Executive Briefing & Guide To Sales & Operations Planning
IBM Global Business Services Executive brief Consumer electronics and office equipment Enabling CPFR with SOA: a flexible, scalable solution for collaborative supply chains.
2 Realizing the promise of VMI and CPFR Realizing the promise of VMI and CPFR3 The collaboration challenge Consumer electronics and office equipment companies4 The need for flexibility and scalability must react quickly to volatile supply and demand conditions.4 SOA-enabled CPFR Rapid changes in technology compress product lifecycles.6 Improving alignment of supply and demand Many products last less than a year, with production cycles8 The IBM Global Business Services advantage of only three months. Consumers have their pick of a large variety of new and existing products that are being aggres- sively marketed. It’s difficult to predict what they will choose to buy. Frequent retailer and manufacturer promotions disrupt buying patterns and put downward pressure on prices. Poor forecast accuracy can lead to excess inventory or write-offs. Or it can lead to stock-outs, resulting in lost sales and poor customer service. Adding to the uncertainty is accelerating growth in the Asia-Pacific region. This growth extends and strains supply chains, which can affect delivery reliability and increase risks. To achieve success in this kind of environment, all members of the supply chain need visibility into current and future events, along with the means to work together to solve problems and deal with delivery constraints as they arise. Therefore, it’s not surprising that retailers and original equipment manufacturers (OEMs) have been cooperating for years on programs such as vendor-managed inventory (VMI) and Collaborative Planning, Forecasting and Replenishment (CPFR).
Since the publication of the Voluntary Interindustry Commerce The collaboration challengeStandards (VICS) Association guidelines for CPFR in 1998, Real-time collaboration is critical to the sales and operationshundreds of companies have implemented the process to some planning (SOP) process in consumer electronics. Planningextent. In CPFR initiatives, retailers and manufacturers combine time has shrunk from quarterly and monthly cycles to weeklytheir intelligence to predict demand and align supply by: updates based on daily monitoring of operations that can span three continents.• Sharing retail point-of-sale forecasts and information about product introductions, promotions, inventories, supply chain OEM headquarters capabilities and planned replenishment Customer headquarters Suppliers• Identifying exception conditions that require collaboration — Customer DCs Contract situations in which predefined supply chain tolerances and manufacturers thresholds are exceeded Japan Contract factory suppliers• Agreeing on plan adjustments to resolve exceptions• Evaluating key performance metrics. Logistics Mexico Consumers companies factoryThere’s little doubt about CPFR program benefits. Numer- Other serviceous case studies of CPFR projects show in-stock percentage providers Ireland OEM DCs Retailers factoryimprovements for products in stores, accompanied by signifi-cant channel inventory reductions. Figure 1: When rapid response is critical, collaboration among organizational facilities and with supplier, partner and customer systems must be automaticDespite the success of CPFR initiatives, the reality is that and event driven.CPFR adoption rates have been slower than expected. Asidefrom the obvious reluctance to share data, technological SOP requires rapid coordination between every part of thebarriers have delayed CPFR rollout for many companies. A business as well as with the retailer, component suppliers,major hurdle to using CPFR on a larger scale has been find- contract manufacturers, logistics and other service companies.ing an easy and cost-effective way to pass agreed-on data Information across systems must flow just as quickly as it doesautomatically and securely between disparate systems and across organizational boundaries.to enable collaboration within and among organizations. This Yet many current VMI and CPFR programs lack the fully auto-brief describes the technology issues and highlights how IBM mated, event-driven processes that enable timely collaborationcan help OEMs overcome these challenges with a service- on forecasts, demand plans and supply chain events. Evenoriented architecture (SOA) and Web services approach to inside the four walls of the enterprise, disparate technologiesInternet-based VMI and CPFR.
can make it difficult to communicate at the same pace that Accelerating the CPFR adoption process first requires CPFRbusiness information changes. Most OEMs rely on multiple interoperability — where during any peer-to-peer collaboration,departmental systems and technologies. It’s enough of a one trading partner can use his or her CPFR application andchallenge to automate shared processes among the siloed the other trading partner can use another. These disparategroups involved in the SOP process — sales and market- applications should be able to work on privately hosted net-ing, procurement, manufacturing and logistics — let alone to works, public exchanges or the Internet.extend collaborative processes to all involved players exter- In addition, the OEM must be able to leverage its existing CPFRnal to the organization. applications to quickly implement new initiatives with additionalWithout automation, cross-enterprise collaboration is ham- supply chain partners and also be able to adapt the applica-pered by inaccurate and dated information. Lacking reliable tions as individual partner relationships evolve.replenishment information, retailers pad sales forecasts toincrease allocation of constrained products. In the absence SOA-enabled CPFRof a commitment process for suppliers, the order process is IBM Global Services offers an SOA-enabled solution thatnot really collaborative. And, without good planning tools, it’s provides the interoperability, standardization, flexibility andhard to use information from consensus forecasts effectively. scalability necessary to help you realize the full benefits of VMI and CPFR. Software decisions to support CPFR no longerThe need for flexibility and scalability need to be dictated by internal systems and the technologiesWith early CPFR initiatives, the partner requesting the pro- your trading partners have in place. And CPFR implementationsgram (most often the retailer) frequently specified the enabling needn’t be limited to one-on-one projects.technology, usually a proprietary solution. It became clear Essentially, the IBM solution provides four Web services builtthat — if each new CPFR program involved implementation, on an SOA platform:integration and maintenance of incompatible systems — theIT complexity and support costs for the OEM organization • Statistical forecasting service — to generate a baselinewould increase exponentially. forecastTo address this challenge, in June 2001 a VICS working • Forecast collaboration service — to generate a consensuscommittee released an eXtensible Markup Language (XML) forecastspecification to serve as a basis for standardization. Although • Inventory and replenishment analysis service — to generatea promising first step, this move to standardization did not a baseline replenishment planaddress CPFR program flexibility and scalability. • Replenishment planning collaboration service — to generate a consensus replenishment plan
Create joint VMI Plan supply and develop business plan Plan demand replenishment plan Retailer POS/data Retailers analysis Sell-through Develop Create collaboration Replenishment master joint Gather call and plan agreement business data generate collaboration plan sell-through consensus forecast Adjust sell- Manufacturers through Generate forecast replenishment plan Manufacturer Prepare for POS/data sell-through Prepare for analysis collaboration replenishment collaboration System Generate statistical sell-through forecast (daily) IBM Global Business Services CPFR/VMI solution scope process management solutionsFigure 2: The IBM solution enables key capabilities in your SOP process to be packaged into SOA services and quickly implemented.The IBM solution combines SOA and Web services for optimal The IBM solution enables key capabilities in your SOP processbenefit. Recently, there’s been some confusion in the business to be packaged into SOA services and quickly implemented —world about these two elements. You can have one without the allowing rapid integration to multiple systems and businessother, but it’s best to have both. SOA offers flexibility through partners. You can combine and reuse prebuilt service compo-componentization. But without common connections, you’re lim- nents to quickly develop and deploy collaborative applicationsited in how far you can extend components and the composite in response to marketplace conditions. Essentially, you elimi-applications. Web services offer standardization and interoper- nate the need for duplicate CPFR systems. You’re able to:ability to enable access to components and applications from • Speed execution on CPFR agreements by building collab-the widest range of user devices, but you first need to have orative capabilities once and then leveraging them to speedcapabilities to extend. With SOA and Web services together, execution on CPFR agreements with new trading partnersyou have the optimal IT flexibility and responsiveness to supportyour changing business. • Offer new services to your customers without having to worry about the underlying IT infrastructure • Improve alignment of the CPFR business process with actual operations.
The IBM collaboration platform is role based with security- integrates proprietary IBM Research analytics engines withenhanced sign-on. Your partners and customers can only see collaboration and exception management services to offertheir own information, helping to foster trust-based relationships. end-to-end CPFR and VMI capabilities. The solution was developed using Java™ technology and is exposed as a WebAnd because of the modular design, you have maximum service for integration with business processes. The collabo-flexibility to determine the scope of the solution. You’re able ration platform is event driven for improved coordination withto pick and choose the components you want to implement. suppliers, partners and retailers. You’re able to detect market-You can even outsource selected services to IBM Global place changes more rapidly, create synchronized plans andBusiness Services. effectively execute those plans.For example, one IBM client in the electronics industry did Consensus-based forecastingnot want to do advanced statistical forecasting. IBM man- The IBM SOA-enabled CPFR process starts with retrieving theages that step by generating a statistical baseline forecast POS data. You use the POS and master data in the forecastas the starting point of this company’s weekly SOP pro- analytics engine to establish a baseline forecast. Developedcess. Using information from point-of-sale (POS) systems by IBM Research, this analytics engine is among the best inand promotion plans, IBM creates a forecast baseline that the industry. It helps you to:is used by the electronics company in its collaboration withretail partners. Once the collaborative forecast is agreed • Deal with partially known demand by combining an infla-upon, IBM generates the detailed replenishment plan. This tor algorithm and an autoregressive forecasting model witharrangement has allowed the electronics company to focus partially known demandon relationship management with its retailers. The average • Correct for quarterly order skew, seasonality and repetitiveforecast accuracy for products four weeks out has risen from order trends50 percent to approximately 90 percent at the retail partnerdistribution center (DC) level of measurement. • Estimate volumes accurately during product transitions by analyzing short-term trendsImproving alignment of supply and demand • Accommodate promotional events within the forecastingThe IBM solution is designed to provide consumer electron- processics and office equipment companies with a proactive demandmanagement process using business levers such as pric- • Forecast demand at multiple levels in the product hierarchy.ing, promotions, inventory targets and supply allocations. It
Once a baseline OEM forecast is generated, it is sent out to Developed at IBM Research in collaboration with the Universityevery player via the collaboration portal. An exception alert is of Michigan, the IBM inventory and replenishment analysisgenerated if there is a mismatch between the OEM and retail engine helps you generate optimized safety stock recom-partner forecasts. Alerts are based on predefined business mendations. Unlike other planning engines, the stochasticrules. For example, if a retailer’s forecast falls ten percent dynamic IBM programming framework takes into account theoutside the baseline, then an exception notice can be sent risks of structured supply contracts when they involve pricevia e-mail to those in each organization who are responsible protection. You reduce the risk of markdowns with the ability tofor addressing any discrepancies. The OEM scheduler and use parameters for the price protection horizon and price ero-individual partner staff are then able to collaborate through an sion costs, together with such traditional criteria as inventoryenterprise portal to agree on a consensus forecast. carrying costs, customer service levels and replenishment lead time, to generate optimal buy decisions. OEM scheduler and partner staff OEM scheduler For example, an electronics OEM promises retailers that, E-mail Collaborate on Record consensus Consensus notification forecast forecast forecast should a price drop occur while they are holding inventory, POS data it will provide a refund to cover the difference. To minimize risk, the OEM is able to collaborate with retailers to effectively balance service levels with inventory carrying costs and price Retrieve Develop baseline Forecast POS data forecast data Baseline Consensus erosion expenses. A 99 percent service level may be fine for forecast forecast OEM scheduler Forecast a new product in high demand, but as the product gets older, analytics engine retailers may be willing to accept a much lower service levelFigure 3: The IBM analytics engine solution for building consensus forecastscan help organizations improve forecast accuracy, decreasing the incidence of (say 90 percent) to minimize inventory carrying costs.stock-outs for more flexible, responsive service. OEM scheduler and partner staff OEM schedulerSynchronized replenishment Consensus E-mail replenishment Collaborate on Record consensusWhen complete, the consensus forecast is used to calcu- notification replenishment plan replenishment plan planlate the baseline replenishment plan. The IBM inventory andreplenishment analytics engine calculates the reorder pointsand buy recommendation. The OEM scheduler is automati- Calculate reorder Consensus points and buy Inventory/cally notified if there is a mismatch between the OEM and forecast recommendations Baseline replenish- Consensus replenishment ment replenishmentpartner replenishment plans and can pass the alert on to his Inventory plan plan analytics engineor her counterpart in the supply partner organization via theenterprise portal. Using the portal, the parties are able to col- Figure 4: The IBM analytic engine solution for exception-based, event-driven inventory and replenishment planning can help organizations decrease the costslaborate on changes to quickly resolve plan discrepancies. associated with price erosion, lower the level of channel inventory and improve service levels.