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.