“All unsuccessful segmented supply chains are alike; each successful supply chain is successful in its own way.” ― Leo Tolstoy Sadovy
Segmentation is the new big thing in supply chain management, or at least it’s an old big thing made new again. It was the keynote topic at last month’s IE Group Supply Chain Summit in Chicago, and is typically addressed by at least a couple of speakers at every supply chain conference I’ve seen lately.
The complexity of customer expectations and service levels, your product portfolio, the global supply chain, varied distribution channels, coupled with the internet and social media, makes moving from an undifferentiated to a segmented supply chain almost an imperative, even though doing so adds a layer of complexity that many manufacturing companies are not ready for. To read the recent literature on the topic, when you start trying to combine segmentation based on your products with segmentation based on your customers, it goes from merely complicated to overly complex in a heartbeat.
Here’s a short list of just a few of the various segmentation strategies and permutations to consider:
- Product-driven segmentation:
- Large volume, long production runs, standardized operations
- Limited editions, fluctuating demand
- Made-to-order, low volume, short runs, high margin (high cost-to-serve?)
- A volume / variability 2x2 matrix
- High volume commodities
- High volume seasonal or promotional items
- Low volume, predictable
- Low volume specialty or custom orders
- A typical three-segment retail-oriented model:
- Regular replenishment
- Seasonal, but predictable demand (swimwear, lawn fertilizer)
- Volatile, one-off demand (fashion, new products, promotions)
- Customer-based segmentation – many ways to do this:
- Standard, higher quality, or premium service / customization
- By channel
- By lead-time service level (build-to-stock, configure-to-order, build-to-order)
- By customer size, volume or value
- Other customer characteristics, such as vendor managed inventory, level of data and forecast/POS integration / collaboration, SLA penalties or geography
- Risk-oriented segmentation, based on political, environmental or economic risk/disruption factors, and on product lifecycle stage considerations
I am a practical sort, concerned primarily with execution. I want to make Pareto’s Law work for me and go after the low-hanging 80% that only requires 20% of the effort, and I want that first demonstrable success. Lastly, I would be well advised to dust off the old adage – keep it simple, stupid – and that list of possible segmentation models above looks anything but simple.
The conference keynote case study mentioned above concerned a multinational alcoholic beverage company that was trying to balance the production needs of large volume, stable, established brands with the flexibility needed in a surprisingly innovative market that sees several hundred new products introduced every year. Their big breakthrough was to move from a one-plant/one brand, one-line/one-product practice (largely inherited via multiple acquisitions over the years) to an agile approach where each line in each plant could handle any combination of product, bottle, label or packaging. For example, before the changeover, there were some labels that had to be spun on clockwise, and other labels counterclockwise, which just by itself cut the number of available production lines in half.
With that in mind, and based on the success stories and key takeaways I’ve seen presented or in print, I think I’d approach my first supply chain segmentation project in the following manner:
- Get a good understanding of my cost-to-serve.
- Employ analytic forecasting.
- Take a product-oriented approach to the supply chain segmentation.
- Deal with my customer segmentation opportunities via inventory and service policy.
Breaking these down a bit further:
- Cost-to-serve. Before I do anything, I want accurate product, process, customer and channel costs on which to base my decisions, informed by a cost and profitability management solution that gives me cost output I can trust.
- Analytic forecasting. Because it all starts with the forecast. It can only get worse from there. Start higher in order to finish higher.
- Product-oriented approach. Yes, it’s inside-out thinking, but it seems to be where all the successful segmentation projects started from. It’s easier to understand and control than either working back from the customer or trying to bite off the entire holistic supply chain in one go.
- I’m still going to have to deal with customer and channel differences. What if a high-value customer wants a low-value product? We all know how that story ends – Lola gets what Lola wants. I need to accommodate my premium customers through some post-production combination of inventory policy, customer service/care, and order allocation/commitment process.
I can, however, imagine several scenarios where I might have to start from the customer and work backwards, such as having the federal government as a customer (where mil-spec products might necessitate a holistic supply chain approach all the way back to the farthest tier-n supplier), or when you have significantly different classes of customers who buy through distinctly separate channels. But for all practical purposes, you aren’t going to get one specific segmentation scheme that meets both all of your operational priorities and all your high-priority customer needs (and mitigates all your major supply chain risks).
One final bit of advice from the experts can be summed up as: One physical supply chain with multiple virtual segmented supply chains running against it. These virtual supply chains are distinguished by policy, not by brick-and-mortar – inventory, sourcing, production, fulfillment, logistics and service policies. Because it’s easier to change policy than to change concrete and steel.
As nearly every supply chain expert stresses, one size does not fit all. You need to select a segmentation strategy that’s right for your business. But please do select just one appropriate strategy, not some unworkable hybrid. Unsuccessful supply chains are alike in that they tend to be more complex than they have to.