Segmentation for structuring supply chain relationships

Roger OakdenGlobal Logistics, Logistics Management, Procurement, Supply Chains & Supply Networks

Segmentation in supply chains

Commercial relationships in supply chains.

The essence of your Supply Network is to manage relationships between buyers and sellers in the core supply chains and to better understand the uncertainties associated with your extended supply chains. Within your core supply chains, the techniques and procedures of planning, buying, inventory storage and distribution are to achieve the expectations concerning ‘delivery in full, on time, with accuracy’ (DIFOTA) that have been established between the parties in an agreement.

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

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

The three elements indicate that a commercial relationship is governed by how the parties view the value of transactions. While the price or cost of an item and the total value of financial transactions in a year are valid measures, there should be additional non-financial factors measured. Examples are the:

  • type and importance of the products and/or services to a buyer or seller
  • strategic importance of the supplier or customer
  • ‘cost to serve’ the customer including
    • choice of distribution channel
    • response time required following a service call from a customer

Segmentation in supply chains

The term Segmentation is used in the design of supply chains to identify suppliers and customers within one or more financial or non-financial factors. The term is also used for structuring categories of purchased items and inventories of materials, components and service parts. The objective of Segmentation is to better achieve the desired level of customer service.

To introduce Segmentation from an upstream perspective, earlier blogs discussed supply markets. One discussed the elements of Procurement Strategy and the second discussed research and analysis of supply markets. These blogs will be referenced in my next blog to be published on August 10, that will discuss segmenting suppliers and categories of purchased items.

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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...