Practical Supply Chain Segmentation

Segmentation is a topic far from unfamiliar to the pages of TheValueChain.net, and this fantastic guest post from John Sewell, Principal at leading supply chain consultants Crimson & Co continues the trend with aplomb. If segmentation is something you have yet to try, maybe dabble in or if you are simply looking for a more strategic approach, this post will be of interest.

• There is an explosion of demands on the supply chain, driven by diversity in markets and customer demands; this requires differentiation of how the supply chain is managed, summarised as supply chain segmentation
• Most attempts to introduce segmentation have been disappointing. There are many ways of segmenting the supply chain – simple ‘lean versus agile’ solutions barely start to recognise the real challenges of what will make a difference
• There is a need for a new, rigorous approach to effective segmentation strategies that will have impact in your business

If the answer to supply chain segmentation is “lean or agile” then the answer to food is “sweet or savoury”, it may represent one of your choices but does not come close to being all the choices you have.

There is an explosion of demands on the supply chain, driven by increasing diversity in markets and customer demands. In markets, globalisation and penetration of the central supply chain down to the local market mean that products have to be managed, made, sold, delivered and paid for; in tiny alcoves in mega cities through mega-marts in the heartlands to single unit traders at the end of a river trip; on-line and off-line. Meanwhile, the customer wants the product: immediately, custom configured, made or even designed; and cheap and exclusive. And all this needs to be accommodated in one supply chain.

It is a cliché that one-size-fits-all is no longer good enough, running a supply chain with the same performance measures, skills, systems support and way of operating but trying to accommodate the explosion of requirements leads – gradually, painfully – to complexity, confusion and lost performance.

Supply chain segmentation is presented as the thing to fix it, and how can you argue with it? Clearly, a part of the supply chain that has to satisfy stable demand with lowest cost product will need all aspects of lean operations – in buying, the factory, distribution and in the relations to suppliers and customers – to deliver lowest cost consistent service to the customer.

Similarly, a product with erratic demand but high margins may justify the cost of holding spare capacity or inventory at each stage in the supply chain so that we never miss out on a sale, even at the most erratic peaks. If these clearer objectives are linked to performance measures, infrastructure, processes and systems, while maintaining the overall economies of scale of a single supply chain: then it has to be a clearer, simpler task for everyone involved.

Segmentation is not, of course, new. Even before it became a buzz word in supply chains, different businesses have always combined a mix of expertise – the challenge now is that the cost and complexity of just “working-it-out-on-the-job” has become too high.

We have seen a lot of attempts to create clarity. Starting with the Supply Chain Insight Framework from the late 1990s and since then we have worked with many companies in refining their streams of business and how to manage, operate and measure them. We have also seen a lot of academic exercises. There is a typical lifecycle to them. Start with lots of enthusiasm with some early clear wins, often in manufacturing with a focus on lean and agile cells, or focus on tender business versus continuous flows. Produce some early good results.

Followed by a long waning of the programme as the intellectual case remains strong but where, frankly, everybody runs out of ideas of what to do next. Somewhere in this programme there always seems to be a packaging postponement exercise (make in bulk, pack-off on demand), which always seems to end up a big mess.

What to do? To get a supply chain segmentation programme that is actually going to produce sustainable results requires a much deeper focus than most outside advisors actually go for. Simply looking at product volume versus product volatility is never going to be the answer.

Agility? What sort of agility is needed – the agility to respond to erratic demand, or is it the agility to launch novel products which may be wildly successful but may bomb, or the agility to configure products to individual customer requirements, or the agility to flex the physical supply chain in response to changing costs, duties or political risk? Each of these agilities requires different skills, measures and solutions. In turn, some solutions will apply right along a product’s supply chain, from material purchase through to customer delivery, but others will only really produce a different way of organising in manufacturing or distribution or customer interface or some other aspect of the supply/demand chain.

How to move from a lot of ‘arm waving’ to practical action? Step one is to recognise that setting the future of your supply chain cannot be based on some ‘intuitive’ and ‘obvious’ opportunities. When the process is finished the segments may become obvious, but to start, go for a clean sheet of paper. Then work through all the factors that are likely to cause different management techniques along the supply chain: as well as a product’s volume and its erratic nature our estimate is that most businesses have ten or more relevant factors out of possibly hundreds. Why wouldn’t the products’ customers’ type be relevant? Why not their stage in their product lifecycle, or profitability? There are a whole range of features that are bound to be relevant to the management of products.

Crimson & Co has worked with a major multinational business to develop a method of much more rigorously clustering customers that share similar characteristics. This is allowing a comprehensive approach to grouping products and identifying products as they – inevitably – move from one grouping to another.

Once clusters are identified action plans are developed that focus on real actions that can be taken to improve performance. Are these novel; in some cases they are, but more importantly they are comprehensive, all products have a strategy, a working process and appropriate performance measures – not just a few obvious candidates.

Having the clusters themselves do not necessarily stimulate a crazy rush to a new world order. With a clear identification of the groupings both by function and across the supply chain it becomes possible to quantify the opportunity from each, enabling clear prioritisation of what is going to deliver the biggest bang first.

Interestingly, our observations so far is that the ‘obvious’ actions are already anticipated – you may not think you are running a very flexible approach to very volatile products but your planners and people on the shop floor are already managing them differently.

The real prizes come in the less spectacular groups where effective refinement of focus and management can produce really valuable results in inventory, service and cost.

We will be describing our approach to designing supply chain segmentation at LogiCon, 07 – 09 February 2012, Amsterdam. To find out more, visit logiconeurope.com

Related posts:

1. Supermarket Supply Chains: The Cost Of Convenience
2. Does Your Supply Chain need a Health-Check?
3. Supply chain finance is a key cog in the buyer-seller relationship