The Supply Chain Challenge:

1. Systematic Collaboration in the Supply Chain -Planning, Forecasting, and Replenishment Ram ViswanathanErnst & Young LLP, St.Louisram.viswanathan@ey.com(314) 259-1823

2. The Supply Chain Challenge: “To ensure that all operations are customer focused, with minimal duplication of effort, and continuous improvement” Manufacturing Requirements Retailer/Wholesaler Requirements Consumer Requirements …via manufacturing planning and purchasing …to manufacturer’s suppliers …through manufacturing …and distribution …to retailers/wholesalers …and end consumers …from product development/ design raw material finished goods finished goods finished goods work in progress finished goods replenish-ment orders sub and final assembly orders replenish- ment orders production orders point of sale develop- ment orders procure-ment orders factory orders planning orders retailer orders mfr. retailer consumer Retailer Forecast Manufacturer Forecast

3. 8.2 6.5 3.4 3.1 Industry “Supply Chain” IssuesOut of Stocks Translate into 3.1% Loss in Sales to Retailer “This does not take into account other intended purchases lost at time of the visit” Source: Retailer Operating Data, Prism Partner Store Audits, Coca Cola Retail Council Independent Study, 1996

4. Industry “Supply Chain” IssuesOut-of-Stocks result in 4-5% Loss in Sales to Manufacturer 8.2 6.5 1.5 “This does not take into account other intended purchases lost at time of the visit” 5.0 Source: Retailer Operating Data, Prism Partner Store Audits, Coca Cola Retail Council Independent Study, 1996

5. Industry “Supply Chain” Issues • Manufacturer and retailer forecasts are not integrated • Sales history used as a predictor for future demand. • Forecast do not include future planning and set programs. • Manufacturers are not building to retailer/consumer demand. • Forecasting of promotional, seasonal, and new item remain a critical issue. • Collaboration occurs most often after the initial order is placed • Category Buyer, Replenishment Buyer, and Forecast Analyst at retailer do not communicate all forecasting factors to each other. • Reengineering to category “intra” teams needed to be effective • Marketing, Sales, and Production Planners at Manufacturer do not communicate all forecasting factors to each other. • In VMI/CRP relationships focus is on the DC instock versus store instock where true consumer demand is.

6. Industry “Supply Chain” Issues Forecasting a key Cause of Out of Stocks on Warehouse Supplied Items Store Personnel Unaware of Current/Potential OOS Condition - Did Not Order Item Replenishment From Warehouse Backroom/Display Inventory Not Restocked To Shelf Shelf Capacity Inadequate Promotion Forecasting and Ordering Source: Retailer Operating Data, Prism Partner Store Audits, Coca Cola Retail Council Independent Study, 1996

7. Collaborative Planning, Forecasting and Replenishment Initiative • Historical Background • Origin in late ‘96 under Dynamic Information Sharing subcommittee of Merchants Issues Group of VICS, using results from an earlier manual effort under the CFAR name • The Wal-Mart/Lucent/Sara Lee prototype demonstrated a model for systematic collaboration in the forecasting process • Formalization and publication of the process models and the technology framework completed in Jan 1998 • Pilots support DIS’s mission - to improve partnership between retailers and suppliers through shared information • Pilots demonstrate process viability, technology viability and business case for enhanced information sharing

8. Goals and Objectives • Overall Goal • Design, prototype, pilot and implement processes and systems for collaborative forecasting • Objectives • Support the definition of process models for sales and order forecasting • Design the application, data and communication architecture for collaborative forecasting processes • Construct and test the applications for collaborative forecasting • Integrate the collaborative applications with backend forecasting and replenishment systems

9. CPFRInitiative Participants Apparel Group Benchmarking Partners Inc. Corning Consumer Products DAMA Project Ernst & Young LLP Federated Department Stores Fieldcrest Cannon Goody’s Family Clothing Hewlett Packard JC Penney Johnson & Johnson Kimberly-Clark Kmart Levi Strauss & Co. Lucent Technologies May Department Stores Mead School & Office Nabisco Nestle-Canada Pillsbury Procter& Gamble QRS Sara Lee Schnucks Spiegel Staples Uniform Code Council Wal-Mart Warner-Lambert

10. Retailer and manufacturer discuss other options ? Decision - Is manufacturer able to meet retailer’s purchase order? Forecast drives production Production planners validate item-level forecast Product shipped to meet purchase order specifications Forecasting and Replenishment ProcessCurrent State RETAILER Retailer POS Data Create item-level forecast and special event calendar (e.g..., promotions, store openings, item distribution) Market/item knowledge, store planning, item planning by individual stores Collect POS Data and other supporting information Create purchase orders for items No Yes MANUFACTURER Marketing Programs and Promotional developed with Input from Sales/Marketing (e.g..., pricing, item additions/deletions) and market/customer knowledge

11. Manufacturer MRP System Manufacturer Retailer Decision - Is exception within tolerance? Retailer Replenishment System Manufacturer Retailer Manual Collaboration Decision - Does message, event calendar and/or detail information explain discrepancy? Adjust Item Forecast Collaborative Planning, Forecasting, and ReplenishmentFuture StateProcess Overview YES Exception analysis process Order Forecast Retailer & Manufacturer generate forecast & special event calendar at item level, and maintain it on the Internet Request and Retrieval of event calendar and/or detail information YES NO

12. Industry Opportunities • Meeting Consumer Expectations: • Items being in stock ranks high in consumer shopping criteria • 10-30% of consumers lost annually through dissatisfaction • 84% rank having product and sales items in stock as important* • Issue with wrong “product” in wrong “place” (store) at the wrong “time” (season) • Retail Customer Service: • Best in class: 90%-92% in-stock levels • Opportunity to close this 8-10% gap • Category Management collaboration: • Store unique assortments based on demographic and household panel data, and climate related impacts (i.e. weather) *Progressive Grocer Consumer Survey April 1996

13. Industry “Supply Chain”Cost Reduction Opportunity • Total supply chain costs estimated at $730 Billion* • Majority of costs reside in Inventory and Operating Costs • Inventory investment usually comprises the largest single asset of a manufacturing company. The number is usually 27% of the total assets of a company. Retailer inventory investment averages 41% * * 6th Annual State of Logistics Report May 1994

14. “Collaborative Forecasting” Opportunity • Business Case for Collaboration: In Stock Fill Rate Highly Collaborative 97.0 98.9 Somewhat Collaborative 94.7 87.9 Non- Collaborative 84.4 77.3 * Data captured from a retailer database and set of 20 manufacturers

15. Collaborative Planning, Forecasting, and Replenishment • How is this different from Continuous Replenishment? • Key difference is systematic collaboration • Use of a combination of non-proprietary vehicles including the Internet to share information • Focus on integration of business processes between retailer and manufacturer • Retailer and manufacturer share a broader set of information dynamically • Coordinated collaboration from planning and forecasting through entire execution.

16. Collaborative Planning, Forecasting, and Replenishment Benefits: • Consumer satisfaction • Reduced prices & inventory in stock • Improved customer service and ROI • Increased sales • Decrease in Cost of Goods Sold • Decrease in Selling, General, & Administrative Costs • Increased turns • Improved cash flow • Reduced Inventories • Increased store level customer service • Increased asset utilization

17. Collaborative Planning, Forecasting, and Replenishment Benefits: • Consolidated/Improved supply chains • Demand allocated against total supply chain capability • Order Forecasting and plan development • Pre-notification and resolution of fill-rate issues • Decreased cycle times • Reduced forecast error • Long Term Planning and commitment to forecast • Consumer satisfaction through reduced out of stocks • Increased promotion effectiveness as result of reduced out of stocks • Increase in consumer marketing effectiveness • Business growth and relationship development through next level of customer partnering

18. People Technology Process Framework For Success • Empowerment • Shared Accountability • Shared Responsibility • Collaborative Communication • Open System • Internet • Application Development Methods • Secure Communication • Working to a Single Forecast • Common Measures • Planning • Information Sharing

19. Collaborative Planning, Forecasting, & Replenishment The Collaborative Process Joint Business Planning Retailer Manufacturer Generate joint forecast Generate joint forecast Common Event Calendar Drive MRP Drive replenishment • Retailer Forecast Drivers • In stock position • Fill Rate • Consumer Demand • Price Changes • Growth Plans • Distribution Channels • Manufacturer Forecast Drivers • Capacity • Order Lead time • Consumer Behaviour • Product Availability • Promotions • Raw material supply Joint Forecast

20. Retailer 1 Retailer 2 Retailer 3 Retailer Systems Forecasting, Decision Support Replenishment Information Flow Product Flow Collaborative Planning, Forecasting, & Replenishment End-to-End Integration Standard non-exceptional data Exceptional data Manfacturer Systems MRP, Decision Support Internet

21. Collaborative Planning, Forecasting and Replenishment • Prototype Deliverables - April ‘97 • Completed prototype • Demonstration of prototype at IQ ‘97 • Process Model for Sales Forecasting • Refer to website www.cpfr.org

22. Collaborative Planning, Forecasting and Replenishment Prototype Architecture Sun Ultra Netscape LiveWire Informix 7.2 EnterpriseServer 3.0 Netscape/Explorer HTTP Server Client

23. Collaborative Planning, Forecasting and Replenishment • Prototype Process/Functionality • Authenticates users • Stores exceptions data • Allows selective retrieval of data • Displays time-variant data such as supplier forecast, retailer forecast, POS for 52 weeks • Displays detail time-invariant data such as On-hand, Fill-rate, store information etc for a specific forecast • Displays information in both tabular and graphical form • Displays calendar of events for both sides, for each item

24. Collaborative Planning, Forecasting and Replenishment • Prototype Process/Functionality - continued • Shows how a level 1 (corporate) forecast can be drilled down to DC and store levels • Shows how a forecast update can take place interactively • Shows how messages associated with an exception can be created, stored and sent.

25. The Evolution of EDI • Data Content, Formats • Communication (Transport) • Security FACTORCURRENT STATEEC/EDI TRENDS Standards X.12, EDIFACT Internet Overlays Bysync/Async HTTP, S/MIME, FTP Mapping Labor intensive Automated, Transparent Translation Static Dynamic Transport VANs Internet, Extranet Interfaces Complex Simple, Open, Intuitive Business Boundaries Rigid Virtual User Access Proprietary Standard, Ubiquitous (web) Messages Data Objects

26. Collaborative Planning, Forecasting, and Replenishment Shared Process and Data Model RETAILER MANUFACTURER Item Table Item Table Internet Inter- face Inter- face APPLICATION APPLICATION Shared Data Forecast Table Forecast Table Promotions Table Promotions Table ITEMNUMBER 1234567890001 1234567890002 1234567890003… RTLR’SFORECAST 1200 14000 330 MFR..FORECAST 1150 9000 350 DELTA 50 5000 20 TOLERANCE 100 2000 50 OK? ü û ü

27. Backend Server Apps Backend Server Apps Data Data CPFRTechnology Architecture Peer to Peer Scenario Workstation Manufacturer Retailer Workstation SMTP S/MIME, SIL CPFR Server www.supplier.cpfr.com CPFR Server www.retailer.cpfr.com

28. Next Steps for CPFR and the industry • Refinement and publication of process models • Define/establish prerequisite EDI feeds if non-existent • Define/establish other feeds (manual initially) - forecast drivers (promotions, price changes, replenishment strategies etc) • Define/establish business rules for exception generation • Develop exception processes based on forecast comparisons • Define/establish procedures for use of CPFR system • Develop measurements/business cases • Refine technology infrastructure • Introduce security - S/HTTP and/or S/MIME • Investigate use of open data model

29. Collaborative Planning, Forecasting and Replenishment • Challenges • Organizational readiness • Process confirmation • Integration of supply chain collaboration tools with backend applications • data models • architecture (hub-hub, hub-spoke, hub-web) • Change management

30. Collaborative Planning, Forecasting, and Replenishment • The CPFR initiative provides the means (through standard process models) for the growth and evolution of tools starting to appear in the marketplace that address inter-enterprise collaboration.

31. Process Readiness Forecasting and Replenishment Scorecard Solution Change Management Inter & Intra organization communication channel readiness Technology Readiness Data availability Internet Enablement Electronic Commerce Capabilities Assessment

32. Collaborative Planning, Forecasting, and Replenishment • Collaboration can produce results!!! “In a manual pilot between WalMart & Warner Lambert, the two companies eliminated a full 2 weeks of inventory from the supply chain for a test product, Listerine. They also halved the order cycle and eliminated out of stocks.” Sharing IS Secrets, Julia King, Computerworld 9/23/96