Supply Chain Segmentation: Time for a Refresher?

With all the changes going on in the world, especially changes linked to the lingering global economic crisis, it may be high time to reassess the effectiveness of your supply chain.

Since many companies throughout the value ecosystem are shifting operations, divesting unprofitable units, or refocusing their customer or product strategies, it makes sense for companies throughout the supply chain to constantly examine how they serve their suppliers and customers.

What they may find could be a bit surprising. There seems to be growing acceptance of -- or at least more chatter about -- supply chain segmentation and the notion that one overriding supply chain strategy no longer works across the board for every single partner.

Segmentation solutions are tailored for each customer or product in a company's portfolio. It suggests that supply chain policies, practices, and value propositions are coordinated and managed differently and are dependent on the customer/product/supplier relationship, as opposed to using a general blanket approach applied universally.

That seems like a massive undertaking, doesn't it? Who has time or resources to offer customized solutions, you may be asking yourself.

Perhaps, though, that direction isn't so far-fetched. One-size-fits-all supply chain management hasn't ever really been an effective strategy, at least not in practice. Top-tier customers and suppliers -- the handful of companies that represent 80 percent of an organization's business -- often have "special needs" or specific order or fulfillment requirements that demand more catered care, and companies very frequently are obliged to meet those requirements. Maybe segmentation means supply chain review should be a routine exercise that will lead the conversation beyond on-time delivery, low-cost sourcing, and materials cost management.

In Supply Chain Quarterly, a publication from the Council of Supply Chain Management Professionals, there's an extensive article about the possible benefits of segmentation and 10 tips for using this strategy to achieve greater profits. The article points out:

Segmentation is not just a network strategy, or an inventory strategy, or a fulfillment or manufacturing strategy. Rather, it is an end-to-end strategy for the supply chain that has implications for many areas, from the customer through to the supplier... By understanding the profit profiles of their customers and products, companies can tailor a more profitable supply chain strategy to each of them and thus increase the overall profitability of their portfolios.

Many companies today, however, still use 'one size fits all' supply chain processes and policies, overserving some customers and underserving others—a practice that leads to significant profitability and cash-flow leakages and potentially lost sales. Indeed, research shows that on average, 30-40 percent of a company's customer and product portfolio is unprofitable.

As noted in Janet Godsell's "The Power of Supply Chain Segmentation," posted on the Cranfield University School of Management website, segmentation provides greater congruence among the products, the markets, and the supply chains. In addition to providing ways to get started on this, she states:

No longer can the supply chain pursue cost reduction in splendid isolation. It needs to connect to the marketplace and ensure that the right supply chain strategy is developed to meet market needs. These needs are a fairly complicated mix of varying product and service requirements which the marketing community address through various forms of brand, channel and customer segmentation. Unfortunately these segments lack relevance to the supply chain.

Since effective supply chain management involves constant tweaking, flexibility, and handling supply and demand swings, segmentation does, at least superficially, provide a means to that end. Does it work in practice? Next week, I'll look at a few companies that have started to do this kind of work.