Supply Chain Segmentation - Dreams and Reality
Written by Dave Alberts, Director, Crimson & Co
There is a standard remedy being prescribed to big global companies, it is called supply chain segmentation. It is being pushed by academics and experts along with a big dose of theory on the need to be both lean and agile, and customer aligned - but does it all sound a bit thin?
If segmentation is the right answer, how do you adopt a more rigorous approach to defining your supply chain segments?
Let’s start with a little scene setting. We are all experiencing an explosion of new pressures on the supply chain driven by increasing diversity in markets and customer demands. The resultant penetration of the central supply chain into local markets means that products have to be managed, manufactured, sold, delivered and then paid for in a number of locations and in many different ways, both online and offline.
All this needs to be accomplished in a way that provides enough flexibility to handle all the market conditions and customer requirements in a joined up single method. This is whilst recognising the need for different performance measures, skills, systems support and ways of operating per region and per market.
Enter supply chain segmentation (which of course is not new). There have been lots of attempts to provide clarity on how to segment and then implement such a strategy. Unfortunately most of the resultant programmes go through a typical lifecycle that starts with lots of enthusiasm with some early clear wins, often in manufacturing with a focus on lean and agile cells, or on tender business versus continuous flows. This produces some good early results but is often followed by a waning of interest as everybody starts to run out of ideas on what to do next despite the intellectual argument remaining strong
Simplification and focus is key - but how can you simplify without losing track of reality?
The key to achieving segmentation is not to lose control of the key things that deliver real business value.This requires a laser focus on the capabilities, processes, people, infrastructure and control that is needed, and it requires a much deeper approach than most people adopt. Simply looking at product volume versus volatility to decide where you need to be lean and where you need to be agile is never going to be the answer – it is too shallow an approach.
The question is what sort of agility is needed; agility to respond to erratic demand, or agility to launch new products; agility to configure products to individual customer requirements, or agility to flex the physical supply chain in response to changing costs?
Each of the different types of agility requires different skills, measures and solutions. Some of these will apply right along a product’s supply chain but others may only really produce a different way of organising certain parts of the supply chain.
The starting point is to recognise that setting a course for your future segmented supply chain is unlikely to be based on some intuitive and obvious opportunities, and you need to start with a clean sheet of paper. Then you have to work through all the factors that are likely to require different management techniques along the supply chain: as well as a product’s volume and its erratic nature, most businesses have ten or more relevant factors out of possibly hundreds. Why wouldn’t the customer types be relevant? Why not product lifecycle, or profitability? There are a whole range of features that are bound to be relevant to the management of products. You have to use a comprehensive approach to grouping products and identifying how they inevitably move from one grouping to another.
Once the clusters have been identified, plans can then be developed per group to focus on the real actions that can be taken to improve performance. Will these be novel? Perhaps, but more importantly they need to be comprehensive with all products having a strategy, working process and appropriate performance measure, and this cannot be restricted to a few obvious candidates. For many the required actions may be obvious but the big prizes come from the less spectacular groups where effective refinement of focus and the management approach will produce valuable results in inventory, service and cost. As always the devil lies in in the detail and not in academic dreams!
NTT DATA Services, Remodelling Supply Chains for Resilience
Joey Dean, the man with the coolest name ever and Managing Director in the healthcare consulting practice for NTT DATA and is focused on delivering workplace transformation and enabling the future workforce for healthcare providers. Dean also leads client innovation programs to enhance service delivery and business outcomes for clients.
The pandemic has shifted priorities and created opportunities to do things differently, and companies are now looking to build more resilient supply chains, none needed more urgently than those within the healthcare system. Dean shares with us how he feels they can get there.
A Multi-Vendor Sourcing Approach
“Healthcare systems cannot afford delays in the supply chain when there are lives at stake. Healthcare procurement teams are looking at multi-vendor sourcing strategies, stockpiling more inventory, and ways to use data and AI to have a predictive view into the future and drive greater efficiency.
“The priority should be to shore up procurement channels and re-evaluate inventory management norms, i.e. stockpiling for assurance. Health systems should take the opportunity to renegotiate with their current vendors and broaden the supplier channel. Through those efforts, work with suppliers that have greater geographic diversity and transparency around manufacturing data, process, and continuity plans,” says Dean.
But here ensues the never-ending battle of domestic vs global supply chains. As I see it, domestic sourcing limits the high-risk exposure related to offshore sourcing— Canada’s issue with importing the vaccine is a good example of that. So, of course, I had to ask, for lifesaving products, is building domestic capabilities an option that is being considered?
“Domestic supply chains are sparse or have a high dependence on overseas centres for parts and raw materials. There are measures being discussed from a legislative perspective to drive more domestic sourcing, and there will need to be a concerted effort by Western countries through a mix of investments and financial incentives,” Dean explains.
Wielding Big Tech for Better Outcomes
So, that’s a long way off. In the meantime, leveraging technology is another way to mitigate the risks that lie within global supply chains while decreasing costs and improving quality. Dean expands on the potential of blockchain and AI in the industry.
“Blockchain is particularly interesting in creating more transparency and visibility across all supply chain activities. Organisations can create a decentralised record of all transactions to track assets from production to delivery or use by end-user. This increased supply chain transparency provides more visibility to both buyers and suppliers to resolve disputes and build more trusting relationships. Another benefit is that the validation of data is more efficient to prioritise time on the delivery of goods and services to reduce cost and improve quality.
“Artificial Intelligence and Machine Learning (AI/ML) is another area where there’s incredible value in processing massive amounts of data to aggregate and normalise the data to produce proactive recommendations on actions to improve the speed and cost-efficiency of the supply chain.”
Evolving Procurement Models
From asking more of suppliers to beefing up stocks, Dean believes procurement models should be remodelled to favour resilience, mitigate risk and ensure the needs of the customer are kept in view.
“The bottom line is that healthcare systems are expecting more from their suppliers. While transactional approaches focused solely on price and transactions have been the norm, collaborative relationships, where the buyer and supplier establish mutual objectives and outcomes, drives a trusting and transparent relationship. Healthcare systems are also looking to multi-vendor strategies to mitigate risk, so it is imperative for suppliers to stand out and embrace evolving procurement models.
“Healthcare systems are looking at partners that can establish domestic centres for supplies to mitigate the risks of having ‘all of their eggs’ in overseas locations. Suppliers should look to perform a strategic evaluation review that includes a distribution network analysis and distribution footprint review to understand cost, service, flexibility, and risks. Included in that strategy should be a “voice of the customer” assessment to understand current pain points and needs of customers.”
“Healthcare supply chain leaders are re-evaluating the Just In Time (JIT) model with supplies delivered on a regular basis. The approach does not require an investment in infrastructure but leaves organisations open to risk of disruption. Having domestic centres and warehousing from suppliers gives healthcare systems the ability to have inventory on hand without having to invest in their own infrastructure. Also, in the spirit of transparency, having predictive views into inventory levels can help enable better decision making from both sides.”
But, again, I had to ask, what about the risks and associated costs that come with higher inventory levels, such as expired product if there isn’t fast enough turnover, tying up cash flow, warehousing and inventory management costs?
“In the current supply chain environment, it is advisable for buyers to carry an in-house inventory on a just-in-time basis, while suppliers take a just-in-case approach, preserving capacity for surges, retaining safety stock, and building rapid replenishment channels for restock. But the risk of expired product is very real. This could be curbed with better data intelligence and improved technology that could forecast surges and predictively automate future supply needs. In this way, ordering would be more data-driven and rationalised to align with anticipated surges. Further adoption of data and intelligence and will be crucial for modernised buying in the new normal.
These are tough tasks, so I asked Dean to speak to some of the challenges. Luckily, he’s a patient guy with a lot to say.
On managing stakeholders and ensuring alignment on priorities and objectives, Dean says, “In order for managing stakeholders to stay aligned on priorities, they’ll need more transparency and collaborative win-win business relationships in which both healthcare systems and medical device manufacturers are equally committed to each other’s success. On the healthcare side, they need to understand where parts and products are manufactured to perform more predictive data and analytics for forecasting and planning efforts. And the manufacturers should offer more data transparency which will result in better planning and forecasting to navigate the ebbs and flows and enable better decision-making by healthcare systems.
Due to the sensitive nature of the information being requested, the effort to increase visibility is typically met with a lot of reluctance and push back. Dean essentially puts the onus back on suppliers to get with the times. “Traditionally, the relationships between buyers and suppliers are transactional, based only on the transaction between the two parties: what is the supplier providing, at what cost, and for what length of time. The relationship begins and ends there. The tide is shifting, and buyers expect more from their suppliers, especially given what the pandemic exposed around the fragility of the supply chain. The suppliers that get ahead of this will not only reap the benefits of improved relationships, but they will be able to take action on insights derived from greater visibility to manage risks more effectively.”
He offers a final tip. “A first step in enabling a supply chain data exchange is to make sure partners and buyers are aware of the conditions throughout the supply chain based on real-time data to enable predictive views into delays and disruptions. With well understand data sets, both parties can respond more effectively and work together when disruptions occur.”
As for where supply chain is heading, Dean says, “Moving forward, we’ll continue to see a shift toward Robotic Process Automation (RPA), Artificial Intelligence (AI), and advanced analytics to optimise the supply chain. The pandemic, as it has done in many other industries, will accelerate the move to digital, with the benefits of improving efficiency, visibility, and error rate. AI can consume enormous amounts of data to drive real-time pattern detection and mitigate risk from global disruptive events.”