Component shortages, raw material inflation, logistics capacity shortage and freight cost surge. … This is the world we are living in now.
That’s what makes up the so-called “supply chain gridlock.” It is impacting different industries in different magnitudes. But the common factor here is the fact that these supply constraints are straining manufacturers’ ability to maintain service levels across the breadth of often-complex portfolios. Not only that, but this instability of managing the supply chain inputs is also creating volatility in production and delivery schedules that grows in impact through each level of the supply chain.
The reality of the “supply chain gridlock” puts pressure on supply chain leaders to look for different strategies again and again and to redefine alternative approaches to manage their supply volatility. Many leading and mature organizations have focused their current efforts on building strong and structured collaborative relationships with their suppliers and logistics service providers.
Collaborative planning forecasting and replenishment (CPFR) is not a new concept. It has been there for quite some time, yet mostly adopted by retailers and CPG companies before. In recent years, however, the concept has been reapplied by several other industries given the established benefits that a collaborative framework would bring to both partners. CPFR provides a structured process to expose and mitigate supply risks and improve responsiveness to constraints.
Based on Gartner research, here are steps you can follow to build an effective CPFR process with your key suppliers to mitigate direct material constraints and supply risks:
1. First things first — Define who your key strategic suppliers are.
Segmenting your suppliers is a starting point to focus your efforts where they really matter. With hundreds, and sometimes, thousands of suppliers to manage, an effective supplier segmentation exercise is much more than a spend analysis. Ask yourself these three questions:
- “What is our revenue risk exposure with the supplier?”
- “How difficult is it to replace this supplier?”
- “Can we leverage the supplier’s capabilities to create a competitive advantage, and is the supplier willing to collaborate?”
Strategic suppliers are the ones who impose a high-risk exposure on volume/revenue, are complex to replace and have capabilities that can be leveraged to create competitive advantage.
2. Align on CPFR process scope and joint business objectives.
Before going ahead and implementing a CPFR process with your key suppliers, get clarity and alignment on the scope of the process. Agree on the expectations and the different metrics that will be tracked. Define the frequency of the reviews and who would be attending from each side. And, most importantly, align on the joint value that this process is intended to create and deliver for both you and your supplier. Examples could be lead time reduction, improved visibility, better risk mitigation, joint scenario planning and optimized inventories, etc.
3. Design the CPFR weekly and monthly process checkpoints and connects.
Typically, collaborative planning is a weekly process, with a formal monthly review involving the material planner, procurement, the supplier’s customer fulfilment planner and the account manager at the supplier end.
- Structure the weekly meeting to cover the short term and to enable actions and decisions needed to mitigate short-term risks. Examples of metrics covered in the weekly review are shipments schedule adherence, demand attainment and inventory projections (out-of-stock and excess) for the next 12 weeks.
- Structure the monthly meeting to cover the mid long term and to enable actions and decisions to mitigate mid-long-term risks. Examples of metrics covered in the monthly review are forecast accuracy, on-time deliveries, supply chain cost, transportation costs, lead-time adherence, inventory health and materials readiness for NPIs.
4. Integrate the outputs of the CPFR process into your S&OP and S&OE processes.
Once you are ready to embark on this journey of setting a strong and effective CPFR process together with your key suppliers, it’s crucial to ensure that the outcomes of this process are going to be fed into your core planning procedures. The more these outcomes are integrated into your planning processes, the higher the value you’ll get from the CPFR process. The figure below shows the five levers that help build this integration between your CPFR process and the core planning processes: S&OE and S&OP. The CPFR weekly cadence should feed into your S&OE meeting while the monthly cadence should feed into your S&OP process.
5. Run a regular health check on the effectiveness of the CPFR process.
Monitor the outcomes of the collaboration on an ongoing basis using the joint scorecard developed when the process was kicked off. The main objective is to validate that the intended value creation for both parties is being delivered. During this review, both parties agree to actions that ensure the sustainability of the relationship. Also, run health-check audits for the weekly and monthly CPFR connects, e.g., ensure the agenda points are covered, data is available, all attendees are in and expected meeting outputs or action items are achieved. With the above, implementing a CPFR process with key suppliers helps expose material risks, drives mitigation plans and actions and prioritizes decisions for the future.
Gartner Supply Chain