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HOME > GLOBAL SUPPLY CHAIN > WASTE NOT, WANT NOT

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Wastenot,wantnot
GabiLedesma

Apr1,2004
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Wastenot,wantnot

Companiesspent$19billionondemandforecasting
softwareandothersupplychainsolutionsin2002,
accordingtoanalystfirmIDC(www.idc.com),yetthe
methodologyandapproachthatcompanieshavebeen
buildingaroundthatsoftwarehasnotbeen
demonstratingvalue.Infact,theU.S.economycontinues
tosufferinpartbecauseofthetremendouswastecreated
byinefficienciesintheplanningprocessbetweenretailers
andsuppliers.
Retailers,onaverage,carrytwomonthsofinventoryof
theirsuppliersproducts.Ontheotherhand,suppliersin
theconsumerpackagedgoods(CPG)industrycarryan
averageoftwotothreemonthsoffinishedgoods
inventoryjusttocopewiththedemandvariabilitycreated
bytheretailersandtheirexpectationsofhighcustomer
service.
Withsuchobviouswasteandanalreadyclearlydefined
need,companiesmustlookatmoreaccurateandefficient
waystocreatereliableforecastsandmanageinventoryin
thepipeline.
Formorethantwodecades,retailcompaniesandtheir
suppliershavebeenlookingforwaystomaximizethe
efficiencyofmovingproductsfromthemanufacturing
plantstotheendconsumer.Inthe1980s,thesearchfor
relationshipswherebothretailerandsupplierwork
togethertoincreasejointvaluebroughtnew
replenishmentpracticessuchasvendormanaged
inventory(VMI),wherethesuppliersmanagedtheir
productsattheretailoutlet.

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ataglance
Thisarticlelooksat
consumerdriven
replenishmenta
strategydesignedto
improvethelevelof
collaborationbetween
suppliersandretailers.
Copyright2004Penton
Media,Inc.

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VMIallowstheretailertoavoidtechnologyinvestments
andpeoplecostsassociatedwitheffectivereplenishment
andinventorymanagementatstores,anditallowsthe
suppliertocontrolitsproductsallthewaytothe
consumer.However,thisarrangementoftenleaves
retailersvulnerabletoinventorypushfromsuppliers
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Wastenot,wantnot

(storejamming)becausethesupplieralonedetermined
howmuchinventorytokeeponhandandhowmuchto
shiptotheretailereveryperiod.
Signuptoreceiveourfreenewsletters

AnotherweaknessofVMIisthatthetypical
implementationatstorelevelisnotintegratedwiththe
restofthesupplierssupplychainplanningprocesses.In
fact,inmanycases,VMIandinternalsupplychain
planningweremanagedbydifferentdivisionswithinthe
suppliersorganization.Theresultwasexcessfinished
goodsinventorybothatretailstoresandatsupplier
warehouses,somethingeverysupplierfears.
Aswemovedintothe1990s,theseVMIweaknesses
coupledwithfindingsthatdemandvariabilitysharply
increasesasitmovesupthesupplychaincausedthe
industrytobeginrethinkingtheintegrationstrategy.The
cascadingeffectofthedemandvariabilityandthe
resultingcompensatoryinventoryreplenishmentresponse
wascoinedthebullwhipeffect,anditnegatively
impactedinventorylevelsandoverallcapacityutilization.

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Thebullwhipeffectwasespeciallyseverebetweenretailer
andsupplierbecausethesupplierdidnothavethe
necessaryvisibilityintopointofsale(POS)information,
inventoryorreplenishmentpoliciesestablishedatthe
retailersoutlet.
Therefore,VMIgavewaytocollaborativeplanning,
forecastingandreplenishment(CPFR).

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InCPFR,eachpartydevelopsitsPOSandorderforecasts
independently.Iftheforecastsareindiscrepancybymore
thanapredeterminedvariance,theyarereconciled
throughnegotiationsbetweentheparties.
Theproblemhasbeenthathistoricallyretailerslackedthe
capabilitytoproduceorderforecastsandtheirPOS
forecastswereofteninaccurate,staticandatahighlevel
ofaggregation,suchasnational,makingitdifficulttouse
thisforecasttodrivestorereplenishmenteffectively.This,
combinedwiththeincreaseintheoverallplanningcycle
timeduetoretailerandsuppliernegotiationneededtoget
toanagreeduponplan,causedmanycompaniestomiss
theopportunitytoreactrapidlytounpredicteddemand
changes.
Today,whiletheavailabilityofinformationtoretailers
andsuppliersisenormous,jointplanninginitiativesare
essentiallystalled.RetailersaredumpingtheVMIstatus
formanysuppliers,andtraditionalCPFR
implementationshavegonenowhere.
Manyretailersarecontinuingtouseunsophisticated
planningsystemstoreplenishstoresthatareunableto
produceaforwardlookingorderforecast.Theseforecasts
arecriticalfromasupplierperspectivebecauseitsthe
onlywayasupplierhastoplanforanticipatedfuture
orders,deploytotherightwarehousesandassign
productioncapacityinatimelymanner.However,
retailersconsideringinvestinginmoreadvancedsystems
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shouldbeawarethattheycanfaceunworkablescalability
issuesanddoubtfulreturnoninvestments.

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Anotherchallengeisthatmanyretailersinan
environmentofincreasedSKUproliferationandproduct
varietyjustcannotdedicatetheresourcesandeffort
requiredtodoefficientstorelevelinventorymanagement
andreplenishment.Infact,onaverage,retailersdedicate
oneinventoryplannerforevery30suppliers.Ifthe
averagesuppliersells100productstoeachofanaverage
of2,000stores,thisindividualwillhavetomanage6
millionSKUs.Iftheproductcategoryisseasonal,this
picturelooksevenbleaker.
WithVMIandCPFRnotlivinguptoexpectations,we
havemovedintoanewworldofplanningandintegration
consumerdrivenreplenishment(CDR).This
modelallowssupplierstouseactualconsumerdemandto
generatemultitiered,constrainedplansfortheentire
supplychain,includingcustomersstoresanddistribution
centers,aswellasthesuppliersownwarehousesand
manufacturingplants.
Asingleplanningplatform,basedonadvanced
planning&scheduling(APS)systemtechnology,is
usedtogenerateaplanforeverytierinthesupplychain
includingdemand,inventoryandcapacityplanning
fromPOSinformationattheconsumerendallthewayup
tothemanufacturingplants.Unlikesuppliersthatplan
theirsupplychainsusingcustomerordersorshipments
alone,CDRallowstheirsupplychainstoreactquicklyto
changesinPOSdemand,thereforereducingtheimpactof
informationlagsandtheresultinginefficienciesin
inventorymanagement.
Thebestpartisthatretailersdonotneedtomake
significanttechnologyorpeopleinvestmentstomakethis
happen.Also,theCDRprogramcanbeimplementedin
incrementalphases,forinstance,beginningwithasmaller
subsetofSKUsandPOSdataaggregatedoveraperiodof
timeandmovingontolargersetsofSKUswithmorereal
timePOSdatafeeds.
Withtheincreasedemphasisthatanumberoflarge
retailersareplacingontheuseofradiofrequency
identification(RFID)technologybysuppliers,thereisa
growinginterestbycompaniestoseekwaystoextract
greatervaluefromthevoluminousamountofdatathat
theywillbecollectingandtracking.CDRprovidesan
innovativewayforbothsuppliersandretailerstofurther
leveragetheirRFIDinvestmentsbyutilizingshared
informationonorders,shipmentsandsalestoimprove
inventoryplanningandreplenishmentdecisionsacross
thesupplychain.
AcriticalcomponenttoCDRisexceptionmanagement
sincethenumberofSKUstobeplannedforandmanaged
istypicallyverylarge,thereforerequiringaneasy
mechanismtoinvestigateandtoresolvesupplychain
issuesefficiently.TheAPSsolutionsofferextensive
exceptionmanagementcapabilitiesthatcanbetailored
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9/13/2016

Wastenot,wantnot

foreachsupplychainrequirement,forexample,byABC
SKUclassificationsaswellastheseverityofexception,
suchasstockoutvs.lowstock.Thenewgenerationsof
APSsystemsarewebenabledandprovideeasyaccessand
visibilitytotheplantobothsuppliersandretailers.
UnlikeCPFR,whereseveralforecastsareprovidedand
compared,inCDRretailersandsuppliersreach
consensusonasinglePOSforecastandpromotionalplan
muchliketraditionalsalesandoperationsplanning.
Metricsandtargetsareagreeduponatthebeginningof
thesessionandmonitoredregularly.
Becauseretailerscanmonitorperformanceattheiroutlets
accurately,theycanholdthesupplieraccountablefor
deviationssuchaslargePOSforecasterrors,lower
inventoryturns,orpoorinstockservice.Thiscangreatly
reducethetimethataretailerspendswithasupplier
discussingreplenishmentplans.
WhencomparedtoVMIorCPFR,wherethemainfocus
isinstockserviceandforecastaccuracyrespectively,CDR
focusesonprofitabilitymetricssuchasreturnon
inventoryinvestment.Inshort,CDRcombinesthebest
conceptsbehindVMIandCPFR.Suppliersknowtheir
productsbetterandcandedicateresourcestomanage
inventoryatstoresefficiently.CDRgoesonestepfurther
thanCPFRsinceitnotonlyimprovesforecastingatall
levelsbutalsoinventorypositionsateachlocationofthe
extendedsupplychain.
CDRhasdemonstrateditsvaluetobothretailersand
suppliers.Suppliersgaincontroloftheirproduct
replenishmentallthewayfromthemanufacturingplant
tothestoreshelf.TheycanreactquicklytoPOSchanges
andminimizedemandvariabilitycreatedbyexistingwalls
betweentheretailerandsupplier.
Retailerscanmanagesuppliersperformancethrough
commonmetricsandvendorscorecards,allowingfor
healthycompetitionamongthem.Reducedcost,provided
byfocusingonmetricsinsteadofexpensiveplanning,
freesupcapitalforthemtoinvestintheircorebusinesses:
increasingtraffictothestoresandexpandingbothlocally
andinternationally.LT
SundiAiyerleadsthedemandandsupplyplanning
servicelineforCapGeminiErnst&Young
(www.cgey.com)intheAmericas.GabiLedesmaisthe
solutionleadforCapGeminiErnst&Youngsconsumer
drivenreplenishmentsolution.Seearticlearchives:The
insandoutsofVMIandTheproblemwithprograms
formoredetailsonforecastingandreplenishment
initiatives.

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