What is supply chain segmentation?
Supply chains are becoming more complex due to expansion, globalization, outsourcing, increasing costs, and customer experience customization. The one-size-fits-all approach no longer works–as it increases inventory costs and fails to meet customer requirements.
As a result, companies are under constant pressure to develop strategies that fulfill customer demands from diverse markets.
One such strategy is supply chain segmentation. Its purpose is to develop and implement the right supply chain solutions for different products, customers, and suppliers based on their value to the organization. The value can be in the form of increased profitability, better customer service, better strategy, or a combination of all.
According to Gartner, supply chain segmentation involves “designing and operating distinctly different end-to-end value chains (from customers to suppliers) optimized by a combination of unique customer value, product attribute, manufacturing, supply capabilities, and business value considerations.”
In this article, we’ll review the different types of supply chain segments and discuss how you can segment your supply chains to increase delivery reliability while improving sales and service.
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Different Types of Supply Chain Segments
Below, we’ll review the different methodologies for approaching supply chain segmentation.
In product-based supply chain segmentation, you make minor variations to a single product to market to different customers based on their personalized service requirements. This can be done under multiple brand names too. It’s an effective segmentation strategy that helps supply chain managers increase market share, reduce product marketing costs, and increase profitability across their product portfolio.
Product segmentation can be categorized based on factors and metrics like:
- Product complexity (Number of products and product variants)
- Volume complexity (combination of production volume and product mix)
- Quality requirements
- Product pricing
- Product life cycle
- Product Innovations
Customer segmentation classifies customers as ‘profitable’ and ‘non-profitable’ customers. This allows supply chain leaders to market to the two different customer segments effectively.
For example, digital segmentation is based on customer engagement and purchase history to market to them differently. This information is then used to create different buyer journeys based on customer segments to guide them to complete the purchase process.
Moreover, these customer segments offer insights into how you can effectively meet your business objectives such as reducing operational costs, streamlining customer service automation, and managing demand variability. As a result, you’ll meet customer needs, maximize sales, and growth-hack your bottom line.
Production and service strategies
Effective supply chain segmentation optimizes different supply chain processes to better serve the needs of diverse customers.
Consider two product lines, one for the in-store customers and another one for online shoppers. The in-store customers want the store with the entire product range available at all times. While online customers are unaware of product stock in the warehouses. Their only concern is to place an order for the products they want to buy.
The production strategy is market-driven and dependent on the type of products to be manufactured including:
- Make to Stock
- Make to Order
- Engineer to Order
Supply chain professionals collect information about the maturity of the product and sales numbers. This information is then used to enhance service strategies, develop new versions of the product, and introduce them into the market from time to time.
Similarly, when creating a service strategy, the organization’s overall goals are the deciding factors—such as reductions in service levels and minimizing the costs of obsolescence.
Production-based segmentation also enables warehouse managers to better plan safety stock, improve forecast accuracy, and optimize transportation costs.
While customer segmentation deals with part of the market, market-driven supply chain segmentation deals with the marketplace as a whole.
For example, if you sell real estate to businesses, your customer segment will be B2B. You might compare customers that are likely to build office spaces or warehouse facilities. These two customers have different needs and might belong to different customer segments.
In contrast, market-driven segmentation involves the whole market (i.e. when you compare people who are in the market for vacant land vs. residential properties). These are much broader.
Market-driven is mostly done based on:
- Geographical location
- Demand patterns (e.g. latent demand, seasonal demand, constant demand)
- Tax and incentive
A combination of market and product-driven approach offers an efficient supply chain segmentation strategy for managers to segment products based on customer requirements, and product and demand characteristics.
Lead time requirements multi-source vs. single-source channels
Sourcing can either be done through manufacturers, distributors, retailers, or sellers on the web. The process of deciding the sourcing channels is sourcing segmentation.
Logistics managers evaluate the optimum space utilization in the warehouse and distribution centers before procurement. Based on the lead time requirements, sourcing channels can either be multiple sources or a single source.
Benefits of Supply Chain Segmentation
Supply chain segmentation offers many benefits from the demand planning stage to production and eventually up to the transportation stage. Let’s look at some of them:
Product purchase decisions and service information is used to develop customer analysis. It is an important step in understanding the individual requirements of your customers as it gives insights into the complexities and intricacies of the products and services, and suggests improvement in product design, delivery methods, etc.
As necessary as it is to find the differentiating factors between different customers, finding the similarities is equally important. By using economies of scale, customer orders can be lumped together to leverage volume and reduce supply chain shipping costs in various segments.
For example, a manufacturing unit can procure components for different products together to reduce procurement and transportation costs. Similarly, the manufacturing unit can focus on a model or a platform and achieve low cost from bulk manufacturing.
The level to which a product can be configured and customized varies depending on the type of customer.
For example, a home user may opt for customized configurations, but a corporate customer might be looking for a common standard configuration.
To achieve economies of volume, supply chain managers can speed up the implementation of customizations in product segments by standardizing the common elements in product design.
Design for supply chain
The product and supply chain management (SCM) teams should closely collaborate and create processes and tools to assess the impact of design on the product.
They should also work together to understand the consequences of the change in terms of design and total cost of existing products, or new products under development.
Demand, production capacity, inventory capacity, and supply can be aligned with integrated sales and operations planning (s&op) in all segments of the supply chain. Shared resources in manufacturing and logistics help organizations achieve efficient planning.
More customer value
Operational strategy and customer value proposition should be aligned to fulfill customer needs.
Supply chain segmentation helps create a focused strategy that relies on parameter optimization and detailed inventory using advanced analytics. This information allows managers to help lower inventory costs and increase responsiveness to customer needs and demands.
From the organization’s perspective, this helps identify trade-offs that are also beneficial for the customer. For example, through strategic process optimization, long-tail parts in product configurations that don’t contribute to profit are eliminated to reduce cost and increase net profit.
Future-Proof Your Supply Chain Operations
How to Segment Your Supply Chain to Optimize Operations
Supply chain segmentation is an end-to-end mix of strategies that include network strategies, inventory optimization strategies, and manufacturing strategies. Testing with smaller segmentation and constantly fine-tuning the strategy to cover the entire lifecycle of the product or service helps in making strategic changes as the situation demands.
Let’s take a look at the activities in the supply chain segmentation process.
Landed cost analysis
Labor costs, fuel costs, raw material costs, and currency exchange rates fluctuate daily. This makes it difficult for supply chain managers to stay in the profit-making zone.
Therefore, landed cost analysis is carried out regularly to check the profitability of the supply chain and its products.
The factors influencing landed cost analysis are:
- Per unit cost
- Transportation cost inclusive of fuel surcharge
- Duties and taxes
- Product rework cost
- Product damage cost
- Handling cost
Demand and cost-to-serve analysis
The first step in supply chain segmentation is to study customer and product demand dynamics and profitability analysis. This data-driven analysis is used to create supply chain policies and service agreements to increase profits and mitigate customer-induced risks.
Profitability analysis has to be carried out at regular intervals in order to mitigate uncertainties in supply chain dynamics.
The factors to conduct a profitability analysis are:
- Procurement costs
The profitability analysis aims to understand the products and customers that bring in more profits and the ones that are not as profitable. The next step is to take measures to turn the not profitable or less profitable products and customers into profit-making segments of the supply chain.
Sifted’s Logistics Intelligence solution empowers shippers through various cost optimizations, including network optimization.
Demand priorities for every supply chain management function
An increase in demand during peak seasons can be the result of incoming orders, different forecasting mechanisms, or from distributors.
Similarly, demand comes from different types of customers including the highly profitable, unprofitable, and less profitable ones.
Managers can make supply chain segments more efficient by carefully studying demand signals from core supply management processes like master planning, transportation, distribution, and manufacturing. This information can be useful in prioritizing supply chain segments based on profitability and sustainability.
An effective way to balance the demand volatility and avoid peak season surcharges is to optimize inventory. You can achieve this by separating products based on their finished product state, semi-finished state, or components state.
Optimized inventory size is decided by evaluating:
- Central Distribution Centers
- Regional Distribution Centers
- Manufacturing Unit
Inventory optimization will help you increase efficiency, avoid the mix-up of processes, and reduce the costs of products that have higher service requirements.
Replenishment strategy involves restocking inventory levels at appropriate times based on customer demand. Replenishment can be from owned or outsourced manufacturing units.
The factors that come into play when deciding the replenishment strategy include:
- Lead time
- Storage capacity of the storage unit
- Costs to be incurred
- Urgency of the requirement
- Customer demand
Restocking of goods with both the suppliers and warehouses depends on the required volume, profitability, and the type of product (build-to-stock or configure-to-order) in demand.
Segment your supply chain to reduce costs with Sifted Logistics Intelligence
Supply chains are becoming more complex due to the rising customer demands for personalized experiences, expanded products and services, and faster lead times. Supply chain segmentation helps you better navigate supply chain challenges by delivering the right mix of product, service, and performance to your customers. It helps businesses reduce their inventory costs, shipping costs, and obsolescence costs while achieving customer satisfaction.
Sifted Logistics Intelligence offers tools for businesses to measure the true cost to serve their customers without sacrificing their profits. It clearly organizes your data so you can identify specific actions related to different segments.
For example, you’ll be able to view every touchpoint to know exactly where orders get delayed. And you can use this data to make adjustments in your buyer journey.
Sifted Logistics Intelligence clearly organizes the necessary information for easy adjustments and optimization.
Ready to segment your supply chain to reduce costs? Get a demo with Sifted today!