It`s in the cards

When dealing with suppliers like Kimberly-Clark, Colgate-Palmolive and Procter & Gamble, even a large retailer like Germany`s METRO Group must know how to play a good game of retail industry poker to get the best terms in price, product and delivery. "We`re trying to buy as low as possible and suppliers are trying to sell as high as possible," says Axel Hopp, METRO Group`s head of corporate information management.

But in developing web-based systems of sharing sales forecast and production information, METRO is setting the negotiating table for a more open back-and-forth that helps to change the rules of the game. "Changing people`s attitudes and mindsets is our main challenge," Hopp says. "But once people see the potential to get more involved in collaboration and get more positive about it, buyers and account managers can play a friendlier game of poker."

Right products, right stores

Over the past three years, Dusseldorf-based METRO has leveraged collaborative planning, forecasting and replenishment, or CPFR, as a central part of multiple web-based processes with its trading partners to improve its record of meeting one of the long-time goals of all retailers: getting the right products into the right stores when customers are most likely to buy them.

Retailers move much of their products around planned promotions, but they often miss opportunities to sell large volumes at the best price because of ineffective communications with suppliers that result in insufficient, untimely or missed deliveries. At METRO, CPFR is proving to be a key ingredient in its efforts to get sufficient amounts of promoted products into the METRO Cash and Carry chain of wholesale grocery stores so as not to disappoint customers, Hopp says. The chain`s suppliers that participate in CPFR have shown a 99% delivery rate of planned shipments, compared to 97.5% for non-CPFR partners, he notes.

Although the difference of 1.5 percentage points may not seem like much, it makes a big difference in overall sales, profit margins and in customer satisfaction levels, Hopp says, adding that Cash and Carry`s professional wholesale customers tend to be more demanding than retail shoppers. "Cash and Carry customers get angry if they go to a store to buy promotions and the products aren`t there," he says.

Increases in delivery rates usually coincide with a reduction in out-of-stocks, resulting in increased sales. "If an item that a customer wants to buy is not on the shelf, we can assume that the 50-50 rule applies--50% of customers will buy a different item, but 50% will shop for it in a different store," Hopp says. By increasing the delivery rate by 1.5 percentage points, METRO is able to recoup the 0.75% of items that would have been lost to other stores. Because the recouped sales don`t come with additional costs like marketing, he adds, they contribute more to profit margins. And because promotions are expected to generate store traffic, METRO expects the increased in-stock levels to keep more customers in the store making additional purchases. "There are a lot of soft benefits," Hopp says.

Bringing in other chains

By the end of 2006, METRO expects to have rolled out the benefits of CPFR to its other retail chains, where partner collaboration will play a crucial role in assuring adequate production and delivery of products whose demand among consumers can be extremely volatile based on promotions.

CPFR has long been touted as a potential boon for retailers, who stand to gain sales, profit margins and happier customers while reducing sourcing costs and improving relationships with suppliers, experts say. But while no one argues with the value of those benefits, few companies have made CPFR a reality. "A lot of people talk CPFR, but not a lot of people do it," says Paula Rosenblum, director of retail research for Aberdeen Group Inc.

Moreover, many retailers that say they`re practicing CPFR are utilizing only the most basic parts of it, leaving much of CPFR`s value still far from reach. The preliminary results of an Aberdeen study on the use of CPFR among retailers found that 50% of 30 respondents across several retail segments and company sizes were using CPFR to collaborate with suppliers. But nearly half of the respondents said they were collaborating only on a transactional basis--by electronically sharing purchase orders, advance ship notices and invoices--leaving them outside the true benefits of collaboration.

"The object of the game is to go from being transactional to being strategic," Rosenblum says. "You have to move forward from a transactional basis to where the retailer and its suppliers are working together to assure they`ll meet customer demand."

As METRO and its suppliers have found, going beyond sharing transactional data to also share sales forecasts and production schedules can provide the kind of visibility that CPFR promises for lining up the right amount of products to suit each planned merchandise roll-out and promotion.

Tiered system

METRO is known as a progressive company, operating at the head of the curve with cutting-edge technology and methods. Last fall, for instance, it started using an RFID supply chain with 20 suppliers as part of the METRO Group Future Store Initiative. That system lets managers track over the web the shipment status of pallets marked with RFID tags. METRO expects to have another 80 suppliers on board with the system this year, then 300 by January.

But even METRO did not dive completely into CPFR all at once or overstate its capability and benefits. Instead, it has deployed CPFR as a key part of a multi-faceted and tiered system of collaboration that provides for different levels of collaboration with suppliers based on their standing with any particular product.

Its tiered system is designed to both make participation by its universe of suppliers more democratic and provide METRO with a broader range of sourcing alternatives in case of unexpected disruptions in the flow of goods into its distribution centers and stores.

Faced with a mandate from its board of directors to produce supply chain benefits through improved information sharing with suppliers, METRO in 2002 started working with the GlobalNetXchange, a retail industry Internet-based trading service, to implement CPFR with seven of its leading suppliers, including Kimberly-Clark Corp., Procter & Gamble Co., Johnson & Johnson and Colgate-Palmolive Co. "We started with them not necessarily because we thought they would bring the highest ROI, but because we were just beginning and needed partners with an affinity for this," Hopp says.

The big-name suppliers in its CPFR project had all at one time or another been the category manager, or lead supplier, for a particular line of products. As a category manager, a supplier received basic information months ahead of time about the assortment of products to be promoted within a category and the scheduled time for the promotion. A few other suppliers would receive partial information in case they needed to step up deliveries, but they wouldn`t receive the information until about three weeks before the promotion was scheduled to begin. Smaller suppliers were even further out of the loop.

Cutting through the hodgepodge

IRCE 2008 Conference Multi-Media CD-ROM

As planned promotions got closer to the scheduled date, managers at METRO and their counterparts at the category managers would work out the details of specific products, quantities and pricing through a mixture of meetings and communication methods. METRO would share some demand data like sales forecasts and projected demand for particular product sizes, but there was little if any sharing of supply data related to the supplier`s ability to meet METRO`s orders. "On the supply side, there was no collaboration," Hopp says. "Suppliers just got their orders and hopefully met them."

There were exceptions, but not without faulty communications, he adds. For unusually large promotions, there might be more communication between METRO and its suppliers, but the hodgepodge of communication methods without a central means of coordinating and recording messages often resulted in confusion. "It was a classic case of a lot of people talking to one another, with a lot of misunderstanding," Hopp says. "Somebody might have been on vacation, for instance, and no one saw a supplier`s message in his mailbox."

Such poor communications could result in an inability to respond to unexpected changes in demand or production, leading to missed opportunities, lost sales or over-delivery of products that would have to be either returned to the supplier or sold at markdown prices. As planned promotions got closer to their kick-off dates, for instance, METRO might learn that demand was lower or higher than initially expected.

"If detergent or diapers were selling at a higher demand than planned, we might not be able to get the trucks to deliver more products, or we might have to pay extra for labor and transportation to do rush orders," Hopp says. "But the worst case is that we don`t get any merchandise at all."

Reaching critical mass

But offering web-based collaboration through GNX`s CPFR service has provided the missing visibility into updated supply and demand information necessary to assuring the proper flow of products into METRO`s distribution centers and stores, Hopp says. The technology itself, by enabling both sides of the negotiating table to easily view information through a web browser, makes partners more willing to contribute information, he adds.

In the meantime, demand for some product categories supports having more than one category manager. So instead of working with one category manager and two or three additional back-up suppliers for each promotion, METRO now often works with up to three category managers for, say, three types of detergents, plus a team of six or seven back-up partners. Using web-based CPFR, Hopp says, makes it possible for all of these suppliers to share information with METRO, giving it plenty of alternatives should demand rise unexpectedly or if a lead supplier experiences unexpected disruptions to supply. "We have category managers plus others to give us a critical mass," Hopp says. He adds that CPFR partners who get information on planned pricing and quantities can add information into the system to suggest different products or pricing. "With CPFR, it`s become more democratized for suppliers," Hopp says.

METRO`s CPFR program is at the core of a 5-tier system of suppliers. The top suppliers or category managers have exclusive access to METRO`s Category Management Plus, a web-based application from Wincor Nixdorf Inc. for sharing initial information on planning assortments and times for product promotions.

A broader view

The category managers and the second tier of suppliers participate in the CPFR system, where they can share in details on pricing and quantities of planned promotions and make suggestions for alternate products and pricing. "Now suppliers can make those suggestions earlier," Hopp says.

CPFR partners, with their knowledge of other retailers` planned promotions, may also share with METRO through a GNX workflow system market data about expected demand for particular products throughout the retail industry. "Without violating their confidentiality obligations with other retailers, a CPFR partner may tell us that a planned promotion might be tough to do in a particular week," he says.

Third-tier suppliers can access METRO`s METROLink extranet, where they can share in some data on promotions but not participate in the planning process by inserting suggested products or pricing. The fourth and fifth tiers receive basic information on promotions through EDI or other means outside of METROLink.

Working with five tiers makes it possible to include all levels of suppliers in information sharing on promotions, creating an even larger critical mass of potential contributors. Beginning to view and share some information in lower tiers helps suppliers to build confidence with METRO as a reliable partner, and it`s a good way for suppliers to get in the habit of planning further ahead. "If suppliers have been used to planning as late as possible, they need to learn the discipline of planning months ahead," says Bharat Popat, CPFR manager at GNX who worked with METRO.

The tiered system also provides incentives for more suppliers to move up to CPFR status. For example, METRO lets suppliers participating in CPFR access data reports through METROLink to analyze historical sales, arming them with information to better prepare and contribute information that could be helpful for future promotions, Hopp says. "The purpose of the tiered system is to build up a hierarchy of collaboration," he says. "We need CPFR partners to reach a critical mass for our supply chain."

Future choices

As METRO rolls out its multi-tiered collaboration for its other retail divisions, however, it won`t necessarily deploy the full extent of collaboration for all products, Hopp says. Collaboration is most important for new item introductions for which METRO and its suppliers don`t already have information on sales history and for complex promotions with multiple products. "Collaboration is not a virtue in itself, it must deliver improvements in the way products get to stores and provide a cost benefit," he says. "If it only provides a 2% improvement in a promotion forecast, it may not be enough of a benefit."

Still, METRO expects to keep adding value to its overall collaboration process. A major avenue for added value will come through RFID, which will bring collaboration to a higher level of detail. In addition to sharing information with suppliers on sales and promotions, RFID will let METRO share information on the status and location of shipments, including whether and how fast a case of products sells out, Hopp says. RFID, or radio frequency identification, uses a system of radio frequency tags and readers to track on the web the status of shipments throughout the supply chain, including within stores.

Such information can be invaluable to suppliers, says Tom Ryan, a specialist in RFID systems and principal of TKR Consulting in West Chicago, Ill. "A supplier can confirm that a case isn`t missing and learn how quickly it sold through," he says.

That can only help suppliers better contribute projections for future promotions, Hopp says. "It`s a natural outgrowth of collaboration," he says. "RFID will let us provide even more detailed data than today on METROLink." Providing higher levels of detail, he surmises, will produce even more incentive for suppliers to show their cards.

paul@verticalwebmedia.com