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A practical look at CPFR: the Sears-Michelin experience. (Partnership).

When Sears and Michelin implemented their collaborative planning, forecasting, and replenishment (CPFR) initiative in 2001, it was not out of a desire to follow the latest business trend. Instead, it was to solve a very real problem in their passenger-tire supply chain. Inventory at Sears distribution centers and Michelin warehouses was high, and yet Sears was still experiencing shortfalls on some items at its retail stores. Through CPFR, the two companies have been able to cut their combined inventory levels by 25 percent while streamlining their key business processes.

Since the 1990s, the Voluntary Interindustry Commerce Standards (VICS) Association has maintained that collaborative planning, forecasting, and replenishment (CPFR)[R] can help companies increase sales and fill rates while simultaneously reducing inventories. (For more information on CPFR see sidebar, "What is CPFR?" on p.48) But can the implementation of an initiative based on the VICS nine-step CPFR model really provide the supply chain benefits proponents have suggested?

This was the question asked at Sears, Roebuck and Co. and the Michelin North American Tire Co. when the idea was initially posed. Although other retailers and suppliers had reported significant benefits through this collaborative technique, no one had ever tried using the CPFR model with passenger tires.

Rationally, the concept of CPFR makes sense: suppliers and retailers communicating and working together in close partnership to achieve results. But what is required to make this actually happen? The Sears-Michelin story answers that question.

Sears and Michelin have a long history of working together, which dates back more than 30 years. Michelin, a French company, found in Sears a retailer willing to introduce their product to the American consumer. The Michelin product is now available in all Sears Automotive Centers as well as its National Tire and Battery Stores.

In the spring of 2001, Sears and Michelin began discussions on collaboration and later that year implemented a CPFR initiative. The mutual goal was to improve business results not only for each individual company but also for the combined supply chain. Initial results from the initiative indicate that CPFR can provide a valuable framework for increasing visibility and collaboration across the supply chain while significantly reducing inventory levels.

Addressing the Need

Sears and Michelin turned to CPFR not out of a desire to adopt the latest industry trend but to solve a very real business problem. The two companies had seen their inventory levels increase because of operational procedures that they had implemented to improve fill rates. The rationale was that there needed to be significant inventory within the supply chain to cover store inventory needs--Sears at its distribution centers (DCs) and Michelin at its warehouses. Even with this effort, however, the fill rate to Sears' stores and distribution centers sometimes fell to unacceptable levels on certain items. Two factors in particular were contributing to these shortfalls: 1) a lack of complete demand visibility throughout the supply chain and 2) the lack of a formal, disciplined business process to address these issues. Although cross-functional/cross-company teams had identified these problems, they had not identified a framework for developing a solution.

Meanwhile, Sears had begun working in the spring of 2001 with the GlobalNetXchange (GNX), a business-to-business exchange for the retail industry. The retailer was using the GNX marketplace auction services for selected products. At the same time, GNX was preparing to offer CPFR software online to facilitate supplier-retailer collaboration based on the VICS model. GNX had reached an agreement with Manugistics, Inc. to make its NetWORKS Collaborate software available online to enable collaboration via the Internet.

Sears was intrigued by the concept. The company had worked with the VICS group for many years on developing electronic-data-interchange (EDI) standardized formats to facilitate e-commerce. Sears also has had a long history of working closely with its major suppliers. For these reasons, it seemed worthwhile to investigate whether the company could forge a partnership, based on the VICS CPFR model.

Sears discussed CPFR with GNX in more detail, focusing particularly on how the software could contribute to the company's current business success. Also, Sears itself further investigated CPFR by attending industry conferences and VICS meetings as well as by reviewing case studies of actual implementations. Sears carefully considered how the nine-step model should be implemented and worked to understand the success others had had. After conducting this investigation, the company concluded that CPFR might have potential benefits for Sears and its key suppliers. The company believed that implementing a CPFR initiative with Michelin could improve inventory productivity and fill rates.

Sears then introduced the CPFR concept to Michelin through a series of awareness meetings. While Michelin was initially interested in the concept and impressed with the potential benefits, it was skeptical about how the process would actually work. In response to these concerns, Sears held another educational session involving people from both companies responsible for the combined supply chain. Concurrently, the Sears automotive vice president and Michelin's vice president of sales discussed the potential benefits CPFR might provide to both companies. As a result of these meetings, the two companies concluded in the early summer of 2001 that the CPFR process and the technical capability offered by GNX could provide a framework for enabling the information visibility and processes needed to reach their respective business goals.

Even though the combined Sears/Michelin business team believed in the concept, the team still needed to develop a business case and gain management support to obtain the resources necessary to develop and implement the initiative. The business case presentations at Sears and Michelin proved successful. Impressed with the success of CPFR projects at other major companies and the belief that Sears' automotive teams had in the concept, senior management approved a Sears-Michelin CPFR proof-of-concept project. Funding was provided for the sourcing of data from legacy systems, the GNX service fee, and project management/education.

Laying the Foundation for Collaboration

Once the decision was made to move forward, the combined Sears/Michelin project team created a list of activities that needed to be completed before implementation could start. This list was developed into a project plan, which established owners and timelines for each activity.

The companies then created cross-company teams to take responsibility for each of the specific activities. To implement the CPFR project on time, broad participation was needed. The teams consisted of members from Michelin, Sears, and GNX, each contributing his or her own areas of expertise to complete the work at hand and keep the project on schedule. The software setup/data acquisition team, for example, consisted of members from Sears IT, Michelin IT, and GNX. These teams proved instrumental in achieving the live date goal as well as contributing to the spirit of the program.

Each team (shown in Exhibit 1) understood its mission and the importance of completing these tasks within the overall project plan. In some cases, one team could not begin its work until another team had finished. In other cases, teams could work in parallel. Each team took from one week to four weeks to complete its mission depending on the complexity of the activities. Team members continued to perform their regular job responsibilities and met to work on the project for just a few hours per week. Some meetings were in person and one was a videoconference, but most were conference calls. Each team designated a team leader who was responsible for coordinating the meeting and completing a weekly status report on the team's progress during the week and activities planned for the following week.

Project Teams

Business                Technical

Current                 GNX Access/
Business Process        Setup

Evaluate                Software
Opportunities           Setup

Front-End               System Testing/
Arrangement             Quality Assurance

Business Process

              Evaluation and

The project coordinator from Sears and the coordinator from Michelin then conducted a weekly conference call to review the status reports from each team and resolve any problems that may have occurred during the prior week. For example, the team responsible for GNX access and setup reported problems with connecting outside of Michelin's firewall to access the GNX Web site. After discussing the situation, the coordinators discovered that Sears had experienced a similar problem with its firewall in the past. The Sears network and enterprise architecture group and members of the GNX staff who had worked on other CPFR initiatives were then brought in to assist Michelin with this problem.

As this example shows, the teams worked well together--an important factor in keeping the project plan on schedule. This partnering activity also set the stage for the collaboration benefits that would be seen later in the CPFR project.

Pre-Implementation Business Activities

Sears and Michelin agreed that a key first step in the pre-implementation phase should be to document the current business process from the planning stage to when the product reaches the end customer. This effort required understanding how the combined Sears and Michelin supply chain interfaced. The team identified and documented the activities to be performed, who was involved, when activities took place, and what systems were involved. Individuals in various departments within both organizations were asked to contribute their specific knowledge in areas such as sales forecasting, demand planning, production, store replenishment, and logistics. The team consisted of both business and technology experts from both companies. It included people such as the buyer, the inventory manager, demand planning managers, customer service associates, the business solution manager, and IT project managers.

Once this process documentation was completed, the companies identified and evaluated opportunity areas that would be improved by following the nine-step CPFR model and using the CPFR software hosted by GNX. Although the team identified several opportunity areas, it initially chose to target three main areas of improvement: reducing inventory at Sears, reducing inventory at Michelin, and increasing information visibility at both companies. The team initially limited itself to these three areas because they were the ones most closely aligned to the original need and offered the most significant benefits. These potential benefits were quantified and became the goals of the program. To monitor the progress against these goals, the team selected appropriate metrics, such as store in-stock levels, DC fill rates, sales, inventory at Sears DCs, and inventory at Michelin's warehouses.

Based on these business opportunities, Sears and Michelin began to map the future business process and documented these decisions and goals in a front-end arrangement. This initial agreement established the items/SKUs involved, data to be used, program participants, business rules, and project accountability. The agreement included information as specific as which people (job titles) at Sears and Michelin were responsible for conducting the weekly conference call to resolve any exceptions or problems. The arrangement was then presented to the project sponsors at Michelin and Sears for sign-off.

The front-end arrangement was important because it formalized the initiative and ensured proper visibility and support for the project. However, the arrangement was not considered to be inflexible; instead, it was treated as a "living document." The team continued to make some refinements after the project had been live for a couple of months. These changes, which were made based on experiences gained in those first months, led to improved business rules that added value. The following example shows how this was done.

According to business rules established in the front-end arrangement, an exception alert would be generated if Michelin was unable to ship the required amount of product to Sears on a future date. Originally, the tolerance set on this business rule was too restrictive. As a result, the system was generating too many exception alerts for very small deviations, which did not require the companies to take any action. As a rough example, say that the plan called for Michelin to ship 1,000 of a specific item to Sears, but it could only ship 990. The CPFR software would generate an alert even though the order was 99 percent filled, and the shipment was only 10 items short. Sears and Michelin responded by changing the business-rule parameters to allow for a greater deviation between Sears' inventory demand and Michelin's product availability before an alert would be produced.

Pre-Implementation Technical Activities

Early in the pre-implementation discussions, Michelin and Sears decided they would share all supply chain information deemed important to the CPFR process. Also, they determined that GNX would host the CPFR software application (Manugistics' NetWORKS Collaborate) and provide access to this data through a secure Internet site. For a service fee, GNX would provide all software setup, day-to-day support, and software licensing.

The system was designed so that users at Sears and Michelin could access their information through a browser with a user ID and password. Because the information can be accessed via the Internet, users can view the data, even when they are away from the office, by logging onto the GNX site. This eliminates the need for users who are traveling to have reports mailed or faxed to them so that they can stay informed about the business.

The software is flexible, allowing views of the data to be tailored to users' specific needs. Sears and Michelin created some views that all users could access to review the overall business. Other more specific views were developed between the individual partners from Michelin and Sears who normally communicate around certain aspects of the business. The individual at Sears responsible for inventory at the company's DCs, for example, would have the same view as the person at Michelin responsible for ensuring that merchandise was available to meet Sears' future orders. Each personal view could be developed with whatever data components had been sent to GNX by Sears or Michelin. Users can view information at the item level or aggregated to the desired level of the merchandise or location hierarchy. This flexibility has allowed the software to meet the requirements of different users who have different responsibilities while still providing the ability to perform meaningful analysis.

The Implementation Process

The CPFR initiative went live on Nov. 4, 2001 with 80 SKUs. The effort has since expanded and now includes 220 Michelin SKUs at all of Sears' Auto Center and National Tire and Battery locations.

The consolidation of supply chain information in one place with easy access through the Internet has proven to be a particularly effective resource for collaboration. Michelin and Sears have adjusted their business processes and have begun to take advantage of the CPFR opportunities identified during the business process mapping. Some of these adjustments are summarized below.

1. Consolidated Data

Prior to the CPFR initiative, the data necessary for full collaboration did not exist in a centralized location. Although both companies had supply chain data internally, each company had only a portion of the data that the other had. As a result, decisions were made based only on what was available. Through the use of the hosted CPFR software, both Sears and Michelin now can send files with the agreed-upon data components to GNX each week. The data includes sales forecasts (regular and promotional), on-hand inventory (at Sears stores and DCs, and Michelin warehouses), inventory on order for Sears, Michelin production plans, Sears future inventory demand, and actual sales (regular and promotional).

This central view of essential data enables the collaboration to be both meaningful and consistent. The data is "meaningful" because it consists of the key information necessary for creating good plans and forecasts and for ensuring that the right product arrives in the right place at the right time. It is "consistent" because the user is assured that the same data elements are updated at the same time every week. There is now a single view of the truth. Both companies agreed to work with this set of data and to mitigate any system differences they might experience internally.

Because key supply chain data was centralized, it was easy to build certain metrics into the software. For example, the software calculates sales forecast accuracy (the sales forecast vs. the actual sales results) for the two companies. It also retains one year of historical data in the CPFR software, which allows the companies to compare future plans vs. historical performance. The software has been configured to allow for monthly reporting. In this way, weekly performance data can be summed at a monthly level for a more macrolevel view. Viewing several weeks (or months) at the same time provides a view of future (or past) trends. This can be helpful in managing the buying, forecasting, replenishment, demand planning, and production activities.

2. Exception Reporting

The CPFR process and technology also enable Sears and Michelin to apply disciplined "business rules" to the centralized key supply chain data. By applying these rules, the supply chain can generate meaningful exception reports to the decision makers responsible for taking action. To illustrate, according to a disciplined business rule, the appropriate people at Sears and Michelin would be advised if the tire maker's planned future production of an item was insufficient to meet Sears' forecasted demand.

In designing these business rules, the intent was to generate exception reports early enough to allow Sears and Michelin supply chain professionals to resolve issues before they could affect the end customer. Each company discussed possible actions to take that would cause minimal or no increase in supply chain costs.

These rules were established within the CPFR software and are run weekly to generate alerts. These alerts are sent by e-mail to the individuals at both companies responsible for resolving the issues. In the past, this activity was done manually by analyzing only the data available at each company. It was a time-consuming process and subject to error because of incomplete data and the mistakes commonly associated with any manual process.

The automated exception reports provide valuable information that allows any issues to be discussed at scheduled weekly conference calls. The companies can then take actions to correct any negative issues affecting Sears' in-stock levels or Michelin's fill rates. For example, based on an exception report, Michelin might decide to increase production to ensure it has enough product to meet projected demand. This capability has enabled both companies to become more proactive, rather than reactive, in solving inventory problems and responding to customer needs. Previously, Sears might not have been aware of a product shortage until right before a shipment was sent from Michelin to Sears. Now with the CPFR tool, the two companies can anticipate problems.

3. Monthly Meetings

The CPFR process has also made meetings between the two companies more effective. For several years, Sears and Michelin have met monthly to discuss anticipated business for the coming months. These meetings consist of reviewing the marketing effort, sales forecasts, current sales trends, inventory requirements, and past sales results. These sessions involve representatives from buying, marketing, demand planning, inventory replenishment, and occasionally logistics. The focus of this meeting is to discuss the proposed plans for future events, analyze what is occurring in the industry, and take actions to ensure that the two companies have strong merchandise offerings and can meet consumer demand.

These sessions often involve analyzing future sales-forecast trends vs. actual sales, or reviewing future inventory levels against anticipated demand. Examination of current planned inventory for items in high demand can be discussed and adjustments made.

Prior to the CPFR initiative, both companies expended much manual effort to create reports for these meetings. Today, this work has been reduced and replaced by information directly available from the CPFR software tool. CPFR not only has cut the amount of manual effort necessary to obtain the various data points but also has provided additional insight and made analysis easier. For demand planning and replenishment activities, it provides a too] to view the current inventory position either by item or at an aggregated sub-line or line level. The buying and marketing areas are beginning to use the data to track actual monthly performance to the planned performance. Additionally, analysis of actual sales performance vs. forecast is enabled by the Manugistics NetWORKS Collaborate solution.

Embed CPFR in the Business Process

To be successful, a CPFR initiative must be integrated into the normal business process. It cannot be something "extra" that is done because of the project going live; rather, it must be embedded in the normal daily, weekly, and monthly processes. The CPFR process and related technology should be thought of as another important tool for achieving the business objectives.

If companies identify what is needed to improve performance and how CPFR can deliver these improvements, it should not be difficult to gain user ownership of the tool and necessary process changes. Sears and Michelin users participate in the initiative because the tool assists them in delivering results. The level of user ownership at both companies is demonstrated by the fact that users are continually requesting that new capabilities be added to the software so they can analyze the business in new ways. Based on user requests, for example, the two companies have added the ability to track the business plan to actual sales performance. It has been exciting to identify and deliver these capabilities.

Financial and Process Benefits

The benefits from the CPFR initiative fall into two major categories: 1) hard or financial benefits, and 2) soft or process benefits. Each is significant and provides opportunities for even greater potential in the future. A summary of the benefits in those categories follows.

Financial Benefits

After CPFR had been in place for one year:

* Sears store in-stock levels improved by 4.3 percent.

* Sears distribution-centers-to-store fill rate increased by 10.7 percent.

* The combined Michelin and Sears inventory levels were reduced by 25 percent.

* Sears generated additional margin dollars due to proactive exception management.

Process Benefits

The process improvements have been similarly significant, centering on the five areas discussed below.

* Documentation of Business Process. Documenting the current business process forced both companies to take a critical look at how their respective supply chain operated and supported the business objectives. The documentation process also resulted in a clearer understanding of where communication takes place, both internally and between companies. The two organizations now have a greater understanding and appreciation for each role or activity that drives the business. This opportunity to "walk a mile in my brother's shoes" has led to better cooperation between individuals in their day-to-day challenges.

* Exception Management. Following the CPFR process and using CPFR technology has allowed Michelin and Sears to identify and resolve exceptions in a more disciplined, standardized fashion. This, in turn, makes users more efficient. They can now redirect their efforts to those areas that require more attention or will yield the highest productivity gains. Those items performing at the forecasted levels generally do not require attention.

* Facilitates Monthly Business Sales/Inventory Review. The CPFR process and technology has made meetings more efficient. Some of the reports for meetings that used to be generated manually have been automated. If a question arises during a meeting, it often can be investigated immediately by displaying the fact-based information directly from the CPFR tool. The ability to view information at any level of the merchandise hierarchy is also beneficial for Sears or Michelin.

* Product Transition. Having greater visibility of future sales forecasts, inventory on hand, and scheduled production has provided the supply chain with valuable information that facilitates merchandise assortment changes. A more complete view of sales and demand has improved planning and implementation of new products. Greater visibility provides an opportunity to reduce inventory in the old product while increasing it in the new. Because inventory levels are known, plans reflect proper decreases in inventory level, which minimizes the markdowns required to clear the product. In this way, the transition allows both companies to bring new products and features to market while maintaining the ability to hit inventory and margin targets.

* Success Creates Excitement for More Success. Although Sears and Michelin achieved real benefits during the first year of CPFR, they did not stop there. While the project had delivered on many of its initial goals, the team recognized there were still opportunities in the supply chain that needed attention. It seemed natural to investigate ways in which CPFR could be used within the partnership to help address those opportunities. As a result, objectives were set for the second year to utilize CPFR to enable process and financial improvements in those new areas. Much of this effort has focused on expanding the use of CPFR information to other areas within each company's supply chain. The success gained in the first year with this project has earned valuable support within both companies--and a desire to generate even more success. With the goals set for year two, the CPFR process is viewed as providing the framework for a continuous improvement program.

Role for the Future

The Michelin-Sears project proves that an existing business partnership can be strengthened through a collaborative initiative built around the VICS CPFR model. The partners investigated the concept, understood the model, partnered with GNX to provide the technology and service necessary to enable CPFR, and then implemented the project together. They proceeded cautiously, always asking: What is the need? What is the objective? What are the right metrics to track? What will success look like? The decision on the part of Michelin and Sears to target additional benefits in the second year reflects a strong endorsement of this program. Additionally, Sears now is in a position to extend the CPFR process to other suppliers.

As business needs change from year to year, solid partnerships will be necessary for growth. These partnerships require access to pertinent data and the ability to collaborate in a meaningful way. The collaborative planning, forecasting, and replenishment model has an important role in that future.

What is CPFR?

Collaborative planning, forecasting, and replenishment (CPFR) is a business-process model developed by the Voluntary Interindustry Commerce Standards Association that seeks to reduce the variance between supply and demand. VICS structures CPFR into nine steps, which are shown in the exhibit below. CPFR provides retailers and suppliers with a framework for sharing key supply chain information and coordinating plans. Under CPFR, supply chain partners form one consensus forecast. Suppliers and retailers form this one forecast either by working collaboratively or by first developing their own individual forecasts, which are then used to create a consensus forecast. This coordination and information sharing allow retailers and suppliers to optimize their supply chain activities. Production schedules are thus set based on demand at the retailer. As part of CPFR, companies also implement processes that enable problem identification and resolution.

The collaborative nature of CPFR leads to better forecasting of demand and product requirements. The improved forecast, in turn, helps to increase supplier fill rates, improve in-stock levels, and reduce buffer stock. Ultimately, the desired result of CPFR is to increase sales while reducing inventories. To accomplish this goal efficiently, however, CPFR requires data-sharing technology and a solid business partnership.

The Nine-Step CPFR Process Model

Step 1

Establish Collaborative Relationship

Step 2

Create Joint Business Plan

Step 3

Create Sales Forecast

Step 4

Identify Exceptions to Sales Forecast

Step 5

Resolve/Collaborate on Exception items

Step 6

Create Order Forecast

Step 7

Identify Exceptions to Order Forecast

Step 8

Resolve/Collaborate on Exception Items

Step 9

Generate Order

Source: Voluntary Interindustry Commerce

Standards Association

Hank Steermann, former senior project manager for supply chain at Sears, Roebuck and Co., was responsible for the Sears/Michelin CPFR project described in this article.
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Title Annotation:collaborative planning, forecasting, and replenishment
Author:Steermann, Hank
Publication:Supply Chain Management Review
Geographic Code:1USA
Date:Jul 1, 2003
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