Leveraging Supply Chain Segmentation for Profitable Growth

Manufacturing and distribution companies face an ever-widening range of customer demands as they serve diverse markets and dynamic global economies. Understanding these customer demands and crafting value propositions to serve them is critical for profitable growth and business retention.

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Leveraging Supply Chain Segmentation for Profitable Growth BY P U N E E T S AX E N A , V P I N D U S T R Y S T R AT E G Y, J DA S O F T WA R E Manufacturing and distribution companies face an ever-widening range of customer demands as they serve increasingly diverse markets across dynamic global economies. Understanding these changing customer demands and crafting attractive value propositions to serve them is becoming increasingly critical for profitable growth and business retention. Previous one-size-fits-all supply chain strategies cannot adequately or profitably achieve this goal. Instead, companies must segment their supply chain strategies and operations to balance cost-to-serve with the value to the business for each segment. That is the recipe for today’s high-performing supply chains. The concept of segmentation is not new, however. For example, suppose you are a large food manufacturer with a significant portion of your revenue coming from Kroger or Albertson’s. Most likely you have a team and a set of strategies dedicated to each account. The value of their business to you warrants this level of service. The same cost-benefit ratio would not apply for every corner food store who also buys your products, though. You probably have a quite different supply chain strategy for those customers. This difference in strategies in serving various customer segments based on their value to your business is what supply chain segmentation is all about. But the differences between segments may not always be as dramatic as this example. A large portion of your business may be in the middle ground, such as regional grocers or convenience store chains. These may be of insufficient total value to your business to warrant dedicated teams, but large enough to require more attention than a corner store. It is often in this middle ground that companies can especially leverage automated supply chain segmentation to positively impact their growth and profitability. W H I T E PA P E R Leveraging Supply Chain Segmentation for Profitable Growth Supply Chain Segmentation Defined Gartner, a global research and advisory firm, 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.” 1 That 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 business. Commonly this includes: • Customers – as in the Kroger and corner store 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 retailers or B2B customers • Regions – supply chains in the BRIC countries and emerging markets are usually quite different from those in North America or Western Europe A supply chain segment can be defined as a grouping based on one or more of the above categories, such as high-volume products sold to Walmart’s North American operations, based on their total annual value to the organization. That value may be defined by volume, revenue, profit margin, strategic importance, or any combination of these factors. The second consideration for segmentation is cost-to-serve. For example, 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. Determining the cost-to-serve across extended supply chains requires visibility to many cost factors, such as production costs, transportation costs, distribution costs and government import/export fees. These costs may be difficult to determine, 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 Processes While a company’s physical assets—raw materials, factory resources, finished goods inventories, warehouses, distribution centers and channels—may be the same across segments, its processes and policies for forecasting customer demand and positioning inventory can be quite different from one segment to the next. By intelligently defining these processes and policies, supply chain professionals can help drive competitive advantage and profitable growth. Let’s consider a manufacturing company that makes and sells 1,000 products globally. The company believes that 50 of those products will be critical 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 regions to follow incrementally. Thus, this segmentation strategy will be based on the intersection of product, strategic importance and region. To be successful, a segmentation strategy must flow through all areas of the business. A good segmentation plan, for example, will be of little value if it cannot be put into action during the execution phase. Let’s examine the main components of a segmentation strategy for our sample company. Segmented Demand Planning Since these are new products, or existing products positioned in new ways, the company cannot forecast demand based on past sales history. The segmentation approach for forecasting demand for these 50 products will require market intelligence on similar products and markets coupled with close collaboration with marketing and sales personnel who are familiar with the customer base. These new products will need to be tracked separately to monitor market acceptance, with more frequent feedback cycles relative to other products in the company’s portfolio. Deploying this segmented demand forecasting technique and performance tracking will support the company’s business strategy for focused growth. Inventory Segmentation High inventory availability and corresponding customer service levels are critical to support rapid growth of new products. The company’s strategy to pursue market-share growth through the 50 products will require special attention to inventory policies associated with these products in the North American target market. Higher service levels require higher investments of working capital in inventory. This segmented approach to inventory planning will require an increase in service levels on these products in North America, say, to 99 percent. This may require a corresponding decrease in service levels on other products which the company is not marketing as aggressively, perhaps to 95 percent. As was the case with demand planning, inventory and customer service performance related to these 50 products will need to be monitored separately, in line with the company’s business strategy to leverage these products for growth. 1 Gartner IT Glossary, Gartner.com Leveraging Supply Chain Segmentation for Profitable Growth Master Planning and Replenishment Producing inventory to meet higher service levels on the strategic products may have significant impact on manufacturing and replenishment policies. Demand prioritization may need to be adjusted to increase the production priority associated with these products. If delivery lead times are a competitive differentiator, positioning these products in finished goods form (make-to-stock) closer to customers may also become a priority. While manufacturing postponement strategies, such as build to a semi-finished stage and assemble-to-order thereafter, may still make sense for some of these products, they may need to be deployed differently. As the company strives for profitable growth by leveraging these strategic products, master planning policies for production and replenishment will need to be tailored accordingly to serve this segment effectively. Allocation Planning and Order Promising As the company seeks market-share growth in North America from these strategic products, finished goods supply from across the company’s global manufacturing network will need to be allocated more heavily towards North America to support the expected spike in sales. Thus, the company will need to adjust its allocation policies to make sure that projected supply is assigned appropriately across regions in line with its business growth strategy. With suitable allocations in place, order promising in North America should result in short lead times, even with rising demand. Conversely, unexpected demand in Europe or Asia- Pacific would be promised longer delivery lead times because of limited supply allocations, in line with the business strategy. Strategic segmentation based allocation planning and order promising helps balance value to the business against service levels required to support corporate objectives. Planning for Profitable Execution Carefully laid plans for the strategic products can become pointless during execution if the cost-to-serve is too high. There are several factors to consider. First, the company will want faster cycle times, but with reasonable costs, to fulfill high priority orders on the strategic products. Warehouse slotting should be used to place the strategic products in forward pick areas so workers can access them faster with less travel. This will help reduce cycle times and costs. Second, labor management systems can reduce the effort and expense for receiving, put-away, replenishment, picking and shipping these strategic products by instituting preferred methods and standards for performing each task. The work is monitored in real time so supervisors can quickly make adjustments if work falls behind schedule. Finally, higher service levels for strategic goods may require faster replenishment. This often means smaller, more frequent shipments that raise transportation costs. Therefore, transportation expense must also be considered as part of the cost-to-serve model that is balanced against desired service levels. Careful shipment planning for the strategic products, including load consolidation, mode selection, routing and carrier selection, can significantly reduce transportation costs while ensuring high service levels. The business strategy in this simple example was to drive profitable growth through focusing on a subset of products in one specific region. That segmented business strategy required a segmented supply chain response – including specific adjustments to demand, inventory, master planning, replenishment, allocation, order promising, distribution, labor and transportation management processes. In doing so, even though physical resources remain the same, the end-to-end value chain for strategic products operates differently from the value chain for all other products. That is how supply chain segmentation can be leveraged for growth. Leveraging Supply Chain Segmentation for Profitable Growth UK & Northern Europe +44 (0) 1344 354500 France & Southern Europe +33 (0)1 56 79 27 00 US +1 800 479 7382 Canada & Latin America +1 480 308 3555 WEB jda.com EMAIL info@jda.com ASIA PACIFIC Singapore +65 6305 4350 Australia +61 3 9860 1000 South Korea +82 2 3016 0700 India +91 22 6700 0794 Japan +81 3 4461 1000 China +86 21 2327 9400 EUROPEAMERICAS Copyright © 2014, JDA Software Group, Inc. All rights reserved. JDA is a Registered Trademark of JDA Software Group, Inc. All other company and product names may be Trademarks, Registered Trademarks or Service Marks of the companies with which they are associated. JDA reserves the right at any time and without notice to change these materials or any of the functions, features or specifications of any of the software described herein. JDA shall have no warranty obligation with respect to these materials or the software described herein, except as approved in JDA’s Software License Agreement with an authorized licensee. 09.20.14 4-Color Technology Enablement To be successful, segmentation strategies must ripple through all aspects of supply chain operations. This will require careful analysis, planning and monitoring to balance higher service levels with associated cost-to-serve. While conceptually appealing and intrinsically valuable, companies have often struggled to deploy supply chain segmentation strategies because underlying decision support technologies have not been readily available for end-to-end value chains. That has changed with the advent of new, advanced technologies over the past few years. JDA offers advanced, integrated supply chain planning and execution technology to drive end-to-end value chains, including all supply chain processes described in this article. Together with in-line analytics for real-time analysis of disruptions and trends, and in-memory processing for speed and scalability, JDA supply chain management suites now provide everything leading companies need to profitably grow their business and create competitive advantage through intelligent supply chain segmentation. The technology is ready. It is up to you to leverage it for your growth and profitability.