The CPFR Web site (www.cpfr.org) explains each of these steps in detail and lays out a roadmap for implementation.

Six years after the initiative was launched in 1997, where does CPFR stand today in terms of acceptance and adoption? The short answer is that adoption has been slow but steady, with some evidence suggesting a breakthrough in the near future. A recent study by AMR Research, for example, found that while only 12 percent of companies have CPFR in place today, 39 percent plan to implement it within the next two years. Twenty percent of the survey respondents, in fact, plan to implement CPFR pilots in 2003. Overall, the respondents said that the requirement to collaborate effectively with trading partners was one of the pressing challenges they faced today.

Other surveys suggest more modest adoption prospects. For example, a survey sponsored by the Food Marketing Institute, Food Distributors International, and Grocery Manufacturers of America concluded: "Very few traditional grocery retailers are currently involved in formal CPFR initiatives with manufacturers. On the other hand, manufacturers are focusing their in-depth CPFR development efforts on their larger, more technologically advanced mass merchandiser partners."

Anecdotally, recent case examples of successful CPFR implementations abound, many of which are posted on the CPFR Web site. A recent article in Global Logistics & Supply Chain, for example, describes the CPFR experience of Henkel KgaA, a German-based manufacturer of household cleaners and home care products.¹ Specifically, by implementing the CPFR processes, the company significantly improved the quality of its sales forecast in just six months from October 1999 to March 2000. During that period, the number of forecasts showing an average error of more than 50 percent declined from nearly half of the total to around 5 percent. Meanwhile, forecasts with an error rate of less than 20 percent grew from 20 to 75 percent.

That same article went on to describe how another company, Ace Hardware, has successfully scaled CPFR to embrace a number of suppliers including Black & Decker and Manco (which was subsequently acquired by Henkel). With these key suppliers, Ace has achieved increased sales and improved effectiveness and efficiency. Just as importantly, Ace credits CPFR with reducing the time buyers have to spend on nonvalue-added activities, allowing them to source new and exciting products for their customers.

The benefits that companies like Henkel and Ace Hardware have realized from CPFR have been well documented over the years. Yet for the most convincing financial proof of the benefits of collaborating with trading partners, you need look no further than Wal-Mart. Consider the inroads that this company has made in the grocery business. In a few short years, it has emerged as the largest and one of the most successful grocery chains in the United States. Start by comparing Wal-Mart's financials to those of their more traditional grocery chain competitors. Wal-Mart has used collaboration through CPFR with an estimated 600 trading partners to help drive its operating expenses (OPEX) to the lowest in the industry. (For more details see Exhibit 1.) Successful collaboration, combined with a willingness to accept a lower operating margin in order to grow overall and same-store sales, allows Wal-Mart to price its products 10 percent below most of the competition.

Broadly speaking, the benefits of CPFR come from higher sales and lower supply chain costs. (The specific components of these benefit categories are discussed below.) Our benefit assessment is based on a large number of pilot studies that have been made publicly available through VICS. (For more on these successful applications, see www.cpfr.org.) These pilots include such notable companies as Procter & Gamble, Kmart, Wal-Mart, Sara Lee, Wegmans, and Nabisco. While most of these pilots have been between retailers and suppliers (called downstream 2-tier suppliers in CPFR terms), some new initiatives have sought to extend these benefits to the "n-tier" suppliers. N-tier means applying CPFR to other parts of the supply chain (for example raw material suppliers and manufacturers) or to multiple trading partners within one tier (such as a manufacturer partnering with multiple retailers).

The downstream 2-tier benefits of CPFR can be summarized as follows:

These results are based primarily on pilot studies conducted in the United States where service levels (defined as complete delivery of what was actually ordered) and inventory turns average 92 percent and 15 times respectively for companies overall. Interestingly, performance on these metrics tends to be lower than what we see in Europe where there is less competition, fewer SKUs, and deal structures that don't encourage inventory buildup.

Out-of-Stock (OOS) Items. The main reason for lost sales is that items are out of stock on the retail shelf. According to a 1998 study conducted jointly by Coca-Cola and the Grocery Manufacturers of America, OOS items run in excess of 8 percent at retail locations on a day-to-day basis and as high as 14 percent on weekends for highly promoted items. Of the customers that do not find what they want on the shelf, 40 percent will either defer the purchase or go to another store to find the item. There are certain recurring reasons for items being out of stock: the supplier fails to provide the proper level of service to the retailer's distribution center; the retailer does not get the item out of the back room and onto the shelf; or the retailer does not order in sufficient quantity to cover demand, particularly with promotions. CPFR's ability to enhance communications and enable trading partners to forecast demand more accurately alleviates and often eliminates these problem areas.

Pilot studies in the United States have shown that CPFR has reduced OOS items by as much as 50 percent. This, in turn, can result in as much as a 6-percent increase in sales—for the supplier and the retailer.

Promotional Planning. Promotional planning is a key step in the CPFR process. It produces an accurate estimate of promotional volumes between trading partners and assures that replenishment is timed with in-store, national, and direct-to-consumer advertising. The sales increases of 1 to 3 percent are a subset of the sales seen through a reduction of OOS items and accrue to both the supplier and the retailer.

Service Level. Increased service levels result from the advance forecasting and planning performed by trading partners prior to placing the order. These increases, averaging 3 to 5 percent, are seen for both the supplier and the retailer. As with promotional planning, these sales increases are a subset of the increases realized from reducing OOS items.

Inventories. The average inventory reduction realized is in the range of 20–40 percent, depending on the product category and the pilot participants. This results from reduced safety stocks because of greater confidence in the forecasting and planning process prior to order execution. These decreases are seen for both the supplier and the retailer.

Damages. As inventories are reduced, the likelihood and level of damages decrease proportionately for both the supplier and the retailer.

Warehouse Space. As inventories are reduced, the cost of the space needed to store products decreases proportionately. These decreases are seen for both the supplier and the retailer.

Labor Production. Labor production smoothing is defined as the savings in labor experienced by the supplier when promotional spikes are removed from the production and distribution processes. In the United States, an estimated 40 percent of inventory is ordered in the last week of any particular quarter as manufacturers flood the market with special incentives to hit quarterly revenue and earnings targets. The negative impact of this ordering pattern on supply chain productivity is significant. Both production and distribution ramp up to hit these unforecasted volumes, and then become underutilized during the first weeks of the following quarter while that excess works its way through the system.

The GMA estimates the impact of this promotional period spike to be between 3.5 and 7.5 percent of total labor costs. CPFR, with its ability to collaboratively time production and replenishment with consumer demand, reduces labor costs accordingly. A single company's ability to achieve these savings greatly depends upon its ability to gain critical mass among trading partners (see the discussion on n-tier benefits below). These decreases are seen primarily for the supplier. Note that end-of-period promotions are much less common in Europe, which is a main reason why inventory levels are lower there.

Capital Production. CPFR also can decrease the capital required to manufacture products, typically by 3.5 to 7.5 percent of capacity. This capital should decline in direct proportion to the labor component and, again, is highly dependent on the supplier's ability to reach critical mass. These decreases are seen primarily by the supplier.

Looking at the overall impact of 2-tier benefits on a typical manufacturer, we can identify four broad improvement areas—revenue improvements, process costs reductions, inventory savings, and systems cost avoidance. Exhibit 3 gives the percentage improvements typically realized by the manufacturer in each of these areas.

The next level of benefits apply to the n-tier, which refers to multiple partners in a CPFR process. These can be multiple partners in one tier (for example, multiple manufacturers supplying a single retailer) or multiple tiers of partners—from a supplier all the way through to sale to the consumer. The n-tier also can involve the participation of a broader array of companies such as packaging or transportation service providers.

• Scaling of results. The downstream 2-tier benefits described above relate primarily to sales increases and inventory reductions. These scale proportionally to the amount of volume that is on CPFR. In other words, the more trading partners you have on CPFR, the greater the benefits that accrue not only to your company but also to your partners.
• Reaching critical mass. Certain of the labor- and capital-production smoothing benefits described above have a step-function, rather than a linear, relationship to cost reduction. That is, production lines or warehouses can't be reduced incrementally but only in "steps" when you have enough volume on CPFR to remove a complete warehouse or whole production lines from the system. This volume level is thought to be in the range of 40 to 60 percent of total volume.
• Applicability to other parts of the supply chain. The 2-tier benefits apply mainly to the manufacturer and the retailer. Based on early pilot results, however, there is reason to believe that the upstream benefits to the manufacturer and its suppliers will be equally significant. This extends all the way back to the raw materials suppliers.

Companies can estimate the magnitude of n-tier benefits for their company by using the n-tier CPFR Benefits Calculator, which is available through the Web site www.cpfr.org. All calculations included in the model are based on actual industry pilot-site data and reference those specific sites. Leading practitioners from the raw material supplier, manufacturer, and retailer communities all have vaildated the results of the model.

The n-tier model and calculater can be an important tool in demonstrating the value of CPFR. Armed with the hard data provided by the model, it is much easier to get management's buy-in and active support—two essential ingredients for any successful supply chain initiative.

Despite the proven benefits and the success of the latest pilot projects, CPFR has experienced something less than widespread adoption. Part of this has to do with education—or perhaps more accurately, the lack of education. A number of critics with little or no first-hand knowledge or experience of the process have attacked CPFR as either too complex or completely unrealistic. Yet, for the most part, these critics have never attended a CPFR committee meeting, never actively participated in a CPFR program, never spoken with companies that benefited from a CPFR initiative, and so on. Conversely we have had testimony by some of the largest companies in the world, endorsing CPFR and highlighting the opportunities and the benefits realized.

A related impediment to the growth of CPFR is the various myths surrounding its adoption. Seven, in particular, demand a closer look.

1. CPFR requires a major investment in technology.
   Not true; the technology can be as simple as e-mail and spread sheets. In some models, the retailer has simply opened up its system to its supplier, providing information that can be used to create a go-to-market plan. Many software companies have developed bolt-on collaboration features and functions that are modestly priced. In no way can the cost of CPFR be compared to the cost or challenges associated with an enterprise resource planning (ERP) installation. Moreover, many CPFR investments have had a payback period measured in months—not years.
2. CPFR is an administrative burden.
   Suppliers that have a substantial percentage of their total business on CPFR report only a minimal increase in headcount. Typically, what's involved is more of a reallocation of resources, as the sales and logistics teams are prepared for their new task of collaborating with customers. Sharing information to develop a sales/marketing and operational plan alleviates, if not eliminates, many of the organizational problems experienced in the past. Consequently, resources move from reactive roles to proactive, business-building activities.
3. CPFR requires point-of-sale (POS) information.
   Among those companies that have adopted CPFR, only a few large suppliers are using POS data to drive the process. All of the other programs are using information that is rolled up at the customer's distribution center. Though the use of POS information is desirable, it is not essential. POS does present the opportunity to react quickly to local market conditions. The problem is that most companies are not technologically capable of capturing good POS data, which means that the information is not reliable.
4. CPFR is not scaleable.
   CPFR is, in fact, scaleable when enabled by interoperable, standardized electronic communication and synchronized data. This is why major retailers such as Wal-Mart, Shaw's Supermarkets, Wegmans, and others have strongly endorsed the use of UCCnet, a product registry service. The need to share accurate and timely information is key to any successful business relationship and, when combined with CPFR, the results are exponential.
5. CPFR takes too much time and effort to implement.
   The time and effort expended depends on a number of factors including company culture, leadership, process capabilities, and level of supply chain sophistication. Companies with vendor- or joint-managed inventory programs already in place are well positioned to move forward with CPFR. Depending upon the chosen approach and the state of information architecture, the time to implement can be as little as two weeks. From two to eight weeks is a reasonable amount of time from the decision to move forward to implementation. It's true, though, that in some cases companies have spent as much as a year getting the CPFR program's elements fully in place.
6. CPFR is rigid.
   There is a nine-step CPFR framework, which was referenced earlier in the article. However, at no time has the CPFR committee suggested that all nine steps must be followed. There are many examples of companies that have used a variation of the model quite successfully. For example, some companies have chosen to compare forecasts and identify and resolve exceptions; others use only one forecasting system, either the suppliers' or the retailers'.
7. CPFR is a supply chain activity.
   CPFR is really more of a broad business initiative than it is a specific supply chain activity. That's evident in the first two steps of every CPFR program—establish a collaborative relationship and create a joint business plan. It's the blending of both demand and supply chains to bring full value to the consumer. CPFR is a holistic business approach that brings together trading partners and enablers—including brokers, third party providers, co-packers, and so on—to improve sales and operating efficiency.

Debunking these myths will require a collaborative educational effort that involves both the business and academic communities. To date, the VICS CPFR committee has borne the responsibility for education. It has developed white papers, guidelines, and other information that can be used in a CPFR implementation. (This material can be found on the CPFR Web site.) However, recognizing the critical importance of engaging the academic community to gain credibility for CPFR, the committee has invited educators to participate in developing the necessary educational material. As Professor Lee Schwarz of Purdue University pointed out to the committee members, distribution requirements planning (DRP) was accepted by the business community only after APICS engaged academics, and DRP was brought into the classroom. The goal here is to leverage the strengths of academia and business in a collaborative educational effort.

CPFR is going through the same kinds of growing pains as any new business practice that involves senior leadership understanding, organizational acceptance, and change. The lingering misunderstanding and misconceptions surrounding the concept are held mostly by those who have not taken the time or made the effort to understand CPFR and how it works. To be clear, CPFR is not a stand-alone program that is bolted onto an existing process. It is an attitude, a philosophy, and an approach that has to be woven into the very fabric of the company. It is a contributing part of an overall strategy that focuses on the customer and the various components of the supply chain.

We know that many senior managers are skeptical about CPFR. They are somewhere on the periphery, not knowing enough to make a judgment, yet having an opinion. In certain circumstances their gut instinct is right as CPFR may not be able to respond to a specific industry with the model that exists today. However, for those companies facing extinction from competitors that have stepped out of the accepted business model, alternatives like CPFR must be considered. CPFR is not going to rescue the dysfunctional, disorganized, or leaderless. But it can be the glue that brings together trading partners and enables them to compete in ways never before thought possible.

In addition to the hard quantifiable benefits outlined here, CPFR brings with it some some softer advantages such as a more amicable business relationship that opens new doors and opportunities for both sides. The adversarial positions that companies have taken in the past have stymied cooperation and kept them from reaching their sales and profit potential. CPFR provides the model they can use to embrace a new way of doing business to achieve that potential.

Every successful process requires a technology foundation that allows it to be implemented and taken to scale. CPFR will require the acceptance of standards that allow for the efficient and accurate exchange of information between trading partners. Machine-to-machine information exchange is critically important here—and the UCC and UCCnet have provided the models for success in this regard.

Collaborative planning, forecasting, and replenishment will not be for every company. It may require modification in order to accommodate certain industries, products, or services. However, a collaborative mindset will prevail. As we have learned, companies are more successful when silos are eliminated. All of this seems to point to a future where stand-alone supply chains will only be discussed in business history classes.