Monthly Product Demo Register Now

Sifted logo

How To Segment Your Supply Chain To Optimize Operations

Jun 23, 2022

12 min read

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.

Are you taking care of supply chain management tasks manually? Automate these tasks with one of Sifted Logistics Intelligence solutions.

Different Types of Supply Chain Segments

Below, we’ll review the different methodologies for approaching supply chain segmentation.

Product 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

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.

Market driven

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:

Reduce complexity

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.

Discover synergies

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.

Increase standardization

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.

Expand integration

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.

FBA vs FBM

Future-Proof Your Network for Greater Efficiency

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:

  • Transportation
  • Inventory
  • 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.

Inventory optimization

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

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!

Topics: Carrier Optimization, Distribution Network, Supply Chain Operations
Topics

Check out related resources at Sifted.

Monumental Rate Hikes: 2023 UPS & FedEx General Rate Increase (GRI) Analysis

Monumental Rate Hikes: 2023 UPS & FedEx General Rate Increase (GRI) Analysis

It’s here. UPS & FedEx have announced an average General Rate Increase of 6.9%. Actual impact to most ...
Read More
Freight Transportation: The Ins, the Outs, and How it Affects Logistics

Freight Transportation: The Ins, the Outs, and How it Affects Logistics

What Is Freight Transportation? Freight transportation is the movement of goods, merchandise, and cargo using ...
Read More
What is a UPS Residential Surcharge?

What is a UPS Residential Surcharge?

As a shipper, you can request delivery to any address. However, when your packages are shipped to a residential ...
Read More
Shipping Contracts: Key Responsibilities You Can’t Miss

Shipping Contracts: Key Responsibilities You Can’t Miss

What Is a Shipping Contract? Whether you are a high-volume shipper or run a small business, you must understand ...
Read More
Logistics Planning: Why Your Business Should Prioritize It

Logistics Planning: Why Your Business Should Prioritize It

What Is Logistics Planning? Logistics planning is a planning process that helps businesses achieve their logistics ...
Read More
How Companies Can Reduce Parcel Shipping Costs in 2022

How Companies Can Reduce Parcel Shipping Costs in 2022

Different Factors to Consider One of the top priorities for eCommerce businesses and shippers alike is finding ...
Read More
How Predictive Analytics Helps Improve Supply Chain Operations

How Predictive Analytics Helps Improve Supply Chain Operations

What Is Supply Chain Predictive Analytics? Supply chain predictive analytics use historical and present data and ...
Read More
Cyber Monday and Tips for Shippers to Stay Ahead of the Curve

Cyber Monday and Tips for Shippers to Stay Ahead of the Curve

What Is Cyber Monday? Cyber Monday is a major eCommerce-exclusive shopping event that falls on the first Monday ...
Read More
Do Fedex, USPS, UPS do Black Friday Mail Delivery?

Do Fedex, USPS, UPS do Black Friday Mail Delivery?

What Is Black Friday? Black Friday is one of the busiest shopping days of the year in the United States, and falls ...
Read More
Sifted at PARCEL Forum ‘22: Our Recap

Sifted at PARCEL Forum ‘22: Our Recap

In October, Sifted traveled to Chicago to attend PARCEL Forum ‘22, the largest event for eCommerce-centric B2B and ...
Read More
Delivery Exceptions: How to Handle Them

Delivery Exceptions: How to Handle Them

What Is a Delivery Exception? A delivery exception (also known as shipment exception) is when package delivery ...
Read More
The Importance of Business Intelligence in Supply Chains

The Importance of Business Intelligence in Supply Chains

What is Business Intelligence? Business intelligence (BI) is a method of collecting and analyzing business data to ...
Read More
Black Friday and How Shippers Can Combat Potential Shipping Delays

Black Friday and How Shippers Can Combat Potential Shipping Delays

What is Black Friday? Black Friday an annual shopping event that takes place the day after Thanksgiving. It is ...
Read More

How Sifted Works

Connect to
your account

Sync
your data

Power your
dashboards

Get Your Logistics
Intelligence Demo

Strategic ways to prevent loss down the line

Services you could be utilizing right now for savings

Ways to cut material costs without cutting quality

Are you an FBM (fulfillment by merchant) Amazon seller?

Check out our Marketplace Intelligence solutions to protect your bottom line.

Shipping Insights & Alerts
Get updates and track the things impacting your business most

Decision Support
See how supply chain adjustments pay off before you pay out

Carrier Management
Streamline how you manage your carrier operations and contracts

Business Automation
Let software do what it does better than people can

Seller Insights
Measure and monitor with confidence.

Sales Visualization
Shed new light on your sales data.

Fee Analyzer
Understand the impact of ever-changing FBA fees.

FBA Audit & Recovery
Secure money you’re owed from Amazon.

Blog
Discover news, tips, and industry best practices

DIM Weight Calculator
See how DIM is impacting you

Customer Stories
Learn how other brands use
Logistics Intelligence

Carbon Calculator
Calculate your CO2 Emissions

Guides
Download free reports and expert how-tos

Demo
Get a personalized tour of our software

Logistics Intelligence
For parcel shippers

Marketplace Intelligence
For Amazon FBA sellers

Let's get you to the right place!

SIFTED DASHBOARDS
For parcel shippers

AMAZON Marketplace Intelligence

Not sure if you have an account? Email [email protected].