Part 1: High performance supply chains, by JDA Software Group
Written by Puneet Saxena (pictured) Vice President of Industry Strategies at JDA
Of the five core tenets of high performance supply chains customer-centricity, segmentation, synchronization, business agility and optimization segmentation represents the most fundamental evolution in supply chain thinking.
Manufacturing and distribution companies must cater to a wide range of customer needs as they serve increasingly diverse markets across dynamic global economies.
Understanding these needs and crafting attractive value propositions to serve them accordingly is becoming increasingly critical for profitable growth and business retention.
Clearly, a one-size-fits-all supply chain strategy cannot adequately or profitably achieve this goal. Instead, companies must segment supply chain operations to balance the cost to serve with the value to the business for each segment.
As an example, if you are a large consumer goods company with a significant portion of your revenue coming from Walmart, you likely have a team and a set of strategies dedicated to that account. The value of their business to you warrants this level of service. However, the cost-benefit ratio would not be positive if you applied this strategy to every mom-and-pop store that also buys your products. You probably have a different supply chain strategy for those customers.
Employing different strategies to serve different customers and channels based on their value to your business is what supply chain segmentation is all about. While the differences between supply chain segments may not always be as dramatic as the Walmart example, the principles and potential value are the same. That is why it is important to understand the ways companies are segmenting their supply chain strategies, how this segmentation impacts each supply chain process, and the role technology plays in enabling profitable segmentation.
Defining supply chain segmentation
IT research and advisory firm Gartner describes supply chain segmentation as, “Designing and operating distinctly different end-to-end value chains (from customers to suppliers) optimized by a combination of unique customer value, product attribute, manufacturing and supply capabilities, and business value considerations. In essence, supply chain segmentation is the dynamic alignment of customer channel demands and supply response capabilities optimized for net profitability across each segment.”
This comprehensive definition covers a lot of ground, so let’s break it down into simpler terms.
First, you will want to group elements of your supply chain based on their value to your organization. This could be done by:
· Customers — as in the Walmart and mom-and-pop stores example
· Products — certain products may be key for growth strategies, for the customers who order them, or for the volume of sales they generate (think of the 80/20 rule)
· Channels — fulfilling direct-to-consumer orders is quite different than fulfilling orders from major retail or business-to-business customers
· Regions — supply chains in the BRIC countries (Brazil, Russia, India and China) and emerging markets are usually significantly different from those in the U.S. or Western Europe
A supply chain segment can be defined as a grouping based on one or more of any of the above categories, such as high- volume products sold to Walmart’s China operations, based on their value to the organization. That value may be defined by volume, revenue, profit margin, strategic importance, or any combination of these factors.
The second element of segmentation is the cost to serve. It is likely that the cost to serve a customer in Germany for a French company will be quite different than for that same company to serve a customer in India, for example. Determining the cost to serve across extended supply chains requires visibility into many cost factors. These may be difficult to obtain, so intelligent approximations may be used. Each segment represents a unique value to the organization along with the corresponding cost to serve. Offering differentiated service across these segments, profitably, is the goal of supply chain segmentation.
Supply chain segmentation at work
While a company’s physical assets raw materials, factory resources, warehouses, distribution centers and channels may be the same across all segments, its processes and policies for predicting customer demand and positioning supply can be different from one segment to another. It is in defining these processes and policies that supply chain professionals help drive competitive advantage and profitable growth. Let’s take a look at a product- based segmentation example to illustrate how business growth strategies might be supported with supply chain segmentation.
For instance, suppose a manufacturing company makes and sells 1,000 products globally. The company predicts that 50 of these products will be critical market share growth drivers going forward. This U.S.-based company decides to roll out these new products to the North American market first, with expansion to other markets to follow incrementally. Thus, this segmentation strategy will be based on the intersection of product, strategic importance and region.
Since these are new products (or existing products positioned in new ways), the company cannot forecast demand based on past sales history alone. The segmented approach to forecasting demand for these
50 products will require market intelligence on similar products and markets, along with close collaboration with marketing and sales personnel. These products will need to be tracked differently to monitor market acceptance, with more frequent plan-do-check-act feedback cycles relative to other products in the company’s portfolio. Therefore,
The company will need to deploy segmented demand forecasting techniques and performance tracking to support its business strategy for focused growth.
Driver shortages: Why the industry needs to be worried
While driver shortages are a global problem, with a recent survey from the International Road Transport Union suggesting that driver shortages are expected to increase by 25% year-on-year across its 23 member countries, the issue has very much made itself felt for UK businesses in recent weeks.
A perfect storm of factors, which many within the industry have been wary of, and warning about, for months, have led to a situation wherein businesses are suddenly facing significant difficulties around transporting goods to shelves on time, as well as inflated operating costs for doing so.
What’s more, the public may also see price rises as a result due to demand outmatching supply for certain product lines, which in turn brings with it the risk of customer dissatisfaction and a hit to brand and stakeholder reputation. Given that this price inflation has been speculated to hit in October, when the extended grace period on Brexit customs checks comes to an end, the worst may be yet to come.
"Steps must be taken to make a career in the industry a more attractive proposition for younger drivers, which will require a joint effort from government, industry bodies, and the sector as a whole"
That said, we have already been hearing reports of service interruption due to lack of driver availability, meaning that volumes aren’t being transported, or delivered, to required schedules and lead times. A real-world example of this occurred on the weekend of 4-6 June with convenience retailer Nisa, with deliveries to Nisa outlets across the UK affected by driver shortages to its logistics provider DHL.
But where has this skills shortage stemmed from?
Supply is the primary issue. Specifically, the number of available EU drivers has decreased by up to 15,000 drivers due to Brexit alone, and this has been further exacerbated by drivers returning to their home country during the COVID-19 pandemic, as well as changes to foreign exchange rates making UK a less desirable place to live and work. This, alongside the recent need to manage IR35 tax changes, has also led to significant inflation in driver and transport costs.
COVID-19 complications have also meant that there have been no HGV driver tests over the past year, meaning the expected 6,000-7,000 new drivers over the past year have not appeared. With the return of the hospitality sector we understand that this is a significant challenge with, for instance, order delivery lead times being extended.
It is little surprise, therefore, that the Road Haulage Association (RHA) earlier this month became the latest in a long line of industry spokespeople to write to the government about the driver shortage for trucks. The letter echoed the view held by much of the industry, that the cause of this issue is both multi-faceted and, at least in some aspects, long-standing.
So, many in the industry are in agreement as to the driving factors behind this crisis. But what can be done?
Simply enough, outside of businesses completely reorganising their supply chain network, external support is needed. In the short-term, the government should consider providing the industry with financial aid, and this can also be supported more widely with legislative change.
Specifically, immigration policy could be updated to place drivers on the shortage occupations list, which would go some way towards easing the burden created by foreign drivers returning to their home countries. Looking elsewhere, government should also look for ways to increase the availability of HGV driver tests after the blockage created by the coronavirus lockdowns.
Looking more long-term, steps must be taken to make a career in the industry a more attractive proposition for younger drivers, which will require a joint effort from government, industry bodies, and the sector as a whole. As it stands, multiple sources suggest that the average age of truck drivers in the UK is 48, with only one in every hundred drivers under the age of 25. We must therefore do more to increase the talent pipeline coming into the industry if we are to offset more significant skills shortages further down the line.
On the back of a turbulent year for the supply chain industry, it has become increasingly clear that the long-foretold shortage of drivers is now having a tangible and, in places, crippling effect on supply chains.
Drivers, and the wider supply chain industry, have rightly been recognised for the seismic role they played in keeping the nation moving and fed over the past year under unprecedented strain. If this level of service is to continue, we must now see Government answer calls to provide the support the sector needs, and work hand-in-hand with the industry to find a solution. If we do not see concrete action to this effect soon, we are likely to be in for a turbulent few months.
Rob Wright is executive director at SCALA, a leading provider of management services for the supply chain and logistics sector