A supply chain segmentation strategy can help your company gain a competitive advantage, streamline processes and reduce waste.
Digital transformation and new technologies are changing the business landscape dramatically. A number of factors - among them globalization, complicated networks, and logistics capacity uncertainty and volatility - are making supply chains more complex than ever, leading companies to explore supply chain segmentation to reduce complexity and increase profit. But using an outdated approach to supply chain segmentation will prevent retailers and manufacturers from achieving the desired benefits of reducing complexity and improving margin.
Segmentation isn’t a new thing - in fact, it goes back to 1997. Over the past 20 years, the methods for segmentation have used different criteria, such as product demand volume, product demand variability, product handling, production variability, selling channel type, and end customer behavior.
Before we get into some specifics, let’s set the stage with a definition of the overall concept. As a supply chain specialist and author, I define supply chain segmentation as profitably managing different virtual end-to-end supply chains defined by a combination of channel/customer requirements, product characteristics, business value considerations, and differentiated supply response strategies.
This is the basis for a framework that companies can use to ensure a smooth and successful implementation journey leveraging digital technologies.
Why we need supply chain segmentation
Executives and supply chain leaders face many challenges today in every aspect of their operations and enterprise integration. Among them are:
Many retail and manufacturing companies are still using “one size fits all” supply chain processes, over-serving some channel and product combinations and under-serving others. For example, research of one industry showed that around 50% of a company's customer and product portfolio was unprofitable, which would require different supply chain response to reduce cost.
By gaining an in-depth understanding of the profit profiles of their customers, channels, and products, companies can tailor a more profitable supply chain strategy to each and increase the overall margin of their portfolios. It can also increase inventory turnover through optimal inventory positioning and aligning fulfillment, logistics, demand planning, manufacturing, and procurement strategies.
The formula for success in managing the supply chain transformation journey is mastering the change transformation cycle, leveraging digital technologies, and ensuring effective change management. Supply chain segmentation is not a one-time exercise or sprint; it is a journey. There are five success factors in the framework that will help ensure the required support for the segmentation transformation program:
The right transformation team. Having the right transformation team is crucial for the supply chain segmentation journey. Special skills to consider in selecting your transformation team include process design and automation, lean principles knowledge, Six Sigma expertise, data analytics, systems optimization, program management, organizational influence, and communication.
Culture support and executive commitment. Supply chain segmentation is not just a business initiative - it’s a culture change. Executives need to enforce the culture of promising what you can deliver and delivering on every promise, and the culture of committing to continuous improvement as a way of life for the organization. The CEO must step up and collaborate with the CMO, COO, and CIO to jointly create a segmentation vision of the company and inspire employees to pursue that vision.
Leveraging digital technologies. Technology management teams must play a pivotal role in enabling digital transformation for supply chain segmentation. CIOs must champion a business technology agenda with investments in digital technologies and collaborate with sales, leveraging social media and research data to find out the value propositions to win, serve, and retain customers.
Proven change management methodology. A structured plan for managing change - beginning with the transformation team and then bringing in key stakeholders and leaders - should be developed early and executed effectively as changes move through the organization. For transformation programs to work, there must be a convergence of new process and technology capabilities, people ready with the required new skills, and organization structure alignment changes.
An effective performance measurement system. that includes data availability, metrics, and KPIs. Comprehensive end-to-end measures of supply chain performance, such as total cost, inventory, forecast accuracy, and perfect order, must be established to show the trade-offs required. Operational and financial data will be needed at both aggregated and granular levels to analyze performance and conduct corrective actions.
Streamline your segmentation journey. Segmentation is a living, ongoing process - not a one-time exercise. It’s a continuous journey to keep your supply chain(s) relevant to your customer(s). Beyond being a business initiative, supply chain segmentation is a change in the organization’s culture, so executive commitment and visible support are mandatory to the success.
Leveraging digital technology makes the supply chain segmentation journey smoother and more effective. Without the right decision-support tools, segmentation strategies will not yield the expected benefits. To further ensure the success of your transformation, assess and adjust your status with regard to the five success factors early on in the process.
A supply chain segmentation strategy presents huge opportunities. It can help your company gain a competitive advantage, streamline processes, reduce waste, and eventually achieve the business agility you need in a highly competitive global marketplace.
For more on creating a digital supply chain, please reference select chapters of Technology Optimization and Change Management for Successful Digital Supply Chains, a pivotal reference source that provides research on the application of digital business transformation programs to improve strategic, tactical, and operational supply chain processes.