The Long Road to CPFR

But if there’s one thing that business managers have learned it’s that the revolution that a web-enabled process promises is not as easy or as quick as proponents would have one believe. And nowhere is that truer than in the supply chain.

Moving an internal procedure to the web—such as reporting sales data from the store to headquarters—is a difficult process, but it at least is still only communicating data within an organization. Moving the supply chain to the web, however, adds an incredible layer of complexity not only because it involves so many entities but also because it affects so many processes.

For that reason, most participants in collaborative supply chain projects stress that the starting point for any collaboration comes long before any technology decisions are made. “The starting point is the entire business relationship,” says Mike Schrader, manager of forecasts for pharmaceutical manufacturer Schering-Plough Corp., which has been engaged in a supply chain collaboration effort with drugstore chain Rite Aid Corp. for nearly two years.

Says Harrison Lewis, vice president of data management and e-business at the Great Atlantic & Pacific Tea Co.: “It’s not really about the technology, it’s about processes and cultural issues.”

With so much to understand and automate and so many procedures to have in place before a CPFR program can really start, it’s no surprise that some would-be participants are overwhelmed—and thus hold back waiting for someone else to make the first move. “CPFR is a giant multiple choice test in which there is no right answer,” says Matt Johnson, chief technology officer and a founder of Syncra Systems Inc., provider of collaborative supply chain technology.

Collaborative planning, forecasting and replenishment has caught the attention of many retailers and suppliers who are attracted by the promises of increased sales, reduced inventory costs and more accurate forecasting for production purposes. CPFR is the trademarked name of a process being developed by the Voluntary Interindustry Commerce Standards Association. For all the attention CPFR has garnered over the past couple years, few retailers have adopted it. Boston-based AMR Research Inc. reports that perhaps as few as 45 and no more than 60 retailers are piloting or using CPFR. On the manufacturing side, that number could be as low as 100 or as high as 150, but no more, AMR says.

AMR cites a number of reasons for the lag. For one thing, the decline of the economy got in the way just as retailers were getting interested in CPFR. For another, some retailers are watching the development of trading exchanges to see what effect they might have on the development of CPFR. And finally, many would-be participants are confused about where to start and others questions whether CPFR is really beneficial.

Getting off the blocks

As with any complex technology, web-based supply chain automation has any number of starting points. And getting one’s hands around a single starting point is not easy. Participants advocate a number of jumping off places. Analysts most often cite: Determining which products make the most sense for collaboration, developing close working relationships with partners, cleansing data and making sure that all data feeds into a central database.

TruServe, for instance, is collaborating with only 15 of its 2,000 suppliers. And while Linder expects the program to grow substantially this year, it still will involve collaborating with only as many as 50 suppliers—2.5% of its vendor base. “But they’re a significant part of our business,” he says, and so they’re the most valuable to convert to collaboration. Among TruServe’s collaboration partners are Black & Decker Inc., The Scotts Co., Delta Faucet Co., Manco Inc., General Electric Co.’s lighting products and Genova Products Inc., providers of pipe and plumbing supplies. Narrowing the partners “streamlined what was a daunting task,” Linder says.

Each organization must determine the minimum size partner with whom they will collaborate, some say. “Everything you do has to be thought of in terms of economy of scale,” Schrader says. “Unless your partner represents at least 5% of your business, collaboration would not have enough impact.”

Once a retailer has chosen products and partners, the next step is building the right relationships, most participants in CPFR programs say. “The hardest part is the communications,” Schrader says. Schering-Plough, which is using the E3 technology from JDA, is actively seeking to collaborate with other chains and has done some collaboration with CVS Corp. and J.C. Penney Co. Inc.’s Eckerd Inc. “You have to develop the relationship between two companies so that communication works just as if two individuals were sitting in cubicles next to each other,” he says.

Management Commitment

Key to developing that relationship is a commitment from management within the organizations, Schrader says. “You have to have a catalyst,” he says. “Each account has to have a champion who is committed to making sure the relationship is created.”

Another crucial starting point is the state of the data. For one thing, the data must be consistent and clean. The retailer’s database must report each product in the same way, no matter the source of the data or where the data reside. And the retailer must also have a centralized view of data throughout the system—“visibility” in the current term. “One of the biggest failings of CPFR initiatives to date has been that retailers have tried to implement collaboration without visibility to their demand levels,” says Scott Pulsipher, director of business solutions for Yantra Corp., provider of management software in a number of areas including retailing.

But if not having a view of the demand level isn’t bad enough, most don’t have a view of their supply level either, Pulsipher says. “Even if they can get that demand data, many still are unable to figure out where all the available inventory is to sell against that demand,” he says. “There’s a lot of data work to be done for organizations to understand what they have in their global environments.”

Finding the people

Yet another early requirement for making a CPFR project work is making sure the right people are in place. “Systems are important, but the really critical piece to making collaboration work is the people,” Schrader says. “Making collaboration work takes a different kind of person.”

“Five years ago, the type of person that we need didn’t exist,” Schrader says. “To make collaboration work, you really need a new person who understands development, manufacturing, distribution, production as well as marketing.”

While retailers may have a hard time getting their hands around a CPFR project, results to date of the limited tests show the effort is worth it. TruServe, for instance, has reduced its inventory by $200 million in that time, Linder says, while the rate at which stock has been available on the shelf for customer purchases has gone up a couple of percentage points.

Similarly, Schering-Plough reports a significant increase in in-stock positions for seasonal items at Rite Aid. Coppertone profitability is up 20% at Rite Aid, due to more timely stocking, Schrader says. AMR’s study showed, among other findings, that retail store shelf stock rates improved 2% to 8% while inventory levels dropped 10% to 40% and sales increased 5% to 20%. Manufacturers’ inventory levels fell as well while sales increased 2% to 10% (see box).

Those results were achieved on a fairly modest investment by retailers, AMR says. Suleski says software license fees range from $300,000 to $3 million, although a retailer can make a quick start in a few areas for a range of $125,000 to $175,000. Or a retailer can start with a CPFR system hosted by a vendor for $90,000 to $250,000 and expect to pay about $30,000 a month. “Retailers can pilot CPFR processes without making large up-front financial investments,” Suleski says in her report from AMR.

Those improvements in inventory and stock availability rates make AMR optimistic about the future of CPFR. Retailers and their trading partners last year spent $21 million in software licensing fees for CPFR, Suleski says. She expects that figure to rise to $250 million in 2004.

Suleski’s report underscores what retailers and their suppliers have learned about the CPFR process. Once again, the web makes it possible, but it’s the people who have to make it work. “The learning process, not the software, is the biggest commitment your organization will need to make,” she concludes.

kurt@verticalwebmedia.com

 

The benefits of CPFR
Retailer benefits
Better shelf stock rates	2-8%
Lower inventory level	10-40%
Higher sales	5-20%
Lower logistics costs	3-4%
Manufacturer benefits
Lower inventory level	10-40%
Faster replenishment cycle	12-30%
Higher sales	2-10%
Better customer service	5-10%
Source: AMR Research Inc.