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The
importance of communication and collaboration can never be stressed
enough in a supply chain. A well-documented example is of Volvo
and green cars. In the 80's, Volvo had a growing inventory of
green cars. To reduce this growing inventory, a promotional campaign
was initiated which turned out to be a huge success. The production
department saw the sales of green cars pick up and assuming that
demand has increased, they started producing more green cars.
This again resulted in a growing inventory of green cars and negating
the entire motive behind the campaign. This example shows that
if different entities collaborate and communicate in their functioning,
the situation is always much better. A similar issue is faced
in supply chains where lack of communication results in increasing
demand variability through the supply chain popularly referred
to as the "Bullwhip Effect". The point here is that
the left hand HAS to know what the right hand is doing. Collaborative
Planning, Forecasting and Replenishment (CPFR®) is an attempt
to address this issue.
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Collaborative
Planning, Forecasting and Replenishment (CPFR®) is a business
practice that combines the intelligence of multiple trading partners
in the planning and fulfillment of customer demand. The Voluntary
Interindustry Commerce Standards (VICS) Association published
guidelines for implementing CPFR in 1998 (updated in 2001) and
it has been in various stages of implementation at different companies
since then.
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CPFR is one of a series of
supply chain initiatives like JIT (Just-In-Time), ECR (Efficient
Customer Response) and VMI (Vendor Managed Inventory) driven by
organizations to make their supply chains more responsive and keep
all the supply chain members in tune with the end customer demand,
both in terms of the product and its volumes. By ensuring end-to-end
communication, the occurrence of the "Bullwhip Effect"
is prevented thus reducing inventory levels across the chain. It
also allows partners to visualize the bigger picture in terms of
the entire supply chain rather than their enterprise alone. As partner
collaboration is initiated right from the planning till the replenishment
stage, the supply chain as a whole is in a better position to respond
to exceptional circumstances making it a more proactive entity rather
than a reactive one. On a more abstract level, CPFR aims at creating
an environment of trust between trading partners where the benefits
of sharing information are known. The role of CPFR in various stages
of supply chain activity is aptly represented in the figure below.
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The
VICS Association provides information about the structure of CPFR
activities and guidelines for implementing them. According to them,
CPFR comprises of four main collaboration activities: 1) Strategy
and Planning 2) Demand and Supply Management 3) Execution and 4)
Analysis.
Implementation of all four activities is not necessary for implementing
CPFR and a subset of these activities can also be implemented.
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| 1)
Strategy and Planning: |
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This
activity establishes the ground rules for the collaborative relationship.
It determines the product mix and placement and develops event plans
for the period.
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| 2)
Demand and Supply Management: |
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This
activity estimates consumer demand and order and shipment requirements
over the planning horizon. |
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| 3)
Execution: |
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In
this activity, orders are placed, shipments are placed and delivered,
products are received and stocked, sales transaction are recorded
and payments are made.
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| 4)
Analysis: |
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In
this activity, planning and execution are monitored for exceptions,
results are aggregated and key performance metrics are calculated.
The insight thereof is shared between the partners and plans are
adjusted for improving results.
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Implementation
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| To
derive maximum benefits from CPFR, it needs to be implemented in a
well-defined structure. A step-wise implementation of CPFR is outlined
in the following manner. |
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- Formally
establish an agreement with your trading partners and identify
key performance indicators consistent with the purpose of collaboration.
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Formalize the roles and responsibilities of each partner in the
CPFR process.
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Develop a collaborative business plan that is consistent with
the goals of individual partners and the supply chain alike.
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Develop a sales forecast for the collaborative initiative and
identify key exceptions along with methods to address those exceptions.
- Execute
the collaborative plan and address any exceptions that arise in
a manner decided before hand
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Value
Proposition
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The
greatest value of CPFR is derived from the reduction in inventory
levels and eliminating out-of-stock situations. Moreover, replenishment
cycles get smaller as supply chains get more responsive to end customer
demand making it more competitive. As out-of-stock situations are
eliminated, sales increase especially in the retail goods industry.
As inventory levels are reduced, warehousing costs are also reduced
which can result in significant savings. In summary, the supply
chain becomes more customer-driven than before and realizes significant
advantages from such collaborative activities.
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The
purpose behind CPFR or any other collaborative activity in a supply
chain is to leverage the competencies of each trading partner in
a manner where the entire supply chain benefits. Even if trading
partners do not implement CPFR in the structured manner defined
by VICS, an environment of trust and a collaborative interaction
can greatly benefit each one of them.
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Next Issue:
Collaborate and Conquer
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Services For Your Supply Chain |
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