forecast exception management.

Hartnett recommended that retailers using the Internet to do CPFR ensure the security of the data. He also suggested that trading partners "set measurable goals" and evaluate them over time, as well as ensure that appropriate time and resources are allocated. "Organizational and cultural changes will be the biggest challenge," he said.