Why Segmentation in supply chains?

The role of Supply Chain professionals is to provide Availability. This intention is defined through expectations concerning ‘delivery in full, on time, with accuracy’ (DIFOTA), established between the selling and buying parties to an agreement or contract.  To achieve the agreement requires planning of distribution, storage, inventory, operations and buying. However, Availability is influenced or affected by Uncertainty in sales and supply markets and at customers, internally within your organisation, contractors and suppliers.

Uncertainty is the term used in supply chains to define risk. The likelihood of disruption (or increased risk) in your Supply Network will be influenced for each Supply Chain by its:

• Breadth: the number of direct tier 1 customers and suppliers
• Depth: the number of customer and supplier tiers in each supply chain
• Spread: the global geographical location of customers and suppliers

For each Supply Chain these elements are affected by:

• Complexity: this is both external (i.e. customs procedures) and internal (i.e. systems and procedures – the way we do things)
• Variability: the short term movements in demand and supply of items that can dis-proportionally affect the operations of your Supply Network
• Constraints: the internal and external capacity bottlenecks that affect the flow of items, money, transactions and information through your Supply Network

These factors interact with and amplify each other to an extent that is difficult to understand and measure. This affects development of a Supply Network strategy to meet customer and supplier markets needs.

To reduce the difficulties and to help make planning easier, structure each Supply Chain into categories (that is segment) and so allow specific planning to be done that achieves the desired outcomes. Unfortunately, the different objectives of Marketing and Supply Chain mean that access to Marketing data concerning Marketing’s mix of product and service offerings provided through segmenting brands, channels and customers, will have little relevance.

This means that Supply Chains must develop their own segmentation. Start with commercial relationship that are mainly governed by how the parties view the value of transactions; However, while the price or cost of an item and the total value of financial transactions in a year are valid measures, non-financial factors measures can also influence the business relationship. Examples are the:

• type and importance of the products and/or services to a buyer or seller
• strategic importance of the supplier or customer

The objective is to identify and isolate the more stable parts of: demand; supply; trade routes; LSP capacities etc.  The result can be the removal of buffers against uncertainty (inventory, capacity, work in progress), while maintaining or improving customer service.

Segment your Supply Chains

How your supply chains are segmented and the number of segments used will depend on the industry, markets and level of Uncertainty that your organisation works within. Examples of segmentation in supply chains are:

• Supply Chain and Markets: the geopolitical situation of markets; customer grouping such as consumer based (B2C), business-to-business (B2B) and business to government (B2G); volatility of markets and demand predictability; demand patterns, such as seasonal; distribution channels available
• Customer service: Cost to Serve (CTS) by selected customers to identify the Customer Contribution to overheads; similar order fulfilment needs
• Product complexity: life cycle length and variability; availability of input materials and components; volume – margin mix
• Planning and Operations processes
• Supplier risk – spend matrix
• Inventories of finished goods: Use the average sales and standard deviation results to calculate the coefficient of variation (CoV) for each SKU. The segmentation defines how to manage inventories of materials, components and service parts

To develop segmented supply chains for your organisation, the following steps need to be completed:

• Map each supply chain
• Identify that part of each supply chain that can be managed (the Core supply chains). The balance of each supply chain can only be understood
• Identify the primary customer and supplier base (typically Tier 1)
• Analyse the demand profile through each chain
• Identify the decoupling point(s) in each chain. This is where strategic inventory will be held to buffer against demand – supply variability
• Identify the key segments for each supply chain
• Develop practices to address each segment

Segmentation is not a supply chain initiative, but is part of the broader business strategy. Therefore, for success, segmentation requires a dedicated supply chain organisation that incorporates at least Procurement, Operations Planning and Logistics, with those engaged in segmentation analysis capable in data analytics. Finally, the process must be underpinned by the principles of project and change management.