Information Processing: INFORMATION MANAGEMENT
CLEARING THE COBWEBS FROM THE STOCKROOM
New Internet software may make forecasting a snap
Buy a bottle of Listerine at a Wal-Mart this fall, and besides freshening your breath, you'll be part of a test of electronic-commerce technology.
Wal-Mart Stores Inc., with Warner-Lambert Co., Listerine's maker, is using the mouthwash to demonstrate a way for all retailers and their suppliers to save billions of dollars by more accurately forecasting demand for individual products. While Wal-Mart is famous for how it analyzes daily cash-register data and works with suppliers to avoid building up inventory, it now hopes to go a step further. Like other retailers, it does its own forecasting but shares little of that with suppliers. The result: errors of as much as 60%, says Frederick A. Crawford, head of consumer-goods consulting at Computer Sciences Corp. Afraid of being caught short, retailers wind up ordering more than they need, and suppliers make more than they can sell.
So a staggering $715 billion worth of consumer goods sit idle in U.S. inventory, tying up capital and running up interest charges, according to Benchmarking Partners Inc., a consulting firm in Cambridge, Mass. But if retailers and manufacturers could coordinate their forecasts of demand, they might cut a quarter of that, Benchmarking says--and save $179 billion.
INDUSTRY STANDARD? That's where the new scheme, called CFAR, comes in. It stands for collaborative forecasting and replenishment and offers a standardized way for manufacturers and merchants to work together on forecasts across the Internet. Why not phone or fax? With thousands of forecasts, one for every product in every store for 52 weeks into the future, companies would be overwhelmed. With CFAR software, the parties will exchange a series of written comments and supporting data electronically--details of a future sales promotion, an analysis of past sales trends. For an allergy pill, for example, they would swap weather analyses to gauge how bad the hay-fever season will be. By organizing all the exchanges on an electronic bulletin board, CFAR makes it easy for each side to review related messages and append new ones.
As the "see-far" acronym implies, a key benefit of the new system, which Wal-Mart is proposing as an industry standard, is to provide more reliable, longer-term views into the future. "So far, supply-chain partners have cooperated only over the short term, via orders," says Michael Hammer, co-author of Reengineering the Corporation. "What they need to do is get their overall forecasting and planning systems integrated for a long-term view."
If everybody can agree on a forecast and stick to it, "you don't have to be changing your production schedules back and forth," says Ernest R. Lazor, chief information officer at Prestone Products Corp., in Danbury, Conn. "That's the way to get better margins."
Does such collaboration raise antitrust issues? Only if market information moves between retailers or between suppliers. By coordinating forecasts, two or more suppliers might influence the supply of dish detergent, say, and affect its price. "Then, the alarm bell starts to ring, says Lawrence J. White, a professor of economics at New York University. By design, CFAR keeps data private to prevent such collusion.
Is the world ready for the Wal-Mart system? Yes, says Ralph W. Drayer, vice-president of product supply at Procter & Gamble Co., which is adopting CFAR. "It can strip out waste, inventory, people, rework, you name it--and deliver better value to the customer," he says. And there are alternative schemes: American Software and a unit of Information Resources Inc., which collects point-of-sale data, are launching collaborative systems, too. "Intuitively, everyone thinks it's a great idea," says Hau L. Lee, a business professor at Stanford University.
The collaborative systems won't achieve critical mass for at least a year or two because they require a lot of reengineering, concedes Benchmarking Partners. Benchmarking developed CFAR with funding from Wal-Mart, IBM, SAP, and Manugistics. The latter two are makers of accounting and supply-chain software, respectively. To promote CFAR as a standard, Benchmarking has posted specifications on the Web and briefed more than 250 companies, including Sears, J.C. Penney, and Gillette. About 20 companies are implementing CFAR. Perhaps, just perhaps, from little bottles of mouthwash a mighty Internet standard will flow.By John W. Verity in New York