ARTICLE IN PRESS

Int. J. Production Economics 113 (2008) 575–586

www.elsevier.com/locate/ijpe

On the benefits of CPFR and VMI: A comparative

simulation study
Kazim Sari
Department of International Logistics and Transportation, Faculty of Economics and Administrative Sciences, Beykent University,
Sisli Ayazaga Mah., Hadimkoru Yolu Mevkii, 34396 Sisli, Istanbul, Turkey
Received 1 December 2006; accepted 4 October 2007
Available online 10 March 2008

Abstract

This paper aims to help managers of a supply chain to determine an appropriate level of collaboration according to their
specific business conditions. For this purpose, a comprehensive simulation model representing two popular supply chain
initiatives, that are collaborative planning, forecasting and replenishment (CPFR) and vendor-managed inventory (VMI),
is constructed. In addition, a traditionally managed supply chain (TSS) is also included in the model as a benchmark. The
results indicate that benefits of CPFR are always higher than VMI. However, we also realize that under certain conditions,
the gap between the performances of CPFR and VMI does not rationalize the additional resources required for CPFR.
Especially, when the lead time is short and/or when available manufacturing capacity is tight, a careful consideration has
to be given on the selection of an appropriate collaboration mode.
r 2008 Elsevier B.V. All rights reserved.

Keywords: Supply chain collaboration; CPFR; VMI; Simulation

1. Introduction requires intensive communication and coordination

A supply chain, consisting of several organiza-
tions with different and sometimes conflicting ob-
jectives, is a complex network of facilities designed
to produce and distribute products according to
customers’ demands. By coordinating different
enterprises along the logistics network or establish-
ing business partnerships, supply chain management
(SCM) is concerned with finding the best strategy
for the whole supply chain (Simchi-Levi et al., 2003,
p. 2). Nevertheless, finding the best strategy in this
complex network of facilities is not an easy task. It
Tel.: +90 212 444 1997; fax: +90 212 867 5060.
E-mail address: kazimsari@msn.com
among trading partners so that material flow along
the supply chain is optimized as well as information
flow. Fortunately, with the emergence of new
management paradigms at the beginning of 1980s,
e.g. Lean Thinking, Total Quality Management and
Partnership Sourcing Programme, much progress
has been made in the coordination of material flow
(Mason-Jones and Towill, 2000; Simchi-Levi et al.,
2003, p. 5). However, an equal attention has not
been paid to the optimization of information flow.
This ignorance of the information flow has con-
tributed to one important problem in supply chain
literature, which is called ‘‘bullwhip effect’’ (Lee
et al., 1997a, b). The bullwhip effect represents the
phenomenon where orders to supplier tend to have

0925-5273/$ - see front matter r 2008 Elsevier B.V. All rights reserved.
doi:10.1016/j.ijpe.2007.10.021
 ARTICLE IN PRESS
576 K. Sari / Int. J. Production Economics 113 (2008) 575–586
a larger variance than sales to the buyer (Lee et al.,
1997a, b). In return, high inventory levels and poor
customer service rates are typical symptoms of the
bullwhip effect (Metters, 1997; Chopra and Meindl,
2001, p. 1363). Today, SCM researchers indicate
that elimination the bullwhip effect plays a vital role
for supply chain enterprises to gain competitive
advantage.
Most of the researchers focusing on remedies for
coping with the bullwhip effect dictate that sharing
retail-level information (i.e. point of sales (pos)
data) between supply chain members is a prerequi-
site for elimination of the bullwhip effect, see e.g.
Lee et al. (1997a), Chen et al. (2000a, b), McCullen
and Towill (2002), Dejonckheere et al. (2004),
Ouyang (2006) and Li et al. (2006). Nevertheless,
retailers, most of the time, do not desire to engage in
information sharing because it provides ignorable
levels of benefits for them, see e.g. Lee et al. (2000),
Yu et al. (2001, 2002), Zhao et al. (2002a, b).
Therefore, this requires upstream members (e.g.
suppliers or manufacturers) to offer incentives for
retailers in return for information sharing. Vendor-
managed inventory (VMI) and collaborative plan-
ning, forecasting and replenishment (CPFR) are the
partnership programs primarily developed to en-
courage retailers to share information, see e.g. Lee
et al. (1997b) and Disney and Towill (2003a, b).
VMI, also known as continuous replenishment or
supplier-managed inventory, is one of the most
widely discussed partnering initiatives for encoura-
ging collaboration and information sharing among
trading partners (Angulo et al., 2004). Popularized
in the late 1980s by Wal-Mart and Procter &
Gamble (Waller et al., 1999), it was subsequently
implemented by many other leading companies
from different industries, such as Glaxosmithkline
(Danese, 2004), Electrolux Italia (De Toni and
Zamolo, 2005), Nestle and Tesco (Watson, 2005),
Boeing and Alcoa (Micheau, 2005), etc. It is a
supply chain initiative where the vendor decides on
the appropriate inventory levels of each of the
products and the appropriate inventory policies to
maintain those levels. The retailer provides the
vendor with access to its real-time inventory level.
In this partnership program, the retailer may set
certain service level and/or self-space requirements,
which are then taken into consideration by the
vendor. That is, in a VMI system, the retailer’s role
shifts from managing inventory to simply renting
retailing space (Simchi-Levi et al., 2003, p. 154;
Mishra and Raghunathan, 2004).
VMI offers a competitive advantage for retailers
because it results in higher product availability and
service level as well as lower inventory monitoring
and ordering cost (Waller et al., 1999; Achabal et al.,
2000). For vendors, on the other hand, it results in
reduced bullwhip effect (Lee et al., 1997b; Disney
and Towill, 2003a, b) and better utilization of
manufacturing capacity (Waller et al., 1999), as well
as better synchronization of replenishment planning
(Waller et al., 1999; C- etinkaya and Lee, 2000).
While many benefits have been identified in the
literature, there are also a number of challenges that
may exist in practice and that can potentially reduce
the benefits obtained from VMI or lead to failures in
VMI programs. For instance, Spartan Stores, a
grocery chain, shut down its VMI effort about 1
year after due in part VMI vendors’ inability to
deal with product promotions (Simchi-Levi et al.,
2003, p. 161). Similarly, Kmart cut a substantial
amount of VMI contracts because Kmart is not
satisfied with the forecasting ability of VMI vendors
(Fiddis, 1997). Consequently, many studies have been
carried out to investigate the effectiveness of VMI
programs under different conditions. For instance,
Kuk (2004) empirically tested the acclaimed benefits
of VMI programs in electronics industry. Similarly,
Sari (2007) used a simulation model to evaluate the
benefits of VMI under different market conditions.
Dong and Xu (2002), on the other hand, evaluated
the value of VMI programs both for suppliers and
buyers. Most of these studies show that ineffective
usage of retail-level information is one major limita-
tion of VMI programs (see e.g. Aviv, 2002; Ovalle
and Marquez, 2003; Angulo et al., 2004; Yao et al.,
2007). That is, since retailers are closer to the
marketplace, they may have better knowledge about
customer behaviors, products and marketplace.
However, in most, if not all, VMI programs, this
unique knowledge of the retailers cannot be joined
into inventory decisions. This is because in a typical
VMI program, retailers are excluded from demand
forecasting process. Indeed, in a VMI system, the
responsibilities of the retailers are noting more than
sharing sales and inventory data.
CPFR, on the other hand, can solve majority of
the problems that are encountered in adaptation of
VMI because it requires all members of a supply
chain to jointly develop demand forecasts, produc-
tion and purchasing plans, and inventory replenish-
ments (Aviv, 2002). It is a business practice that
combines the intelligence of multiple trading part-
ners in the planning and fulfilment of customer
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K. Sari / Int. J. Production Economics 113 (2008) 575–586
demand (CPFR Workgroup, 2002). CPFR adds
value to the supply chain in the form of reduced
inventory and increased customer service level by
achieving better match of demand and supply
(Foote and Krishnamurthi, 2001; Aghazadeh,
2003; Aichlmayr, 2003; Fliedner, 2003). Nonethe-
less, successful implementation of CPFR is not an
easy task. It requires more intensive organizational
resources than VMI as well as mutual trust of
multiple trading partners (Barratt and Oliveria,
2001; Fliedner, 2003). Furthermore, dramatic
changes are also required in usual ways of doing
business for CPFR implementation.
Consequently, examination of the previous litera-
ture reveals the fact that adaptation of higher levels
of collaboration among members of a supply chain
creates greater benefits for the supply chain. On the
other hand, we also see that development and
operational costs of a highly integrated collabora-
tion is also higher. That is, while CPFR eliminates
most of the problems encountered in VMI pro-
grams; investment and operation costs of CPFR are
substantially higher along with greater implementa-
tion difficulties. Indeed, these difficulties might
explain why many of the CPFR programs have
not moved beyond a limited number of product
categories or a small set of trading partners (see e.g.
Baird, 2003; Program may build CPFR momentum,
2005). Therefore, this trade-off between benefits and
costs of supply chain collaborations creates an
urgent need for SCM practitioners to determine the
right collaboration level for their supply chains.
Today, many SCM practitioners try to determine
the appropriate level of collaboration for their
supply chains. Here, the following two questions
play a critical role in determining the right
collaboration level:
 Does it is required to invest in CPFR if an earlier
supply chain initiative such as VMI, had already
been adopted? In other words, does the gap
between the performances of CPFR and VMI
compensate the cost of investing in CPFR?
 Which factors are influential in answering the
question described above? Do capacity of the
manufacturing facility, lead times, or uncertainty
in customer demand influence the desire for
CPFR?
To the best of our knowledge, there have been
very few research studies aiming to explore these
questions. That is, a few research studies e.g.
577
Raghunathan (1999), Aviv (2001, 2002, 2007),
Ovalle and Marquez (2003) and Disney et al.
(2004) represent most of the developments in this
area. Our paper is different from these previous
studies in three ways. First, most of the models have
tended to mainly analytical with some very restric-
tive assumptions (e.g. two-stage supply chain,
normally distributed or correlated market demands)
for the sake of mathematical tractability (e.g.
Raghunathan, 1999; Aviv, 2001, 2002, 2007; Disney
et al., 2004). Second, some of the models have been
developed so far are only concentrated on forecast-
ing part of CPFR (e.g. Aviv, 2001, 2007). Third, as
far as we know, none of the models has explored
CPFR and VMI comparatively in capacitated
multi-stage supply chains under both stationary
and non-stationary customer demands (e.g. Ovalle
and Marquez, 2003) as we have done in this paper.
Therefore, this paper contributes to the current
literature by extending the results of previous
research studies in a way that managers in a supply
chain enterprise can determine an appropriate level
of collaboration for their supply chains.
Unlike many prior analytical studies which have
very restrictive assumptions for the sake of math-
ematical tractability (e.g. Mishra and Raghunathan,
2004; Lee and Chu, 2005; Yao et al., 2007), we have
used a simulation model in this study to investigate
the benefits of CPFR and VMI under more realistic
circumstances. The simulation approach has been
used extensively in the literature for analyzing
supply chain systems (e.g. Waller et al., 1999; Zhao
et al., 2002a, b; Angulo et al., 2004; Lau et al., 2004;
Sari, 2007; Zhang and Zhang, 2007). In this study,
we considered a four-stage supply chain, which
consists of four echelons: a manufacturing plant, a
warehouse, a distributor and a retailer. The plant
has limited manufacturing capacity and produces a
single product. Each enterprise replenishes its
inventory from its immediate upstream enterprise.
The remainder of this study is organized as
follows. Section 2 clarifies the methodology and
development of the simulation model. Setting of
experimental design is identified in Section 3,
followed by simulation output analysis in Section 4.
Conclusions are presented in Section 5.
2. The simulation model
At the initial stages of this research, we intended
to use Microsoft Excel in constructing the simula-
tion model; however, research conducted by Keeling
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578 K. Sari / Int. J. Production Economics 113 (2008) 575–586
and Pavur (2004) indicated that it might possible for
errors to occur in the random numbers generated by
Microsoft Excel. Therefore, in order to eliminate
this potential problem, we have used Crystal Ball,
an Excel add-in published by Decisioneering. It is a
popular risk analysis and forecasting program that
uses Monte Carlo simulation in a spreadsheet
environment.
According to different situations of information
sharing and ordering information coordination, the
partnership between supply chain members can be
described as one of the following integration levels
(see Fig. 1). The first structure is a supply chain
operated under traditional ways of doing business
(TSS) and the second structure is a supply chain
model operated under a VMI program. Finally, the
third structure is the supply chain operated under a
CPFR program.
In all three supply chain structures, an (R, S)
inventory control policy is used for replenishment
decisions. Here, R indicates the review interval and
S indicates the order-up-to level. R is chosen as 1
week. Order-up-to level, however, is updated at the
beginning of each week to reflect changes in demand
patterns.
Under TSS, each member strives to develop local
strategies for optimizing his own organization
without considering the impact of his strategies on
the performance of other members. Moreover, since
Fig. 1. Three supply chain structures.
no information is shared between members, up-
stream stages are unaware of actual demand
information at the market place. That is, while
creating demand forecasts and inventory plans,
supply chain members use only replenishment
orders placed by their immediate downstream
member. Therefore, each member of the supply
chain replenishes his own inventory by following an
installation-based (R, S) policy. Under an installa-
tion-based (R, S) policy, each member considers his
local inventory position. The sequence of events
followed by a supply chain member under TSS is
outlined as follows:
(i) The member receives the delivery from its
immediate upstream member, which was or-
dered L periods ago (the lead time is L periods).
If the member is the plant, L is the production
lead time.
(ii) The member observes the order placed by its
immediate downstream member. If the member
is the retailer, the order is the market demand.
(iii) The member fulfils the customer orders (plus
backorders if there are any) by on-hand
inventory, and any unfulfilled customer orders
are backordered. The member analyzes the
historical replenishment orders placed by its
immediate downstream member for forecast-
ing. Based on this demand forecast, the member
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K. Sari / Int. J. Production Economics 113 (2008) 575–586
updates its order-up-to point. If the member is
the retailer, historical market demand data are
analyzed. The order-up-to point of the member
at stage k, Sk, estimated from the observed
demand is as follows (Nahmias, 1997, p. 278):
 
1 bk
Sk ¼ F k (1)
bk þ hk
where Fk (.) is the distribution function of the
demand realized by the member at stage k.
Similarly, bk and hk are backorder and holding
costs of the member at stage k, respectively.
Here, parameters of the demand distribution,
Fk (.), are updated at the beginning of each
week by using the exponential smoothing
method (see e.g. Nahmias, 1997, p. 74) to
reflect changes in demand patterns.
(iv) The member decides how many units to order
from its immediate upstream member. The
quantity of the order is equal to the difference
between the order-up-to level and inventory
position. If the member is the plant, a produc-
tion order is placed. Here, the plant, because of
its limited manufacturing capacity, cannot
always produce enough to bring its inventory
position up to the updated value of S. In these
cases, the plant makes full capacity production
by backordering the remaining requirement.
This modification of order-up-to policy for the
case of limited production capacity provides an
optimal solution for uncertain demands (see
e.g. Gavirneni et al., 1999; Federgruen and
Zipkin, 1986a, b).
Under VMI, on the other hand, the retailer
provides the distributor with access to its real-time
inventory level as well as its pos data (Fig. 1b). In
return, the distributor takes the responsibility of
managing the inventories at the retailer. That is,
under VMI, the distributor does not only need to
take its own inventories into account while making
inventory plans, but also the inventories of the
retailer. Therefore, under this structure, the dis-
tributor follows an echelon-based policy in his
replenishment planning. Under the echelon-based
policy, the distributor looks at its own inventory
position plus the inventory position of the retailer,
instead of his local inventory position only. For a
discussion of installation and echelon policies, see
Clark and Scarf (1960), Axsäter and Rosling (1993).
All other echelons of the supply chain (the plant and
the warehouse), on the other hand, are operated in
579
the same way as in TSS. Here, in order to compute
the echelon order-up-to levels of the retailer and the
distributor, the heuristic developed by Shang and
Song (2003) is used. Again, in this supply chain, the
exponential smoothing method is used to update the
order-up-to level at each week.
Finally, under CPFR, inventory levels, pos data,
promotion plans, sales forecasts and all other
information that may be influential on the market
demand are shared between supply chain members
(Fig. 1c). Consequently, a single joint demand
forecast is created by the contribution of each
member. Here, there is no doubt that demand
forecasts created with the joint contributions of all
supply chain members are more accurate than the
ones created by the individual organizations (e.g.
demand forecasts created by the supply chains
operated under TSS or VMI). Indeed, it is very
possible that the parameters of the demand dis-
tribution can be predicted under a CPFR program.
Therefore, in the simulation model, it is assumed
that distribution parameters of the market demand
are predicted under CPFR by contribution of each
member. This assumption does not mean that at the
end of the collaborative forecasting process, the
members can know exactly what the customer
demand is, but rather they can know what the
parameters of the underlying demand distribution
are (i.e. if the customer demand is normally
distributed, mean and standard deviation of the
customer demand is known only). Indeed, this
assumption makes it sure that the promise of CPFR
is realized. That is, the large amounts of informa-
tion available with CPFR are effectively used to
minimize the uncertainty along the supply chain. Of
course, in practice, as the model of Disney et al.
(2004) also indicates, it might possible that bulk of
information available with CPFR result in confu-
sion of supply chain managers, which leading low
levels of supply chain performance. Therefore, the
benefits of CPFR obtained in this study are valid
only if CPFR is properly implemented. Moreover,
under this collaboration mode, an echelon-based
(R, S) inventory policy is used for entire supply
chain. That is, inventory positions and inventory
costs of all four supply chain members are taken
into account in replenishment decisions.
The cost structures for the supply chain members
in the simulation model are assumed to be as
follows; the unit backorder costs per week for
the plant, the warehouse, the distributor and
the retailer are $5, $11, $18 and $25, respectively.
 ARTICLE IN PRESS
580 K. Sari / Int. J. Production Economics 113 (2008) 575–586
The unit inventory costs per week for the plant, the
warehouse, the distributor and the retailer are $0.25,
$0.50, $0.75 and $1.00, respectively.
2.1. Retailer’s demand structure
Although normal distribution is more widely used
in supply chain research studies, the g-distribution is
used here to represent the customer demand realized
by the retailer. This is due to the fact that there are
some limitations of normal distribution in repre-
senting demand structures. For example, normal
distribution allows the occurrence of negative
customer demand. Therefore, in order to avoid this
unrealistic situation, some restrictive assumptions
have to be included in the model (e.g. Waller et al.,
1999; Zhao et al. 2002a, b; Lau et al., 2004). The
g-distribution, on the other hand, does not have
such problems because it allows only non-negative
values. Moreover, the g-distribution is flexible in
that it can represent a wide variety of demand
structures. Keaton (1995), for instance, states that
choosing g-distribution is an effective choice to
represent the demand patterns.
There are two parameters of the g-distribution.
These are shape (a) and scale (b) parameters. The
mean and the variance of the distribution can
be expressed as ab and ab2, respectively. In the
simulation model, we assume that the shape para-
meter of the demand distribution is 15 (a ¼ 15). The
scale parameter (b), on the other hand, is assumed
to be a stochastic variable in the form of Eq. (2).
 
2p
bðtÞ ¼ 20 þ season  sin t (2)
52
In Eq. (2), b(t) is the scale parameter of the
g-distribution in week t. The variability in the scale
parameter of the demand distribution allows us to
generate both seasonal and non-seasonal customer
demands. For example, while assigning zero to the
season constant produces non-seasonal demand
pattern, assigning non-zero values results in season-
ality in customer demand. A representative histo-
gram of the market demand for the selected
parameters is generated in Fig. 2 to clarify the
distribution of the market demand to the readers.
Three demand structures representing different
combinations of seasonality are used in this study.
These are customer demand with no seasonality
(SDV), customer demand with medium level of
seasonality (MDV) and customer demand with high
level of seasonality (HDV). The values of the season
Fig. 2. Histogram of the market demand when a ¼ 15 and
b(t) ¼ 20.
constant for each demand structure are determined
as 0, 2 and 4, respectively. The values of the season
constant are selected in such a way that both non-
seasonal and seasonal customer demands with
different strengths are generated. For example,
while SDV represent the non-seasonal customer
demand, MDV and HDV represent the demand
structures with seasonal swings of the size of
approximately 10% and 20% of average demand,
respectively.
2.2. Verification and validation of the simulation
In order to verify that the simulation program
performs as intended, the conceptual model is
divided into three parts: demand generation and
determination of total manufacturing capacity,
forecasting and production/inventory planning,
and order fulfillment and reporting. Each part is
designed separately so that more efficient and
effective debugging is made possible. Moreover,
the combined simulation model is also traced and
tested with the results calculated manually.
Later, in order to validate the simulation output,
the random demand variables generated in the
simulation model are plotted on a scatter diagram.
Then, it is validated that the intended demand
structure is generated. The supply chain model
above is simulated for 1128 weeks. The initial
parameters of the forecasting model are estimated
with the first 400 weeks of simulation run, which are
removed later from the output analysis to eliminate
the worm-up period effect. Therefore, the rest of the
data are used for effective simulation output
analysis. In order to reduce the impact of random
variations, the same random numbers are used to
simulate all three systems. That is, same customer
demand is generated for all types of supply chain
systems. In addition to this variance reduction
 ARTICLE IN PRESS
K. Sari / Int. J. Production Economics 113 (2008) 575–586
technique, 15 replications for each combination of
the independent variables are conducted.
3. Experimental design
Four independent factors are considered in the
experimental design. These are; type of supply
chain (SCTYPE), available production capacity of
plant (CAP), uncertainty in customer demand (DV)
and replenishment lead times (L). The number of
levels of these variables and their values are listed in
Table 1.
Factor SCTYPE refers to the way the supply
chain is operated. Specifically, this factor indicates
whether the supply chain is operated under TSS,
VMI, or CPFR. The factor CAP is expressed as the
ratio of the plant’s total capacity to the total market
demand. Total capacity of the plant is distributed
to each week, equally. The factor L denotes the
replenishment lead times between each member of
the supply chain. Finally, the factor DV indicates
the level of uncertainty seen in market demand.
Two factors are used as dependent variables in
the experimental design in order to evaluate benefits
of CPFR and VMI. These factors are total cost for
the entire supply chain (TSC) and customer service
level of the retailer (CSL). TSC is the sum of the
inventory holding costs of all members in the supply
chain and backorder cost of the retailer. Here, we
include the backorder cost of the retailer only,
because all other backorder costs are internal costs
within the entire supply chain and they are not
actually incurred. Factor CSL is the percentage of
customer demand satisfied by the retailer through
the available inventory.
4. Simulation output analysis
The output from the simulation experiments are
analyzed using MANOVA procedure of the SPSS.
MANOVA analysis is chosen because it is more
Table 1
Independent factors of the experimental design
Independent factors Levels
1 2
SCTYPE TSS VMI
CAP 1.10 1.30
DV SDV MDV
L 1 4
581
appropriate for our model because MANOVA
considers the correlations between the dependent
variables in the experimental design, see Hair et al.
(1998, p. 331). Selected MANOVA results are
presented in Table 2.
MANOVA results in Table 2 show that at 5%
significance level, SCTYPE has significant impacts
on both performance factors, which indicates that
CPFR and VMI have substantial influences on the
performance of the supply chain. The performance
of each type of supply chain is presented in Table 3.
Examination of Table 3 reveals that the reduction
in total supply chain cost derived from CPFR
significantly higher than the reduction derived from
VMI. For example, while CPFR provides 33.90%
cost savings, VMI provides 17.34% on the average.
Similarly, the results also indicate that CPFR
provides higher level of increase in the customer
service level than VMI does. For example, while
CPFR leads to an increase of 3.84% in customer
service level on the average, VMI results in 1.54%
increase in customer service level. Therefore, these
results lead us to conclude that CPFR produces
substantially higher benefits than VMI in terms of
total supply chain cost and customer service level.
Actually, these findings are simple and intuitively
expected for us, so we will not concentrate on them
further. Instead, we will concentrate on how the
performance increase gained from CPFR and VMI
change in parallel to changes in specific conditions
of supply chains. For this purpose, performance of
CPFR and VMI under various capacity levels
(CAP), demand uncertainty (DV) and lead times
(L) are produced in Fig. 3.
4.1. Impact of manufacturing capacity (CAP) on the
supply chain collaboration
MANOVA results in Table 2 shows that at 5%
significance level, the interaction effect between
CAP and SCTYPE has significant impacts on both
dependent variables. This means that manufactur-
ing capacity has a significant influence on the
performance of CPFR and VMI for all performance
measures.
Examination of Fig. 3 reveals that both supply
3
chain initiatives better off operating in the environ-
ments where larger manufacturing capacities are
CPFR available. That is, we see that contribution of CPFR
1.50 and VMI is in its lowest level when the plant has its
HDV
smallest manufacturing capacity (i.e. CAP ¼ 1.10).
For example, when CAP is 1.10, the reductions in
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582 K. Sari / Int. J. Production Economics 113 (2008) 575–586

Table 2
Selected MANOVA results

Source Dependent variables

CSL TSC (a)

F value Pr4F F value Pr4F

SCTYPE 881.2724 0.0000 424.7569 0.0000

CAP 153.6741 0.0000 24.7766 0.0000
L 508.1819 0.0000 3491.4777 0.0000
DV 627.2433 0.0000 205.2806 0.0000
SCTYPE  CAP 13.7673 0.0000 12.4347 0.0000
SCTYPE  L 50.8457 0.0000 104.2851 0.0000
CAP  L 13.1954 0.0000 3.8058 0.0227
SCTYPE  CAP  L 12.4123 0.0000 8.9866 0.0000
SCTYPE  DV 18.3525 0.0000 5.0148 0.0005
CAP  DV 59.6543 0.0000 27.2560 0.0000
SCTYPE  CAP  DV 9.5052 0.0000 6.2094 0.0000
L  DV 106.4525 0.0000 10.0771 0.0000
SCTYPE  L  DV 6.1199 0.0001 2.6900 0.0302
CAP  L  DV 4.3597 0.0017 5.0067 0.0005
SCTYPE  CAP  L  DV 13.3417 0.0000 6.3501 0.0000
a
Based on residual analysis, log transformation of TSC was made to satisfy the assumptions of MANOVA.

Table 3 highest level (i.e. CAP ¼ 1.50). For example, while

Performances of each type of supply chain the difference between the percentage of cost
Performance SCTYPE Average 95% confidence
reductions provided by CPFR and VMI is around
measures interval 22% when CAP is 1.50, it is realized around 4% only
when CAP is 1.10. Therefore, this result clearly
Lower Upper shows that choosing to implement a CPFR program
bound bound
rather than a VMI program provides substantially
CSL (%) TSS 94.37 94.25 94.50 higher benefits for the supply chain where larger
VMI 95.91 95.78 96.04 levels of manufacturing capacity are available. In
CPFR 98.22 98.09 98.35 other words, this shows us that under the conditions
TSC ($) TSS 699,869 677,720 722,019 where available manufacturing capacity is tight, a
VMI 578,451 556,301 600,600 careful consideration has to be given on the selection
CPFR 462,737 440,588 484,886 of an appropriate collaboration mode. That is, under
the conditions where the manufacturing capacity is
too tight, additional performance increase provided
total supply chain cost for VMI and CPFR are by CPFR over VMI may not justify the higher
realized as 14.6% and 19.2%, respectively. On the implementation and operational cost of CPFR.
other hand, when CAP is increased to 1.50, we see
that the reductions for VMI and CPFR dramati- 4.2. Impact of demand uncertainty (DV) on the
cally jump to 21.0 and 42.3, respectively. This result, supply chain collaboration
consistently with previous studies (e.g. Gavirneni
et al., 1999; Lee et al., 2000; Gavirneni, 2002; MANOVA results in Table 2 show that at 5%
Simchi-Levi and Zhao, 2003; Lau et al., 2004), significance level, the interaction effect between DV
shows that the contributions of supply chain and SCTYPE has significant impacts on both
collaborations are significantly higher when larger demand variables. This means that uncertainty in
levels of manufacturing capacity is available. market demand has a significant influence on CPFR
In addition, examination of Fig. 3 also reveals that and VMI for all performance measures.
the distinction between CPFR and VMI reaches its Examination of Fig. 3 reveals that higher levels of
maximum level when the capacity ratio is in its demand uncertainty results in substantial decreases
 ARTICLE IN PRESS
K. Sari / Int. J. Production Economics 113 (2008) 575–586
Fig. 3. Overall performance of CPFR and VMI.
in the cost savings derived from VMI. For example,
the reduction in total supply chain cost decreases
from 24% to 15% when the uncertainty in the
customer demand (DV) changes from low level
(LDV) to high level (HDV). On the other hand,
same level of increase in the demand uncertainty
does not produce that much performance reduction
in CPFR. That is, it results in approximately 3% of
reduction in total supply chain cost. In addition to
this, Fig. 3 also shows that the supply chain
operated under CPFR produces higher customer
service level under all levels of the demand
uncertainty. Similarly, the gap between the custo-
mer service levels of VMI and CPFR is in its highest
level when the uncertainty in market demand is in
its highest level. For example, we see that, while
CPFR produces 1.52% of higher customer service
level under low level of demand uncertainty
(DV ¼ SDV), it is increased to 2.90% when there
is high level of uncertainty in the market demand
(DV ¼ HDV).
The results obtained here lead us to conclude that
compared with a VMI system, the value of CPFR is
substantially greater under the market conditions where
demand variability is high. Therefore, SCM practi-
tioners have to be more eager to implement CPFR
programs under more volatile market conditions.
4.3. Impact of lead times (L) on the supply chain
collaboration
MANOVA results in Table 2 show that at 5%
significance level, the interaction effect between L
583
and SCTYPE has significant impacts on both
performance factors. This means that lead times
have a significant influence on CPFR and VMI for
all performance measures.
Examination of Fig. 3 reveals that CPFR and
VMI exhibit different performance levels under
different replenishment lead times. That is, while
the reduction amount in total supply chain cost
under CPFR substantially increases as the replenish-
ment lead times increase, the supply chain cost
savings gained from VMI do not change signifi-
cantly. For example, when the supply chain operated
under CPFR is considered, it is seen that the
reduction in total supply chain cost dramatically
increases from 20% to 40% as lead times increase
from 1 to 4 weeks. On the other hand, in case of
VMI, it is apparent that any level of increase or
decrease in replenishment lead times does not result
in significant changes in the reduction of total supply
chain cost. Furthermore, when the customer service
level is considered, we see that under all levels of lead
times, CPFR produces higher level of fill rate than
VMI does. There is, in addition, one further point to
make that the gap between the service levels achieved
by CPFR and VMI substantially increase as the
replenishment lead times increase.
The results obtained here imply that compared
with a VMI system, the value of CPFR is
substantially greater under the conditions where
replenishment lead times are longer. Therefore,
SCM practitioners have to be more eager to invest
in CPFR instead of VMI in supply chains where
lead times are long.
 ARTICLE IN PRESS
584 K. Sari / Int. J. Production Economics 113 (2008) 575–586
5. Conclusion
This paper comparatively investigates the perfor-
mance increase obtained from VMI and CPFR in a
four-stage supply chain under both stationary and
non-stationary customer demands viva a compre-
hensive simulation study. Through comprehensive
simulation experiments and subsequent statistical
analysis of the simulation outputs, we make the
following three important observations.
First, we observe that the benefits gained from
CPFR are always higher than that of VMI under all
conditions considered in this study. That is,
compared with VMI, CPFR produces lower total
supply chain cost as well as higher customer service
levels. Therefore, from this study, we may sure and
clear about the fact that the managers of a supply
chain enterprise better off investing in CPFR.
Second, through simulation output analysis, we
observe that the performance increase gained from
CPFR and VMI significantly depends on three
factors. These are capacity tightness of the plant,
replenishment lead times and uncertainty in market
demand. As these factors get different levels, the
benefits obtained from both initiatives also change
substantially. Moreover, the gap between the
performance improvements produced by CPFR
and VMI also changes significantly. For example,
we observe that when the lead times are short and/
or where available manufacturing capacity is tight,
the benefits of switching from VMI to CPFR are at
its lowest value. That is, contribution of switching
to CPFR is almost ignorable when we consider the
additional resources required for CPFR adaptation.
The managerial implication of this finding is great
because nowadays, adaptation of every business
practice, which is in fashion, is popular without
analyzing the suitability of it for specific business
conditions. Therefore, this research indicates that it
is of highly importance to make careful benefit/cost
analysis to invest in CPFR under the conditions
where lead time is short and/or where available
manufacturing capacity is very tight.
Finally, we recognize that there are substantial
decreases in the performance of VMI as the un-
certainty in customer demand increases. On the
other hand, we also recognize that there is only a
slight decrease in the performance of CPFR under
higher variable customer demands. Thus, indicating
that highly variable customer demand results in
widening the gap between the performances of
CPFR and VMI. This is because of the fact that
supply chain members may better manage the
uncertainties through joint forecasting and inven-
tory planning under CPFR. Therefore, one other
managerial implication that can be drawn from this
finding is that the practitioners have to invest in
CPFR as soon as possible in the industries in which
demand uncertainty is highly variable. The compu-
ter industry, for instance, with its very short product
life cycle and highly variable customer demand, is a
good example to industries where the adaptation of
CPFR is an urgent need.
Although this study provides important insights
into CPFR and its relationship with VMI, we have
to state that there are some limitations of this study.
First, we consider a serial supply chain structure
with one member at each echelon. This supply chain
structure is only a simplified case and in future
research studies, modeling more realistic supply
chain structures may better explain and extend the
results obtained from this research. Second, we
assume that the members in the supply chain apply
order-up to policies to make their production/
inventory decisions; however, there are other types
of inventory/production policies that can be in-
cluded in the model. Third, the cost structure used
in the simulation model only represents one special
case.
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