B. Jovanovic, "Flowcasting Systems for Support Retail Supply Chains Management", Info M, Vol. 6, Iss. 23, pp.

23-27, 2007.
http://www.infom.org.rs/brojevi/2007-23.html

FLOWCASTING SYSTEMS FOR SUPPORTING RETAIL SUPPLY CHAINS MANAGEMENT

Biljana Jovanovic
Faculty of Organizational Sciences, Belgrade, Serbia
biljanaj@fon.bg.ac.yu

ABSTRACT: In this paper the basic characteristics of a new class of information systems named flowcasting
systems are manifested. Flowcasting systems represent a useful extension of a DRP system. They are
oriented on support of retail supply chains management. Advantages of flowcasting systems over traditional
systems are emphasized.
KEY WORDS: DRP system, Flowcasting system, supply chain.

INTRODUCTION

At the beginning of the 20th century new competitive relationships were established on the global market.
Such relationships contributed to many initiatives for integrating and fulfilling the expectations of all trading
partners in the supply chain. Development of information systems and technologies enabled and supported
such changes in the ’ways’ of achieving successful business. Flowcasting systems have been designed and
beginning to use in order to improve a retail supply chain management. A research has recently been
conducted including 20 of the largest consumer goods manufactures and 5 of the largest retailers in the
world, considered to be the best representatives of the needs and benefits of applying these new systems’.
The most interesting results of the research given in [1] are the following:
Consumers buy a product at a price 2 to 4 times greater than the manufacturing cost per unit of that
product.
The manufacturing cost per unit of a product make 45 percent of its selling price, while the cost of
marketing, selling, distributing and administration per unit of the product represent 37 percent of its
selling price.
The implementation of Flowcasting systems make possible trading partners in the supply chain to reduce
their cost of doing business in the range of 1 percent to 6 percent of their total sales volume.
The implementation and use of Flowcasting systems can generate savings of over $600 billion (USD) on
the Global Consumers Goods marketplace.

DEVELOPMENT OF THE FLOWCASTING SYSTEMS

Flowcasting systems were designed and developed as one of the results of the search for the best answers
to the universal logistics questions:
What is to be sold?
Where is it to be sold?
What do we own?
What has been ordered?
What is to be gained?

As early as 1934, Wilson developed Re-Order Point System based on ordering ‘greater’ quantities of items
whenever the inventory level drops below a predefined reorder point.

In 1958, Jay Forrester, then a professor at the Massachusetts Institute of Technology, observed the
behaviour of the flows of money, materials, orders, personnel and capital equipment (or, using modern
terminology – supply chains) and pointed to the bullwhip effect. Namely, in the article issued by the Harvard
Business Review, he stated that 10 percent increase of sales in retail stores brings in 40 percent increase on
the manufacturing level. He estimated that a quadruple increase on the manufacturing level needs 6 months
to be manifested. The multiplier between retailer and manufacturer is still four-fold, but owing to information
technology the consequences is manifested in no more than a couple of days or weeks, this is points out in
[1].
Throughout nineteen sixties and seventies Material Requirements Planning (MRP) systems were developed
and applied, which enabled ’pushing’ the necessary materials and component items into the production
processes in the right times and in the right quantities, in the most cost-effective way possible. The first MRP
system for calculating material requirements by data processing using the regenerative approach was
developed by Bosch in 1959, while the first MRP system for calculating material requirements by data
processing using the net change approach was developed by J. I. Case Company in 1962, according to [2].

MRP systems calculate the net requirements for the items in the planning horizon by data processing the
input source (bill of materials, master production schedule and inventory data). Then they generate general
and additional reports presenting proposals for meeting customer needs in the future. MRP systems
generally enable the use of pegging tool, as well as the firm planned orders tool. Pegging is a tool that helps
planners to determine how the lack of certain items influences the items directly or indirectly superior to
them. On the other hand, firm planned orders tool helps defining some planned orders as firmly planned,
‘freezing’ the quantity and time related to them and pushing the MRP system to plan in a certain way. This
reduces the MRP “nervousness” caused by events, such as the changes in Master Production Schedule
(MPS), late supplier deliveries, inappropriate item quality, etc. Additionally, MRP systems are conventionally
used in the production systems, but it is estimated that they could also be applied in a non-productive
systems. Although, various examples of Service Requirements Planning (SRP) systems (actually the
analogies of MRP systems) can be found in theory, in [3] states that there is no up to now actual application
of the SRP system in practice.

In 1975, Andre Martin in Abbott Laboratories developed Distribution Requirements Planning method, which
enabled the management of the flows of goods within distribution networks. DRP systems were first
implemented in American Hardware Supply (currently Servistar) and Mass Merchandisers Inc. (currently a
part of McKesson) in 1983, also owing to Martin, according to data given in [4].

DRP systems use MRP logics to enable the supply source to supply the right demand centres with the right
goods at the right time. They generally function according to the ‘pull’ principle, although there are some
DRP systems that function according to the ‘push’ principle. Pull DRP functioning can be explained by the
following steps:
1. Identifying the projected requirements of the lowest distribution network levels by planned periods,
according to the forecasted demand for items;
2. Generating report – schedule of the planned orders, with application of MRP logic, and issuing purchase
orders on the next higher level within distribution network;
3. Calculating the projected requirements by planned periods on a higher level, influenced by the orders
issued by the lower level; and
4. Going back to the second step, until the highest distribution network level has been reached.

During the nineteen eighties feedback MRP systems functioning was enabled. It was organized in such a
way that the received output was used to synchronize MPS. Such systems were called closed loop MRP.
Furthermore, a module for Capacity Requirements Planning (CRP) was added downstream MRP enabling
automatic feasibility check of both the necessary capacity plans and material requirements plans, all in order
get a balance. New term - Manufacturing Resource Planning (MRP II) was introduced by guru Oliver Wight,
[2]. Purchasing, DRP and Production Activity Control (PAC) modules were soon included in the MRP II
systems. Simultaneous to MRP II development was DRP systems extension that included planning of the
crucial resources within the distribution system, such as warehouse space, human and financial resources,
cargo vehicles, etc. The term used for such DRP system extension was Distribution Resource Planning (DRP
II). Aspirations to integrate the internal information, processes and functions of an enterprise resulted in the
original MRP II extension into the Enterprise Resource Planning systems (ERP). It was first developed by
IBM programmers who founded the SAP company, according to [5]. ERP is considered to have been the
software solution for the central computer SAP R/2 presented in 1979. However, no sooner than 1992 the
term ERP was introduced, basis on [6].

During the nineteen nineties, development and implementation of ERP class systems was continued
intensively. Simultaneously, the systems projected to support managing the processes and flows of
information, materials and funds among the supply chain participants were also developing. Those systems
were: Advanced Planning and Scheduling systems (APS), Business Process Optimization systems (BPO) and
Collaborative Planning, Forecasting and Replenishment (CPFR). However, enterprises actually use hybrid
systems since the systems are interrelated when applied in practice.
Although numerous initiatives had been taken in order to improve process management of the supply chains
and develop information systems and technologies for supporting integration and meeting expectations of all
the trading partners in the supply networks, the outcome of the research „Where to Look for Incremental
Sales Gains“ conducted by Andersen Consulting was disturbing. The results show that the retail out-of-stocks
rate is about 8.2 percent, while the average rate during the promotion period is no less than 15 percent,
according to [7]. The same source states that the results of the research “Retail Out-of-Stocks: A Worldwide
Examination of Extent, Causes and Consumer Responses“ conducted by Grocery Manufacturers of America in
2002 were similar, and the retail out-of-stocks rate was estimated to 8.3 percent. Among other things, these
studies inspired Martin, Doherty and Harrop to develop Flowcasting systems. The term Flowcasting was
accepted by the influential journal – Extended Retail Industry Journal, in April, 2006 [8, 7]. In May, 2006 the
book „Flowcasting the Retail Supply Chain: Slash Inventories, Out-of-Stocks and Costs with Far Less
Forecasting“ was published by André Martin, Mike Doherty and Jeff Harrop. A part of this book is free to be
downloaded on [1].

FLOWCASTING SYSTEMS FOR SUPPORTING RETAIL SUPPLY CHAINS MANAGEMENT

A Flowcasting system enables the inventory management from the store shelves to the factory that
produces products. Automatic proposing the adjustment of the flow and level of inventory through the
supply chain depends on whether the store level is increasing or decreasing above or below the forecasted
level. General functions of the Flowcasting systems are forecasting the products necessary at the retail store
level, and accordingly, planning inventory, replenishing, planning people, space, equipment and capital
resources necessary to all the participants within the supply chain. Forecasting within the supply chains,
traditionally conducted by every individual trading partner, was thus replaced by a ‘single’ forecasting on
point of sales (POS) level. These systems are projected for a 52 week planning horizon, and daily automatic
data update is provided.

„The solution [Flowcasting system] is simple and intuitive – first, create a model of total supply chain from
the factory to the store shelf inside the same system (see graphic [1]), then make a forecast for what
consumers are going to buy, item by item and store by store. With a clear picture of demand at the ultimate
point of sale, schedule all upstream supply nodes to meet demand. The calculated supply schedules are just
basic math.“ [7]

Figure 1. A Flowcasting-extended retail supply chain, enabled by a store-level consumer demand

forecasting [7]

Flowcasting system represents a useful extension to DRP system. It functions in the following way:
Forecasting demand for each item by the planned periods in retail stores.
Planning the promotion for items by the planned periods in retail stores.
Determining the projected requirements for items by the planned periods in retail stores.
DRP method calculation for each trading partner of the supply chain; and
Forecasting people, space, equipment and funds necessary for each trading partner in the supply chain.

The comparison between Flowcasting and the traditional approaches having in mind the problems related to
stock, forecasting customers’ needs, aggregate plans and continuous re-planning based on new information
within the supply chains is presented in Table 1. The conclusion follows that the Flowcasting approach is far
more powerful in comparison to the traditional approaches.
 Table 1. Flowcasting vs. Traditional Approaches, according to [4]
Flowcasting Approach Traditional Approaches

Avoiding Out-of-Stocks

Rarely would stores be given the chance to run out of Shelves could be in a stock low status for days
stock. If POS sales on any given day are higher than between order reviews. Often, it’s only caught when a
expected, the chain reaction of demand will customer complains that the shelf is empty.
immediately and automatically react.

Forecasting Your Customers’ Needs

Suppliers receive actionable information (how much
needs to be shipped and when) from their retailer
customers, giving them unprecedented visibility into
what demands will be placed on them, weeks and
months into the future. As a result, they can eliminate
key account shipment forecasting and offer shorter
commit times and supply protection to their retail
customers who Flowcast.
Suppliers invest significant effort in determining what
their customers are going to do because the supply
chain isn’t completely connected from a planning point
of view. It often boils down to two choices: angry
customers or clogged warehouses.

Developing Aggregate Plans

Future dated demand, supply and inventory
information exists in selling units at every level in the
retail supply chain. As a consequence, it’s possible to
convert and aggregate Flowcasting plans to any level
desired in any unit of measure.
Functional areas develop their own separate methods
for forecasting capacity requirements, budget
requirements, transportation requirements and labor
requirements. Rarely do these forecasts all agree,
unless by coincidence.

Continuous Re-Planning Based on New Information

Forecasting is completely decoupled from supply
planning. Because the rules of Flowcasting are simple
and transparent, network changes, web retailing, VMI,
store direct shipments, cross-docking and temporary
supply changes can all be re-mapped and recalculated
quickly and accurately.
Nothing is seamlessly connected, so it takes days or
weeks of analysis to try to judge the impact of a
network change. At the end of it all, flawless execution
of the change is dependent on a huge number of
assumptions all coming true – a rare occurrence.

Flowcasting system advantages are ranged according to the assumed participants of the retail supply chain,
as follows: consumers, retailers, wholesalers, manufacturers and suppliers.
Flowcasting environment provides the consumers with the right products, at the right place, in the right
time and at the right price.
Flowcasting system application enables retailers to:
- Establish and apply a common system for inventory management in retail distribution centres (DCs)
which enable data exchange with suppliers on daily basis;
- Establish and apply a common system for managing the processes of purchasing, storage, distribution
and sales of products;
- Apply cross-docking strategy in retail DCs;
- Yearly achieve 50 (or more) store inventory turns in retail DCs, according to [1];
- Gradually decrease the number of retail DCs;
- Increase sales in retail stores by 2 percent to 8 percent, according to [1];
- Free up shelf space and warehouse space in retail stores;
- Visibility of products on the retail store shelves and into warehouses in retail stores, sold products and
products due to arrive, too;
- Reduce the internal theft-induced losses;
- Reduce the number of customer appeals; etc.
Flowcasting system application enables wholesalers to:
- Improve purchasing, storage, distribution, marketing and sales processes;
- Apply cross-docking strategy;
- Reduce total holding cost;
- Reduce the average inventory holding time to a couple of days;
- Reduce the quantities of the products in stock;
 - Reduce the warehouse space; etc.
Flowcasting system application enables manufacturers to
- Convert from manufacture-to-stock strategy to manufacture-to-order strategy for the major part of
product assortment;
- Reduce the product demand uncertainty and consequently the number of necessary MPS changes;
- Reduce the manufacturing and storage costs;
- Reduce the safety stock level; etc.
Flowcasting system application enables suppliers to
- Decrease the product demand uncertainty;
- Decrease total cost; etc.

FLOWCASTING SYSTEM IMPLEMENTATION

In order to successfully implement Flowcasting systems a fourteen-step methodology (Figure 2) has been
developed.
It appeared as a result of adjusting Oliver Wight’s „Proven Path“methodology, used for implementing MRP
II, DRP and ERP systems into a few hundred companies throughout the world (it is still in use). One of the
crucial Flowcasting system implementation steps is to create a special (i.e. Flowcasting) team by each of the
supply chain participants. The main responsibilities of such teams are the following:
Providing retailer data storage up-to-date that include among the other data: daily POS, daily store, on-
hand inventory balances and in transits, daily store and DC cycle count adjustments, lead times, safety
stocks, fixed order quantities, schedule receipt, data on new store openings, new product introductions
as well as product deletions;
Collaboration of the supply chain participants in order to make the right forecast of the product demand.

Figure 2. Flowcasting Systems – Implementation Steps, according to [4]

Figure 3 presents two such teams– the team of retailers and the team of suppliers. Flowcasting uses
distribution patterns to model the total product flow from factories to store shelves, thus serving as a bridge
between the retailer and the suppliers ERP system.

Figure 3. Communication patterns in Flowcasting environment, according to [1]

Many companies have already started to apply Flowcasting systems to gain competitive advantage on the
marketplace. Some of them are among the 100 most successful companies according to the Fortune
magazine list (Fortune 100), according to [1].

CONCLUSION

Flowcasting systems enable the retail supply chain participants to both effectively and efficiently coordinate
their activities. A development summary of this kind of specialised new class of information system has been
tried to present in the paper. Special attention is focused to DRP systems as they represent the basis for
Flowcasting systems development. Furthermore, general characteristics of Flowcasting systems have been
presented, as well as their advantages over the traditional ones. Finally, the steps necessary for successful
implementation of the Flowcasting systems have been indicated.

BIBLIOGRAPHY

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Stocks and Costs with Far Less Forecasting, Factory 2 Shelf Publishing, May 2006., a part of this book is free
to be downloaded on http://www.flowcastingbook.com/ (18/06/2007)
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2004 “Menadžment – ključni faktori uspeha”, Zbornik radova na CD-u, 2004. (in Serbian)
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eleventh edition, McGraw-Hill Irwin, 2006.
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