Ever since it pioneered the virtual-storefront revolution, Amazon.com has often been cited as the gold standard for fast and cost-effective product delivery. Though there is no doubt that the “Amazonification” of fulfillment has changed expectations of customers in all channels, this omnichannel model doesn't necessarily translate to success in the electronics sector. In fact, I would venture to say that players in today's high-tech supply chain would be better off emulating Burger King's iconic “Have it your way” approach.
Delivery performance is increasingly recognized as a key driver of customer satisfaction. According to the PwC (formerly PricewaterhouseCoopers) Global Supply Chain Survey 2013 report (registration required, best-in-class delivery was cited as one of the most critical elements of an optimized supply chain by 94% of the technology companies surveyed. But, given the diverse size, geography, and product mix of players in today's supply chain, achieving perfect order fulfillment is more difficult than ever, and OEMs that try to emulate Amazon's one-size-fits-all strategy will more than likely end up overserving some customers and underserving others. That's why market leaders are more frequently deploying a segmentation strategy that tailors the supply chain to meet specific customer requirements. In fact, PwC reports that more than 83% of top performers configure their supply chains for different customer segments.
Strength in numbers
Supply chain segmentation is not a new concept, but until recently few companies had managed to successfully break down the traditional monolithic supply chain structure in favor of multiple, smaller, and more nimble supply chains. The essence of supply chain segmentation is the aggregation of like customer supply chain requirements into a single service model optimized to meet the performance priorities of these customer clusters. Cost-service tradeoffs most commonly focus on the supply chain attributes of reliability, responsiveness, agility, cost, and efficiency.
A basic example would be grouping high-volume, low-mix customers in a supply chain built for efficiency, while the supply chain for low-volume, high-mix customers would focus on maximizing flexibility. OEMs that configure their supply chains based on these tradeoffs can consistently satisfy customer demands without adding cost or risk to the supply chain.
As with any significant process change, the first, and sometimes most challenging, step is to map out current flows. At Avnet, we recommend customers use the Supply Chain Council's SCOR methodology to define their current supply chain activity. We then help them to analyze this information in conjunction with the results of a Supply Chain Maturity Monitor (SCM2) survey, a self-assessment questionnaire that helps to identify their organization's current supply chain reliability, responsiveness, and agility levels.
To assure that you are starting with the most accurate picture of the supply chain, it is important to include inputs from across the organization's business disciplines, including marketing, sales, manufacturing, planning, and procurement. With all these varying perspectives in play, interdisciplinary wrangling over priorities is inevitable. It can be helpful to bring in an outside party to facilitate the process. Having an objective person involved can help ascertain the gaps between the ultimate goal of the supply chain and its actual performance.
Often, when we broach the subject of supply chain segmentation with customers, there is a concern that a divided supply chain will be more difficult to manage, more costly, and less efficient. In reality, the opposite is true. According to analysts from McKinsey & Co., in high tech, segmentation typically improves service levels by 5-10% while reducing inventory levels by 15-20%. In my professional experience, I've seen even more significant results.
To illustrate the advantages of segmentation, I'd like to share a couple of real-world examples. Avnet Velocity was recently engaged with a customer that was struggling with extreme shifts in customer demand. The first 10 weeks of the quarter saw consistent, yet somewhat meager, order activity. Then, in the final two weeks of the quarter, approximately 50% of its orders need to be fulfilled, with nearly 40% in the last week. To further complicate matters, the final system configuration is not known until the customers place their purchase orders.
Initially, our customer attempted to change its customers' back-end-loaded demand path by adjusting the sales compensation plan. When this approach failed, Avnet suggested it segment its supply chain and adopt an “available to build” inventory model for the customers that are quarter-end driven. Because the customer segmentation on the “demand side” didn't solve the entire problem, a dual response model was deployed to match the customer segmentation on the demand side to supplier segmentation on the supply side.
Another customer scenario demonstrates how even the process of establishing a segmentation plan can yield substantial efficiencies. When working with a consumer electronics customer to define its supply chain flow, we discovered that its businesses in the Americas and Europe had roughly the same size distribution center infrastructures, but the European business was employing an extensive channel network, whereas the Americas' consumption was primarily customer direct. With input from its logistics group, we determined that this customer could substantially lower its cost by centralizing like products into its lower-cost global distribution center and still service its channel network, which generally received product in larger, less frequent shipments. This approach enabled the customer to reduce its footprint in the higher-cost European center.
Executing a supply chain segregation initiative isn't for the faint of heart. Breaking down traditional beliefs and behavior patterns is never easy. But our experience has shown that a successful segmentation strategy can enable a wider range of customers to “have it their way” while simultaneously improving operational efficiency and profitability and driving greater value — all vital to remaining competitive in today's global supply chain.
This article originally appeared in the Avnet Velocity e-magazine, “The Talent Pinch.”