A Crisis of Confidence: Collaborative Forecasts Don't Match
Trust Lost?
Frustrated, Graham Wills, Senior Replenishment Manager for Kraft Foods UK, hung up the phone. For the past 30 minutes, Tony Brown, Asda's Coffee Commodity Manager, had coolly dismissed two years of painstaking work. Tony had intimated that he didn't trust the CPFR program their two companies had co-developed. Graham pondered Tony's criticism:
"Graham, I realize I'm new to the team and that you've been working on this CPFR program for two years, but the forecasts just don't match," Tony had scolded. After a brief pause, Tony had continued, "For all of the time and effort invested in monthly meetings, shared plans, and good relationships, I would have thought we would have at least been on the same page. But, your forecast for next month is 30% lower than ours. We've shared our promotion plans with you. You know we are going to run a big buy-one-get-one free promotion on your premium coffees. If you produce and distribute to your forecast, you will never be able to keep our shelves stocked. We can't afford partners who can't or won't deliver to our needs. What are you going to do about the discrepancy?"
Graham had assured Tony that Kraft would fill the orders placed by Asda's buying team. But, he had said, "Tony, we've dedicated tremendous resources to CPFR and we have a good team supporting the Asda relationship. I'm confident that we've shared good forecasts with you. Trust the numbers. I do." Tony, unfortunately, had taken Graham's expression of confidence wrongly, and responded, "Graham, I've got a good team over here. We are closer to the market. We know what we are doing. Why would I trust your numbers over those of my own team?" With that rhetorical question hanging heavily in the air, the call had ended.
Collaborative Planning and UK Retail Success
Graham had always believed that retail success was built on two capabilities:
Product Availability: Kraft needed to have the right product on the shelf when and where the customer wanted to buy it. If Kraft wasn't on the shelf, the customer might buy Nestle's Nescafe—and like it. He never wanted to give the customer a reason to try the competition.
Efficiency: Kraft needed to keep inventories to a minimum. Retail is a low-margin game. Efficiency was critical to profitability—and to buyer/supplier relationship success.
These capabilities were vital in the UK where competition for the British pounds spent on coffee was fierce. The "Big Four" retailers controlled approximately 75% of the broader retail market as follows: Tesco (29.9%), Asda (17.5%), Sainsbury's (16.7%), and Morrisons (11.7%). Further, Kraft was locked in a fierce battle with Nestle for market share. Nestle owned a 60% share compared to Kraft's 20%. The intense competition that emerged from this market structure led to two behaviors that complicated collaborative planning,
Heavy Promotions: British consumers were notorious for buying on promotion. CPGs and retailers fed this behavior by running constant promotions to steal consumers from rivals.
Price Copying: To prevent consumer defection, the different players in the coffee market had adopted a strategy of price copying. No sooner would a retailer offer a "great deal" on one of its products than another retailer would try to out promote it.
These behaviors introduced huge variability into consumer purchasing patterns. Thus, despite the fact that overall UK coffee usage was stable, forecasting at the brand and SKU level wasn't easy. To cope, Graham and his team employed the best forecasting techniques, sought access to the best competitive intelligence available, and worked closely with key customers.
CPFR and the Asda-Kraft Relationship
Graham wondered what had gone wrong in the Kraft/Asda CPFR relationship. He took a deep breath and felt his anxiety dissipate. He began to focus on the CPFR process. Developing the collaborative arrangement and creating the joint business plan at the front end of the journey had been difficult. Yet, these had not been the real challenge. Good forecasting was a must. And linked information technologies were important. But, the real issue was rooted in human nature. CPFR required the commitment and confidence of decision makers on both sides of the relationship. Managers had to believe in the process! Monthly cadence calls were required to review changes to demand forecasts caused by promotional or assortment planning, resolve supply constraints, and review current metrics. Graham's team held these cadence calls with each of Kraft's UK customers. Equally important, managers needed to believe the output of the process. Otherwise, the collaborative planning and execution cycle would be undermined and the cadence of collaboration disrupted.
Given Tony's frustration, Graham wondered what he could do to re-create confidence in the CPFR process. He felt certain that if he kept quiet and delivered the larger volumes Tony demanded, a lot of product would sit idle on the shelf. Tony wouldn't be happy holding so much extra inventory. Under those circumstances, saying, "I told you so!" would build neither trust nor confidence. Graham wondered how could he use this "glitch" in the relationship as a teaching moment—as an opportunity to get Tony to trust him and the entire Kraft team? That thought triggered a memory from Graham's childhood. His parents had had complete confidence in Disney movies. Because of Disney's outstanding track record, his parents never doubted that it was safe for him to go see a Disney show. "Well," Graham thought, "I want to be the Disney of CPFR. I want Tony to say, ‘If Kraft told me so, it must be right.'"
Questions:
Is it possible that Graham's confidence is misplaced—that Tony's team really did have better access to market information and had developed a better forecast?
If the Kraft forecast is accurate, what are the most likely causes for the discrepancy? Why didn't or couldn't Graham explain the discrepancy?