The Ultimate Retail Supply Chain Machine:
Connecting the Consumer to the Factory
Version 1.1 January 2013 Don’t wait to be great… Collaborate™ A Guideline of the Voluntary Interindustry Commerce Solutions Association
The Ultimate Retail Supply Chain Machine: Connecting the Consumer to the Factory Table of Contents Executive Summary ................................................................................................................ 4 1. Connecting the Consumer to the Factory ............................................................................ 6 2. Forecasting from the Shelf: Benefits and Case Studies ....................................................... 9 3. Retailer Order Forecasts or Supplier Schedules ................................................................ 11 4. Retail Closed Loop Planning Using DRP ............................................................................ 15 5. Collaboration Powered by Store Level Forecasts ............................................................... 17 6: Protecting Supply for Forecasted Orders........................................................................... 21 7: Interfacing Supplier Schedules into Manufacturer Processes ............................................ 24 8. Managing Forecast Horizons ............................................................................................ 25 9. Forecast Commitments .................................................................................................... 26 10. Creating and Sharing Gains ............................................................................................ 27 11. A Roadmap for Getting Started ...................................................................................... 28 12. Conclusion ..................................................................................................................... 28 Appendix I: Supplier Scheduling -­‐ A Brief History ................................................................. 32 Appendix II: Technology for Forecasting From the Shelf....................................................... 32 Suggestions for further reading on this subject..................................................................... 35 About VICS ........................................................................................................................... 35 The Ultimate Retail Supply Chain Machine: Connecting the Consumer to the Factory 2 of 35 Voluntary Interindustry Commerce Solutions (VICS) Association ©2012-­‐-­‐ www.vics.org The VICS CPFR® Committee Advisory Team Larry Smith, West Marine, Inc., Co-Chair *
LeRoy Allen, Lowe’s Companies, Inc., Co-Chair *
Jim Flannery, The Procter & Gamble Company, Co-Chair
Gary Maxwell, Wal-Mart Stores, Inc., Co-Chair
Joe Andraski, VICS
Gene Arnold, Kimberly-Clark Corporation
Fred Baumann, JDA Software Group, Inc. *
Robert Bruce, Hewlett-Packard Company *
Eric Deutsch, Oliver Wight Americas, Inc. *
Stan Fawcett, Georgia Southern University
Paul Giamberdino, J&J
Vikash Goyal, Oracle
Brian Greene, JC Penney
Ron Ireland, Oliver Wight Americas, Inc.
Al Jankauskas, Kraft Foods North America
Clint Johnson, Wal-Mart Stores, Inc. *
Darryl Landvater, Red Prairie *
Andre Martin, Red Prairie *
Rich McLoone, Target
Steve Pantier, Accenture
Mike Pechtel, Whirlpool Corporation *
Lloyd Rinehart, University of Tennessee
Todd Schilling, Best Buy Co., Inc.
Anita Spence, Dillard’s, Inc.
Louise Tang, Sony Electronics, Inc.
Matt Waller, University of Arkansas
Jeff Ziegler, Lowe’s Companies, Inc. *
Yuka Yu, Sony Electronics, Inc.
* Co-authors for this guideline
The Ultimate Retail Supply Chain Machine: Connecting the Consumer to the Factory 3 of 35 Voluntary Interindustry Commerce Solutions (VICS) Association ©2012-­‐-­‐ www.vics.org Executive Summary
For 25 years VICS has spearheaded numerous technical and business process innovations that have
provided value for consumers and trading partners. VICS led the implementation of barcodes and
electronic data interchange (EDI) which speed the flow of desirable products to consumers while
reducing transaction and distribution costs. VICS created and trademarked the widely used VICS
Collaborative Planning, Forecasting and Replenishment (CPFR®) business process, with which
numerous trading partners share insights and capabilities to deliver better products and assortments
while reducing supply chain costs – all from a willingness to act from collaborative rather than “silo”
mindsets to seek win-win solutions.
Today, VICS is driving the implementation of two key technical solutions: 1) VICS Item Level RFID
Initiative (VILRI), and 2) Store Level Distribution Resource Planning (DRP). Recent experience,
research and technical advances have brought both of these key initiatives to commercial viability.
As demonstrated by Macy’s and others, item level RFID improves product sales and reorders based
upon increased inventory accuracy that more than funds the costs of tagging. Similarly, Lowe’s and
Sony Canada’s store level DRP solutions have contributed to higher sales, higher on time shipments by
suppliers and lower inventory costs. The industry leaders at the forefront of these initiatives drive
competitive advantages as early adopters. They also achieve strategic advantages as they deliver
process excellence and become learning organizations, which drives continuous improvement.
This VICS CPFR guideline develops the case for retailers to implement new retail automatic
replenishment solutions, called store level distribution resource planning systems (store level DRP),
which enable them to:
•
•
•
•
•
Create a bottoms-up model of the retail business that projects forecasted sales, shipments,
receipts and inventories at all stores and DCs over a 12-month or longer rolling planning
horizon.
Detail in the model of the business the events and changes planned in their retail and supply
chain strategies.
Share accurate forecasts of future orders, called supplier schedules, with manufacturers.
Create retail closed loop planning by tightly managing the tolerances between the bottoms up
model of the business and the retailer’s top down strategies and financial plans.
Accomplish closed loop supply chain planning with manufacturers who agree to build products
as forecasted and who commit to protect product availability for retailers who share these
forecasts.
The new store level DRP systems are critical technology solutions that enable retailers and their
manufacturers to focus on increasing consumer sales -- the key driver of value in their supply chains.
These store level DRP systems assist trading partners in building shared plans for consumer demand
and supply, designing and delivering winning products and assortments while lowering variable
operating and capital costs. These systems have the capability to transform retail supply chains from
disjointed inventory “push” systems to coordinated inventory “pull” systems based directly upon
shared forecasts for consumer purchases.
The approach described in this guideline overcomes five fundamental gaps in the demand forecasting
and replenishment systems utilized by most retailers and their partners today. The following gaps
The Ultimate Retail Supply Chain Machine: Connecting the Consumer to the Factory 4 of 35 Voluntary Interindustry Commerce Solutions (VICS) Association ©2012-­‐-­‐ www.vics.org prevent predictive and optimized demand modeling of the supply chain – from store to retail DC to
manufacturer:
Gap #1: Current store level systems support planning consumer purchases. But, since these forecasts
cannot be leveraged in upstream demand modeling, retail planners often neglect forward planning in
favor of planning only short-term product needs or events.
Gap #2: Current store level systems are essentially execution systems, not planning systems. They
have no capability to incorporate a volume forecast of products the store will need beyond the current
order, much less next week, next month or next season.
Gap #3: Current retail DC systems forecast what stores will need based on historical shipments to
stores. This forecast is completely disconnected from the store level sales forecasts and does not
account for variables like store sales or inventory.
Gap #4: Current retail DC systems, like current store level systems, have no capability to forecast the
products and quantities the retail DC will need tomorrow, much less next week, next month or next
season. The only demand information provided to manufacturers is an order, which often comes as a
complete surprise.
Gap #5: Currently deployed retail store level forecasting solutions are not capable of handling the
extremely large computer processing requirements of store level DRP calculations. Computerized
solutions capable of handling these requirements have become available only recently for large-scale
implementations. These large-scale programs have proven that retail DRP systems are practical. They
have shown that this approach improves on-shelf availability for consumers and lowers supply chain
inventory and operating costs.
With the implementation of store level DRP systems at global retailers, manufacturers no longer have
to guess what retailers will order; retailers can share a reliable demand plan by item by store and DC.
These store level DRP systems calculate time phased store and retail DC product requirements based
directly upon the store level forecasts for sales to consumers. Both retailer and manufacturer benefit
from increased supply chain visibility, just as high-intensity car headlamps provide greater visibility to
the road ahead.
This paper will show you how to:
•
Create a model of the business with a store level DRP system and your trading partners’
manufacturing MRP II/ DRP systems to connect the consumer to the factory.
•
Jointly manage a business model to a single set of numbers, driving the retail supply chain
from the retail sell-through forecast.
•
Obtain superior control of a business by creating a rack-and-pinion relationship between dayto-day operating forecasts and high-level business plans, while identifying gaps and creating
scenarios that will close the gaps between those plans.
•
Significantly reduce and even eliminate the famous Bullwhip or Forrester effect between
trading partners.
•
Jointly drive sales, lower inventories and reduce manufacturing, transportation, warehousing
and buying and selling costs.
The store level DRP capabilities described in this article align the operating forecasts and business
plans of supply chain trading partners. Traditionally, each trading partner in the supply chain has
operated with disconnected systems and different goals and measures of success. Sharing of
information routinely has been difficult, and technology has been lacking to flow through store level
data into manufacturers’ planning systems.
The DRP capabilities described in this article connect the consumer to the factory by linking forecasts
and business plans to the retailers’ store level sales. As Andre Martin, a leading proponent of store
level DRP, said; “The farther from the consumer that forecasting takes place, the less accurate
The Ultimate Retail Supply Chain Machine: Connecting the Consumer to the Factory 5 of 35 Voluntary Interindustry Commerce Solutions (VICS) Association ©2012-­‐-­‐ www.vics.org forecasts are likely to be. The retail store is both the beginning and the end of retail supply chains. It’s
the beginning of the information flow and the end of product delivery.”
Store level DRP is a fundamental enabling technology for the retail supply chain. Instead of
independent forecasts at every level of the supply chain, Dr. Joe Orlicky, an IBM consultant,
recommends; “Never forecast what you can calculate.” A best practice principle advocated by Oliver
Wight is: “Don’t forecast what is known: communicate it.”
Linking all activities to the store level forecast creates a complete and dynamic calculated model of the
retail supply chain. All product flow requirements are driven and calculated from a single consumer
(store-SKU level) forecast regardless of whether the products are high volume and fast moving or
slow moving. The store level DRP system described in this guideline has been effective in planning and
communicating forecasts of products that retailers sell one to 10 units or more per day per store or
one to 10 units per year per store. Managing a retail supply chain without such a solution is like trying
to drive a high performance automobile by looking in the rear view mirror.
Connecting the Consumer to the Factory
•
•
•
A Single Forecast
Integrated Model of the Business
Complete Visibility Throughout Entire Supply Chain
Store
Retail DC
Manufacturer DC
Factory
Forecast
Calculation
Calculation
Calculation
•
•
•
A single forecast
Integrated model of the business
Complete visibility throughout entire supply chain
Figure 1
Source: Adapted from Red Prairie Collaborative Flowcasting Group, LLC.
1. Connecting the Consumer to the Factory
A new retail supply chain revolution is upon us. Today, retail trading partners can provide a store level
sell-through forecast as shown in Figure 1 and use it to calculate demand three levels into the retail
supply chain, driving factory output from what consumers are actually buying in stores.
Store level DRP systems create a computerized model of the business and the supply chain. As a
result, robust bottoms-up forecasts and replenishment plans spanning all supply chain nodes can be
constantly updated and compared with higher level aggregate forecasts to achieve business
objectives. DRP systems for manufacturers and retailers support extremely flexible and robust
modeling of a business. These systems generally forecast over at least a rolling 12-month planning
horizon. The most effective systems also support scenario or “what if” analysis and provide alerts
when agreed upon aggregate plan, or Sales and Operations Planning (S&OP), tolerances are
exceeded.
The Ultimate Retail Supply Chain Machine: Connecting the Consumer to the Factory 6 of 35 Voluntary Interindustry Commerce Solutions (VICS) Association ©2012-­‐-­‐ www.vics.org The information accessible in the model can be analyzed and benchmarked to identify additional
opportunities for improvements in:
1. Seasonality planning
2. Promotional planning
3. Product flow method planning
4. Planning for product introductions and retirements
5. Inbound and outbound transportation planning
6. Planning for distribution center network changes
7. Planning for new stores and store closings
8. Distribution center capacity planning
Recent technical breakthroughs and the deployment of reliable and economically scalable store level
DRP capabilities have made the above improvements possible. The result: trading partners have the
ability to synchronize their supply chain with a daily demand signal at the shelf or web portal and
incorporate all of the logistics constraints of product flow from the factory floor to the store shelf with
unparalleled accuracy. Once a company connects the factory to the store, every activity that takes
place from the time product leaves the factory to the time someone puts it on the store shelf is
subject to review and change as needed.
These new store level DRP systems enable manufacturers and upstream suppliers to use retailerprovided consumer demand information translated into forecasts of future orders in lieu of their own
historical order shipments-based forecasts. Retailers and manufacturers create a model of their supply
chain spanning the echelons from stores to retail distribution centers to manufacturer distribution
centers to factory to raw materials. Since all future supply chain activities can be captured in this
computerized model of the business, trading partners can share a single plan and work together to
analyze and optimize their linked business activities.
Traditional retail replenishment systems required the retailer to separately forecast distribution center
shipments based upon historical shipments from their retail DCs to the stores. Without intelligent
intervention or a forecasting system that captured current plans and events at stores, it was possible
that the DC system recommended buying last year’s promotion. Even if intelligent intervention by the
retail DC planner avoided the mistake of releasing orders for the previous year’s promotion, the
manufacturer may not have avoided the same mistake. The manufacturer would also forecast based
upon historical shipments to the retailer, and was likely to include last year’s promotion – and to have
built the product for it.
With the deployment of a store level DRP system, the demand signal is based upon only one forecast the current forecast for consumer sales at each and every store that sells the product. This eliminates
the need for multiple forecasts in the supply chain and provides a common road map to help the
supply chain partners arrive at the same destination.
Employing and maintaining this new game-changing retail supply chain planning capability provides a
detailed model of the business that can transform S&OP as well as CPFR. Having such a plan enables
trading partners to conduct what-if scenarios and rapidly respond to performance gaps or changes in
sales or supply. The result reduces uncertainty in the supply chain and allows planners to manage
inventory uncertainties and associated supply chain constraints more successfully. Gaining alignment
of plans at the strategic (S&OP) as well as the tactical (detailed planning) level reduces waste in the
supply chain, like building products that are not needed and expediting the availability of products that
are unplanned.
This “Ultimate Retail Supply Chain Machine” guideline contains a number of key terms that may be
unfamiliar to some readers. What follows will provide some historical background and definitions of
terms.
Distribution Resource Planning developed with the use of computerized materials requirements
planning (MRP) systems in manufacturing organizations starting in the 1960s. Manufacturing Resource
Planning systems enabled manufacturers to set Master Production Schedules (MPS) to meet customer
The Ultimate Retail Supply Chain Machine: Connecting the Consumer to the Factory 7 of 35 Voluntary Interindustry Commerce Solutions (VICS) Association ©2012-­‐-­‐ www.vics.org demand through the use of MRP logic and bills of material to plan and order materials from their
suppliers to support the MPS. This resulted in a synchronization of materials acquisition and
production with the forecast for shipments to customers. Manufacturers using MRP systems
communicated their future purchase plans, called supplier schedules, to their suppliers.
In the early 1970s, Andrè Martin, then at Abbott Laboratories in Canada, extended the planning and
scheduling capabilities of their MRP system to include Abbott’s distribution operations. This became
the first installation of what is now known as Distribution Resource Planning. Integration extended to
Abbott’s financial planning functions, leading the late Oliver Wight to create the term Manufacturing
Resource Planning, which he called MRP II. MRP II enabled management to obtain both operational
and financial control of a manufacturing business. In later years, these capabilities led to the
development of an aggregate planning process that extends over at least a 24-month rolling planning
horizon, known as Sales and Operations Planning.
In the late 1980s, Enterprise Resource Planning (ERP) systems integrated all the functions of MRP,
MRP II and DRP along with translations of languages (units, cases, hours, cube, weight and dollars).
The improvements in ERP systems flow from earlier work to create closed loop planning based upon
time-phased computerized scheduling processes.
Since the development of MRP II and DRP, thousands of manufacturers have deployed DRP solutions
to drive the flow of products across their distribution networks and to align their supply chains around
a single forecast. Collaboration on a single forecast became a standard practice between
manufacturers and their suppliers. For retail product supply chains, however, retailers and
manufacturers were still disconnected. While the manufacturer’s forecast was connected with
upstream suppliers, the forecast did not begin with the consumer and was not connected with
retailers.
Store level DRP driven supplier scheduling is far more than a process for efficiently moving data
among trading partners. It represents a transformation of the way trading partners work together and
do business. Over time, transparency and trust breeds more effective planning and efficiency between
supply chain trading partners. Retailers who formerly changed suppliers constantly on the basis of
who offered the lowest price in a given week now work with trading partners on opportunities for
lowering costs and developing better products to grow consumer demand. Implementing and
managing with a store level DRP system will help mediocre suppliers become good ones, and good
ones become excellent.
Retail supplier schedules are the connecting bridge between the S&OP processes at the retailer and
the S&OP processes at the manufacturer. By sharing timely and accurate demand information, the
trading partners can work together to optimize their execution to the plan. If consumer sales are
greater or less than forecasted, this information is immediately communicated so that both partners
can adjust to changes and create joint action plans to resolve gaps while there is still time to achieve
goals.
The new retail store level DRP systems solve the five capability gaps of the older retail automatic
replenishment systems. With these new systems, the retail demand forecast for consumer purchases
becomes the reference forecast or demand plan for the entire retail supply chain. All of the acquisition,
production and distribution activities in the supply chain can be calculated and aligned to retailers’
forecasts for sales to consumers at the store by forecasting consumer sales and calculating dependent
demands for retail DCs, supplier DCs, factories and raw materials suppliers. This brings additional
focus to how to ensure the execution of the plans, with the retailer and manufacturer working
together to adjust to consumer, competitor and market dynamics. The flow of product has always had
a clear road to travel from factory to store. With store level DRP solutions, the flow of supply chain
planning information has a clear road to travel from store to factory.
The Ultimate Retail Supply Chain Machine: Connecting the Consumer to the Factory 8 of 35 Voluntary Interindustry Commerce Solutions (VICS) Association ©2012-­‐-­‐ www.vics.org 2. Forecasting from the Shelf: Benefits and Case Studies
Benefits from employing store level DRP capabilities include:
Consumer benefits:
•
Improved availability at the shelf for desired purchases.
•
Lower prices enabled by supply chain efficiencies.
Retailer benefits:
•
Improved store and distribution center in-stock and service levels as a result of better supplier
delivery performance.
•
Reduced safety stock as a result of reduced demand uncertainty and better supplier delivery
performance.
• Supplier protection of forecasted product as a result of providing suppliers with a supplier
schedule. Manufacturer benefits:
•
Improved forecast accuracy as a result of using supplier schedules instead of statistical
forecasts.
•
Reduced safety stock as a result of improved forecast accuracy.
•
Improved service to retailers due to a more complete picture of retailers’ needs.
•
Reduced production costs as a result of more stable production schedules.
Benefits for both retailer and manufacturer:
•
Improved productivity from using a single set of numbers shared by both manufacturer and
retailer (less expediting as well as the ability to find and fix root causes of problems).
•
Earlier identification of business plan shortfalls, and working together to mitigate gaps.
•
Reduced transportation cost as a result of the visibility of planned shipments in the future.
•
Less obsolescence and fresher product due to a highly visible and streamlined supply chain.
•
“What if” or scenario analysis to optimize and integrate their business plans.
•
Improved information flows and reduced lead times as a substitute for inventory.
Retailer driven store level DRP case studies
Sony Canada:
In 2009, Sony Canada implemented a store level DRP system to manage demand and supply
planning for its company stores and key retailers. Rick Courtin, Business Process Manager,
recalls: “This was a simple implementation with quick results. Store level DRP gave us the
ability to improve store in-stocks and reduce inventory quickly, while at the same time
providing us the ability to automate many tasks that were manual and very cumbersome in
the past. Thanks to the new system, we can now focus on fire prevention activities instead of
being in a constant state of firefighting.” The gains achieved included:
•
Store level forecast accuracy improved by 30%.
•
Store in stock levels improved from 87% in 2009 to 95-97% in 2010, including the
holiday season.
•
Supply chain inventory reduced by 20%.
•
Obsolete inventory reduced from 14% to 9% of total inventory.
Lowe’s Home Improvement and Black & Decker:
In 2010 Stanley/Black & Decker and Lowe’s Companies were nominated for the VICS CPFR
Implementation Excellence award. The award recognized their efforts in implementing a store
level DRP capability. Lowe’s generated purchase forecasts every week from POS. Stanley/
The Ultimate Retail Supply Chain Machine: Connecting the Consumer to the Factory 9 of 35 Voluntary Interindustry Commerce Solutions (VICS) Association ©2012-­‐-­‐ www.vics.org Black & Decker used that information in their detailed and aggregate planning processes. The
gains included:
•
Consistent fill rate improvement, achieving 98% consistently in 2010.
•
In-stock improvement (from 92% to a consistent 98%).
•
Significant reduction in excess inventory and overall improvement in inventory
productivity.
•
10% improvement in forecast accuracy.
•
Decreased airfreight and other expediting costs.
Manufacturer driven store level DRP case studies
Kraft and Sam’s Club:
In 2007, Kraft and Sam’s Club implemented store level DRP to jointly manage their total
supply chain from retail stores to factories. The trading partners linked the first three levels of
their supply chain inside a single system. The project included hundreds of stores and dozens
of DCs, at both retail and manufacturing levels. Significant benefits were obtained for store in
stock, and inventory was reduced at both retailer and manufacturer DCs. The implementation
also contributed to lower warehousing, transportation, product returns and obsolescence
costs. For their achievements, Kraft was named Sam’s Club’s 2008 “Supplier of the Year”
across all product categories.
Figure 2 depicts an example of the stability that was induced on the factory. The chart shows
the average absolute error for all orders produced based on a prediction made on May 15,
2008 for the month of June 2008. The Average Absolute Error was 2.3 days or 7.7%.
Average Absolute Error
Figure 2
The Ultimate Retail Supply Chain Machine: Connecting the Consumer to the Factory Source: Red Prairie Collaborative Flowcasting Group, LLC.
10 of 35 Voluntary Interindustry Commerce Solutions (VICS) Association ©2012-­‐-­‐ www.vics.org Sony Electronics and Wal-Mart:
In 2009, Sony Electronics strengthened its ability to collaborate more effectively with its key
retail partners and was recognized by Wal-Mart Stores as its 2009 “Supplier of the Year.”
Sony hosted a store level DRP system to forecast demand over an extended planning horizon
with daily updates through web portals and EDI. With a common database, Sony could
automatically calculate sell-through and sell-in forecast accuracy, channel weeks of supply,
order-to-commitment, and customer in stock as well as make timely recommendations to the
Wal-Mart team during weekly CPFR calls to improve store level execution. The gains achieved
included:
•
In stock improvement by up to 18% with the same or lower aggregate inventory.
•
Forecast accuracy improved by up to 40%.
These case studies demonstrate the improved results possible for all retail supply chains based upon
the use of store level DRP solutions. The new store level DRP systems enable retailers and their
manufacturers to quickly, easily, and inexpensively create up-to-date supplier schedules that account
for current sales at the stores, inventory at the stores and distribution centers, and all the other
factors that affect demand within the retail supply chain. The ability to create and maintain a model of
a retail supply chain enables trading partners to collaborate to fulfill orders, plan seasons and execute
winning strategies that deliver to the consumer on time while improving profitability for the entire
supply chain.
3. Retailer Order Forecasts or Supplier Schedules
Supplier schedules created by store level DRP systems are the connecting bridge for the flow of
demand information from buyers to sellers. MRP II and DRP systems were developed to create and
synchronize the flow of demand information from manufacturers DCs to their factories and to their raw
materials and components suppliers. The new store level DRP solutions can now provide the same
timely, efficient, responsive and synchronized flow of demand information from retailers’ stores and
DCs to manufacturers. A retailer order forecast or supplier schedule is calculated from a single
store/SKU sales forecast. Using a store level DRP technology solution, the consumer sales forecast
drives all demand forecasts across all the nodes in the retail supply chain.
The Ultimate Retail Supply Chain Machine: Connecting the Consumer to the Factory 11 of 35 Voluntary Interindustry Commerce Solutions (VICS) Association ©2012-­‐-­‐ www.vics.org Retailer to Manufacturer Information Flow
Figure 3
Source: Adapted from Flowcasting the Retail Supply Chain
Figure 3 depicts the retailer to manufacturer information flows, for which supplier schedules are the
bridge between the companies.
A retailer order forecast or supplier schedule is a projection of product requirements, which are
expected orders from the retail DC (or store for direct shipped product) to the manufacturer. The form
of the schedule includes but is not limited to dates, quantities, and item numbers representing the
expected orders from the retailer to the manufacturer. The horizon for the supplier schedule should at
least cover the accumulated lead time to manufacture and deliver the product. Most supplier
schedules extend a year or more, providing forward visibility that aligns with the manufacturer’s
business planning process.
Supplier Schedule (5/1/11 to 6/26/11)
Item
number
5/1/11
5/2/11
5/3/11
37655921
120
100
80
3765989
100
80
60
…
5/4/11
6/19/11
6/26/11
80
510
610
50
420
500
Figure 4
The Ultimate Retail Supply Chain Machine: Connecting the Consumer to the Factory 12 of 35 Voluntary Interindustry Commerce Solutions (VICS) Association ©2012-­‐-­‐ www.vics.org The supplier schedule in Figure 4 shows the forecasted orders for two products over time. The
schedule communicates daily forecasts for the first several weeks (starting 5/1/2011) and weekly
forecasts for the remainder of the horizon. For some manufacturer’s, daily forecasts may not be
useful, while other manufacturers may improve their production planning and execution by using the
daily detail forecasts.
Los Angeles Store 40” HD TV Forecast
Week
Past due
Forecast
In-transit
Projected
on-hand
Plnd.
Shipment
s-Receipts
Plnd.
Shipment
s-Ship
400
5/1/xx
5/8/xx
5/15/xx
5/22/xx
5/29/xx
6/5/xx
100
120
90
110
120
100
300
180
390
280
160
360
300
300
300
300
Figure 5
Source: DRP: Distribution Resource Planning
Figure 5 shows the building blocks for the supplier schedule: the demand plan (Forecast) and
replenishment forecast (Plnd. Shipments) for a single product in a single store. A store level DRP
forecast is always created from this lowest or “atomic” level data: item/store. The forecast line in
Figure 5 represents the consumer take-away forecast; that is, what the store will sell. This forecast
includes promotions and incorporates insights resulting from CPFR information sharing between
retailer and manufacturer. The projected on-hand line represents the projection for inventory,
accounting for the sales forecasts and the receipts of planned shipments. The planned shipments are
calculated accounting for the planned safety stock, the presentation minimums required to support the
physical presentation on the shelf, as well as delivery schedules and order minimums and multiples.
Summary of Planned Shipments to the Six Stores
Week
Los
Angeles
Past
due
Montreal
New
York
5/1/xx
5/8/xx
5/22/xx
300
5/29/xx
6/5/xx
6/12/xx
6/19/xx
0
0
300
150
300
300
Chicago
300
150
Toronto
Internet
store
Total
5/15/xx
150
300
300
300
150
300
750
450
300
300
Figure 6
The Ultimate Retail Supply Chain Machine: Connecting the Consumer to the Factory 13 of 35 Voluntary Interindustry Commerce Solutions (VICS) Association ©2012-­‐-­‐ www.vics.org Figure 6 summarizes the forecasts for planned shipments from one DC to five brick-and-mortar stores
plus an Internet store. Note that the Los Angeles store has two planned shipments to be received for
300 each (shown in red) in the weeks of 5/1/xx and 5/22/xx. These planned shipments are combined
with the other planned shipments for all stores to provide a total of the planned shipments (also
shown in red) to all six stores. Since the total line is the sum of all DC shipments for the 40” HD TV,
this represents the consolidated calculated demand on the distribution center responsible to supply the
six stores with this item.
Distribution Demands at the Retail DC for the 40” HD TV
Week
Distribution
demands
Scheduled
Receipts
Projected
on-hand
Purchase
schedulereceipts
Purchase
scheduleship
Past
due
5/1/xx
5/8/xx
5/15/xx
5/22/xx
5/29/xx
6/5/xx
6/12/xx
6/19/xx
300
300
150
750
450
300
300
0
0
350
50
400
150
200
400
100
100
100
500
500
500
500
500
500
500
500
Figure 7
Figure 7 summarizes the calculated distribution demands at the retail DC for the 40” HD TV. Store
level DRP systems look ahead to accurately plan and revise plans automatically based upon changes
that occur, whether those changes are in demand volume, supply capability, or timing. The
distribution demand for each store and in total is a calculated, or dependent, demand. Each
distribution demand or shipment forecast is simply calculated from the store level sales forecasts,
inventories, lead times and minimum ship quantities as demonstrated in Figure 6.
The total distribution demand volume and timing, as shown in Figure 7, comprise a time-phased
model of future shipments from the retail DC to the stores. As sales are greater or less than forecast,
the distribution demands are dynamically recalculated. When sales are greater than forecasted in a
given store, the distribution demands in Figure 7 will move in to an earlier date. Similarly, when sales
are less than forecasted, the same distribution demands will move out to a later date. This planning
methodology will cause the store level DRP system to automatically update and recalculate the
purchase schedule shown in Figure 7. The planners responsible for managing inventory in the retail DC
have constantly updated visibility into all changes in demand. They continuously receive an up-to-date
picture of what is happening at store level and immediately understand the impact this has on the
DC’s ability to service stores.
The bottom of Figure 7 shows the time-phased purchase schedule for the retail DC for 40” HD TVs. At
the DC, the current on-hand balance is 350, after satisfying the past due order of 300 for the New
York store. In this example, the safety stock is zero, the lead time is one week and the order multiple
is 500. The Purchase schedule – ship line is the order forecast or supplier schedule that is transmitted
to the manufacturer. With these business rules, an automated order recommendation will generate to
the manufacturer to ship 500 TVs in the week of 5/1/xx (see the Purchase schedule-ship line). This
order will be received by the retailer in the week of 5/8/xx with a one-week lead time (Purchase
schedule-receipts). Similarly, the store level DRP calculations are projecting orders in weeks 5/8, 5/15
and 5/22.
Figures 5 through 7 show the building blocks for calculating an order forecast or supplier schedule for
transmission to a manufacturer. The store level DRP process uses only one independent forecast: the
The Ultimate Retail Supply Chain Machine: Connecting the Consumer to the Factory 14 of 35 Voluntary Interindustry Commerce Solutions (VICS) Association ©2012-­‐-­‐ www.vics.org forecast for consumer sales at the store. All other demands are dependent and thus calculated
demands. This is how a store level DRP process connects the consumer to the factory.
4. Retail Closed Loop Planning using DRP
This section shows how the visibility of store level DRP empowers retailers to tightly manage
tolerances between the bottoms up DRP model of the business and their top down strategies and
financial plans. Figure 8 provides a summary of supplier schedules for all sizes of HD TV sets. Note the
four planned receipts (shown in red) for the 40” set of 500, replicated from the schedule in Figure 7.
Note that Figure 8 provides a comparison of the calculated receipt plan for HD TVs compared to the
receipt plan approved in the monthly sales and operations plan.
Summary Schedule of Receipts for HD TVs vs. the Monthly S&OP
Week
Past 5/1/x
5/8/xx 5/15/xx 5/22/xx Monthly 5/29/xx 6/5/xx 6/12/xx 6/19/xx Monthly
due x
40" HD
TV
500
500
500
1,500
46" HD
TV
52" HD
TV
70
56" HD
TV
Monthly
Totals
TV
category
70
70
70
150
500
500
0
1,040
280
280
150
Monthly
S&OP
plan
1,040
280
560
450
450
1,930
2,550
1,900
2,100
Figure 8
Figure 9 illustrates how store level DRP enables retailers to manage automated order forecasts to
category plans approved in the monthly sales and operations review.
The Ultimate Retail Supply Chain Machine: Connecting the Consumer to the Factory 15 of 35 Voluntary Interindustry Commerce Solutions (VICS) Association ©2012-­‐-­‐ www.vics.org Retailer Sales & Operation Plan HD TV Category
Time periods = months
Figure 9
The ability to compare the sales and operations plan approved by the company executive team with
the sum of the suppliers’ schedules coming from the day-to-day operating system (store level DRP)
provides an extremely powerful capability for the retail management team to obtain improved control
of their business. The red circle in Figure 9 highlights the monthly sales and operations plan for
purchase quantities of 1,900 for the current month and 2,100 next month.
The management team also set a tolerance for purchase variance for the HD TVs of plus or minus 2%.
The variance between the automated order forecast for the current month is 1.6%, within the 2%
tolerance, but the variance projected for next month is 21.4% and requires resolution. Systems can
generate alerts where the difference between the detail planning projections and the aggregate sales
and operations plan are greater than the agreed-upon tolerances.
In this instance, the buyer must either make a change in his planned purchases for the second month
or seek approval for the additional purchase before releasing orders. The store level DRP system
provides the transparency into the demand process that enables the retail management team to
connect day-to-day purchase plans with their business plans.
The store level DRP system provides the capability to continuously maintain a dynamic and integrated
planning and control system with which to optimize consumer satisfaction and business results.
Whatever is happening at any given point in time in the retail stores and retail DCs, what is selling, in
which store, what is shipping from vendors, how much inventory investment has been made, and
what is in-transit is all visible and recalculated and compared in an ongoing basis to the category plan
approved in the sales and operations planning process.
Instead of deploying vast amounts of money and energy putting out fires, managers and their direct
reports can commit quality time to preventing problems. Having these capabilities enables retailers to
routinely answer what we call the universal retail questions: How much will I sell? Where will I sell it?
What do I have? And what do I have to get?
These questions are at the very core of the functions of retail demand management and resource
planning. By starting at the atomic level (store/item) and leveraging the continuous recalculations in
the store level DRP solution, retailers can drive the supply chain from the consumer demand forecast.
Also, tolerances can be set and efficiently managed to close the loop between S&OP and the day-today operating plans generated by the store level DRP system.
The Ultimate Retail Supply Chain Machine: Connecting the Consumer to the Factory 16 of 35 Voluntary Interindustry Commerce Solutions (VICS) Association ©2012-­‐-­‐ www.vics.org 5. Collaboration Powered by Store Level Forecasts
One of the most significant questions about collaboration has been: “How do we scale?” From the
beginning, the CPFR model assumed capabilities to share sales and order forecasts. Spreadsheets
have often been the medium of sharing, even if those spreadsheets were maintained in collaborative
software hosted on the web.
Until recently, no system could accomplish the processing volumes required for retailers to translate
consumer sales forecasts into order forecasts on an enterprise scale. Today, store level DRP systems
can provide reliable demand-driven order forecasts for fast moving and slow moving products over
planning horizons of up to a year or more. Manufacturers have used MRP II and DRP systems to do
this planning with their suppliers for years. The advent of this capability for retailers is “The Ultimate
Supply Chain Machine: Connecting the Consumer to the Factory.”
The VICS CPFR Guideline, “Linking CPFR and S&OP: A Roadmap to Integrated Business Planning”
explored how CPFR and S&OP improve the internal and external alignments of supply chain trading
partners. The hallmarks of S&OP are establishing a process to create a single consensus operational
and financial plan for the firm through a series of coordinated reviews led by senior management.
S&OP integrates strategic, operational and financial plans over an extended horizon and it is the best
practice model for internal collaboration for a business entity.
Sales and Operations Planning is a widely respected process among manufacturers and suppliers, and
the VICS CPFR committee asserts that S&OP is equally applicable to retailers. The hallmark of CPFR is
the development and execution of consensus plans between trading partners and it is the best practice
model for external collaboration between business entities. The untapped opportunity is linking S&OP
and CPFR to develop an integrated business plan that is coordinated across trading partners to
manage the extended supply chain and create a competitive advantage for each chain participant.
Every supply chain is actually two supply chains. The physical supply chain is the movement of
materials and products from supplier to manufacturer to retailer. The other supply chain is the
movement of demand information from retailer to manufacturer to material supplier. The new store
level DRP systems complete the information link in the supply chain.
Until now, the information supply chain had to begin in the middle. Because retailers lacked the
systemic ability to forecast orders, the first demand forecast that directly generated an order forecast
was from the manufacturer. The manufacturer most frequently estimated its demand based upon
historical shipments with limited input from its (retail) customers forward planning. Because of this
information limitation, the manufacturer’s forecast tended to perpetuate pushing product to retailers
(and consumers) instead of delivering to consumer demand. When the information supply chain is
complete, information can substitute for just-in-case inventory across all the nodes in supply chains.
Figure 10 expands a representation of CPFR linking with S&OP to include DRP systems for both
manufacturers and retailers. When powered by DRP, information is timely; forecasts reflect the most
recent sales as well as the latest changes to plans. The horizon of the detail-level data is up to or
more than a year. Strategic changes in the business are reflected in the model, including assortment
changes or expansions, break out businesses, distribution or flow changes and new or closing stores
or DCs.
The Ultimate Retail Supply Chain Machine: Connecting the Consumer to the Factory 17 of 35 Voluntary Interindustry Commerce Solutions (VICS) Association ©2012-­‐-­‐ www.vics.org CPFR and S&OP Powered by DRP
Figure 10
Manufacturers have had the tools to aggregate and reconcile detailed schedules to top-level plans for
decades, but retailers have only recently been able to do this aggregation and reconciliation to enable
executive management to connect day-to-day activities to their strategic business plans.
Figure 11 suggests the integrated relationship between a retailer’s store level DRP model of the
business and its high level business plans. Most retailers do not have day-to-day planning systems of
the type indicated in Figure 11. Consequently, most retailers produce top-level business plans that are
not connected with what happens on a day-to-day basis.
The Ultimate Retail Supply Chain Machine: Connecting the Consumer to the Factory 18 of 35 Voluntary Interindustry Commerce Solutions (VICS) Association ©2012-­‐-­‐ www.vics.org Retailer DRP/Business Planning Alignment
Figure 11
Source: Flowcasting the Retail Supply Chain
Without this inter-connection, manufacturers lack timely and actionable information about the
retailer’s demand requirements. As a result, each partner forecasts demand and resulting supply
needs independently, and the retailer’s orders are frequently a surprise. Past supply chain outages
drive both suppliers and buyers to build buffer stocks to avoid risk.
The store level DRP system provides timely and accurate supplier schedules that enable the
manufacturer to build product efficiently and effectively to satisfy consumer demand. The retailer’s
order execution is linked to the supplier schedule and the computerized model of the business informs
demand and resource planning. Aggregate planning for sales and operations plans and strategic
business plans are also informed by the bottoms up modeling to enable better business decisions. The
detailed model of future strategies and the “what-if” scenario capabilities of the bottoms up model
make it possible to determine a plan of action with sufficient time to execute to close the gaps.
Figure 12 suggests the integrated relationship between a manufacturer’s DRP model of the business
and its high level business plans. Like the retailer with a store level DRP system, the manufacturer’s
DRP system provides accurate supplier schedules for the manufacturer’s suppliers to plan and prepare
materials or components efficiently and effectively to the manufacturer’s demand.
The Ultimate Retail Supply Chain Machine: Connecting the Consumer to the Factory 19 of 35 Voluntary Interindustry Commerce Solutions (VICS) Association ©2012-­‐-­‐ www.vics.org The manufacturer’s order execution is linked to the supplier schedule and the computerized model of
the business informs demand management, rough cut capacity planning, master scheduling, and plant
scheduling. Aggregate planning for sales, operations and strategic business plans are also informed by
the manufacturer’s bottoms up modeling to enable better business decisions. The detailed model of
future strategies and the “what-if” scenario capabilities of the bottoms up model make it possible to
identify potential gaps in achieving the company strategy and business plan – and to determine a plan
of action with sufficient time to execute and close the gaps.
Manufacturer DRP/Business Planning Alignment
Figure 12
Source: Oliver Wight International
Figure 13 shows how a retailer’s store level DRP generated supplier schedule links the retailer and
manufacturer and also aligns the retailer and manufacturer’s S&OP processes. Without the retailer’s
supplier schedule, the manufacturer’s demand plans and S&OP are developed based upon historical
shipments and what the manufacturer believes consumer demand will be. With the retailer’s supplier
schedule, the manufacturer replaces its own shipment-based demand plan for this retailer with the
retailer’s demand plan calculated from consumer sales. If the retailer plan does not consider category
and marketing efforts by the manufacturer to influence and generate consumer demand, the gap
between the retailer plan and the manufacturer plan can be discussed so that consensus is reached on
a single plan.
Notice that the two-way red arrow represents the flow of actionable information between the retailer’s
supplier schedules and orders, which both drive the manufacturer’s demand management. The arrows
connecting retailer and manufacturer go in both directions because demand information flows from the
retailer to manufacturer, while information about the manufacturer’s supply problems also flows back
to the retailer and is reflected in the retailer’s plans.
The Ultimate Retail Supply Chain Machine: Connecting the Consumer to the Factory 20 of 35 Voluntary Interindustry Commerce Solutions (VICS) Association ©2012-­‐-­‐ www.vics.org Retailer and Manufacturer DRP/Business Planning Alignment
Figure 13
Sources: Oliver Wight International & Flowcasting the Retail Supply Chain
6: Protecting Supply for Forecasted Orders
Receiving a supplier schedule from a retailer conveys significant benefits to a manufacturer. First and
foremost, it eliminates the need for the manufacturer to forecast what this retailer will buy. In the
near term, the manufacturer has very accurate retail demand information. Better alignment between
the retailer and the manufacturer’s short-term plan results in lower costs for both trading partners.
On a longer term, the manufacturer can evaluate capacity, process or automation solutions that will
drive further costs out of the supply chain. The longer-term supplier schedule also reveals the
retailer’s forecasts for new product sales or other strategies to grow sales and profits.
When manufacturers treat a supplier schedule as a series of time-phased orders in their own DRP
systems using available-to-promise (ATP) methodologies, they protect the retailer with product supply
as if the forecasts were actual orders. Available-to-promise methodologies are new in retailer and
manufacturer trading relationships, but they are very common in manufacturer and supplier trading
relationships. In the upstream retail supply chain, suppliers use manufacturers’ supplier schedules in
lieu of their own independent demand forecasts based upon shipment history.
The business rules for managing ATP are straightforward. ATP capability prevents un-forecasted
orders placed by other buyers from taking inventory that should be protected for a retailer that has
provided a supplier schedule.
The Ultimate Retail Supply Chain Machine: Connecting the Consumer to the Factory 21 of 35 Voluntary Interindustry Commerce Solutions (VICS) Association ©2012-­‐-­‐ www.vics.org Manufacturer’s S&OP: Today
Figure 14
Figure 14 shows a manufacturer’s approved sales and operations plan when the retailer is not
providing a supplier schedule. The manufacturer has only its historical shipments to plan its sales plus
the actions being taken to promote or otherwise increase volume and velocity at the retailer. The only
reliable data about the retailer’s purchases are the orders in hand for 32 in the current period.
Manufacturer’s S&OP Tomorrow
Figure 15
Figure 15 shows the different situation resulting when the retailer and manufacturer are linked
together using supplier schedules. The manufacturer has not only current period orders, but also
future period order forecasts from the retailer’s supplier schedule reflecting the latest retail consumer
sales forecasts and the latest dependent demand calculations.
The Ultimate Retail Supply Chain Machine: Connecting the Consumer to the Factory 22 of 35 Voluntary Interindustry Commerce Solutions (VICS) Association ©2012-­‐-­‐ www.vics.org ATP or Supply Protection
Figure 16
Figure 16 displays a simplified manufacturer’s DRP and master production schedule where no retailer
is providing a supplier schedule. The cells in yellow show a typical ATP calculation, taking place inside
the manufacturer’s DRP system. Since only the actual customer orders of 2,200 units in Period 1 are
visible to the manufacturer, all of the supply arriving from the plant is available for any customer
order on a first come, first served basis.
Supply Protection now Completed
Figure 17
The Ultimate Retail Supply Chain Machine: Connecting the Consumer to the Factory 23 of 35 Voluntary Interindustry Commerce Solutions (VICS) Association ©2012-­‐-­‐ www.vics.org Figure 17 shows how ATP works when Retailer A is providing a supplier schedule to the manufacturer.
The manufacturer treats the projected purchases in Retailer A’s supplier schedule as if they were
actual orders. The ATP values now reflect availability, but after deducting the quantities projected by
Retailer A. In return for gaining visibility to Retailer A’s needs and future demand, the manufacturer
now reserves product for the forecasted orders.
In committing to manage ATP methodologies, manufacturers give a fair return to retail customers who
provide valid product purchase forecasts. The VICS CPFR Committee recommends ATP methodologies
as a best practice between manufacturers and their retail trading partners.
7: Interfacing Supplier Schedules into Manufacturer
Processes
While retailers and manufacturers increasingly collaborate on customized products for various
markets, manufacturers have many different retail customers for general market goods. Some
retailers will provide supplier schedules for these general market goods, while others may not. This
will result in different demand streams for the manufacturer.
A Manufacturer receiving different inputs from its Retail Customers
Retailer A
Retailer
B
Retailer C
Manufacturer
Figure 18
Source: Adapted from Flowcasting the Retail Supply Chain
In Figure 18, a manufacturer supplies product to three different retail customers. Each of these
retailers has a different planning approach:
•
Retailer A is forecasting using store level DRP. This retailer is calculating a forecast of store
needs based on consumer sales by store. The sum of these store level needs becomes the
dependent distribution demand at the retail DC. The retail DC supplier schedule in turn is
calculated from the dependent distribution demand and provided to the manufacturer.
The Ultimate Retail Supply Chain Machine: Connecting the Consumer to the Factory 24 of 35 Voluntary Interindustry Commerce Solutions (VICS) Association ©2012-­‐-­‐ www.vics.org •
•
Retailer B’s stores send only immediate replenishment requests or orders to its retail DC.
Retailer B’s DC, however, creates forecasts from its historical shipments to stores using a DRP
system and provides a supplier schedule to the manufacturer.
Retailer C has not implemented either store level or DC level DRP. In this case, the planners in
the retail DC have no visibility of individual stores future demand, and the demand planners
for the manufacturer also have no visibility into what the retail DCs will need. The
manufacturer must forecast Retailer C’s needs based upon its historical shipment data for this
retailer.
How can a manufacturer benefit given the mixed information it is receiving from different retail
customers? Since both Retailer A and Retailer B are sharing supplier schedules with the manufacturer,
they are assuming forecast responsibility for their accounts. Retailer A’s store level DRP supplier
schedules will most likely be more predictive than Retailer B’s, because all sales and inventory are
being considered at store and DC level. The only forecasting effort required of the manufacturer is for
retailer C, who does not share a supplier schedule. The best approach for planning the manufacturer’s
demand is to sum the dependent demands from retailers providing supplier schedules with the
manufacturer’s forecasts for shipments to retailers who do not provide supplier schedules. The ideal situation for the manufacturer would be for all of its retail customers to provide supplier
schedules. As store level DRP gains acceptance within the retail community and as process capabilities
at retailers improve, more manufacturers will accept demand forecasts calculated from consumer sales
in the form of supplier schedules, connecting the consumer to the factory.
In addition to retailers, some manufacturers are also investing in store level DRP systems to support
retailers that want to achieve the accuracy and extended insight of store level DRP, but that currently
lack the system to accomplish this result. Section 2 of this guideline included two case study examples
of manufacturer-driven store level DRP solutions.
Some retailers and manufacturers may also enter into co-managed store level DRP programs hosted
by the manufacturer. Either manufacturer-driven or co-managed solutions require that the
manufacturer have timely access to all the relevant data needed to generate item/store level forecasts
in the store level DRP system. The manufacturer creates a model of the way its products should flow
into the retail DCs and stores. The manufacturer and retailer can then agree on a supplier schedule to
drive the manufacturer’s demand. Regardless of who calculates the supplier schedules or who releases
orders or shipments, the most accurate and insightful forecast will be derived from consumer
purchases translated up the supply chain through executable supplier schedules.
8. Managing Forecast Horizons
Changes to forecasts have little or no cost if they reference future production plans. But if the changes
exceed material availability or production capacity closer to the shipping date, the costs of these
changes can be onerous. Manufacturers and their retail trading partners can share the benefits of
reduced end-to-end supply chain costs if retailers take these decision points into account in their
forecasting and order release processes.
Typically there are multiple zones along a time scale where collaborative decision points occur for time
fences. The basic model shown in Figure 19 uses three zones of flexibility for forecasting and order
placement. In the free change zone, the supplier schedule can be increased (or decreased) and the
manufacturer’s rough-cut capacity planning can ensure that supply can match the forecasted demand.
Inside the trading and firm zones demand must be constrained to match supply, since a significant
change in demand may exceed available materials, production capacity and safety stock.
The Ultimate Retail Supply Chain Machine: Connecting the Consumer to the Factory 25 of 35 Voluntary Interindustry Commerce Solutions (VICS) Association ©2012-­‐-­‐ www.vics.org Forecast Horizons in Retailers Supplier Schedules Figure 19
Source: Demand Management Best Practices
Managing forecast horizons can be a controversial subject. In the consumer packaged goods industry,
manufacturers are commonly expected to carry finished goods inventory in anticipation of future
orders, but deciding what inventory to hold depends upon the accuracy of the forecast. Retailers want
to be able to change forecasts or place orders unconstrained by prior forecasts, because that is what
their planning systems and their current insight indicate is required to satisfy consumer demand.
Manufacturers want new forecasts or purchases to be constrained to the forecast in the near term
where production adjustments are costly or impossible.
The VICS CPFR Committee recommends managing forecast horizons as a best practice. Collaborative
trading partners will focus on improving product availability at the retail shelf and work together to
reduce both lead times and product shortages. A retailer’s forecast or purchase may be the result of
an order policy, presentation or assortment change rather than a change in expected consumer sales.
These changes should be planned in the free change zone.
Variances to supplier schedules within the trading or firm zones that relate to changes in consumer
purchases should be managed on an exception basis. Systems exist which provide automated alerts to
these variances. Retailers lacking an automated alert system should leverage their manufacturer
capabilities. As a last resort, the partners may manage unforeseen exceptions after orders are
released.
9. Forecast Commitments
Retailers and their manufacturers will want to measure the new store level DRP forecasts for
consumer purchases and supplier schedules to determine their accuracy and to promote continuous
forecast and execution improvements. Retailers who have adopted store level DRP systems are
developing forecast accuracy measures to assist their teams in improving results, and they are
beginning to share these results with manufacturers as collaborative metrics.
Forecast measures need to be simple and easy to understand as well as applicable to the business
model of the trading partners. Since many families of products may share common materials or
components, it may be relevant to measure forecast variance by family of product. Our case studies
show that the most productive collaborations use forecast results as a basis for triggering
improvement actions rather than blame.
The Ultimate Retail Supply Chain Machine: Connecting the Consumer to the Factory 26 of 35 Voluntary Interindustry Commerce Solutions (VICS) Association ©2012-­‐-­‐ www.vics.org Mean absolute percentage error (MAPE) is the most mathematically robust measure of the magnitude
of variance to forecast, regardless of the direction of variances. Bias is an important indicator of the
persistence of the direction of variances, which may reflect tendencies for optimism or pessimism in
the forecast.
Results from practitioners show that forecasts of consumer sales are usually more accurate than
forecasts of orders to manufacturers. The farther from the consumer that forecasting takes place,
economic shipment quantities and load building create lumpier demand. Results from practitioners
also show that forecasts for fast movers are usually more accurate than for slow movers. The most
critical forecast accuracy in the supply chain is the demand hitting the factory, where a cumulative
positive bias in orders over several weeks can result in delays and backorders.
Progressive retailers and their suppliers focus primarily on the consumer sales forecast and use
collaboration and shared insights about promotions and assortment changes to align their planning
and optimize results. Since a cumulative forecast bias is most likely to create overstocks or shortages,
a good strategy is to base forecast accuracy measurement on a standard cumulative review period,
such as eight weeks, measured on a rolling weekly basis. This measurement approach provides
meaningful and comparable results across vendors and categories.
Retailers will build trust with a demonstrated track record of forecast accuracy; forecast accuracy will
convince manufacturers of the value of basing production on the store level DRP supplier schedules.
Store level generated DRP supplier schedules incorporate valuable new information that was always
missing from a manufacturer’s statistical forecast: forecasts for new products, changes to
assortments, changes to order policies or changes to distribution networks. When, 10 years ago, West
Marine became the first retailer to provide store level DRP forecasts on a large scale, managers at the
retailer decided that it was fair and reasonable to provide manufacturers with an assurance that they
would not be left with excess finished goods because they built to forecast. To encourage
manufacturers to build to the forecasts, they decided to guarantee their forecasts. West Marine
purchased a lot of good will at no cost, and kick-started their CPFR programs.
10. Creating and Sharing Gains
Consider the following realistic scenario, loosely borrowed from J. Schorr, Purchasing in the 21st
Century. A retailer conducts an annual negotiation attempting to receive better costs from a
manufacturer. The retail buyer uses his leverage (volume purchases) knowing that he may be
squeezing the manufacturer’s margins. The manufacturer’s salesperson sees that if his prices are only
marginally higher than a competitor’s, he may lose the business. The focus of this negotiation is
clearly near term and involves no consideration of the qualifications or relationship strengths of the
parties.
If the focus for this relationship was over an extended term, the negotiations would be different,
especially if the manufacturer believed the retailer valued its competence, honesty and fairness and
considered it a long-term partner. The negotiators should take an extended view of the relationship,
especially if design or manufacturing investments might be involved in future value creation or value
engineering. A rare but probable strategy might be for the retailer to offer its manufacturer a profit
guarantee. For instance, the retailer might suggest that the manufacturer would make the same dollar
profit per item as before (including new investment costs), while passing along to the retailer excess
savings related to lower materials, manufacturing or overhead costs. With such a profit guarantee,
both manufacturer and retailer would be more likely to candidly share their costs and margins with the
goal of lowering total supply chain costs over time.
Retail buying organizations often act as if manufacturers were their competitors instead of their
innovation partners. Retailers’ real competitors are the existing and emerging retailers serving their
customers. The reality is that effective gain sharing is the norm in progressive supply chains. For
instance, Toyota and other progressive manufacturers develop target costs with suppliers and work
with them as partners to design-in lower costs over time. Toyota’s approach encourages creativity and
invention, a focus on the process as much as product, and win-win results. Many progressive retailers
The Ultimate Retail Supply Chain Machine: Connecting the Consumer to the Factory 27 of 35 Voluntary Interindustry Commerce Solutions (VICS) Association ©2012-­‐-­‐ www.vics.org take similar approaches to vendor management, particularly as it relates to tailored or private label
product offerings.
Retailers and manufacturers will be more likely to commit their respective expertise in work teams to
lower costs in sourcing, manufacturing, design and development and joint end-to-end logistics if they
understand that risks and rewards will be fairly shared. Gain-sharing agreements can be collaborative
rather than contractual. Retailers can significantly enhance the profitability of a project by prompt
decision-making, adequate commitment of people and resources, multi-level and cross-functional
contacts early in the process, and by accelerating the time-to-market of the project. The VICS CPFR
Committee recommends collaborative planning for gain sharing as a best practice.
11. A Roadmap for Getting Started
The VICS CPFR Committee asserts that the advent of effective large-scale store level DRP systems
represents a retail revolution. We recommend that retailers undertake a streamlined investigation to
assess the benefits of these new solutions for their businesses.
Retailers can launch a well-organized project in approximately one to two months. We suggest the
following six-step launch program:
1. Audit and Assessment (one week). Form an executive team with appropriate operating
managers and outside experts to analyze the current systems and processes used in demand
planning and replenishment in retail stores and DCs and coordinating with manufacturers.
The assessment will cover what’s not working well and what needs to change to make the
organization more competitive. Current process design, technology, and planning competency
will be addressed in the audit and assessment.
2. Establish the Vision (a half day workshop with the same leadership team). The purpose of this
session is to achieve clarity about what will be accomplished in the store level DRP project and
to document the leadership team’s expectations that will be communicated to the
organization.
3. Establish Performance Goals (a one day workshop with the same leadership team). This
session will establish the performance categories that need to improve, how they will be
measured and to what levels performance will be expected to rise. The plan will set goals and
measures for continuous performance improvements.
4. Building the Plan for Costs and Benefits (a one day workshop with the same leadership team).
This session will review all the anticipated costs and benefits related to adopting new
processes and the store level DRP solution.
5. Project Authorization (a half day executive meeting). The authorizing decision should be taken
either at the conclusion of this meeting or as soon thereafter as possible.
6. Project Organization (one week). Form the project organization, allocate appropriate resources
and delegate required decision-making authority. This step effectively launches the project
and the project organization.
This one to two months roadmap will launch the project and provide the structure for project design
and governance. The executive or team in charge of the project will establish appropriate timelines
and milestones to implement and rollout the new technical solution, plus needed improvement to the
impacted processes and people’s capabilities to operate in the new planning environment. The
implementation will include a rollout of new processes, roles and responsibilities appropriate for the
organization and for coordinating with its manufacturers.
12. Conclusion
This VICS CPFR Best Practice Guideline focuses on a new breed of scalable technology solutions and
best practices that enable retailers to provide predictive reference forecasts (supplier schedules) of
future orders through a multi-echelon process based on the dependent demand concept. A retailer
employing such a methodology and generating supplier schedules uses a streamlined approach to
coordinating its trading partners and suppliers. The entire supply chain converts to using only one
forecast - the forecast of consumer purchases at the store. The deployment of a store level DRP
The Ultimate Retail Supply Chain Machine: Connecting the Consumer to the Factory 28 of 35 Voluntary Interindustry Commerce Solutions (VICS) Association ©2012-­‐-­‐ www.vics.org system provides significant opportunity to free up employees at retailers and manufacturers to
perform more value-added activities.
Store level DRP is now practical, and it is the missing link in operating retail supply chains at greater
levels of effectiveness and profitability for all trading partners. Manufacturers and their suppliers
already have DRP systems, so store level DRP completes the connection between consumers and the
factory. By linking their DRP capabilities, supply chain partners will create a model of their business
and jointly manage to a collaborative forecast. They will gain improved control of their business by
creating a rack-and-pinion relationship between their day-to-day operating plans and their high level
business plans and strategies. The synchronization of their information flows leverage and streamline
their operations and will minimize, if not eliminate, the bullwhip effect in supply chains.
The transparency and timeliness of store level DRP information will enable trading partners to review
and change for the better any activity that occurs between the time a decision is made to obtain
materials or components and to produce something in a factory and the time someone puts it on the
store shelf.
Trading partners will collaborate and manage their supply chain as if only one company were
managing it. This will lead them to jointly reduce inventories, manufacturing, transportation,
warehousing, buying and selling costs. It will also lead them to jointly collaborate on how to increase
consumer sales.
The New Retail Supply Chain
Figure 20
The Ultimate Retail Supply Chain Machine: Connecting the Consumer to the Factory Source: Adapted from Flowcasting the Retail Supply Chain
29 of 35 Voluntary Interindustry Commerce Solutions (VICS) Association ©2012-­‐-­‐ www.vics.org Retailers using store level DRP can easily provide their manufacturers visibility to supplier schedules.
Manufacturers can evaluate the projected purchases, question events that do not seem right, and
improve their confidence in the forecasts. The retailer’s creation of a robust supplier schedule
improves the collaborative planning possibilities between the trading partners. Because the supplier
schedule is a long-term schedule, it also provides a basis to validate and refine planning in relation to
key business strategies for growing sales and profit.
According to several industry leaders, innovative retailers and their manufacturers are becoming more
significant stakeholders in each other’s business planning and execution capabilities. Planning horizons
are being extended, consensus single number planning is becoming more prevalent and standardized
planning processes and balanced scorecards are moving beyond supply chain planning to executive
business management.
Leading retailers are demonstrating that collaboration with manufacturers over an extended planning
horizon can provide competitive advantages in aligning marketing, product, life cycle and assortment
development. A retail store level DRP system that starts at the store and calculates everything else is
a significant innovation in supply chain infrastructure and the flow of information in the supply chain.
Collaborative partnerships and structured planning processes including CPFR and S&OP will enable
trading partners to leverage such a solution to attain more alignment on key strategies and deliver
more value to consumers.
This “Ultimate Retail Supply Chain Machine” guideline is a companion to the VICS CPFR guideline
“Linking CPFR and S&OP.” The “Linking” guideline explains how CPFR and S&OP improve both the
internal and external alignments of supply chain trading partners. CPFR is the best practice model for
external collaboration. CPFR is a strategic business management process that aligns the
complementary capabilities of trading partners in a coordinated external collaborative process. S&OP
is the best practice model for internal collaboration for any firm. It is a widely respected process
among manufacturers that utilizes a series of monthly reviews to put the executive team in the
driver’s seat to continuously redefine the actions the organization will take to achieve consensus
rolling plans and strategies. S&OP is equally applicable to retailers who wish to achieve superior levels
of performance. The VICS CPFR Committee defines Integrated Business Planning (IBP) as requiring
excellence in both internal and external collaborations from retailers and manufacturers.
A
manufacturer’s S&OP and a retailer’s S&OP internal collaboration processes are linked together using
CPFR external collaboration processes. The store level DRP capabilities described in this “Ultimate
Retail Supply Chain Machine” guideline enable retailers and manufacturers to align their detailed
operating forecasts and business plans. The scalability of their detail plan alignment in turn allows
people and process resources to shift to higher value activities to drive sales and reduce costs.
The Ultimate Retail Supply Chain Machine: Connecting the Consumer to the Factory 30 of 35 Voluntary Interindustry Commerce Solutions (VICS) Association ©2012-­‐-­‐ www.vics.org Integrated Business Planning Powered by DRP
Figure 21
The Ultimate Retail Supply Chain Machine: Connecting the Consumer to the Factory 31 of 35 Voluntary Interindustry Commerce Solutions (VICS) Association ©2012-­‐-­‐ www.vics.org Appendix I: Supplier Scheduling - A Brief History
Steelcase and Abbott Labs Canada were among the earliest manufacturers to adopt supplier
scheduling in manufacturing back in the early 1970s. Mass Merchandisers, Inc., a rack jobber from
Harrison, AK, was the first non-manufacturing company to use DRP to generate supplier schedules in
1983. Also in 1983, distributor American Hardware Supply adopted DRP. They were followed by
Sears, which, in 1987, became the first retailer to use DRP to provide supplier schedules to
manufacturers. These earliest adoptions of DRP and supplier schedules in non-manufacturing were all
based on DC level rather than store level forecasts.
In 1993, Giant Foods of Landover Maryland and Kellogg engaged the LogicNet division of IRI to deploy
a store level DRP system. This attempt was an industry first. The pilot was successful, but a full rollout failed because of problems forecasting slow movers and difficulties handling the massive number
of calculations required to generate a rolling 52 week supplier schedule updated daily.
In 2001 West Marine completed a successful multi-echelon integration of their E3 systems and
launched a large-scale CPFR program including supplier scheduling with 200 vendors.
In 2001, Lowe’s began its DRP and collaboration journey by implementing a custom system called
Collaborative Purchase Forecasting. This was achieved by running their legacy replenishment system
repeatedly each week to provide a simulation of future purchases over the next 6-12 months. Lowe’s
also began collaborating with key vendors at this time, comparing their purchase forecast with their
vendor partner’s purchase forecasts. The system worked well, but the computing power available at
the time only allowed them to collaborate with their largest suppliers. In 2007 Lowe’s expanded its
DRP capabilities with the implementation of a store level DRP solution managing all products flowing
through retail DCs (about 70% of volume). This system simulated all store needs through the
distribution network and from manufacturers and supported a weekly refresh of plans for all DC
servicing manufacturers. With the expanded capabilities, Lowe’s now collaborates with about 140 of its
top suppliers and provides sales forecasts and supplier schedules through a web portal. Lowe’s
successful DRP program and its collaborative results with manufacturers led to it receiving both the
VICS CPFR Implementation Excellence Award and JDA’s Best in Collaboration award in 2010. In 2009, Walmart announced to its suppliers that it was implementing a store level DRP system with
the intention of modeling the supply chain with its trading partners and providing supplier schedules.
Appendix II: Technology for Forecasting From the Shelf
The basic requirement for a retail supplier schedule is a store level DRP projection extending well into
the future, typically a year, and updated daily. Only a small number of leading-edge retailers are using
these systems. A retail supplier schedule should reflect what sold in the stores the prior day. For
products distributed through a retail distribution center, a dependent demand is used to calculate the
supplier schedule. Until recently, the computer processing and timeliness requirements for retail
supplier schedules exceeded available system capacities. Today, a number of very large retailers are
using dependent demand successfully to create supplier schedules, and this approach is now a proven
solution for retailers.
Once supplier schedules have been generated, they need to be communicated to manufacturers.
There are several ways this can be done:
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The EDI 830 is a future forecast, so this transaction is typically used to communicate a
supplier schedule or order forecast.
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A retailer’s portal may provide manufacturers access to retailer information.
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Collaborative systems may support direct access by manufacturers to a retailer’s system,
while maintaining security so that each manufacturer accesses only its product information.
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Either automated or manual email can be used to send supplier schedules to manufacturers.
The Ultimate Retail Supply Chain Machine: Connecting the Consumer to the Factory 32 of 35 Voluntary Interindustry Commerce Solutions (VICS) Association ©2012-­‐-­‐ www.vics.org The VICS CPFR Committee maintains industry neutrality as it relates to software solutions that
facilitate the best practice processes highlighted in its guidelines. Since the computerized processes
referenced within this guideline need to leverage software solutions to scale beyond a small pilot, this
appendix provides some high-level guidance to assist companies to identify the key software
capabilities these solutions can support.
The following questions highlight software and decision support capabilities companies should consider
in selecting a solution:
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Can the store level DRP solution scale economically across all products at all stores and retail
DCs?
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Can the solution accurately represent and model a multi-echelon supply chain starting at the
retail shelf? This is very different than looking at each node in the supply chain independently
and forecasting demand in isolation of the effects of downstream nodes. As reinforced in this
paper, demand starts with consumer take-away and is translated up the supply chain by
calculating a dependant demand stream from the retail store to the requirements of the
factory.
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For manufacturers, will the system support a manufacturer-led strategy? Manufacturers, who
previously built their distribution and production plans based on their historical shipment data,
will need to efficiently scale to volumes that will grow exponentially when modeling demand
from the shelf back to the factory with their largest and most strategic customers.
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Is the system capable of managing multiple forecast or demand types (Slow, Fast, Seasonal,
Erratic, Continuous, for all products at all stores and DCs)?
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Can the system provide a minimum planning horizon of one year for the projections to impact
critical sourcing and manufacturing lead times for manufacturers to retailers as well as for
comparisons to S&OP and annual business plans?
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Can the solution present the time-phased plan in a variety of units of measure? As an
example, some stakeholders may want to see the plan in units, while others may want to see
the plan in cases, cube, weight, hours or different currencies.
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Can the solution summarize and aggregate the time-phased plan in logical groups; for
example, items across a store cluster, distribution center, or across a defined geography?
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Does the solution have the flexibility to show the plan at varying levels of time granularity
(Daily, Weekly, Monthly, Quarterly, YTD)?
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Does the solution have a track record of easily integrating with other critical systems that can
leverage the new valuable forward looking time-phased data? A partial list of system
applications include:
o Shelf Space Planning
o Assortment Planning
o Merchandise Planning
o Transportation Planning
o Warehouse Management
o Labor Management and Scheduling
o Factory Planning and Scheduling
o S&OP
o Order Promising
o Gap identification between high level business plans (S&OP) and day to day operating
plans
Key capabilities that the solution should be able to calculate and model include:
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Shelf-level forecasts (Based on POS) for fast, medium and slow movers for all products in all
stores so as to create a true model of a retail business
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Trend Recognition
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Identification and management of seasonality
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Past promotion filtering and smoothing
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Historical stock-out filtering and smoothing
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Management of moving holidays
The Ultimate Retail Supply Chain Machine: Connecting the Consumer to the Factory 33 of 35 Voluntary Interindustry Commerce Solutions (VICS) Association ©2012-­‐-­‐ www.vics.org -­‐
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The capability to forecast specific items at store level using different forecast horizons (e.g.,
weekly, monthly, quarterly) and to use forecast consumption to consume the forecast over the
forecast horizon
The ability to develop integer forecasts for slow and very slow moving products
Exception management processing with prioritization
Mass maintenance and mass copying of history for new items
Mass maintenance and mass copying for new store setup
Exception messaging for managing large numbers of forecasts
Aggregation of forecasts by group of products or locations
Initiation of mass changes to forecasts
The ability to reforecast one or several products on the fly and then re-plan DRP, also on the
fly, to support `What-If Analysis’ for a variety of possible scenarios
The ability to “firm plan” or lock select order forecasts so that they will not be re-planned
The ability to drill down into dependant demand projections to provide visibility to the
components of demand
Creation of time-phased sourcing relationships
Establish bill of material assemblies for component products and in-store displays
Handle products that are sold in more than one configuration but are replenished in one way
New product launch and end of life planning functionality to make sure projections respect
items in transition.
Creation of financial plans based on product location projections including sales, purchases,
inventories and gross margins
Promotional/Event Lift for demand shaping activities
Inventory positions at the store and each upstream node
Shelf presentation requirements
Safety stock-level requirements at the shelf and each upstream node
Lead-time requirements of store and each upstream node
Truckload building based on multiple weight and cube constraints for a specified planning
horizon
Order multiples/pack size constraints with the item
Shipment and receiving schedules for each node
DC and store capacity constraints
Varying replenishment flow strategies to consumer (Through DC, Cross-Dock, Direct, Flow
Through, etc.)
Network updates that will likely impact time-phased projections (Store to DC re-alignment,
New Stores, New DC’s, New Plants, etc.)
As store level DRP must be updated daily across all products in all retail stores and retail DC’s,
the system should support “net change” capability (where only records that have changed will
be processed in each update to the system)
Available to promise calculations (ATP)
Marrying multiple demand streams including private brands
To maximize success, computerized capabilities, people and process requirements all ultimately drive
solution selection. The questions and key capabilities provided here will be useful to consider when
the time is right to select a store level DRP solution for your business.
The Ultimate Retail Supply Chain Machine: Connecting the Consumer to the Factory 34 of 35 Voluntary Interindustry Commerce Solutions (VICS) Association ©2012-­‐-­‐ www.vics.org Suggestions for further reading on this subject
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VICS, “Implementing Successful Large Scale CPFR® Programs & Onboarding Trading
Partners,” August 2007.
VICS, “Linking CPFR and S&OP: A Roadmap to Integrated Business Planning,” September
2010.
Richard C. Ling and Walter E. Goddard, Orchestrating Success: Improve Control of the
Business with Sales and Operations Planning, John Wiley & Sons. 1988.
Andre Martin, DRP: Distribution Resource Planning, Third Edition, John Wiley and Sons, 1995
John Schorr, Purchasing in the 21st Century, Second Edition, John Wiley & Sons, 1998.
George E. Palmatier and Colleen Crum, Enterprise Sales and Operations Planning:
Synchronizing Demand, Supply and Resources for Peak Performance, J. Ross Publishing,
January 2002.
Colleen Crum with George E. Palmatier, Demand Management Best Practices: Process,
Principles and Collaboration, J. Ross, 2003.
Ron Ireland with Colleen Crum, Supply Chain Collaboration: How to Implement CPFR, J. Ross,
2005.
Andre Martin, Mike Doherty and Jeff Harrop, Flowcasting the Retail Supply Chain, Factory 2
Shelf Publishing, 2006.
About VICS
Since 1986, VICS, the Voluntary Interindustry Commerce Solutions Association, has worked to
improve the efficiency and effectiveness of the entire supply chain. VICS is made up
of companies who have proven that a timely and accurate flow of product and information between
trading partners significantly improves their competitive position. VICS' Committees continue to build
on their legacy of supply chain excellence through continuous improvement of existing supply chain
processes, development of new collaborative commerce business processes and effective
implementation of e-Commerce standards.
The Ultimate Retail Supply Chain Machine: Connecting the Consumer to the Factory 35 of 35 Voluntary Interindustry Commerce Solutions (VICS) Association ©2012-­‐-­‐ www.vics.org