Segment elements of supply chains for better management

Roger OakdenLogistics Management, Operations Planning, Procurement, Supply Chains & Supply NetworksLeave a Comment

International trade not moving

Effectiveness or efficiency

The previous blogpost discussed the benefits from reducing the number of stock keeping units (SKUs) offered for businesses operating in the fast moving consumer goods (FMCG) or consumer product goods (CPG) sector. Alternatively, there can be the necessity of adapting operations to an increase in the number of SKUs. A recent report, published by the consulting firm McKinsey, indicates that CPG businesses are more likely to increase the number of stock keeping units (SKUs).

Although the words ‘increased SKUs’ are not used, the report has terms like: ‘growth pockets’; ‘growth from developing markets’; ‘premium products’ and ‘innovation and relevant marketing’, which indicate that additional SKUs will be launched. These will most likely fit within the ‘Lumpy’ group/class for managing inventory that was discussed in a earlier blogpost concerned with segmenting SKUs.

To enable these initiatives, the actions required in a CPG company’s Core supply chains are only identified with statements of: ‘push productivity improvement across the value chains’; ‘digital transformation’; ‘rightsizing market service levels to better tie cost-to-serve to scale and growth prospects’ and ‘more activity is sent to the CPGs low-cost hubs’.

No mention is made of the need to restructure planning and scheduling activities. Nor the time, effort and investment required for changes to the layout of factory equipment and setup capabilities of machines and holding tanks to accommodate increased SKUs. These actions are directed at a company’s Core supply chains being more effective. But the consultant’s report appears to place a higher importance on efficiency through ‘digital transformation’ and ‘having more activity sent to the CPGs low-cost hubs’. However, actions to improve efficiency are not designed to directly improve Availability of SKUs for customers.

Aim of a Supply Chains group

The essence of your organisation’s Supply Chains group (Procurement, Operations Planning and Logistics) is to manage the relationships between buyers and sellers in the Core supply chains. And to better understand the uncertainties and therefore risks associated with the Extended supply chains.

Three statements should guide the development of relationship between a buyer and seller:

  1. Customers and suppliers businesses are not the same: A comprehensive relationship between buyer and seller requires an understanding of the other’s business. The time and resources required to achieve this only allow for a few relationships to be comprehensive. This means that a range of relationships should exist, that align with the different levels of service required or expected.
  2. Relationships are holistic: The relationship between buyer and the seller may appear to be focused at the point in time when a sale or purchase is transacted. However, for the experience to be mutually satisfactory involves issues surrounding logistics, financial and information. Improving a business relationship therefore requires an increasing understanding by each party of the other’s business systems and culture.
  3. Customers define service differently from suppliers: Commercial customers and suppliers must have some involvement in defining the service they require or expect; however, they might not always be right in their expectations. Therefore, suppliers need to understand their customer’s business to guide the agreement concerning levels of service. However, a customer’s overriding requirement is that their order is a ‘perfect order’. The initial order is ‘delivered in full, on time, with accuracy’ (or DIFOTA) – not an order that has been modified because:
    • sufficient stock of an SKU is not available
    • the range of SKUs is not available or
    • deliveries cannot be made when required by the customer

Within your organisation’s Core inbound and outbound supply chains, the techniques and procedures of planning, buying, inventory storage and distribution should be designed to achieve the expectations established concerning DIFOTA.

The Aim of an organisation’s Supply Chains group is to provide Availability of products for customers. However, Availability is influenced by Uncertainty in an organisation’s sales and supply markets, at customers, suppliers and contractors and internally within the organisation. To reduce Uncertainty is one of the roles within a Supply Chains group, through identifying uncertainties as risks in the supply chains and where possible, to reduce the level of risk.

Segment customers and suppliers

For reduction of Uncertainty through an organisation’s supply chains, an activity is to divide the main elements into segments that provide for different management. The elements are: finished goods SKUs; inbound items; suppliers and customers (different than the approach to customers by Sales). To segment enables management of each to be more focussed to reduce risks, rather than using the same techniques for all items and parties. But the segments must be specific for each business, based on the service needs of distinct segments. Supply chain processes are then changed to effectively and efficiently serve the segments.

For physical items, the objective of segmentation is to identify the more stable parts in the supply chains – demand; supply; trade routes; LSP capacities etc. The result should be the removal of unnecessary buffers (inventory, capacity, work in progress) allocated to the more stable areas. For customers and suppliers, the objective is to improve the balance of effort expended by the Supply Chains group between categories of customer and supplier. The requirement is to provide an appropriate level of customer service and obtain appropriate support from suppliers.

It is fairly typical in business that the evaluation of customers and suppliers based on the commercial relationship – the value of transactions between the parties. However, while the price or cost of an item, the volume bought or sold and the total value of financial transactions in a year are valid measures, non-financial factors measures will also influence the business relationship. Examples are the strategic importance of the customer or supplier and the importance of products and/or services to the buyer or seller.

A structure is required whereby customers and suppliers can be evaluated in the same way and then be segmented based on a score. The evaluation for customers is the ‘Cost to Serve’ and for suppliers the PESTEL acronym. Outbound SKUs are segmented using the CoVM approach discussed in an earlier blogpost. Inbound items are segmented using the ‘Spend-Risk matrix’ and ‘Gross Margin on Inventory Investment’ calculation. These will be discussed in future blogposts.

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About the Author

Roger Oakden

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With my background as a practitioner, consultant and educator, I am uniquely qualified to provide practical learning in supply chains and logistics. I have co-authored a book on these subjects, published by McGraw-Hill. As the program Manager at RMIT University in Melbourne, Australia, I developed and presented the largest supply chain post-graduate program in the Asia Pacific region, with centres in Melbourne, Singapore and Hong Kong. Read More...

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