6 Reasons to Consider Supply Chain Segmentation

Gartner defines 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 is a complicated way to say that you need to consider the characteristics of your products, channels and service models in order to provide the most profitable supply chain. This can be complex as it may require different skills from the same company and reduce the ability to use synergies in various parts of the supply chain.

For example, you can see the difference in capabilities between Amazon which specializes on internet orders and any other competitor in this space especially ones who also have stores. 

Many companies are not aware that they need to segment their customers and they currently treat everyone with the same supply chain strategy. While this helps keep things simple, the needs of some customers may not be met and for others the cost of meeting their needs is too high. The following are six reasons why it is important for companies to perform Supply Chain Segmentation:

1. Reduce Complexity: In order to segment the supply chain companies need to go through an extensive customer analysis. This requires understanding of how customers are purchasing products and services, and what combinations are profitable. Therfore this provides an opportunity to reduce complexity. Working with Dell, as described in one size does no fit all we identified a reduction of 99% in the number of configurations offered. Opportunities to reduce complexity may also be found in product design and in the delivery methods.
2. Discover Synergies: Despite the need to offer different value propositions to different customer segments, companies can drive synergies in the supply chain by leveraging volume across the various segments to reduce costs. This is done through leveragin economies of scale. For example, as a result of standard components and leveraging procurement across segments, the manufacturing infrastructure can usually also be used by all supply chains. There is no need to dedicate production facilities to serve a specific customer segment. Instead, the focus can be platform or model based, allowing companies to drive economies of scale.
3. Increase Standardization: Another opportunity in leveraging volume across various segments (or customers) is to emphasize the use of standard components in product design. Often, customer segmentation is driven by the level of configurability. For example, in the corporate segment, each customer has its own configuration but with large batch sizes and many common standard   components. Similar in the online segment where customers can configure their own solution, based on standard components. While the corporate business might be best served by a Configure-to-Order strategy and the online segment by a Build-to-Order strategy, both can be based on a product design in large with common parts.
4. Design for Supply chain: Rather than simply taking what the product teams create, put in place processes and tools in to accurately evaluate the impact of design and development decisions on the portfolio. By helping product managers or designers/developers to predict the impact of their new products or product changes on total landed cost and other supply chain ramifications, we can create more efficient designs.
5. Expand Integration: In order to coordinate manufacturing capacity for the different supply chains, companies need a single process. With other words, the ability to drive economies of scale in a shared manufacturing network also drives efficiencies on the planning side. A single, integrated Sales and Operations Planning (S&OP) process across all supply chain segments will align demand, supply and inventory, and allocate production capacity to the various supply chains based on actual and forecasted demand.
6. Match Customer Value: The most important reason, however, is the customer value. It is the key driver for the right operational strategy, balancing the need for efficiency with customer needs. If the operational strategy is out of synch with the customer value proposition, customer service levels decline and inefficiencies increase. SC segmentation recognizes that different customer segments have different needs; it provides a responsive strategy focused on speed, order fulfillment, service level and customer satisfaction. This will help any company achieve lower inventory costs by increased responsiveness. Executing a SC Segmentation project with Dell, for example, has led to a transformation with remarkable results. With the help of advanced analytics and optimization techniques Dell identified four customer segments resulting in three different SC strategies. The product portfolio was optimized by cutting off a long-tail of parts, also identified using advanced analytics. Product configurations that were not contributing to the bottom line were reduced by 99% while net income grew by 85% and EPS by 40%. Forecast accuracy increased by a factor of three and product availability by 37%.

Source: OPS Rules

Related: Supply Chain Segmentation: Operational Reality or Just a Pipe Dream?