A Better Approach to Supply Chain Segmentation?

Most companies segment their supply chain by breaking it down according to operational and logistical metrics. That’s necessary for continuous improvement and operational excellence.

But there is another way to segment supply chains that begins with the customer. Gartner research director Jennifer Loveland calls it end-to-end segmentation, where you determine first what your customers want, then create end-to-end models—from sales through sourcing, delivery, and customer service—to serve them.

In a 2015 SupplyChainBrain interview she says this allows companies to give their customers a differentiated experience – she compares it to the difference between fine dining and fast food. It starts with customer needs, rather than the traditional approach based on cost-to-serve.

This type of segmentation lets you group customers by similar drivers and trade-offs, like price, lead time and lot size. It gives companies the ability to identify a set of customers that “are close enough” such as group that is willing to wait longer and order bigger lot sizes, versus another group that needs it tomorrow, but is less price sensitive and may be willing to give up some choice in order to gain faster delivery. She says that companies typically create 2 to 5 customer segments.

Segmentation helps handle complexity more effectively. This is important since complexity is intensifying in most supply chains. In a 2015 Gartner survey, more than half of CEOs said that growth was their top priority – creating added complexity through new products, markets and channels that enable that growth. “Instead of having one approach, you create a menu of approaches, and each can be targeted to a specific outcome,” she said. “It gives you the ability to solve more problems, and be more targeted in how you meet each outcome.”

This approach of focusing on the customer for supply chain segmentation can also be applied to inventory segmentation. In a blog earlier this year entitled What's wrong with ABC inventory classification?, Anders Remnebäck of Optilon AB described a new inventory classification approach that supports end-to-end segmentation.

Remnebäck showed how traditional inventory management uses an outdated ABC inventory classification method to segment inventory. But with this approach, it’s impossible to optimize service levels for individual SKUs. “That is why this is called inventory management rather than inventory optimization,” he says.

But just as Loveland suggests starting with the customer, Remnebäck starts with the downstream part of the supply chain, concentrating on business strategy and using “service classes” to segment products in terms that executives can relate to, such as high-margin items or top-line brands. He then defines aggregated service levels by these service classes, instead of by over-simplified ABC matrices.

The business can then correctly determine—and dynamically adapt, based on things like demand variation and lead time changes—the level of safety stock, optimizing the service level and reserve stores of each SKU-Location. This allows a company to meet its targets with the least working capital outlay and enables customer-driven end-to-end supply chain segmentation.

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