Daily Archives: June 2, 2014

Segmentation Strategies for Success

In their IdeaBook 2014, the editors of DC Velocity and Supply Chain Quarterly published a piece on Supply Chain Segmentation: 10 Steps to Greater Profits that stated that segmentation lets companies boost profitability by tailoring their supply chain strategy to each customer and product in their portfolio. The paper aimed to outline 10 key practices that would ensure success.

The purpose of segmentation is to align supply chain policies to the customer value proposition as well as to the value proposition for the company as a whole.
A company that adopts segmentation will develop multiple virtual supply chains that run against each physical supply chain and move towards a portfolio management approach where they have a portfolio of customers and channels, a portfolio of products, and a portfolio of suppliers and supply modes.

Success depends on doing it right. The ten keys to successful segmentation presented in the paper are good ones.

1. Regular Demand and Cost-to-Serve Analysis.
The goal is to tailor service agreements and supply chain policies in order to raise the overall profitability of the portfolio. It also helps you to provide value to the business by highlighting both profitable and unprofitable product and service lines. A truly valuable Supply Management department can guide the organization down a more profitable path in addition to saving coin.

2. Differentiated Demand Policies in Core Functions.
Not all products are as equally profitable, or equally critical to business operation. While a company can’t stock-out on critical pats to keep a production line running and shouldn’t stock-out on the products that are in the highest demand by its customers, there will be little or no detriment to occasionally running out of office supplies or forcing a customer to wait an extra few days for a part that is rarely bought. Thus, expedited orders should not be placed promptly when (potential) stock-outs are detected for non-critical products but should be when a critical part is out of stock and production or profit will be impacted considerably.

3. Differentiated Inventory Policies.
Just like non-critical parts and products should not be unnecessarily expedited, stock-levels of non-critical parts and products shouldn’t be unnecessarily high. An occasional stock-out on a non-critical product is worth the shipping savings obtained by buying an appropriate volume that generates the appropriate product and shipping discounts.

4. Differentiated Customer Replenishment Programs.
Just like some products and services will be much more valuable than others, some customers will be much more valuable than others. In addition, your contracts will dictate that some customers receive higher service levels (and, if the person executing the contract did her job right, the service level each customer receives corresponds to the value of the customer).

5. Differentiated Supplier Allocation Programs.
Just like some customers will be much more valuable than others, some suppliers will be much more valuable than others as each supplier has different capabilities. For example, nearshore facilities will provide opportunities for quick replenishment, but offshore facilities will often provide opportunities for low-cost high-volume replenishment. Use the right supplier for the right order at the right time.

6. Regular Total-Landed-Cost Sourcing Analysis.
As SI continually insists, it’s important to do a total cost analysis before making a sourcing decision because it’s not what you pay per unit, it’s what the buy costs you overall! If you’re having difficulty, obtain a real strategic sourcing decision optimization solution.

7. Differentiated Allocation and Order Processing.
Allocation is the process of reserving inventory and/or capacity for certain customers or groups of customers. The intention is to make sure that the needs of preferential customers are always met. Similarly, orders are processed in order of customer preference.

8. Incorporate Monthly and Weekly Tradeoffs into S&OP.
S&OP once a month isn’t enough — demand patterns change weekly, and in some fast-moving verticals, even daily. Be sure to update forecasts, inventory levels, and allocation strategies at least weekly.

9. Business Optimization Centre for Continuous Learning.
In order to progress to the next level on your Supply Management journey, your organization will need a Supply Chain Center of Excellence whose mission includes establishing, implementing, and monitoring segmentation policies, and then continuously learning as such policies are executed over time.

10. Automated Policy Management.
Not only is the supply chain centre of excellence responsible for policy analysis, deployment, and management but it is also responsible for ensuring that the various policies related to promising, fulfillment, inventory, transportation, manufacturing, and sourcing are coordinated, aligned and synchronized in time. In order to succeed in any strategy, segmentation or otherwise, it’s critical that the organization continuously improve.

Furthermore, even if your organization isn’t looking to apply (much) segmentation, it’s all good advice for any Supply Management operation.