STOCKED MARKETS

You can`t sell what you don`t have. That`s why Schering-Plough has teamed up with some of the nation`s top retailers to improve store replenishment practices.

By James Aaron Cooke, Senior Technology Editor -- Logistics Management, 1/1/2001

When Schering-Plough Healthcare Products wanted to get plugged into product demand from some of its major retailer customers, it turned to an experimental approach. The company adopted an initiative known by the acronym CPFR, becoming one of the first in the country to work closely with customers to improve both product forecasts and item-replenishment practices.

Schering-Plough today is one of a handful of U.S.-based consumer-product goods (CPG) manufacturers spearheading the business strategy known as Collaborative Planning, Forecasting, and Replenishment (CPFR). Under this program, trading partners work together to determine replenishment and inventory strategies. They exchange their respective forecasts on product sales and then align them to optimize shipments.

CPFR's proponents claim the strategy will help participants achieve inventory reductions and higher sales. Yet despite Schering-Plough's conviction that CPFR has produced value for itself and for its trading partners, the initiative has yet to yield firm quantitative evidence of major gains.

Getting Closer to the Customer

Schering-Plough's Healthcare Products Division makes sun-protection products, footcare products, and over-the-counter drugs, which it sells to mass merchandisers, drug-store chains, food-store chains, drug and food wholesalers, and specialty markets. Last year, that division netted the company about $800 million in sales.

The Healthcare Products Division's logistics department maintains both offices and its sole U.S. distribution center in Memphis, Tenn. Over the past decade, the corporation has made substantial investments in the latest tools and technology for its logistics operations. For instance, it installed software packages from Manugistics Inc. to improve transportation management and demand and supply planning. It also automated its Memphis distribution center, installing McHugh Software International's warehouse management system. "The company is focused on ... driving efficiencies throughout the supply chain," says Brad Stitt, director of Schering-Plough's Demand Communication and Management (DCM) Department.

Stitt's department was formed in October 1997 as a centralized function that would work with the company's customers to develop improved forecasts. "Our primary responsibility is to build a "bottom-up" forecast," explains Stitt. "A lot of [consumer goods] companies still use the traditional top-down method - using a financial number that is blown back to the supply chain without building a bottom-up forecast at the customer item level."

Since that time, the DCM department has worked with retailers to implement vendor-managed inventory programs as well as co-managed inventory initiatives. "Think of this replenishment evolution as a stair step," says Stitt. "You've got VMI [vendor-managed inventory] as step one and co-managed inventory processes as the more advanced step two. Then, the third step - the best practice - is CPFR."

Kicking Off CPFR

Touted as a business strategy for the millennium, CPFR is being championed by a prominent industry group, the Voluntary Interindustry Commerce Standards Association (VICS). Schering-Plough Healthcare Products is one of 16 companies taking part in VICS-sponsored pilots to determine the benefits of that strategy. "If companies use this collaborative process to the fullest, it will drive product component and raw-material purchases," says Stitt. "That, in turn, will drive your supply planning and production schedules, which integrate distribution and transportation planning. Once the product gets to the retailer, you'd have the stores full when consumers come in to buy your product."

Last year, Stitt's department began working with some of its retailer customers to begin implementing CPFR. In February 1999, it kicked off its first CPFR pilot with the retail pharmacy chain Walgreens, which is headquartered in Deerfield, Ill. Later that year, Schering-Plough approached Wal-Mart Stores Inc. of Bentonville, Ark., about participating in its CPFR pilot. Six months ago, Kmart Corp. of Troy, Mich., invited Schering-Plough to take part in its CPFR rollout. More recently, Target Stores of Minneapolis selected Schering-Plough to be one of the "first adopters" of its CPFR strategy.

Although Walgreens, Wal-Mart, and Kmart employ different technology, the CPFR process works basically the same way with all of them. Stitt's group develops a forecast for replenishing inventory of a specific product, using its demand-planning system. The retailer, in turn, develops its own forecast for inventory and store replenishment. Schering-Plough's customer forecast analysts and their counterparts on the retailer's team then compare forecasts online and discuss any major deviations from each other's projections. In the case of major variations, the two compare their market intelligence and try to reach a consensus on what the demand will be.

The actual software used for collaboration varies from retailer to retailer. In Wal-Mart's case, Schering-Plough uses that retailer's own proprietary system. With Kmart and Walgreens, Schering-Plough uses collaboration software written by Syncra Software of Cambridge, Mass. The software serves as "middleware" that combines forecast data from the trading partners into a composite view. Schering-Plough transmits an electronic data interchange (EDI) message called an 830, which contains a forecast for restocking the retailer's distribution centers. Kmart and Walgreens likewise send an EDI 830 message to Syncra. They also send an EDI 852 message, which lists the shipments from the retailer's distribution centers to its stores and current levels of DC inventory.

Syncra's software compares the forecasts and points out deviations. "You take those forecasts and put them side by side and look for exceptions that are outside the agreed-upon variance parameters," notes Stitt. "If we're within a certain percentage variation, we move on." If not, the forecast analysts from both Schering-Plough and the retailer make a conference call while viewing the data on a secure site on the Internet. "With Syncra, the middleware provides tables and graphs for us to do this online," says Stitt. "During the teleconferences, we can see any changes made in the system while we're on the phone."

Prior to launching the CPFR pilots, Schering-Plough and its retail partners met and set the parameters for forecast variances as well as the metrics to measure the program's success. The metrics include forecast accuracy, fill rate, inventory management, and sales growth. In addition, Schering-Plough and the retailer had to run through "data mapping" exercises to ensure that the computer systems exchanged like data for apples-to-apples comparisons.

Computing CPFR's Benefits

Since it began collaborating with its three trading partners, Stitt says, Schering-Plough has improved certain product forecasts. In a couple of instances, he notes, Schering-Plough uncovered miscommunications between the companies. For example, his company discovered that a distribution center run by one of its retailer clients hadn't loaded an item number for a new product into its system. Hence, the retailer had no forecast whatsoever for that new product. "If we hadn't caught that, we literally would have spent money advertising and preparing for a new-product launch," he says, "but the stores pulling from that DC wouldn't have had the product on their shelves."

In another case, Schering-Plough found out that a retailer was classifying the over-the-counter allergy drug Chlor-Trimeton as a cold medicine. "Looking at the gaps in the forecast, we recognized that the item profiling in our customer's system was set up wrong," says Stitt. "So we were building up inventories in their DCs during cold season vs. building it during the allergy season when they needed it."

Although CPFR has enhanced information sharing, these pilot programs have yet to yield solid evidence that the program can meet its touted goals of decreasing inventories while boosting sales. Stitt reports that the lack of evidence on CPFR's benefits has prompted VICS to establish a subcommittee devoted solely to the issue of metrics. "CPFR is so hard to put your hands around," he notes. "All this activity is in a pilot phase. It hasn't been going on long enough to get a before and after [picture]. Everybody doing this right now is struggling with the quantitative metrics of the program."

Despite that lack of hard evidence, Stitt is convinced that the program is worthwhile. "If you asked anybody involved in these pilots, [they'd tell you] the qualitative value is there in that you're more aligned with the customer," he contends. "You have a deeper level of relationship. You're more in tune with your business in their stores, and they are more in tune with your products across the supply chain."

Improved Visibility

Although proof of CPFR's financial benefits has yet to materialize, Schering-Plough is pressing ahead with the initiative. But if the program is to succeed, Stitt says, upper management has to embrace the concept and totally support this investment. "Both within the company and within the retailer, executive sponsorship is so important," he notes. "There's a tremendous commitment of resources, time, and effort associated with these pilots. So if you don't have executive-level commitment, the pilots will just fall apart."

With executive-level support, a CPFR program can synchronize product flows throughout the supply chain. Although the initiative has yet to demonstrate clear financial benefits, it can have a positive impact on the overall supply chain operation. Observes Stitt: "The [benefit to] the supply chain is having better visibility of future demand, which will [boost] the efficiency of your operation."