Collaborative Planning, Forecasting and Replenishment (CPFR)

  • Collaborative planning, forecasting and replenishment (CPFR®) is a way to integrate the elements of demand management among supply chain partners.
  • CPFR is:
    • A collaborative process whereby supply chain trading partners can jointly plan key supply chain activities from production and delivery of raw materials to production and delivery of final products to end customers. Collaboration encompasses business planning, sales forecasting, and all operations required to replenish raw materials and finished goods.
    • A process philosophy for facilitating collaborative communications.

CPFR Model

The VICS CPFR model is broken into four major activities comprising eight collaboration tasks, with two tasks listed under each of the four activities. The eight collaboration tasks are further associated with 16 enterprise tasks carried out either by the buyer/retailer or seller/manufacturer.

CPFR Collaboration Activities and Tasks

The enterprise tasks function as links between the collaboration tasks and the overall operation of the enterprise. These links serve to eliminate redundancies and discrepancies that occur when the manufacturer and the retailer carry out those tasks in isolation.

Strategy and Planning

  • The purpose of strategy and planning is to establish rules for the relationship, define the mix of products, and develop plans for upcoming events.
  • There are two specific collaboration tasks to be completed within this area:
    • Collaboration arrangement:

      Collaboration arrangement involves setting business goals, defining the scope of collaboration, and assigning roles, responsibilities, checkpoints and escalation procedures.

    • Joint Business Plan:
      A joint business plan identifies significant events such as promotions, inventory policy changes, store openings and closings, and product introductions. Marketing planning is the responsibility of the manufacturer, while the retailer takes care of category management.

Demand and Supply Management

  • In this area, the partners forecast consumer demand at the point-of-sale and determine order and shipment requirements. The model specifies two tasks:
    • Sales Forecasting
      The manufacturer analyzes market data, while the retailer forecasts point-of-sale (POS) numbers.
    • Order planning/forecasting
      The manufacturer conducts demand planning, while the retailer undertakes replenishment planning.

Execution

  • This area, which is also known as the order-to-cash cycle, involves placing orders, preparing and delivering shipments, receiving and stocking products at the retail site, recording transactions, and making payments.
  • The model identifies two execution tasks:
    • Order Generation
      The manufacturer does production and supply planning, while the retailer conducts the activities associated with buying.
    • Order Fulfillment
      This involves logistics and distribution management for both manufacturer and retailer.

Analysis

  • In the analysis phase, the supply chain partners monitor planning and execution activities to identify exceptions.
  • They also aggregate results and calculate key performance metrics, share insights, and adjust plan as part of continuous improvement.
  • Analysis involves the following two tasks:
    • Exception Management
      This involves execution monitoring by the manufacturer and store execution by the retailer.
    • Performance Assessment
      Manufacturer and retailer keep scorecards to access each other’s performance.

Technology

  • CPFR is at heart about developing effective business processes to synchronize supply chain operations across enterprise boundaries.
  • The success of CPFR depends upon willingness to work with shared data efficiently in real time.
  • CPFR software solutions include systems that allow enterprise partners to:
    • Share forecasts and historical data.
    • Automate the collaboration arrangement and business plan.
    • Evaluate exceptions.
    • Enable two-way, real-time conversations, revisions and commentary.

CPFR Benefits and Challenges

Instituting CPFR and realizing its benefits may require meeting several predictable challenges:

  • Increased costs
  • Resistance to data sharing
  • Bridging internal functions

When setting up a CPFR relationship, cross-functional teams might bring together marketing and sales, financial product specialist, logistics specialists, and demand planners who would collaborate among themselves and speak with a single voice to the customer.

Linkages to Match Organizational Strategy

Planning Demand (fixed high capacity strategy)

  • The organizational strategy is to meet demand to the maximum extent possible by providing the necessary capacity to meet peak demand at any time.
  • Ensuring that capacity will be available requires a focus on planning demand, especially in terms of long-term planning.
  • Such a strategy could be pursued if the costs of maintaining excess capacity are considered less than that of losing business.

Communicating Demand (highly variable capacity strategy)

  • The organizational strategy is to match supply to demand as closely as possible by being flexible enough to increase or reduce capacity spontaneously as demand changes.
  • Matching strategies such as these require a focus on communications so that the changes in supply can be proactive rather than reactive.
  • Such strategies may employ a great deal of contract work, outsourcing, and flexible work scheduling.

Influencing Demand (moderately variable capacity strategy)

  • The organizational strategy is to level production and carefully manage demand to meet optimal capacity.
  • The focus is on influencing demand so that there is little need to change capacity.
  • Sometimes this process is called demand shaping because it involves convincing customers to buy certain models based on excess inventory.
  • Demand is influenced by carefully scheduling delivery of products and services and timing promotions to operational requirements.

Managing and Prioritizing Demand (fixed average capacity strategy)

  • The organizational strategy is to control demand to the maximum extent possible through scheduling, promotions, queues, and rationing.
  • The focus is on managing and prioritizing demand because fixed average capacity will be by definition result in periods of insufficient supply.
  • This strategy could be beneficial for products or services that require development and retention of expert personnel or other expensive resources.

Planning Demand

  • Planning demand is one element of demand management and is not to be confused with demand planning, which is the larger process of forecasting and demand management that is the subject of this entire section.
  • A key output of the demand planning process should be regular updates to the demand plan.

The Demand Plan

  • The demand plan is a consensus document requesting products and services from the supply side of the organization to meet the expected future demand for the organizations products and services in each period.
  • It is an estimate of how many products customers will purchase, at what price, and on what time table so that the organization and its suppliers can determine how much to produce, when to produce it, and when to ship it.
  • The demand plan is based partly on forecasting and partly on commitments by the demand side of the organization to generate the necessary demand to meet the plan and the goals set in the organizations business plan.

Demand Plan Inputs

  • The demand plan influences and is influenced by forecasting, by commitments, by product and brand management, marketing, and sales to create, influence, manage and prioritize demand and by business plan and strategy.

  • Other key inputs to the demand plan are the assumptions used and uncertainties encountered by the persons responsible for preparing the forecasts, the product and brand management plans.
  • These assumptions and uncertainties should be documented, reviewed, and challenged in the monthly S&OP review process to validate that the demand plan is realistic.
  • Knowledge of assumptions and uncertainties will also help the organization determine the best way to arrive at a consensus regarding demand plan numbers.

Uses of Demand Plan

  • The demand plan is used by multiple areas of the organization because it indicates demand both in units and in monetary amounts.
  • In this way, each audience for the demand plan can view the information in the most meaningful terms.
    • Operations, logistics, customer service, and product development can view the plan in units
    • Finance can view the plan in monetary amounts
    • Marketing and sales can view both units and monetary amounts
  • A key control to keep demand plans realistic is to treat the demand plan as a request for product from supply side of the organization.
  • In making this request, the demand side of the organization is stating that it is committed to creating this amount of demand and selling the products in the requested amounts.
  • Holding the demand side of the organization accountable for the consequences of producing too much inventory can be an effective control over unrealistic demand plans.
  • Close scrutiny of the demand plan can also reveal when inputs may be biased or assumptions unrealistic.

Planning Horizon and Revision Period

  • A best practice is to produce a demand plan that has at least an 18-month planning horizon and to revise it by re-planning on regular basis.
  • An 18 month minimum horizon has other advantages:
    • It provides a sufficient horizon so that each periods demand has been planned and reviewed multiple times, with increasing accuracy each time.
    • Planned product and brand management and marketing activities typically span at least an 18 month horizon, and sales activities typically span at least 12 month horizon, so the most current and reliable information on internal plans and likely actions of customers and competitors falls within 18 month range.
    • If the demand plan does not seem to be capable of achieving the goals in the business plan and strategy, a longer horizon allows organizations time to plan and execute additional activities to meet the revenue goals.
    • If the demand plan shows a need to increase capacity, it gives the organization sufficient time to approve and execute capital expenditures.
    • When it comes time to generate the annual business plan, by midyear the demand plan will show the next years projected demand and can be used as a key input to the business plan.

Elements of the Demand Management Process

The Demand Management Process is a process that weighs both customer demand and firms output capabilities, and tries to balance the two. Demand management is made up of planning demand, communicating demand, influencing demand and prioritizing demand.

Demand management seeks a balance between the extremes of trying to satisfy every demand and satisfying only demands that current capacity can handle.

Define Demand and Demand Planning

Demand

A need for a particular product or component. The demand could come from any number of sources (for example: a customer order or forecast, an interplant requirement, a branch warehouse request for a service part or the manufacturing of another product).

Demand Planning

Using forecasts and experience to estimate demand for various items at various points in supply chain. Several forecasting techniques may be used during the planning process. Often, families of items are aggregated in doing this planning. Aggregation also may occur by geographical region or by life cycle stage. Forecast demand is compared to actual demand in order to measure and increase forecast accuracy.

Everything in supply network depends upon the number of customers that go to the wholesaler, retailer, or web site offering your product: manufacturing, capacity, warehousing, transportation, location and type of retail outlets, amounts of raw materials to extract – everything.

If production outstrips demand, you suffer financial losses and perhaps go bankrupt. If orders exceed supply, your frustrated customers may go instead to your competitor.