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10 Steps in Supply Chain Segmentation

10 Steps in Supply Chain Segmentation

Many companies are trying to tackle two apparently conflicting challenges as a result of a slowed global economy and fierce competition. While not new to business practices, companies need to reduce costs while simultaneously driving growth through innovative strategies. Traditionally, strategy focused on targeting sales growth through marketing efforts and cost reduction to the supply chain.

This approach typically led to pursuing marketing and supply chain separately. One lesson learned form a sour economy is that companies need to align supply chain segmentation with business alignment. Such practices will ensure there is congruence between customers, the product, marketing efforts and supply chain strategy.

Segmentation is an ideal way for supply chain managers to get the most out of facility practices. Essentially, companies can boost profitability by tailoring supply chain strategy based on each customer and product. This gives them the flexibility to customize service agreements for customers, which can help to increase sales. At the same time, segmentation reduces operational costs because it aligns supply chain policies with the value proposition important to the customer and company.

Typically, value proposition drives segmentation practices by including the, quantity, delivery times, flexibility and service level for customers. When aligned with different policies that shape fulfillment, transportation, inventory, sourcing and manufacturing mode, the entire network and transportation design is improved.

10 Ways to Achieve Supply Chain Segmentation

Supply chain segmentation offers significant financial benefits for many companies. Here are 10 general ways that companies can achieve supply chain segmentation and reach goals.

1. Perform analyses for regular demand and cost-to-serve. Underpinning segmentation is a data-driven analysis of what drives demand and what makes certain products and customers more profitable. Through such analysis, companies have the information necessary to customize service agreements and policies for supply chain management. The goal is to raise a portfolio's profitability without compromising reliable service.

Demand and profitability dynamics change frequently in today's business landscape. Therefore, companies that use this method of segmentation should make it a standardized practice.

While the practice is standardized, there are numerous ways that companies may choose to perform demand and cost-to-serve analyses. Some companies have started with a simple model that assigns ordering costs, inventory and transportation to products based on different ordering dynamics. Typically, this method of analysis produces data that is integrated into a decision-making framework.

2. Implement demand policies for core functions. Not long ago, demand was considered a single requirement that prompted reaction in any supply chain. Now, companies rely on demand signals such as orders, forecasts and safety stock from various distribution channels. Furthermore, demand signals may come from highly profitable and unprofitable customers.

By aligning segmentation strategies based on demand signals, core functions of the supply chain such as transportation and distribution should be prioritized to align with those strategies. The overall segmentation strategy is what drives demand priorities to tie the service/profitability framework. Systems that use these core functions should be easy to configure and adaptable to changing priorities.

3. Utilize inventory policies. For most supply chains, inventory may the one common area that has used segmentation in recent years. Optimization of inventory has progressed during a period where process-driven discipline was practiced regularly. Companies had to determine the what, where and quantity of inventory across a multilayered network for high and low priority customers.

Utilizing inventory policies begins with the foundational understanding of value propositions for each customer/product intersection. Generally, companies use analytic tools based on this information to evaluate the entire network. Stocking policies are determined based in information collected.

The goal is to determine how much inventory of finished goods is carried downstream and upstream to distribution centers. Additionally, supply chain managers can decide where postponement strategies work best to carry semi-finished or component inventory. Products usually have different service requirements involving a need to reduce costs or offset higher demand.

4. Execute customer replenishment programs. Supply chain segmentation may also occur by executing customer replenishment programs. It is not unusual for different customers to have different replenishment relationships. This happens based on the type of service required, volume and the channel supporting the customer. Segmentation also relies on whether the customer is high or low on the profitability scale.

To illustrate, retail customers might be served through a combination of distribution resource planning, forecasting and vendor-managed inventory. Enterprise customers could receive a combination of strategies that are build-to-stock or configure to order.

Further segmentation within any of the channels deployed might provided differentiated service. Additionally, the replenishment relationship between big-box retailers is markedly different than what is used for smaller retailers.

5. Execute supplier replenishment programs. Similar to customer replenishment programs, supplier replenishment is segmented based on component dynamics of the supplier that also connect with business objectives. Most companies combine factories that are owned and outsourced to fulfill supply chain requirements. They may also use a combination of nearshore capacity, offshore capacity, and shorter and longer-lead-time. It is necessary to sync these different supply modes with customer replenishment program at the front end.

An example of how this is done would be using nearshore capacity for enterprise customers that require configure-to-order capabilities. Companies that use this strategy may have short lead times; long lead times might be used for offshore capacity. Lead-time responses for offshore capacity are usually driven by the transportation mode used in delivering goods.

6. Implement analysis on regular total-landed-cost sourcing. Supply chain managers are confronted with fluctuating cost structures in low-cost countries. Where labor, fuel and currency exchange rates once offered some predictability in cost estimations, the economy has created dynamic circumstances. This causes profitable sourcing strategies to become unprofitable faster.

For years, sourcing strategies were executed based on unit price. Now, many supply chain systems have integrated workflows that incorporate total-landed-cost sourcing into decisions regarding procurement and engineering. By taking a holistic view of cost, decisions may include:

  • Unit price
  • Inventory carrying and obsolescence costs
  • Transportation costs
  • Duties and taxes
  • Costs for expediting orders
  • Customer service penalties

In addition, sourcing decisions can also impact the cost-to-serve strategy and should be included within the overall segmentation strategy.

7. Implement allocation and order promising procedures. Strategies for segmented and profitable customer service rely on implementing the right policies within a supply chain system. Allocation and order promising have critical roles in having a successful strategy.

Allocation reserves inventory or capacity for certain groups of customers, sales groups or geographies. The focus is to ensure preference for customers defined by objective criteria. These could be for service level agreements, volume and profit. For order promising, supply chain managers can provide a delivery date with a high level of reliability.

By implementing allocation and order promising procedures, companies manage to achieve most supply chain segmentation operational goals. Some have found it beneficial to employ integrated techniques for both procedures to increase reliability and customer service that is profit-driven.

8. Integrate monthly and weekly tradeoffs with sales and operations planning. Sales and operations planning, which is a tactical process occurring over a monthly cycle, provides a single strategy for supply chains. Also known as S&OP, supply chain managers implement end-to-end coordination, collaboration and alignment through weekly updates, and make adjustments accordingly.

The fact that an enterprise can align decision-making with customer agreements and profit makes S&OP very critical to a successful segmentation strategy. Polices are developed around this process in support of the strategy.

Basically, S&OP is critical to segmentation for several different reasons. Supply chain managers can align customer/product service and profitability with financial and operational configurations. Next, S&OP provides space for monthly discussions on what is working. These discussions make it easier to change what is not working before a problem arises. Another critical aspect of S&OP is that what-if scenario analyses are part of the process to identify variances in processes.

9. Encourage continuous learning with a business optimization center. Essentially, business optimization centers may consist of a small team who shares responsibility for creating analytics used to implement segmentation strategies. They establish, implement and monitor the progress of all policies regarding supply chain segmentation. Reporting structure for the business optimization center is to a high-level executive such as the COO.

10. Automate policy management practices. In conjunction with the business optimization center, this segmentation process focuses on automating policy management practices. All policies regarding supply chain segmentation must be coordinated, aligned and synchronized as necessary. Various policies that supply chain managers choose to implement will relate to all aspects of the process, including from promising through fulfillment, and inventory, transportation, manufacturing and sourcing.

Segmentation is Gaining Ground

In the past, companies could create unique ways to service customers by adding physical assets. Now, they must use smart strategies that align with changing business dynamics without adding to physical assets. Instead, companies are utilizing the same physical assets to provide differentiated service between profitable and unprofitable customers.

Rather than expand physical assets unnecessarily, supply chains can be segmented with a decision-making and information framework. This advances the macro trend of using information in better ways.

Successful deployment of segmentation strategies can improve customer service reliability while profitability increases across a broad product portfolio. This occurs when supply chain policies are aligned to value propositions of customers and products. In addition, fixed and inventory assets show an increase in turnover because of the position and alignment of propositions and profitability.

Segmentation shows how supply chain managers are using these strategies to create a process that is similar to portfolio management. By matching portfolios of channels, customers, products, suppliers and transportation modes, companies can realize tremendous value with segmentation.

Finally, customer service and sales growth can increase as the reliability of delivering on promises improves through segmentation processes. Companies that adopt supply chain segmentation strategies can realize success through many service and financial benefits.

1st Commercial Credit provides supply chain financing for the complete supply chain segmentation process. Financial solutions include accounts receivable financing , purchase order financing and trade payable financing for buyers.

We Attract Clients That:

  • Expand so rapidly that they outgrow their working capital
  • Come from small business start-up ventures
  • Lose bank credit lines due to covenant violations
  • Experience seasonal sales
  • Experience strained cash flow due to a slow turnover in receivables
  • Have a large customer concentration
  • Need export receivable financing, credit protection or purchase order financing
  • Require In-transit inventory finance