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CRP moves toward reality: continuous replenishment will either be a blessing or a curse depending on how the process is managed on both sides of the table.

Continuous replenishment (CRP) has moved from a theoretical construct, practiced in other industries and admired from afar, to a pragmatic food distribution tool. But if CRP is done incorrectly, its projected benefits can be reversed, causing substantial damage to the industry.

Few industry players have yet to achieve the critical mass needed for full implementation. That's one of the conclusions of the Continuous Replenishment Work Group, a subcommittee of the Efficient Consumer Response (ECR) Best Practices Operating Committee. The following is an analysis of the group's additional findings.

Successful CRP is more dependent on effective trade relations than it is on a mastery of advanced logistics. By its nature, the process of linking supplier and distributor in a common system requires shared business practices and systems, full exchange of electronic data interchange (EDI) covering a broad range of transaction sets from purchase order generation to shared inventory management, and a comfort level for both manufacturer and distributor as they enter an environment of mutual dependence.

The clear message from the work being done on CRP is that continuous replenishment is not high technology and it cannot exist as a stand-alone or add-on function. To be fully effective, CRP must be an integral part of a total business process. If the infrastructure for integrated systems is in place on both sides of the pipeline, CRP can be done, provided there is management commitment on both sides.

The challenge of CRP is not whether companies can afford the financial capital to acquire the software/communications system needed to drive CRP, but rather if they can afford the psychological capital to facilitate and maintain CRP systems.

Many companies, particularly suppliers, believe they are involved with CRP. But on a practical level, their ability to use distributor information to automatically create and schedule customer orders that directly drive production is practically nonexistent. The situation is made worse by a lack of intrafunctional communications. The result is that many so-called CRP systems require force feeding with high levels of inventory and substantial administrative intervention.

Ideally CRP would be a logical extension of supply chain management (SCM)--the interlocking of all business functions into a seamless, event-driven process where the only effective measures are total system cost reduction, efficiency and profitability. In today's food industry, under the specter of ECR, efficiency is still measured and rewarded by individual function.

The goal of CRP is to narrow time windows between order and reorder, driving excess inventory out of the system. Such a goal depends on the industry's ability to process timely, accurate information and the ability of all concerned to readjust their performance measurements.

A probable result of true CRP would be a decrease in average order size and an increase in order frequency. Such a system challenges the fundamental assumptions underlining the traditional physical distribution of product. It also sounds the death knell for a system of recognition and reward where salespersons' bonuses are based on volume sold and buyers' bonuses are based on gross margin.

Senior management education is seen as a substantial hurdle to achieving CRP. CRP doesn't necessarily demand a realignment of responsibility or that functional groups change, although the development of cross-functional teams is likely to facilitate CRP. It does call for management to function at the macro level, linking existing functional groups toward a common purpose.

Key to the development of this macro-level thinking is an understanding of cost trade-offs:

* Lowest landed cost: Since few companies are effectively using activity-based costing (ABC), it will be difficult for them to determine the lowest landed cost. Before a company can successfully practice true activity-based management, each cost element in the supply chain must be evaluated, the financial relationships of other supply chain cost must be determined and the various trade-offs affecting the bottom line need to be calculated. The end of such an analysis ought to be the determination of the lowest landed cost by SKU.

* Pricing and promotion: Before a distributor and supplier can implement CRP, they need to arrive at a pricing and promotion strategy they can both support. This assumes that the partners will set predetermined benefit demands for their CRP initiatives and carefully think through the trade-offs.

* Critical mass: Currently, despite a number of successful initiatives in CRP partnering, the CRP work group believes that "...only 1% or 2% of total industry volume is moving on CRP." True CRP benefits will only be realized when there are efficiency gains that can be measured throughout the supply chain.

* Performance measurement: There can be only one CRP performance measurement--delivering value to the consumer. Without value there is no consumer purchase or repurchase.

* Logistics systems: All logistical systems must be capable of supporting CRP. This includes order processing, distribution center management, procurement, receiving, inventory management, sales forecasting and maybe even manufacturing and purchasing.

All departments must have the ability to access the same information databases and operating systems. The timely and efficient processing of EDI information needed to drive supply chain systems and proper systems integration is critical.

* Systems needed to support CRP:

* Order processing. All affected parties--manufacturers and/or brokers, wholesalers and/or retailers--must have the ability to forecast sales, including replenishment and promotional volume. The distributor or stores must provide a variety of data, including inventory on-hand, warehouse withdrawals, on-order, event timing and out-of-stocks. When combined with proven forecasting techniques, these data are used to create an order in a manner and time that will satisfy distributor needs.

This process ought not to be an off-line PC spreadsheet application, but should be managed as an integral part of the overall order processing system. If a spreadsheet application is used, the result will be inefficient, hands-off methods requireing redundant data handling and creating seams in the pipeline. This in turn will cause errors and create costly delays.

Once an order is accepted by the distributor, the system should follow a logical series of processes that check, record, manifest and ship the product. The output of these processes should be made available throughout the organization at each step. A closed-loop operation requires continual feedback among logistics, sales, marketing, systems and other interrelated functions.

* Inventory management. Assuming a fully integrated CRP environment, the inventory management system would function simultaneously with order processing and purchasing. With such a system, orders would immediately affect where and how the distribution system deploys product. However, such a system must be capable of capturing a variety of data, including planned production, in-transit inventory, network inventory and substitutable products.

Without an efficient integration of these systems, inventory cannot be positioned in the right place or at the right time.

* Sales forecasting. Today distributors begin their forecast process by determining the requirements of each store based on experience, judgment, knowledge of the local market, planned programs and promotions, and the availability of deals. The estimate is communicated to the supplier in the form of an order.

Substantial opportunities exist to improve this process through the use of computer-assisted ordering. Efficient store assortment can also play a critical role in shelf management and help facilitate the flow of more accurate and timely information.

In the future, sales forecasting may be done very differently. ECR proponents see an idealized future in which forecasting is a totally automated process driven by consumer buying behavior. Suppliers will receive firm customer orders for specified horizons, which will minimize forecast error and provide a blueprint for future order planning.

* Distributor issues: If CRP results in smaller, more frequent orders, this will mean, for most companies, that less-than-truckload orders will be constantly speeding down the ECR highway. Distributors may face a future in which their receiving docks are clogged with a flood of orders.

The adoption of consolidation programs would mean that fewer loads would contain more orders. This would relieve some of the pressure on distributors and provide other opportunities to improve productivity, such as arranging for standing appointments at times that fit distributors' idle times.

The CRP work group has also examined the feasibility of using a public warehouse or wholesaler to build pallet loads made up of several manufacturers' products. Such pallets could be shipped to a distributor's cross-dock operation, combined with products from other suppliers and then shipped to stores. Distributors could eliminate both the need for inventory and labor to assemble orders in their distribution centers. This would create a functional shift in operating costs.

* Manufacturer issues: With CRP, manufacturers could incur higher expenses in their distribution centers, since the cost of processing a small order increases on a cost-per-unit basis, compared with truckload orders. Suppliers will need to use every technology at their disposal to reduce costs. Depending on an individual manufacturer's product line or lines, transportation costs might also increase.

* Systems and communication: New warehousing systems might help everyone reduce costs. Accurate bar coding of orders, for example, could result in the elimination of invoices. At the time of order, receipt data could be captured by the distributor's purchasing system, triggering an electronic funds payment to the manufacturer. The optimal approach to CRP calls for the development of a common interface for systems that incorporates all these functions.

Reduced inventory levels at the manufacturer, wholesaler and/or self-distributing chain's warehouse could result in chronic retail out-of-stocks unless properly managed. This would increase the pressure on both trading partners to play straight and communicate.

A new look at the organization Traditional organization
      Supplier             Distributor
      Sales                Buyer
      Marketing             Marketing
      Logistics             Logistics
     Operations            Operations
      Finance               Finance
Information systems   Information systems

CRP team organization
      Supplier             Distributor
      Marketing             Marketing
      Logistics            Logistics
        Sales                Buyer
     Operations            Operations
      Finance               Finance
Information systems   Information systems

CRP doesn't necessarily demand a realignment of responsibility or that functional groups change, although the development of cross-functional teams is likely to facilitate CRP. It does call for management to function at the macro level, linking existing functional groups toward a common purpose.

Phasing in CRP
Phase                       Time line
1. Develop objectives
   and desired benefits     2 to 4 weeks
2. Assess internal
   capabilities             6 to 12 weeks
3. Develop a
   partnership checklist    2 to 4 weeks
4. Initiate a partnership   4 to 6 weeks
5. Implement and
   assess pilot             8 to 26 weeks
6. Ramp-up                  Varies widely
   Total process            22 to 52 weeks
                            plus ramp-up

Full implementation of a continuous replenishment program consists of these six phases, which should be conducted by suppliers/brokers as well as distributors. The time required for implementation varies, depending on the particular partnership.
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Author:Mathews, Ryan
Publication:Progressive Grocer
Date:Jul 1, 1994
Previous Article:To live (and die?) in L.A.
Next Article:ECR: the vision blurs: the industry's vision of utopia is fragmenting into pieces of possibilities.

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