Title: Collaborative planning, forecasting and replenishment (CPFR) as a relational contract: an incomplete contracting perspective

Authors: Sung Min Kim, Joseph T. Mahoney

Addresses: Department of Management, School of Business Administration, Loyola University Chicago, Maguire Hall, 422, 1 E. Pearson Street, Chicago, Illinois, 60611, USA. ' Department of Business Administration, College of Business, University of Illinois at Urbana-Champaign, Wohlers Hall, 140C, 1206 South Sixth Street, Champaign, Illinois, 61820, USA

Abstract: This paper analyses collaborative planning, forecasting and replenishment (CPFR) from an incomplete contracting perspective. In the absence of economic incentive problems, CPFR enables trading partners to improve operational efficiency through a structured process of learning by both sharing and utilising information across firm-level boundaries. From a review of the incomplete contracts literature and a case study of the CPFR arrangement between P&G and Wal-Mart, this paper posits CPFR as a relational contract for managing economic incentive problems, which can arise in a vertical supply relationship due to transaction costs, agency costs, and relative bargaining positions. Theoretical propositions are developed regarding when this IT-supported intermediate form of vertical contracting is preferred to other governance modes and how CPFR can be an effective relational contract to support economic exchange and to create intellectual capital between trading partners. With efficient vertical coordination and enhanced specialisation incentives for mutual commitment, CPFR allows contracting parties to avoid the difficulties of formal contracting while realising the benefits that would be anticipated from vertical financial ownership.

Keywords: CPFR; information sharing; mutual commitment; relational contracts; vertical integration; collaborative planning; forecasting; replenishment; incomplete contracting; operational efficiency; economic incentives; intellectual capital; trading partners.

DOI: 10.1504/IJLIC.2010.034377

International Journal of Learning and Intellectual Capital, 2010 Vol.7 No.3/4, pp.403 - 428

Published online: 01 Aug 2010 *

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