Interorganizational collaborative forecasting and replenishment systems and supply chain implications

Collaborative Forecasting and Replenishment (CFAR) is a new interorganizational system that enables retailers and manufacturers to forecast demand and schedule production jointly. The capabilities of CFAR exceed those of the traditional EDI because CFAR allows exchange of complex decision support models and manufacturer/retailer strategies. The proponents of CFAR claim that the fastest way for retailers and manufacturers to slash inventory costs and product shortages is by coordinating their decisions. The impact of CFAR on the supply chain using a model consisting of a manufacturer selling its product through two independent identical retailers is analyzed. The model assumes that the manufacturer doesn't face capacity constraints, the demand is stationary, and retailer prices are constant over time; the shortages are backordered at the manufacturer and retailers to isolate the effects of information sharing in CFAR. The most significant findings relate to the increase in the cost incurred by the nonparticipant in CFAR, the increase in the manufacturer's cost of serving the nonparticipant if the participant can obtain delivery guarantees in return for demand information sharing, and the incentives of the players to move towards universal retailer participation in CFAR. The findings are explained using the risk structure faced by the players in the supply chain. The managerial implications of the impact of CFAR on the supply chain structure are also discussed.