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
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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.
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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