A Collaborative Approach

In the past, suppliers typically concentrated on the anticipated purchases of the retailer based on its go-to market strategy. However, time has shown that the retailers are largely inaccurate in performing these tasks adequately. So, the supplier tries to guess what the retailer will purchase while the retailer's inaccuracies trickle though the supply chain, amplifying what is known as the bullwhip effect (the phenomenon wherein minor variances in the supply chain closer to the consumer are exacerbated as you move up and away from the point where the variances occurred).

 

Supply chain approaches provide value in the current scheme of process improvements. Vendor Managed Inventory (VMI) was introduced to reduce the overhead of managing multiple products by the retailer and achieve a Pareto efficient relationship (Pareto efficiency in this context refers to the level of effort required to maintain the utilized methodology).

 

However, the focus on execution rather than planning failed to integrate the extended supply chain. At the same time, other approaches such as collaborative planning, forecasting and replenishment (CPFR) tried to improve supply chain collaboration but is extremely tedious to implement and not feasible in the retail industry due to the sheer number of products.

 

ENTER CDR
At the core of consumer-driven replenishment (CDR) is its reliance on consumer information such as POS or point-of-consumption data. This data is readily available at the stores of most retailers and is captured during the checkout process. CDR uses this as foundational data and applies advanced algorithms to generate a sales (consumption) forecast that includes market intelligence such as the effect of promotions, price changes, competitive pressures, store resets and remodels, weather changes, etc.

 

This demand signal is then netted out of onhand, in-transit and on-order information to generate a replenishment plan (for the long term) and a suggested order plan (for the short term) based on retailer ordering policies. The resulting production plan and stock transfers (distribution plan) are then utilized by the supplier to ensure that its DCs have the correct product to support orders from the retailer. At the same time, a suggested order (or recommended order) is passed on to the retailer for approval.

 

The retailer reviews any exceptions, resolves the exceptions and creates purchase orders that are sent back to the supplier. The majority of orders should go through unimpeded and be converted into purchase orders. Therefore, CDR allows a supplier to use retailer ordering parameters to model a replenishment plan through the extended supply chain wherein all stakeholders in the process -- the retailer and supplier -- are on the same page at all times, eliminating the bullwhip effect.

 

At the same time, since the supplier does most of the heavy lifting for the retailer, the effort of the retailer is limited to managing exceptions and ensuring integrity of promotional and order parameter data and measuring supplier performance. This process frees the retailer so that it can concentrate on activities that will really improve consumer demand in the long term, namely merchandising.

 

Since CDR involves a symbiotic relationship between the retailer and supplier, there is a benefit to both parties (see chart).

 

 

 

CDR IN ACTION
One in eight dress shirts sold in the United States is supplied by TAL Apparel Ltd., a Hong Kongbased textile manufacturer. Due to economic pressure, TAL has seen the price of its shirts fall almost 20 percent over five years as low-cost textile manufacturing exploded in China's Guangdong province.

 

Its distributor in the United States had two years worth of inventory that was going out of style. Major retailer JCPenney was holding nine months of inventory, twice what most competitors kept. Despite the large amount of inventory, stores ended up missing sales of hot-selling styles while holding less popular models that had to be sold at a discount.

 

TAL took the following approach to CDR:

• TAL operates its entire supply chain from its manufacturing plants to JCPenney's stores.
  
• TAL collects POS data directly from stores. The system directly links the manufacturer to the customer. TAL can respond instantly to changes in consumer demand, upping production if there is a spike or cutting it if there's a slump.
  
• TAL controls inventory management for Penney's stores, including control over orders.
  
• TAL creates the forecast at store level to drive store replenishment and manufacturing.

 

The value realized by both parties includes:

• Store-level inventory is down by 50 percent.
  
• TAL's planning system replaced JCPenney's ordering system.
  
• JCPenney's warehouses carry no inventory
  
• Hot-selling models are now restocked within a month.
  
• TAL is forming a joint venture with JCPenney to manage the supply chain of other suppliers.

 

IN CONCLUSION
The need for rapid response to consumer demand increases as retailers move toward a consumerfocused supply chain. CDR imparts incredible value to retailers and suppliers by virtually integrating their supply chains, providing seamless visibility of consumer-centered decisions in an economic model that minimizes the bullwhip effect. CG