In 1996, the US retail chain Wal-Mart successfully conducted apilot program in which it used internet communications with one of its suppliers toachieve significant cuts in inventories. The process used in the pilot was called CPFR for‘collaborative planning, forecasting and replenishment’. CPFR has since beenimplemented in secret by many companies seeking to emulate Wal-Mart’s success. Today,a number of retailers have CPFR programs underway, but none are willing to discuss whatthey consider to be a highly competitive issue.

Beyond EDI
Wal-Mart has led a successful drive for industry standards on CPFR, and has won approval from the Voluntary Inter-Industry Commerce Standards (VICS) body. To help retailers learn more about the process, the VICS CPFR sub-committee is currently organizing new pilots in which participants will share all the results with the rest of the industry.

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By relying on CPFR, retailers will be able to cut warehouse inventories by up to 25 percent by eliminating the need to stockpile goods for special promotions or seasonal spikes in demand. CPFR uses existing electronic data interchange (EDI) messaging standards to enable retailers to share order forecasts with suppliers over the internet.

Unlike EDI, which allows companies to transmit electronic versions of standard business documents (such as purchase orders and invoices) back and forth, CPFR provides a method of communicating other types of information that cannot easily be captured in a standard format.

Collaboration in the form of electronic communications takes place every time a retailer makes a significant change in an order forecast, which typically extends 12-18 months into the future. Collaboration also takes place when a manufacturer foresees a situation in which there won’t be sufficient product available to meet retailers’ order forecasts. Sharing information on the internet to establish a game plan makes sense, while most retailer-vendor collaboration only occurs after the fact.

Bringing trading partners together
The technology is highly sophisticated but the mission is simple: to facilitate the exchange of information between trading partners to achieve precise forecasting and optimum product replenishment. Making the data readily available through the click of a mouse – rather than telephone calls and faxes – is highly efficient, and enables retailers and suppliers alike to rapidly gauge how many products to send to each store.

CPFR helps trading partners to forecast and replenish more effectively by identifying any discrepancies that may occur between forecasts devised by the retailer, and those developed by a supplier. If one company’s forecast varies significantly from that of its trading partner, a software application will trigger an alert and identify it as an ‘exception’, so that the matter can be resolved by forecast analysts on both the retailer and supplier sides.

To reconcile major discrepancies between retailer and supplier forecasts, each company’s analysts can access information via the internet about current conditions at the other company. Once the source of the discrepancy is identified, an adjustment can be made quickly. In addition to allowing suppliers to manage product replenishment more effectively, CPFR is also intended to improve the efficiency of manufacturing scheduling.