Demand collaboration makes such good sense. If demand information can be communicated throughout the entire supply chain, each trading partner would know how much product to have available and when. Less inventory would be needed as a hedge against uncertainty. Leadtimes could be shortened as less unneeded product would be made, freeing up production capacity. Sales would increase because the right amount of product would be available at the right points of consumption. As a result, all trading partners in the supply chain would reduce the cost of goods sold and increase their profits.

That's the potential, which has been validated by the relatively few companies that have successfully implemented demand collaboration processes. So why aren't more companies doing it? And of the companies that have attempted demand collaboration, why are many of them disappointed by the results?

Here are the most common reasons why demand collaboration has not realized its potential:

• The pace of adopting new ways of doing business is slow.
• Demand information supplied by customers is not put to use in trading partners' own demand, supply, logistics, and corporate planning in an integrated manner.
• Demand management and supply management processes are not integrated, and sales and operations planning is not utilized to synchronize demand and supply.
• Lack of trust among trading partners to share pertinent information and collaborate on decision making.
• The desire to partner but not commit to executing the communicated plans.
• A common view that demand collaboration is a technology solution and that the current technology is too complex.

Just because demand collaboration is not yet used widely does not mean that it is not worthwhile. The pace of adopting any new way of doing business is at work here. Case example: The earliest implementation of sales and operations planning occurred in the early 1980s. Widespread effort in implementing sales and operations planning did not occur until the mid-1990s. It takes a minimum of ten years, according to the authors' experience, for fundamental changes in business practices to become widely adopted. It takes another five to ten years for these changes to become a routine way of doing business for the majority of companies.

At this writing, the use of demand collaboration is in the early adopter phase. Innovators, like Procter & Gamble, Wal-Mart, Warner-Lambert, Kimberly Clark, Nabisco, Wegmans, and Sara Lee, proved that collaborating to plan demand and replenishment strips costs from the supply chain—for all trading partners' financial benefit. Now early adopters are following the leadership of these pioneers.

Some of the earliest efforts in demand collaboration have occurred in the consumer goods industry. Wal-Mart pioneered the effort. Two of its supply chain executives, Robert Bruce and Ron Ireland, first articulated the process of collaborative forecasting and replenishment and worked to develop industry-wide interest in the process. Based on early experiences with the process, a consumer goods industry guideline, called CPFR—collaborative planning, forecasting, and replenishment—was adopted in 1996 by the Voluntary Interindustry Commerce Standards (VICS) Association. The guideline promotes best practices and helps companies avoid pitfalls that the pioneers encountered in implementing collaborative trading-partner relationships.

The success of demand collaboration and the more extensive collaborative planning, forecasting, and replenishment process hinges on sharing demand information. Demand drives the value chain. When demand information is visible throughout the value chain, it reduces uncertainty about the volume and timing of demand. With less uncertainty, order quantities throughout the value chain more closely resemble true demand. There is less need for tactics, like safety stock, as a hedge against the unknown, which in turn reduces the costly bullwhip effect throughout the supply chain.

The bullwhip effect (see Exhibit 1) occurs when each trading partner along the value chain places orders against uncertainty and the unknown. The volume of the orders is typically amplified at each trading partner point along the supply chain. The largest distortion of demand usually occurs with trading partners that are the farthest removed from the end user or consumer. These trading partners typically have the least visibility of true demand.¹

With the bullwhip effect, the ordering of unneeded product and material creates a buildup of inventory throughout the supply chain. The retail industry alone is estimated to be carrying $1.1 trillion in inventory against retail sales of $3.2 trillion, according to a study based on U.S. Commerce Department sales and inventory reports.²

One objective of demand collaboration is to dampen the bullwhip effect and strip inventory from the supply chain. The fundamental principle is to substitute demand information for inventory (see Exhibit 2). Early implementers of CPFR in Europe showed this was possible. Companies piloting CPFR in Europe reduced inventory 30–50 percent and cut supply chain costs 15–25 percent—without sacrificing customer service. Customer service actually improved by 5–10 percent.³

Increased sales is another benefit from dampening the bullwhip effect. Pilot efforts in CPFR have shown a 5–20 percent gain in sales. Wal-Mart and Warner Lambert's CPFR pilot implementation, for example, resulted in an $8.5 million increase in Listerine sales.⁴

Despite this potential, most companies have not been beating down the door to collaborate with their customers. According to one survey, only 41 percent of consumer goods companies and 25 percent of retailers indicated they would implement any part of CPFR by 2003.⁵ This lack of momentum has left some retailers frustrated to the point of mandating that their major suppliers implement the VICS CPFR guidelines by a certain date in the future.

Suppliers argue—and sometimes rightfully so—that the approach of their customers in a demand collaboration relationship is not win-win. Some suppliers, in fact, say that their customers' philosophy is, in the words of CPFR pioneer Ron Ireland: "I win, and you'll have to figure out how to win on your own." The major points of dissension between customer and supplier are:

• When a customer has spent the time and resources to communicate demand information to its suppliers, it expects product to be available when it said it wanted it.
• Suppliers contend that customers communicate demand information but then do not buy in the volume and timing that was communicated, leaving the supplier on the hook for the inventory or to absorb the additional costs in filling last-minute orders of unplanned demand.

Both parties are correct. The solution, however, is not to throw the baby out with the bath water. Rather, both parties require a more formalized approach to the trading partner relationship that defines the operating rules or parameters and mutual expectations.

The most successful demand collaboration relationships are not brokered at the buyer-salesperson level but at the senior executive level of the trading partner organizations. Case in point: H.J. Heinz Ltd. in Canada and Oshawa Foods developed one of the earliest (successful) collaborative relationships in the mid-1990s. The senior executives of both companies championed the collaboration effort. Prior to collaborating, they met to agree on:

• The vision of how a collaborative effort would benefit both companies.
• The expectations of each company in a trading partner relationship.
• The demand and inventory information that needed to be communicated and how it would be acted upon.
• The execution performance required to ensure that both companies would achieve the desired financial gains.

Managers of the sales, marketing, purchasing, distribution, and supply chain functions in both companies were assigned to implement the agreement. The financial managers reported the financial results, and key functional managers reviewed the operational and financial performance measures every month. The company presidents met periodically to review the results and address issues that threatened the success of the relationship.

This approach, as depicted in Exhibit 3, gave the collaborative effort a business focus, rather than a transaction focus. Decisions were based on operational effectiveness and what was needed to enable both companies to strengthen their financial performance. This is a best practice for developing trading partner relationships for demand collaboration.

Once a trading partnership for demand collaboration is agreed upon, all too often companies leap into designing the transaction—the act of trading information—rather than developing the demand management process for the collaborative environment. Demand collaboration, in actuality, is an extension of the demand-management process—outside the walls of a single business entity. As such, the basic principles of demand management still apply and, in fact, are essential to partnering effectively. The fundamental elements of demand planning must be in place—and operating well—in a demand-collaboration process. Those elements are planning, communicating, influencing, and prioritizing, and managing demand. The principles and best practices of these elements are just as important in a demand collaboration process as in a company's internal demand-management process.

The demand-management process for any trading partner is enhanced by regularly and routinely receiving information on customer and end-user or consumer demand. Wal-Mart fostered frequent access to demand information by giving the information to their suppliers rather than expecting suppliers to buy the information from services like A.C. Neilson. Wal-Mart's founder Sam Walton explained his company's philosophy on sharing information with trading partners in his autobiography: "Communicate everything you possibly can to your partners. The more they know, the more they'll understand. The more they understand, the more they'll care. Once they care, there's no stopping them."⁶

When customers make visible demand information, it in turn fosters improved communications between trading partners. With better communications, companies begin to collaborate on influencing demand. Together, they develop marketing strategies and tactics to stimulate greater demand and more profitable sales. Done well, a demand management process drives companies—jointly and individually—to improve and enhance their marketing effort.

At a minimum, demand collaboration provides suppliers with another view for their demand planning process, as shown in Exhibit 4. One of the key questions to address in establishing a trading partnership for demand collaboration is: What customer and end-user or consumer information will be useful for the supplier? Care must be taken not to overwhelm the process with information but to communicate vital information that is pertinent to good judgment and decision making. Useful information communicated by customers typically includes:

• Item-level demand plan for the short term and the assumptions upon which the plan is based.
• Aggregate demand plan over the longer term and the assumptions upon which the plan is based.
• Sales history, including end-user or consumer sales data.
• Planned promotions, pricing changes, and other activities that will influence the timing and volume of demand in the future.
• Current inventory by location.
• Desired inventory levels by location.

Demand information communicated by customers should not be taken at face value. It should be treated as another perspective of demand and another input in developing a consensus plan. 3M of Post-It Note fame established one of the earliest demand collaboration processes in the late 1980s. When 3M's demand manager consolidated the demand plans from all of its customers for a particular product, he found that the combined plans equated to more than 200 percent of the total market potential. This experience reinforces the need for suppliers to look beyond individual trading partners and develop a composite picture of demand based on customer, sales, marketing, and brand/product management input. This is a best practice.

Customer demand information requires evaluation and analysis to put it in the proper business context. Correlation of the customer's end-user or consumer point-of-sale data with the supplier's sales history to the customer can be quite informative. It causes companies to re-evaluate their marketing and sales tactics and better understand end-user or consumer buying behavior, as the case example in Exhibit 5 illustrates.

A client in the consumer-goods industry compared its customer sales to consumer point-of-sales data. Sales to customers rarely coincided with sales to consumers. In determining the reasons for the spikes in sales, it became obvious that the supplier's marketing tactics were at cross-purposes with good business sense. Most of the spikes, followed by steep declines, in customer sales were caused by the supplier loading customers with product at a discounted price to meet mid-year and year-end sales revenue goals. The announcement of price increases also caused a less severe peak in demand as customers opted to buy product early to obtain the lower price.

Loading and price-discounting practices are the antithesis of effective demand management and supply chain management. These practices cause both supplier and customer to consume capital needlessly. In the case example above, the supplier had to invest in material and production before it was really needed. Customers were enticed to spend early and incur costs to warehouse and manage inventory.

Discipline and managing for the long-term financial health of trading partners—rather than for short-term gains—are required among partners. By sharing demand information and having the discipline to eliminate or marginalize the bullwhip effect, trading partners require less capital to operate their businesses. This is where the true win-win is realized from demand collaboration.

With demand collaboration, selling relationships and marketing tactics change. A study, conducted jointly by Canada's grocery-related trade organizations, focused on continuous replenishment practices and trading partner relationships. The practitioners, who conducted the study, predicted in a report on their findings: "The most attractive merchandise strategies and tactics will be driven by valid information. Information itself, such as on-hand inventory balances, order schedules, point-of-sale data, and forecasts, will become sought-after commodities."⁷

The value proposition between trading partners should change with demand collaboration. When a customer provides valid and reliable demand information to a trading partner, this information has the potential to reduce costs for the trading partner. When a customer does not provide demand information to a trading partner, the trading partner's costs are usually higher because of the need to build safety stock against demand uncertainty and to respond to last minute, unanticipated orders. Thus, the pricing for customers should not necessarily be the same.

Many suppliers complain, however, that customers who provide demand information do not order what they communicate in their forecasts. Thus, suppliers do not realize the benefits from demand collaboration. One approach to resolving this problem is agreeing on when demand information represents a commitment to buy and when demand information is provided as future guidance only. This agreement can be based on a time-zone and decision-point approach as shown in Exhibit 6.

Using this approach, the customer and supplier agree on the time horizon when the communicated demand plan or forecast is an order. In the example shown in Exhibit 6, this time zone is 0–3 weeks. For this time horizon, the customer agrees to communicate an order plan by quantities and daily timing for delivery. In weeks 4–16 in the planning horizon, the customer agrees to communicate quantities for delivery each week. The customer commits to ordering the volume in this time zone but has flexibility to change the timing of the delivery. Beyond four months, the demand plan or forecast is for guidance purposes only and does not represent a commitment to buy.

The time zones and decision points that are agreed upon will vary company-by-company and industry-by-industry. The time zones are dependent upon customer and supplier leadtimes as well as the degree of flexibility desired by both trading partners. Time-zone parameters typically can be negotiated between the supplier's selling organization and the customer's purchasing organization. The agreement, however, should be approved by the trading partners' senior executive teams so that both companies' leadership teams understand and support the commitment. This is a best practice.

In the authors' opinion, the majority of suppliers will not embrace demand collaboration until their customers commit to buying what they forecast over some agreed-upon planning horizon. Suppliers require demand stability—at least over the short term—to optimize their production and procurement processes. This stability is the basis for the supplier to gain financial benefits from demand collaboration. Without a commitment from customers to create some form of demand-plan stability, suppliers will remain reluctant to commit to a process that is not truly win-win in nature.

One of the criticisms of current demand-collaboration practices is the short-term focus. As discussed throughout our book, a longer-term planning horizon has many virtues. Chief among the virtues is the ability to respond economically to demand. A planning structure based upon time zones creates a longer-term focus and injects greater stability into the demand plan.... As Ernest R. Lazor, chief information officer at Prestone Products Corp., observes: "If everybody can agree on a forecast and stick to it, you don't have to be changing your production schedules back and forth. That's the way to get better margins."⁸

To agree on a forecast and stick to it requires communication between trading partners. The customer may communicate a forecast or demand plan, which upon review by the supplier may be questionable. Some demand collaboration software applications have a feature that automatically alerts the supplier when customer forecasts are over or under a pre-established tolerance. In CPFR parlance, this is called error checking.

The customer and supplier must have the ability to clarify, review, and challenge one another's assumptions. These discussions improve the accuracy of the demand plan. Companies that collaborate on demand have seen improvements in demand-plan accuracy. According to a study by AMR Research, 35 percent of customers and 20 percent of suppliers reported improved forecast accuracy as a result of demand collaboration.⁹

Another way to improve the accuracy of collaborative demand plans is to update the plans at least monthly and more frequently as needed. As companies develop more automated customer-supplier linkages, the frequency of update becomes at least weekly and in many cases daily. This brings suppliers closer to real-time updates of demand.

A shortcoming cited in the AMR Research study was that both buyer and seller organizations operate from different forecast numbers that are updated at inconsistent times. For example, customer and supplier organizations may both employ people to collaborate on forecasts that are updated weekly. These forecasts, which tend to focus on the short term, are usually not communicated to other pertinent functions within each organization, such as the supplier's sales organization and demand manager or the customer's purchasing management. These functions operate with different forecasts of demand.

Some people involved in the weekly forecasting process between trading partners claim that they attempt to communicate the updated demand plan to their respective organizations. The plans are not integrated into their companies' planning processes, however. Whichever the case, companies end up operating with multiple demand forecasts or plans, which is counterproductive to achieving financial benefits from demand collaboration. Reaching consensus on a single demand plan that is used by both the customer and supplier organizations to drive supply management and financial planning is a best practice. Internalizing that demand plan inside the supplier organization is one of the purposes of sales and operations planning.¹⁰

Trust is at issue here. Today, demand plans communicated between trading partners are usually just numbers. The assumptions that explain the numbers are either communicated sporadically or not at all. As a result, the demand plans are not well understood and thus lack credibility. The adoption of demand-planning best practices, including communicating assumptions, by both customer and supplier helps to overcome the trust issue.

At the heart of the trust issue is credibility. From the supplier's point of view, its trading partner's credibility erodes when it does not buy what was in the forecast. From the customer's point of view, its trading partner's credibility erodes when orders are not delivered on time and in the requested volume.

To regularly and routinely fulfill customer orders on time, suppliers' own internal supply chain management processes must operate effectively. An integrated business management process is needed as well. An AMR Research study¹¹ cites four critical success factors for demand collaboration:

• An integrated forecast (demand planning) organization.
• Single number demand planning process.
• Formal sales and operations planning process.
• Performance measurements.

Many supplier companies opt to get their own internal house in order before embarking on demand collaboration. This involves implementing best practices for demand management and an integrated business management review, known as sales and operations planning, for synchronizing supply and demand on a monthly basis. Improving internal operational competence also involves operating supply chain management processes, such as enterprise resource planning and distribution resource planning, at best practice levels. The Oliver Wight Companies publishes an industry-recognized standard, The Oliver Wight ABCD Checklist for Operational Excellence, which is widely used to assess companies' performance to these best-practice standards.¹²

As suppliers become better prepared for demand collaboration, the question becomes: Should we partner with selected customers or all of our customers? Our recommendation is to pilot first with your most forgiving customers, then extend out to strategic customers where partnering has the best opportunity to increase sales and reduce supply chain costs.

Procter & Gamble has demonstrated that partnering with Wal-Mart, a strategic customer, pays big dividends. Procter & Gamble increased sales to Wal-Mart from $350 million in 1988 to an estimated $4 billion in 1999 while tripling product turns in Wal-Mart stores, according to industry experts.¹³ Procter & Gamble's path to partnering with Wal-Mart began by developing best practices for demand management, sales and operations planning, enterprise resource planning, and distribution resource planning. These capabilities created the backbone of Procter & Gamble's success.

As trading partners build greater credibility with one another, they are in a position to determine who in the supply chain has the best demand-planning capability. Enough trust will have been developed to allow that party to generate the demand plan. This does not mean that the other trading partners relinquish their demand-planning role. They will still need to communicate sales and marketing assumptions and end-user or consumer point-of-sale information. The level of detail that they communicate will be simplified, however.

Collaboration will still be required, and communication will remain essential to fine-tune the demand plan day-to-day, week-to-week, month-to-month, and year-to-year. These communications, even with the aid of technology, will be people-to-people oriented. The challenge is to ensure that the right people are talking to create an effective collaboration process.

Technology certainly facilitates the exchange of demand information between trading partners. Sophisticated computer software, however, is not a prerequisite for demand collaboration. Many companies exchange information via fax, e-mail messages, and electronic data interchange.

One of the most common criticisms of the current technology for demand collaboration is its complexity. Many technology providers have patterned their software applications after the VICS-CPFR guideline. Many users, however, are looking for simple, uncomplicated technology solutions, according to an AMR Research study.¹⁴

Just as demand collaboration practices will evolve over time, so too will the software applications that support these practices. While technology is not essential to support demand collaboration, it becomes more critical when a company desires to collaborate with a large number of trading partners and a large number of SKUs or part numbers. An automated tool is needed to facilitate the exchange of demand, inventory, and replenishment information in a timely manner.

Twenty years from now, demand collaboration will be commonplace, just as consensus demand planning and sales and operations planning are becoming commonplace in industry today. What is taking place today with demand collaboration is a natural phase of the evolution of any new way of doing business. It starts with understanding the potential and recognizing why this potential is beneficial. Then, business process models are developed, tried, and refined, and technology is created to support the new business processes. This is all taking place today and heralds a new dimension for demand management, the most attractive value propositions, and how trading partners work together to generate sales and profits.