Collaboration can eliminate inefficiencies for all parties, but collaborative planning and execution among trading partners is daunting. Short-term projects can be a realistic route to prepare for more strategic collaboration efforts.

Industry Takes Stock of Collaboration Progress

Sam Walton stated that the more information a retailer like Wal-Mart can share
with its suppliers, the more benefits both parties can reap.[1] Though most
trading partners would conceptually agree with collaboration as a useful business
practice, translating this belief into a well-defined, easily measured process
proved difficult. For the past few decades, trading partners have tackled supply
chain collaboration from different angles, generating multiple frameworks, including:

Quick Response and Efficient Consumer Response

In 1985, the quick response framework was defined for the textile and apparel
industry. In the mid-90s efficient consumer responses was launched as its counterpart
for general merchandizing and grocery, leveraging concepts like category management
to capitalize on the suppliers’ expertise in managing and marketing their own
products.[2] Both frameworks can be viewed as predecessors to the now-fashionable
demand-driven approach. The goal is for retailers like France’s Système U and
manufacturers like Coca-Cola to build a well-connected, synchronized supply
chain that can satisfy customers’ demand with the lowest possible costs.

Co-Managed Inventory

This framework assigns varying degrees of responsibility for forecasting sales,
forecasting orders and generating purchase orders on buyers and sellers. Through
its many flavors, like supplier- managed inventory, vendor-managed inventory
and continuous replenishment programs, it transitions some of these responsibilities
from the buyers to their suppliers. The argument supporting this transition
is that suppliers find more efficiency in managing their own inventory across
multiple customer accounts. And though not widely adopted, user companies that
have implemented co-managed inventory initiatives like liquor maker Diageo have
achieved up to 40 percent time savings in administration as well as reduced
raw materials inventory levels.[3]

Collaborative Planning, Forecasting and Replenishment

Probably more popular than other collaboration frameworks, CPFR defined guidelines
for collaboration between trading partners. These guidelines included establishing
a front-end agreement and a joint business plan that outlines how the two partners
will collaborate on generating demand or order forecasts, replenishment plans
and resolve any disagreements.[4] CPFR pilots between retailers like Walgreens
and manufacturers like Kraft have achieved well-documented benefits in increased
inventory turns, reduced lost sales and out-of-stocks.[5]

Initial Collaboration Frameworks Had Limited Success Reducing Inefficiencies

Buyers and sellers hoped that through these initiatives they could better exchange
plans and forecasts and work together to improve product availability and customer
satisfaction. But beyond the much talked about successful pilots, this vision
did not materialize. Many attribute this limited success to a lack of inherent
trust in the relationship between trading partners. This prevents partners from
exchanging enough insights about their demand and inventory positions to significantly
eliminate supply chain inefficiencies. Forrester identifies common pitfalls
that plagued the implementation of these frameworks. Specifically, the implementation
of these frameworks was usually:

Restricted to Collaborating on Forecasts, Not Replenishment Plans

Collaborative frameworks like CPFR allow trading partners to share accurate
demand and supply information to generate an accurate collaborative forecast.
The assumption is that if partners collaborate on demand and order forecasts,
they will face fewer mismatches between buyer and seller exceptions at the time
of execution. But buyers and sellers were ill-equipped to communicate and resolve
mismatches while executing their plans. For example, Campbell’s can collaborate
with Kroger on creating a 52-week sales forecast for its chicken noodle condensed
soup. But plunging temperatures in the Northeast generated an unexpected spike
in demand, making the collaborative forecast of limited use. What is needed
is a way to communicate changes in current demand and collaborate on a plan
to divert additional supplies from, for instance, the Midwest, which enjoyed
higher-than-average temperatures.

Limited to High-Profile Trading Partners

As large retailers and manufacturers looked for additional efficiencies in
their supply chains, they saw the promise in collaboration. But benefits from
a collaborative relation between Wal-Mart and Procter & Gamble are not representative
of expected benefits across the industry. This is because Wal-Mart enjoys more
intensive customer service from Procter & Gamble – translating into more analyst
resources and technology solutions to enable collaboration. As retailers and
suppliers looked to collaborate with their small- and medium-size partners,
they realized the expected savings might not offset the human resources and
technology investment needed to enable this effort.

Decoupled From Other Supply Chain Solutions

Many of the collaboration projects started as pilots that had little or no
integration to other enterprise applications, such as order management systems.
This initially did not pose a problem, as these pilots enjoyed executive sponsorship
and enough resources to relay changes in order forecasts or purchase orders
back to the appropriate parties. But as companies like Lowe’s looked to expand
their collaborative efforts to more trading partners, they realized the need
to integrate their stand-alone collaborative solutions with key supply chain
solutions. This would ensure that supply chain processes like demand planning
can benefit from timely collaborative adjustments, without the need for costly
manual intervention.

Firms Identify and Build a Foundation for Future Collaboration …

User companies that have experienced benefits from conducting collaboration
pilots with key trading partners wanted to expand to a bigger set of partners.
But they realized that to sustain benefits from their pilots, across all partners,
they must streamline and automate the collaboration process. To do that, they
needed to build a foundation for better sharing of information while collaborating.
Namely, they started to invest in:

Data Synchronization

Collaboration attempts brought the problem of asynchronous data to the forefront.
Erroneous product codes result in mismatches between trading partners’ plans,
resulting in costly errors. A manufacturer like Sony would realize that it failed
to satisfy its customer fill-rate requirements for a new DVD player with Circuit
City, due to a mismatch in product identification. As the supplier continues
to send its customers the wrong products, unnecessary transportation costs and
customer dissatisfaction mount.[6] To avoid these problems firms looked for
solutions that systematically synchronized their product data across disparate
divisions and regions as well as with trading partners.

Exception Management

To collaborate with their trading partners, firms needed tools that could quickly
mine massive amounts of data, separate noise from significant drivers and point
the user to the most imminent problems. Users soon realized that using spreadsheets,
phones and faxes are not a scalable solution. They needed an exception management
tool that alerts users to potential problems, based on predefined business rules.
A retailer like Carrefour looked for tools from best-of-breed vendors like Syncra
Systems that offer this functionality in an easy-to-use, graphically rich ASP
solution.[7]

Demand Forecasting

Traditionally, the forecasting process at many companies was no more than using
Excel or pencil and paper to come up with simplistic demand predictions. As
users embarked on collaborative projects, it quickly became clear that these
tools could not generate an accurate demand forecast that could serve as the
foundation for their collaborative efforts. User companies like Whirlpool looked
for solutions from vendors like i2 that will forecast each customer’s demand,
using inputs like history, expert opinion and business objectives. These forecasts
can then be shared with trading partners – the first step in building a consensus
forecast.

… While Targeting Ripe Opportunities to Collaborate, Internally and Externally

Most of the original collaboration frameworks have focused on strategic collaboration
with external trading partners. But as companies gained more experience with
the potential benefits and the limitations of these frameworks, they expanded
their view of what constitutes collaboration. To collaborate successfully, firms
looked to build better communication internally and with their external partners
during planning, executing the plan and settling financial transactions after
execution. As firms’ collaboration scope expanded, they invested in solutions
like (see Figure 1):

Invoice Matching and Financial Reconciliation

Sixty percent of all invoices generated have errors; 43 percent of all invoices
result in deductions; each invoice error costs $40 to $400 to reconcile.[8] When the retailer cannot match received products to the manufacturer’s invoice,
it becomes the manufacturer’s responsibility to identify the mismatch, relying
on an outdated paper trail. With this limitation, manufacturers often sacrifice
valuable promotion dollars to pay for deductions and chargebacks rather than
investigate the mismatch. User companies like Target are looking for improvements
in this area by using tools like Notiva Match and Reconcile to automatically
match their orders to the suppliers’ invoices, identify discrepancies and share
these exceptions with their suppliers (see Figure 2). Presenting this information
in an easy-to-use format encourages the suppliers to investigate the roots of
discrepancies and proactively minimize unnecessary chargebacks.

Global Sourcing Visibility

As user companies look for more cost-effective sources for their products,
they consider disparate global suppliers, which often lack the experience and
the scale for providing their customers with high levels of visibility. This
is exasperated by time differences and language barriers, resulting in costly
mistakes in sourcing that can offset the perceived savings of global sourcing.
Retailers like Best Buy understand the benefits of presenting their suppliers
with an easyto- use, straightforward method to communicate variations and requests.
The retailer invested in a global sourcing solution from U.K.-based Eqos, which
serves as a repository and portal for reliable demand and supply information,
and is available across the retailer’s organization as well as to its massive
supplier base.

Sales and Operations Planning

User companies soon realized that their investment in external collaboration
tools is constrained by their organization’s ability to internally share buy-side
and sell-side data. At the crux of this communication is the sales and operations
planning (S&OP) process that synchronizes sales forecasts, demand plans and
supply plans together with financial plans. Firms typically lack a streamlined,
automated process for sharing disparate forecasts and building internal consensus
in the face of variations in supply and demand. This process becomes even more
critical when planning a time-sensitive promotional event. To ensure that sell-side
and buy-side functions agree on their ability to satisfy demand, companies like
recreation vehicle manufacturer Fleetwood Enterprise have invested in Demantra’s
S&OP solution.

Use ROI From Improved Reconciliation to Fund Future Collaboration

Through collaboration, buyers and sellers can simultaneously eliminate inefficiencies
from their supply chains. But given the growing complexities of supply chains,
it is daunting to manage collaborative planning and execution among trading
partners. These efforts typically require strong long-term commitment from both
sides to nurture that relationship. On the other hand, users can quickly benefit
from implementing solutions like invoice match and reconciliation, improving
productivity and reducing administrative costs. The benefits are twofold. First,
users can invest their savings into funding more strategic collaboration projects.
Second, through a streamlined transaction reconciliation process, firms can
identify long-term trends in their relations with trading partners. These trends
can help them set the right priority for investing in various collaboration
projects.

Endnotes

1. Walton was quoted in a presentation given by Wal-Mart at the Oct. 8-9, 2003,
   CFPR meeting.
2. See ECRnet.org.
3. See the Oct. 23, 2003, GNX press release, https://www.gnx.com/reg/branding.
   jsp?sec=news&sec2=pr&fileIncl=News_046_Diageo_CPFR.
4. Refer to the VICS 9-step guidelines; see www.vics.org.
5. For example, a CPFR pilot at Welch’s reduced forecast error from around
   40 percent to between 8 and 9 percent and reduced inventory levels by 5 percent
   in the first year and 10 percent in the second, while increasing inventory
   turns by an equivalent amount. See www.glscs.com/archives/9.02.CPFR.htm?adcode=10.
6. According to A.T. Kearney, 3.5 percent of total sales lost each year are
   due to supply chain information inefficiencies. See www.gmabrands.com.
7. Syncra was acquired by Retek in November 2004.
8. See the GMA CEO/Presidents Forum summary, found at: www.gmabrands.com/publications/docs/ceoforum.pdf.