Collaborative planning, forecasting, and replenishment strategies mitigating bullwhip effect

CPR Model and Bullwhip Effect

CPFR (Collaborative Planning, Replenishment, and Forecasting) is a growingly applied business practice aiming to lower supply chain spending through the promotion of increased cooperation, integration, and visibility between supply chains of trading partners. The phrase "trading partner" is applicable to nearly all combinations (inter, as well as intra) of manufacturers, suppliers, retailers, or distributors. CPFR itself represents an extension of older collaboration efforts such as just-in-time (JIT) (Andrews, 2008). CPFR defines a broad framework including the components of planning, strategizing, supply and demand management, implementation, and appraisal. The strategizing and planning phase includes developing joint business strategies and collaboration terms. Supply and demand management concentrates on order planning and forecasting. Implementation entails generating and meeting replenishment orders. Lastly, appraisal deals with score carding and exception management processes (Andrews, 2008).

Bullwhip Effect

A firm that wishes to last in the current competitive environment must develop strong supply chains capable of responding rapidly to consumer requirements. Meanwhile, supply chains today are vulnerable to uncertainties that have negative ripple effects when going upstream in a supply chain. Availability of data pertaining to inventory levels, demand, lead times, price, etc. can help reduce uncertainties in supply chains. Furthermore, such access can help alleviate bullwhip effect-related issues. The aforementioned 'bullwhip effect' refers to a phenomenon wherein order sequence variations increase for suppliers (positioned farthest from end customers). Industry observations like simulated experiments (e.g., Beer Game) and macroeconomic data have depicted enormous added supply chain expenses owing to bullwhip (Kazemi & Zhang, 2013).

Mitigation

Bullwhip effect can be mitigated by information sharing, as it introduces a measure of transparency and coordination across the supply chain and allows facilitate efficient allocation of inventories across different stages of the supply chain. Literature cites a wide range of information sharing benefits, which are predominantly dependent on the stage in the chain and the demand market situation. Information sharing not only decreases bullwhip effect (i.e., order fluctuation) in the chain, but adds value to it as well. Numerous researchers have strived to measure (measure) supply-chain VOI (value of information sharing), defined generally as supply chain expenditure ratio with and without the information sharing component. A majority of innovative practices of chain coordination indeed rely on processes, product, and design of supply chain. In the last few decades, different methods like CPFR and VMI (Vendor Managed Inventory insert full form) have helped implement multiple collaborative approaches via VMI (Kazemi & Zhang, 2013).

Relevance of VMI (Vendor Managed Inventory)

VMI denotes a strategy in supply chains wherein the supplier or vendor is charged with management of retailer or customer stock. This concept was first successful during the late eighties when deployed between P&G and Wal-Mart, and ever since, other businesses like Johnson & Johnson, Shell Chemical and Campbell Soup have adopted this strategy. As retailers do not have to place orders under this practice, retailer ordering costs are eliminated, with the supplier being made responsible for replenishing inventories. This implies reduction in administration expenses for retailers, together with decreased delivery expenditures for vendors. Shifting ordering responsibility to vendors means they need to adapt their activities to the factor of customer service. It is demonstrated that VMI implementation helps reduce occurrence of stock-outs, improves customer service, and lowers costs associated with inventory turnover growth and decreased safety stock levels. VMI systems' deterministic model for examining VMI program cost-savings revealed that, with increased ratio of manufacturer-to-retailer inventory replenishment lead-time or inventory-holding cost ratio, overall holding cost-reductions will increase for manufacturers (Kazemi & Zhang, 2013).

Revisiting CPFR

Kazemi and Zhang (2013) define CPFR as a formal process between trading partners that is applied for agreeing upon a collective forecast and plan, monitoring success via replenishment, and recognizing and responding to all exceptions. CPFR constitutes an attempt at coordinating different supply-chain partner activities such as planning of purchase and production, inventory replenishment, and demand forecasting. One of the advantages of this practice is that it eliminates uncertainties by means of improved collaborations and communications between trading partners in a supply chain. As CPFR enhances information sharing as well as demand visibility within the overall supply chain, uncertainty due to reduced bullwhip effect or information distortion. An analysis was conducted of CPFR benefits in supply chains comprising of one producer and a couple of independent retailers, using the traditional newsvendor model as a base. Analysis results suggested that, compared to the conventional practice, manufacturer costs will decrease through application of CPFR.

Discussion

Thus, no single general solution exists that will work with all organizations. Based on their respective corporate strategies, firms must come up with their own appropriate CPFR management plan. This task would be daunting for company leaders if they fail to comprehend the reason for companies' implementation of different kinds of CPFR partnerships, beneficial from a theoretical as well as managerial viewpoint (Kubde & Bansod, 2010). Distribution and logistical functions can offer a tool to forge collaborative partnerships within supply chains, thus improving chain efficiency. Further improvements to chain performance require accelerating order-related information flow to upstream firms in the chain and expediting logistical activities such as product/material delivery and storage throughout the chain (Kubde & Bansod, 2010).

Conclusion

Businesses in the modern day face an extremely competitive international market. Emphasis must be given to delivering to customer the product they desire at the right place and price, in a defined time-frame. For realizing these objectives, organizations employ a number of approaches to improve their business performance. These approaches typically concentrate on a particular organizational operational area. However, CPFR is a holistic approach that encompasses all organizational functional areas (Kubde & Bansod, 2010). CPFR's goal is improved alignment of demand and supply, using data interchange of trading partner, which binds companies via collaborative processes and interdependent transactions for fulfilling customer demand. While the concept of CPFR may outwardly appear simple, implementing it in real-time is not so easy. It necessitates a business process transformation as well as a shift from focus on one's own organization to a wider multi-enterprise outlook.