IBM Global Business Services

Executive brief

Consumer electronics and office equipment

Enabling CPFR with SOA: a flexible, scalable solution for collaborative supply chains.

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2 RealizingthepromiseofVMIandCPFR

3 Thecollaborationchallenge

4 Theneedforflexibilityandscalability

4 SOA-enabledCPFR

6 Improvingalignmentofsupplyanddemand

8 TheIBMGlobalBusinessServicesadvantage

Realizing the promise of VMI and CPFRConsumer electronics and office equipment companies

must react quickly to volatile supply and demand conditions.

Rapid changes in technology compress product lifecycles.

Many products last less than a year, with production cycles

of only three months. Consumers have their pick of a large

variety of new and existing products that are being aggres-

sively marketed. It’s difficult to predict what they will choose

to buy. Frequent retailer and manufacturer promotions disrupt

buying patterns and put downward pressure on prices. Poor

forecast accuracy can lead to excess inventory or write-offs.

Or it can lead to stock-outs, resulting in lost sales and poor

customer service. Adding to the uncertainty is accelerating

growth in the Asia-Pacific region. This growth extends and

strains supply chains, which can affect delivery reliability

and increase risks.

To achieve success in this kind of environment, all members of

the supply chain need visibility into current and future events,

along with the means to work together to solve problems and

deal with delivery constraints as they arise. Therefore, it’s not

surprising that retailers and original equipment manufacturers

(OEMs) have been cooperating for years on programs such as

vendor-managed inventory (VMI) and Collaborative Planning,

Forecasting and Replenishment (CPFR).

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Since the publication of the Voluntary Interindustry Commerce

Standards (VICS) Association guidelines for CPFR in 1998,

hundreds of companies have implemented the process to some

extent. In CPFR initiatives, retailers and manufacturers combine

their intelligence to predict demand and align supply by:

Sharing retail point-of-sale forecasts and information about

product introductions, promotions, inventories, supply chain

capabilities and planned replenishment

Identifying exception conditions that require collaboration—

situations in which predefined supply chain tolerances and

thresholds are exceeded

Agreeing on plan adjustments to resolve exceptions

Evaluating key performance metrics.

There’s little doubt about CPFR program benefits. Numer-

ous case studies of CPFR projects show in-stock percentage

improvements for products in stores, accompanied by signifi-

cant channel inventory reductions.

Despite the success of CPFR initiatives, the reality is that

CPFR adoption rates have been slower than expected. Aside

from the obvious reluctance to share data, technological

barriers have delayed CPFR rollout for many companies. A

major hurdle to using CPFR on a larger scale has been find-

ing an easy and cost-effective way to pass agreed-on data

automatically and securely between disparate systems and

to enable collaboration within and among organizations. This

brief describes the technology issues and highlights how IBM

can help OEMs overcome these challenges with a service-

oriented architecture (SOA) and Web services approach to

Internet-based VMI and CPFR.

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The collaboration challengeReal-time collaboration is critical to the sales and operations

planning (S&OP) process in consumer electronics. Planning

time has shrunk from quarterly and monthly cycles to weekly

updates based on daily monitoring of operations that can

span three continents.

Suppliers

OEMheadquarters

Japanfactory

Mexicofactory

Irelandfactory Retailers

Contractmanufacturers

Contractsuppliers

Logisticscompanies

Other serviceproviders OEM DCs

Customer DCs

Consumers

Customerheadquarters

Figure 1: When rapid response is critical, collaboration among organizational facilities and with supplier, partner and customer systems must be automatic and event driven.

S&OP requires rapid coordination between every part of the

business as well as with the retailer, component suppliers,

contract manufacturers, logistics and other service companies.

Information across systems must flow just as quickly as it does

across organizational boundaries.

Yet many current VMI and CPFR programs lack the fully auto-

mated, event-driven processes that enable timely collaboration

on forecasts, demand plans and supply chain events. Even

inside the four walls of the enterprise, disparate technologies

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can make it difficult to communicate at the same pace that

business information changes. Most OEMs rely on multiple

departmental systems and technologies. It’s enough of a

challenge to automate shared processes among the siloed

groups involved in the S&OP process—sales and market-

ing, procurement, manufacturing and logistics—let alone to

extend collaborative processes to all involved players exter-

nal to the organization.

Without automation, cross-enterprise collaboration is ham-

pered by inaccurate and dated information. Lacking reliable

replenishment information, retailers pad sales forecasts to

increase allocation of constrained products. In the absence

of a commitment process for suppliers, the order process is

not really collaborative. And, without good planning tools, it’s

hard to use information from consensus forecasts effectively.

The need for flexibility and scalabilityWith early CPFR initiatives, the partner requesting the pro-

gram (most often the retailer) frequently specified the enabling

technology, usually a proprietary solution. It became clear

that—if each new CPFR program involved implementation,

integration and maintenance of incompatible systems—the

IT complexity and support costs for the OEM organization

would increase exponentially.

To address this challenge, in June 2001 a VICS working

committee released an eXtensible Markup Language (XML)

specification to serve as a basis for standardization. Although

a promising first step, this move to standardization did not

address CPFR program flexibility and scalability.

Accelerating the CPFR adoption process first requires CPFR

interoperability—where during any peer-to-peer collaboration,

one trading partner can use his or her CPFR application and

the other trading partner can use another. These disparate

applications should be able to work on privately hosted net-

works, public exchanges or the Internet.

In addition, the OEM must be able to leverage its existing CPFR

applications to quickly implement new initiatives with additional

supply chain partners and also be able to adapt the applica-

tions as individual partner relationships evolve.

SOA-enabled CPFRIBM Global Services offers an SOA-enabled solution that

provides the interoperability, standardization, flexibility and

scalability necessary to help you realize the full benefits of

VMI and CPFR. Software decisions to support CPFR no longer

need to be dictated by internal systems and the technologies

your trading partners have in place. And CPFR implementations

needn’t be limited to one-on-one projects.

Essentially, the IBM solution provides four Web services built

on an SOA platform:

Statistical forecasting service—to generate a baseline

forecast

Forecast collaboration service—to generate a consensus

forecast

Inventory and replenishment analysis service—to generate

a baseline replenishment plan

Replenishment planning collaboration service—to generate

a consensus replenishment plan

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Retailers

Manufacturers

System

Create joint VMIbusiness plan Plan demand

Plan supply and develop replenishment plan

Develop master

agreement

ManufacturerPOS/dataanalysis

Adjust sell-throughforecast

Prepare forsell-through

collaboration

Generatereplenishment

plan

RetailerPOS/dataanalysis

Sell-throughcollaboration

call andgenerate

sell-throughconsensus

forecast

Replenishmentplan

collaboration

Prepare forreplenishmentcollaboration

Generatestatistical

sell-throughforecast (daily)

Createjoint

businessplan

Gatherdata

IBM Global Business Services process management solutions

CPFR/VMI solution scope

Figure 2: The IBM solution enables key capabilities in your S&OP process to be packaged into SOA services and quickly implemented.

The IBM solution combines SOA and Web services for optimal

benefit. Recently, there’s been some confusion in the business

world about these two elements. You can have one without the

other, but it’s best to have both. SOA offers flexibility through

componentization. But without common connections, you’re lim-

ited in how far you can extend components and the composite

applications. Web services offer standardization and interoper-

ability to enable access to components and applications from

the widest range of user devices, but you first need to have

capabilities to extend. With SOA and Web services together,

you have the optimal IT flexibility and responsiveness to support

your changing business.

The IBM solution enables key capabilities in your S&OP process

to be packaged into SOA services and quickly implemented—

allowing rapid integration to multiple systems and business

partners. You can combine and reuse prebuilt service compo-

nents to quickly develop and deploy collaborative applications

in response to marketplace conditions. Essentially, you elimi-

nate the need for duplicate CPFR systems. You’re able to:

Speed execution on CPFR agreements by building collab-

orative capabilities once and then leveraging them to speed

execution on CPFR agreements with new trading partners

Offer new services to your customers without having to

worry about the underlying IT infrastructure

Improve alignment of the CPFR business process with

actual operations.

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The IBM collaboration platform is role based with security-

enhanced sign-on. Your partners and customers can only see

their own information, helping to foster trust-based relationships.

And because of the modular design, you have maximum

flexibility to determine the scope of the solution. You’re able

to pick and choose the components you want to implement.

You can even outsource selected services to IBM Global

Business Services.

For example, one IBM client in the electronics industry did

not want to do advanced statistical forecasting. IBM man-

ages that step by generating a statistical baseline forecast

as the starting point of this company’s weekly S&OP pro-

cess. Using information from point-of-sale (POS) systems

and promotion plans, IBM creates a forecast baseline that

is used by the electronics company in its collaboration with

retail partners. Once the collaborative forecast is agreed

upon, IBM generates the detailed replenishment plan. This

arrangement has allowed the electronics company to focus

on relationship management with its retailers. The average

forecast accuracy for products four weeks out has risen from

50 percent to approximately 90 percent at the retail partner

distribution center (DC) level of measurement.

Improving alignment of supply and demandThe IBM solution is designed to provide consumer electron-

ics and office equipment companies with a proactive demand

management process using business levers such as pric-

ing, promotions, inventory targets and supply allocations. It

integrates proprietary IBM Research analytics engines with

collaboration and exception management services to offer

end-to-end CPFR and VMI capabilities. The solution was

developed using Java™ technology and is exposed as a Web

service for integration with business processes. The collabo-

ration platform is event driven for improved coordination with

suppliers, partners and retailers. You’re able to detect market-

place changes more rapidly, create synchronized plans and

effectively execute those plans.

Consensus-basedforecasting

The IBM SOA-enabled CPFR process starts with retrieving the

POS data. You use the POS and master data in the forecast

analytics engine to establish a baseline forecast. Developed

by IBM Research, this analytics engine is among the best in

the industry. It helps you to:

Deal with partially known demand by combining an infla-

tor algorithm and an autoregressive forecasting model with

partially known demand

Correct for quarterly order skew, seasonality and repetitive

order trends

Estimate volumes accurately during product transitions by

analyzing short-term trends

Accommodate promotional events within the forecasting

process

Forecast demand at multiple levels in the product hierarchy.

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Once a baseline OEM forecast is generated, it is sent out to

every player via the collaboration portal. An exception alert is

generated if there is a mismatch between the OEM and retail

partner forecasts. Alerts are based on predefined business

rules. For example, if a retailer’s forecast falls ten percent

outside the baseline, then an exception notice can be sent

via e-mail to those in each organization who are responsible

for addressing any discrepancies. The OEM scheduler and

individual partner staff are then able to collaborate through an

enterprise portal to agree on a consensus forecast.

POSdata

RetrievePOS data

Develop baselineforecast data

E-mailnotification

OEM scheduler Forecastanalytics engine

Baselineforecast

OEM schedulerand partner staff OEM scheduler

Consensusforecast

Consensusforecast

Forecast

Collaborate onforecast

Record consensusforecast

Figure 3: The IBM analytics engine solution for building consensus forecasts can help organizations improve forecast accuracy, decreasing the incidence of stock-outs for more flexible, responsive service.

Synchronizedreplenishment

When complete, the consensus forecast is used to calcu-

late the baseline replenishment plan. The IBM inventory and

replenishment analytics engine calculates the reorder points

and buy recommendation. The OEM scheduler is automati-

cally notified if there is a mismatch between the OEM and

partner replenishment plans and can pass the alert on to his

or her counterpart in the supply partner organization via the

enterprise portal. Using the portal, the parties are able to col-

laborate on changes to quickly resolve plan discrepancies.

Developed at IBM Research in collaboration with the University

of Michigan, the IBM inventory and replenishment analysis

engine helps you generate optimized safety stock recom-

mendations. Unlike other planning engines, the stochastic

dynamic IBM programming framework takes into account the

risks of structured supply contracts when they involve price

protection. You reduce the risk of markdowns with the ability to

use parameters for the price protection horizon and price ero-

sion costs, together with such traditional criteria as inventory

carrying costs, customer service levels and replenishment

lead time, to generate optimal buy decisions.

For example, an electronics OEM promises retailers that,

should a price drop occur while they are holding inventory,

it will provide a refund to cover the difference. To minimize

risk, the OEM is able to collaborate with retailers to effectively

balance service levels with inventory carrying costs and price

erosion expenses. A 99 percent service level may be fine for

a new product in high demand, but as the product gets older,

retailers may be willing to accept a much lower service level

(say 90 percent) to minimize inventory carrying costs.

Collaborate onreplenishment plan

Record consensusreplenishment plan

E-mailnotification

Baselinereplenishment

plan

Consensusreplenishment

plan

Calculate reorderpoints and buy

recommendations

Inventoryanalytics engine

Consensusreplenishment

plan

OEM schedulerand partner staff OEM scheduler

Consensusforecast

Inventory/replenish-

ment

Figure 4: The IBM analytic engine solution for exception-based, event-driven inventory and replenishment planning can help organizations decrease the costs associated with price erosion, lower the level of channel inventory and improve service levels.

The IBM Global Business Services advantageIBM is ideally equipped to help electronics companies implement state of the art

CPFR and VMI processes and SOA. It provides a full spectrum of service options,

from business process transformation to CPFR solution design, implementation and

management. Optimum business value is obtained by proceeding through each

phase in a continuous process.

AssessingtheeffectivenessofyourVMIandCPFRprocess

IBM Business Process Transformation Services helps you define the scope of your

solution by identifying how business process transformation with SOA can help you

meet your supply chain collaboration objectives. It helps foster alignment of business

and IT; prevent costly missteps; and identify and simplify implementation of the sup-

porting technology.

ImplementingtheIBMSOA-enabledsolution

IBM Implementation Services for SOA-based Business Services can help you build

and deploy the SOA and associated Web forecasting and replenishment services on

an enterprise service bus. Because all services are designed to work together and

integrate with your enterprise resource planning systems, you can pick and choose

the components you want to include in the solution. You decide whether you want

just the forecasting capability, the replenishment planning engine or the collaborative

platforms. Or you can use the whole thing. Whatever the scope of the solution, IBM

can help you get up and running quickly.

ManagingyourVMIandCPFRsolution

You also have flexibility in how you manage the IBM solution. If you decide to outsource

any or all of the capabilities, IBM Management Services for SOA-based Business

Services can host your SOA services. IBM provides ongoing performance monitor-

ing and verifies that the SOA meets your specified business needs.

For more informationTo learn more about how IBM can help you enhance your CPFR and VMI processes, visit:

ibm.com/industries/electronics/cpfr

About the authors

Paul Brody is a partner with IBM Global Business Services. He brings a decade of

consulting experience to the position as the global leader of the electronics industry

strategy practice.

Henry Dao is a senior managing consultant in the supply chain strategy practice in

IBM Global Business Services.

© Copyright IBM Corporation 2007

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