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SUPPLY CHAIN SEGMENTATION - A Guide to Creating Value, Countering the Monolithic Supply Chain, and Redesigning the Supply Chain

Supply chain management is an ongoing challenge. Companies' supply chains, no matter how defined, touch every part of their businesses, both external and internal. They extend from suppliers' factories to customers' warehouses or to company shelves. As a result, they deal with demands from inside and outside the company--many of which create distracting and sometimes conflicting demands with regards to service and costs. The noise created can be situational or repetitive; it may be on topics that have no profit or growth benefit. It can even become a cacophony, create an underlying chaos, and be marked with much fire-fighting.

For many firms, a supply chain is a supply chain, regardless of channels, customers, markets, products, regions, or other delineators. These firms view their supply chain and its infrastructure-assets, people and technology-as providing a monolithic service that is defined by costs. There is little or no differentiation as to end uses or users beyond any specificity in customers' instructions on handling their orders and shipments. It is a singular method with its undifferentiated customers that has much noise and that weakens overall performance results.

What Segmentation Is. Supply chain segmentation is dividing business into discrete segments or groups based on similar characteristics. It is a superior best practice and presents a methodology to address important company issues, including:

The basics are to identify the segments; understand the supply chain services required for the segments; analyze the company's supply chain capabilities and performance for the sectors; understand any competitor challenges; select the segments; and, implement and align the services to the respective sectors. There should be recognition of the cost to service a segment and the return to the company for each sector. Because of the importance of benefit to the company, not all subdivisions may be used, often because of size and return. This also means that segmentation, and applicable services, may exclude customers. Segmenting is not about tailoring to each customer. That is unrealistic and is another version of stretching resources.

Segmentation should serve a strategic purpose. It should reflect what is important to company growth and profitability, to senior executives and, in turn, to overall supply chain performance. This approach also gains needed internal support to change operations. Sectoring the supply chain is using it in a targeted way to best support company strategy and maximize return and growth. It can also be viewed as a multi-segment supply chain program with different services for each target sector. Segmenting can be done for existing businesses and for new or potential business.

Companies often sell products into multiple market segments. This method stretches supply chain resources and can lessen the overall effectiveness. Supply chain segmentation is determining how to best service each sector, given the available capabilities and resources. Logistics management is taking a different analysis for segmenting and then designing and aligning the supply chain operations for each.

Segmenting presents a way to view and understand the complexity that is an integral part of supply chains. Focus is placed and resources are aligned where important. This filters much of the background noise. The need is to know where to put the emphasis and why. Each segment has and is served by the same or similar supply chain activity. Segmentation creates a hierarchy of those groupings. It can be a de facto value proposition for the sector and the customers in it.

The project takes time; it cannot be oversimplified. Identifying and profiling sectors, customers that belong in them, evaluating services-both provided and how good those services are, and developing targeted services is not a quick-fix effort.

This use of supply chain segmentation and the strategic view is consistent with accounting guidelines. The Financial Accounting Standards Board (FASB), in Statement of Financial Standards (SFAS) Accounting 131, defines operating segments as "Operating segments are components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. Generally, financial information is required to be reported on the basis that it is used internally for evaluating segment performance and deciding how to allocate resources to segments."

Segmentation Approaches. There are different approaches for supply chain segmentation. The methodology can vary depending upon the purpose. These include-

For some companies, segmenting should not be a one-cut, standalone view. A multi-step segmentation may be best to give deeper insights. This is especially true when a high degree of shared needs, complexity or uncertainty exists with the business, or when there is significant interrelationship among the company's segments.

No matter the approach, include key customers / accounts if the segmentation is "sales" focused. Customers are often the primary way for segmentation since much emphasis is placed on them. Size of buying and long-term relationship for good size buyers can be recognized. There are exceptions depending on purpose and type of segmentation. Segmenting can be at a macro and micro level. The inability to recognize a segment can happen. Also, the analysis may have to assess existing segments and new ones the company is developing. The segments should be large enough to be relevant for matching or to tailoring services to customers' needs.

There is a cautionary note. Segmenting can be incorrectly used. One firm used it to drive their agenda. They divided products as to manufacturing costs and sourcing costs. Based on the review, they decided to build certain volume, low-cost products in their factories. The remaining products were produced overseas. Everything looked good for manufacturing. However, they did not consider shortcomings with their supply chain operations and forecasting. The company overlooked the extended lead times and delivery dependability for the offshore items. As a result, their ability to deliver complete orders on time was compromised and created customer service problems.

WHAT TO DO WITH SEGMENTATION RESULTS. The analysis has identified and given understandings of various segments. This is actionable information. The issue then is designing, aligning, and implementing programs to serve and even exploit these sectors to the benefit of the corporation.

Points for this step should include-

For example, the initial analysis, in the 2x2 matrix, shows the results of segmenting customer orders.

This is a good way, for this company, to look at the segmentation results from a supply chain view-segment customers and their order demands broken down by order size and annual volume. More should be done. Customers in a segment do not have homogeneous orders. Not recognizing this can create programs that do not achieve the intended results for customers and for the company. Three sectors have special requirements and size. The fourth does not. Therefore three sectors will get attention and possible redesign.

Deeper analysis was done of customers in each of the three. Highlights are shown below--

SEGMENT - CUSTOMERS WITH LARGE ORDERS THAT HAVE DEMANDING DELIVERY REQUIREMENTS

SEGMENT - CUSTOMERS WITH MEDIUM-SIZED ORDERS THAT HAVE SPECIAL PREPARATION

SEGMENT - CUSTOMERS WITH SMALL ORDERS DIRECT TO STORE DELIVERY

The study also examined how well the firm did at meeting customer requirements and found issues. Combined with looking business and the supply chain as more than filling a series of orders, improvements can arise, especially where there are common areas for the segments.

The supply chain and operation were redesigned. An inventory positioning change was made, including select satellite facilities that were established to improve service for the three segments. Capabilities were aligned with needs. Customer service improved significantly and became a strength and value proposition.

CONCLUSION. Many supply chains are focused on getting orders prepared and shipped. They strategic role can be lost in all the activity. Segmentation is a very effective way to understand a company's supply chain. It can be applied for different needs. It enables firms to focus resources and attention where they can provide strategic support and create value. The analysis and operational redesign and realignment take time and effort. But it is worth it for the firm and for its customers.