In a more laid-back era, a stockout amounted to something less than a catastrophe. A hardware retailer could get away with asking a customer to come back in a few days to pick up a tube of caulk or a snowshovel. But in 2002's competitive retail environment, that's unthinkable.

Yet avoiding the empty-shelf syndrome represents an extreme challenge if, like Ace Hardware, you're in the business of supplying 62,000 different items to more than 5,500 stores in 66 countries. How do you address that challenge? You might concentrate on forming tightly integrated relationships with suppliers. You might even consider collaborating on joint forecasts for stock replenishment with those suppliers in a program called CPFR (collaborative planning, forecasting and replenishment)—a strategy designed to reduce inventory while at the same time increasing store sales (and company profits) through targeted replenishment.

That is exactly what Ace has done. In 1999, the Oak Brook, Ill.-based retailer initiated its first CPFR relationship with Cleveland-based Manco, a company that supplies Ace with products like tape, glues and adhesives. Ace's positive experience with Manco paved the way for the hardware retailer to spread the gospel of CPFR among its other vendors. Today, the $2.8 billion hardware retailer collaborates on joint forecasts for stock replenishment with 15 of its approximately 2,000 suppliers.

In Ace's case, it all started with the rollout of a strategic plan dubbed "Vision 21," which Scott Smith, Ace's collaboration project leader, describes as "our vision on how to win at retail." Vision 21, he says, "will improve our sales and profits, bring Ace together as a team, and provide ultimate customer satisfaction. That means when you walk into one of our stores, you get the product you want at the right price."

CPFR fit squarely into Ace's Vision 21 plan. In late 1998, the Voluntary Interindustry Commerce Standards Association (VICS), an industry trade group, had introduced CPFR as a way for trading partners to work together to determine what to ship to a retail outlet. By 1999, VICS was urging retailers and manufacturers to put it into practice in pilot programs.

For its part, Ace Hardware hoped that CPFR would improve the visibility of products in the pipeline, correcting such problems as short and late shipments and faulty promotional forecasting. The retailer also hoped that CPFR might provide the visibility into manufacturers' inventory that was lacking in the vendor-managed inventory (VMI) relationships it was conducting with suppliers.

In 1999, Ace began looking for a supplier to participate in its CPFR trials. Because Manco was already taking part in a vendor-managed inventory program with Ace, that manufacturer seemed a likely candidate. "We had been somewhat successful at [VMI]," says Brian Bastock, director of customer logistics at Manco. "We saw [CPFR] as the next logical step."

Another factor working in Manco's favor was that it already had an in-depth accounting system in place for its warehouse and transportation operation. This meant the manufacturer was able to provide the numbers needed to document the benefits of collaboration. "They were perfect in that they were able to accurately measure the improvement," says Smith. Manco, moreover, had a strong interest in cultivating a close business relationship with Ace and viewed CPFR as a way to solidify that relationship. As Bastock puts it: " We looked at this as a way to cement our value proposition to the marketplace."

At about the same time, Ace learned of a collaborative software application being introduced by E3 Corp., which was bought last fall by JDA Associates of Scottsdale, Ariz. "E3 was just rolling out its collaboration program," Smith recalls, "and it reported good results at a customer meeting."

Ace installed E3's software on its server to facilitate the collaborative planning between the two partners. The supplier goes through an E3-run site on the Internet, where it's connected back to the distributed server at Ace. Fred Baumann, JDA's director of collaborative industry software, says that the Web site setup lets Ace determine who has access to the program and thus, ensure data security. In addition to the application, E3 provided consulting services and training to help get the collaborative relationship off the ground.

The software itself lets Manco use the Internet to gain access to Ace Hardware's computer system, which maintains forecast plans based on store sales. "Ace is responsible for having its computer up at six in the morning," says Smith. Ace presents Manco with its forecast for items through a Web browser screen, but Manco has the opportunity to change the forecast before it brings that forecast into its production planning system. "[Manco personnel] look at the same screens we do in real time. As soon as the forecast is agreed to, it flows into the buying system," Smith explains. "Then we track forecast accuracy on a monthly basis."

But the software does more than facilitate an exchange of messages that allows the two parties to reach a forecast consensus. It also provides the intelligence to determine appropriate order quantities to save money. "The system lets you balance inventory velocity with operational costs," says Bastock. "It allows you to make tradeoffs among those components."

Specifically, the application allows the parties to establish a "due order," a specific set quantity of a given item that must be present in a warehouse to maintain customer service levels. When an item's stock falls below a certain level at Ace's distribution center, then Manco accepts a purchase order. "The due order is an order that can't wait any longer without risking the overall service goal for the manufacturer," Smith says. "In other words, we're at the point where the demand would eat into the safety stocks."

The application also looks for opportunities to group orders and build pallet loads for shipment, reducing shipping costs through order consolidation. "The due order is based on what we need," notes Smith, "while the pallet order is based on what we would want to ship. Say a pallet quantity is 100 pieces. If the pieces in an order constitute more than 50 percent of a pallet load, then the software rounds up the order to build a full pallet."

To ensure that the collaboration process is working, Ace and Manco have established a scorecard review process. The two companies meet regularly to review such metrics as forecast inventory, service level accuracy both for costs and units, returns and freight costs as a percentage of sales. They also track a metric called "theoretical inventory," the quantity of inventory that should be held based on the order cycle and safety stock levels.

To date, Ace has documented a number of benefits from the CPFR pilot with Manco. For starters, it has significantly improved its forecast accuracy. "In the past, forecast accuracy was 20 percent over or under the [actual demand]," says Smith. "Now we're less than 10 percent off."

Because the software groups orders, Ace has also found that its average order weight has risen, resulting in the increased use of pallet loads. And as the average weight per order rose from 1,594 pounds to 8,157 pounds, freight costs began to drop. In fact, Smith reports that freight expenses as a percentage of product costs have gone from 7.0 to 2.5 percent. "Those are real dollars that go to help us be more competitive," he notes.

The benefits don't stop there, however. Ace reports that it has improved its inventory turns and order fill rates. The retailer says its distribution center can fill 99 percent of the stores' orders today. "[CPFR]," Smith says, "has helped us maintain a 99-percent service efficiency level."

Following the Manco pilot's success, 14 other suppliers have signed on to participate in CPFR with Ace Hardware. In fact, today Ace makes $200 million worth of purchases through CPFR, Scott says. Furthermore, CPFR has boosted revenue for participating suppliers. Ace reports that its CPFR suppliers as a group enjoyed a 12-percent year-over-year sales increase in the year 2000 vs. 4 percent for other suppliers. And despite the soft economy in 2001, Ace saw its CPFR suppliers' sales shoot up 10 percent while other suppliers' sales remained flat.

Although the prospect of higher sales provides ample motivation for Ace's suppliers to sign on with the retailer's CPFR program, ease of access has also played a role in persuading manufacturers to give CPFR a try. Smith reports that the Internet connection makes it easy for suppliers to take part in forecast collaboration. "Over the years, we have had people approach us about CPFR. But when they found out they had to buy software, they would back away. Dialing through the Internet doesn't affect their IT budgets."

Faced with these kinds of results, Ace Hardware has come to believe that CPFR will help expand business for both itself and for its suppliers. "A successful collaborative partnership," says Smith, "involves a manufacturer that wants to cooperate with a customer and a customer that wants to work with a manufacturer to create a high-performance team."