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| Premise |
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| As an industry, we have found that supply
chain processes, when managed either completely by the distributor or completely by the
supplier have inherent opportunities for improved efficiency. This is because both parties
play an active role in creating and satisfying consumer demand. It is the premise of this
initiative that increased efficiencies could be gained through creating co-managed
business processes, and that to achieve these efficiencies, the operational systems and
processes must be integrated through new methods of sharing information. |
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| Background |
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| The continual pursuit of improving customer
satisfaction and the efficiency by which we do business has led us to much internal
innovation. In recent years, it has also turned attention towards the efficiency of trade
relationships. In initiatives such as Quick Response and ECR have yielded sales increases,
dramatic improvements in the speed, efficiency, and accuracy by which goods can be
manufactured, distributed, and sold to consumers. Examples of this are seen in the results
yielded by implementations of Electronic Data Interchange and Short Cycle Manufacturing. |
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| Through initial VICS initiatives, the
industry convened and defined a common set of ordering and invoicing processes. Through
this process definition, the development of a set of standards for electronic commerce
were made possible. Quick Response defined the replenishment process, initiating the
sharing of sales information for the purpose of Vendor Managed Inventory. Later, processes
for advance shipping notice, item definition and maintenance were defined, and today even
forecasts can be shared electronically. |
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| Many of these initiatives yield
improvements, but, in the long-term analysis, they do not achieve true
integration. Vendor Managed Inventory, for example, has succeeded in improving
lead times and increasing the supplier’s ability to respond to consumer demand.
However, it is not always integrated into retailing processes. Because the replenishment
is handled outside of normal retail processes, the link between the stores and the
replenishment process is broken. As a result, stores have limited visibility into the
replenishment process, and little or no means of reacting to a problem. As another
example, while consumer demand has been available for some time now, most manufacturers
have not employed its use in planning their manufacturing. This is primarily due to the
lack of systems and tools to support the use of this information. |
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| Demand planning is another case in point.
Today, distributors build financial plans which drive category and assortment planning,
driven by sales history. Manufacturers build a financial plan based on market demand and /
or account projections that drive production planning. These processes all affect the
ability to execute at shelf level, yet the business processes and systems are not
integrated. The lack of integration creates natural disconnects in the supply chain
causing excessive response times, costs and inventory. |
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| Issue Definition |
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| If one were to develop process models
detailing the parallel processes for business planning, pricing, promotion, distribution,
product development, and marketing it would reveal that there are some passive interfaces,
but very little true integration. And, in fact, that where there are points of
integration, these points often allow no reaction time to correct divergent paths to the
extent of satisfying consumer demand. Today, supply chain contact typically
occurs when a distributor places an order. The order kicks off a set of
processes for the manufacturer and the carrier. If they are able to fulfill the
requirements everyone is satisfied. If not, the distributor is left, at the last
minute, with very little means by which to satisfy consumer demand. |
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| Conversely, distributors may order
merchandise and, due to lack of consumer demand, cancel an order on short notice, leaving
the manufacturer, at the last minute to determine how to dispose of excess merchandise. |
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| The Opportunity |
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| By defining cooperative, integrated business
processes for major supply chain events, and by building systems that support these
processes by integrating the results, supply chain management efficiencies can be
achieved. To accomplish this, several things must occur: |
- Jointly managed business processes must be defined. These
new processes would leverage the competencies, systems and resources of each trading
partner and would facilitate collaboration on planning , forecasting, and
replenishment
- Standards for the sharing of information (data formats)
must be defined to facilitate the collaboration process.
- Methods of integrating the results of this collaboration
into the operational systems of both the distributors and suppliers must be defined.
- Key performance measures for joint, co-managed supply chain
activities must be defined and agreed upon.
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| Examples of Collaboration |
| A distributor may order a seasonal item
based on a seasonal schedule, 5,000 for the South in March, 5,000 for Central in April,
and 5,000 for the North in May. The manufacturer may know in March that only 10,000 will
be available for the entire season. Today, the distributor typically learns of the
shortage in May, when the final order is placed. By this time, the distributor may be
taking markdowns on the item in the South. Had the distributor had visibility into the
fulfillment capabilities for the entire season, they may have decided to allocate 3,300 to
each seasonal region. A new collaborative system would provide the sharing on information
interactively to allow collaboration throughout the forecasting cycle and to integrate the
final agreed upon forecast back into the replenishment and production planning systems. |
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| A distributor plans to promote an item.
Based on a previous promotion, the distributor estimates a 50% lift over regular sales.
The promotional forecast is shared with the supplier. The supplier reviews the store level
allocation for the promotion and determines that, based on the suppliers market research,
many stores should receive additional supply. Also, this promotion is occurring during the
peak season for the product, which should result in a greater lift. The supplier
recommends changes to both the store level forecasts (optimizing the allocation) and an
increase in the overall purchase for the promotion. |
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| Today, many manufacturers still rely on
distributor demand as a primary forecast driver for production planning. Often, a new
product is forecasted inaccurately or consumer demand will change at a rate that is
difficult to predict. Linking retail consumer demand into the operational systems of the
manufacturer would increase manufacturer responsiveness, allowing earlier visibility into
buying trends, thereby creating preparedness for increased demand from distributors. This
is possible today, however many suppliers cannot use this information in this way.
Conversely, distributors have few systemic links to manufacturer-initiated influences to
consumer demand. Both partners must include all sources of demand and measure their
accuracy to ensure continual improvement of forecast accuracy. |
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| Business and category planning, new item
introduction, and promotion planning and analysis are all additional areas of opportunity
for process and system integration. Much inefficiency is rooted in the inability to
synchronize product information and flow across the supply chain. Assortment planning
processes, profitability planning and measurement, and shelf space management could all
improve as a result of more effectively sharing and integrating product / item
information. |
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| The primary tool used to share information
between trading partners today is batch processing of EDI transaction sets. EDI, the
data standard, offers a rich selection of data elements and the flexibility of their use
by trading partners. However, current implementations of EDI processes are
characterized as batch file transfers through VAN networks, mailboxes and translators with
job queuing for processing by supply chain participants. This is the legacy of
mainframe computing technology. The pervasive availability of client-server
distributed computing, TCP/IP networks, and related software solutions can enable more
interactive and dynamic data exchanges and still use existing EDI standards. As
collaborative business processes evolve, standards such as Standard Interchange Language
(SIL) and eXtensible Markup Language (XML) may provide other flexible data standards that
enable tighter supply chain integration. |
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| To move to the next phase the industry must
define the processes that would benefit by systemic integration and collaboration.
It is expected that true process integration will reveal requirements beyond the
capabilities of most current EDI implementations. For instance, true
"Quick Response" will probably require the sharing of information in real time.
To enable increased reaction time and increased responsiveness on the part of both the
supplier and the distributor will require new informational components not defined in
the current transaction set. Potential additions to the electronic commerce toolkit
of most enterprises would include internet solutions that would facilitate
pull-based information access for dynamic data exchanges. |
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| A broad consortium of retailers and
suppliers have come together to recommend an effective collaborative
process. The consortium created process models leveraging distributor
and manufacturer competencies. The success of this initiative is dependent upon the
acceptance of the concept by the industry. To gain efficiency, from a
supplier’s perspective, a predominant share of distributors must have the competency
to share a broader set of information dynamically. Implementing process changes with a
handful of trading partners will not yield broad wide-scale improvements. To effect wide
scale improvement, the majority of business must be transacted using the increased
efficiencies. To that end, several key retailers and manufacturers are now piloting the
new process developed by the CPFR team. The results of this process will be shared
with the industry so that learnings can be applied to wide scale implementation. |
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| It is anticipated that these concepts could
be extended to include integration with carriers and with raw materials manufacturers,
once successfully implemented at the core. |
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| Consulting and software providers are
beginning to emerge with products supporting this type of integration.
Unfortunately, without industry direction, these products will likely do more to prevent
than to assist in the integration process. This is because these products are being
developed without the benefit of common industry process definition or industry standards.
These efforts could have the impact of splitting the industry across products. In addition
to avoiding the risk of splintering the industry across de-facto standards, industry
definition of collaborative business processes would provide needed guidance and direction
for software providers. This direction would ensure the focus of the key software
solutions providers in developing much needed tools and technologies. |
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| Next Steps |
| In early 1998, VICS will be presented
the process models and technology standards for collaborative planning, forecasting, and
replenishment developed by the cross industry team. It is therefore the recommendation of
this paper that VICS support the business processes defined herein as the process
definition for collaborative planning, forecasting, and replenishment as the first in a
series of industry defined collaborative business processes. The following
outlines the general business definition and requirements for collaboration. The
definition is segmented into five key areas: |
- Process model – How and where forecast collaboration
fits into supply chain processes
- Front-end agreements – Changes to trading partner
agreements to support, define, and measure collaboration.
- Data Sharing – Definition of the data elements to be
shared to support collaboration
- Common Metrics – Definition of measures to ensure
achievement of objectives of collaboration: a) reduce supply chain inventories, and b)
increase sales and profits.
- Rule Sets – Defines how partners will determine which
forecasts require collaboration (exception selection)
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