How To Segment Your Supply Chain To Optimize Operations

by | Dec 14, 2021

9 min read

Supply chains are becoming more and more complex due to expansion, globalization, outsourcing, increasing costs, and customer experience customization.

The one-size-fits-all approach is no longer applicable as it increases inventory costs and fails to meet customer requirements.

Therefore, supply chain companies are always under pressure to develop strategies that fulfill the demands of customers from diverse markets.

One such strategy is supply chain segmentation. Supply chain segmentation increases delivery reliability while improving sales and service.

1. What is Supply Chain Segmentation

Supply chain segmentation aims to determine the best strategies and policies for various products according to their value to the organization. The value can either be in terms of revenue, profit margin, strategy, or a combination of all.

“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 – is supply chain segmentation.” – Gartner

Segmentation is having different strategies for different customers, different products, and different services – to maximize customer service through customized value addition and increase profits.

2. What are the Different Supply Chain Segments?

Strategic, tactical, and operational segmentation are the three levels where segmentation is implemented in supply chains.

At the strategic level, high-level supply chain decisions relevant to the entire organization are organized, which incorporates product development, manufacturing, vendors, logistics, and customers.

Segmentation in supply chains revolves around maximizing customer service, customer satisfaction, and company profits through different parameters like:

Product Segmentation

The core of product segmentation is that minor variations can be made to a single product to market it to different customers based on demand and needs. This can be done under multiple brand names too. It increases market share and reduces product marketing costs.

Product segmentation can be categorized based on factors and metrics like:

i. Number of variants in the product
ii. Volume Complexity
iii. Product Life Cycle
iv. Product Pricing

Customer Segmentation

Customers are classified as profitable customers and non-profitable customers. Marketing is segmented to persuade the two different customer categories to improve sales, increase efficiency, and meet demands based on prioritization.

For example, digital segmentation of customers based on their engagement and purchase history is done to market to them differently and maximize sales.

Production and Service Strategies

The goal of supply chain segmentation is to optimize specific processes to serve the specific needs of diverse customers.

For example, the product line for in-store customers and that for online shoppers varies unquestionably.

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 desire.

Therefore, depending on the maturity of the product and sales numbers, the production and service strategies are drawn.

The production strategy is market-driven dependent on the type of products to be manufactured like:

ii. Make to Stock
ii. Make to Order

iii. Engineer to Order

New versions of the product are developed and introduced into the market from time to time.

While creating a service strategy, the organization’s overall goals are the deciding factors.

Sourcing Channels

Logistics managers evaluate the optimum utilization of space in the warehouse and distribution facility before sourcing.

According to the requirement, sourcing channels can either be multiple sources or a single source.

Sourcing can either be through manufacturers, distributors, retailers, or sellers on the web. The process of deciding the sourcing channels is sourcing segmentation.

3. Why Supply Chain Segmentation?

Supply chain strategies cannot be the same for all customers because the needs of customers vary from one customer to another and from time to time.

Here are the reasons why supply chain segmentation is important:

a. Understanding Details

Product purchase decisions and service information impact future customer analysis.

And customer analysis is a crucial step in understanding the requirements of each of your customers.

This analysis gives insights into the complexities and intricacies of the products and services, and suggests improvisation to product design, delivery methods, etc.

b. Finding Similarities

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.

Likewise, the manufacturing unit can focus on a model or a platform and gain from bulk manufacturing.

c. Create Standardization

The level that a product can be configured and customized will vary according to the type of customer.

For example, an individual customer may opt for personalized configuration but a corporate customer will have a common standard configuration.

To utilize economies of volume and to manufacture various segments or products based on customization, standardization of common elements in product design speeds up these processes.

d. Efficient Designing

The product and supply chain management teams should work together 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 on the existing product, or the new product under development.

e. Integration Across Various Segments

Demand, production capacity, inventory capacity, and supply can be aligned with integrated sales and operation planning in all segments of the supply chain.

Shared resources in manufacturing and logistics help achieve efficient planning.

f. Focused Strategy

Operational strategy and customer value proposition should be balanced to fulfill customer needs.

Segmentation helps create a focused strategy that relies on speed and customer satisfaction.

Segmentation helps achieve parameter optimization and detailed inventory using advanced analytics.

For example, through strategic process optimization, long-tail parts in product configurations that don’t contribute to profit are eliminated to increase net profit.

A focused strategy helps lower inventory costs and increases responsiveness to customer needs and demands.

4. How to Implement Supply Chain Segmentation to Optimize Operations

Supply chain segmentation is an end-to-end mix of strategies that include network strategies, inventory optimization strategies, and manufacturing strategies.

a. Landed Cost Analysis

Labor costs, fuel costs, raw material costs, and currency exchange rates fluctuate every day. This makes it difficult for supply chain managers to stay in the profit-making zone.

Therefore, landed cost analysis is carried out on a regular basis to check the profitability of the supply chain and its products.

The factors influencing landed cost analysis are:

i. Per unit cost
ii. Transportation cost inclusive of fuel surcharge
iii. Duties and Taxes
iv. Product rework cost
v. Product damage cost
vi. Handling cost

b. Demand and Cost-to-Serve Analysis

The first step in supply chain segmentation is to study demand dynamics and profitability analysis of both customers and products.

This data-driven analysis is used to create supply chain policies and service agreements to increase profits and mitigate customer-induced risks and damages.

Profitability analysis has to be carried out at regular intervals in order to maintain the profit ratio in this ever-vulnerability of the supply chain dynamics.

The factors to conduct a profitability analysis are:

i. Transportation
ii. Inventory
iii. Procurement costs

The profitability analysis aims to understand the products/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/ customers into profit-making segments of the supply chain.

c. Demand Priorities for every Supply Chain Management Function

An increase in demand during peak seasons can be understood either from the incoming orders, different forecasting mechanisms, or from distributors, etc.

Likewise, demand comes from different types of customers including the highly profitable, unprofitable, and less profitable ones.

Demand signals from core supply management processes like master planning, transportation, distribution, and manufacturing need to be studied and prioritized to segment the supply chain efficiently.

d. Inventory Optimization

Optimized inventory size is decided by evaluating:

i. Central Distribution Centers
ii. Regional Distribution Centers
iii. Manufacturing Unit

To balance the demand volatility and avoid peak season surcharges, optimize inventory, supply chains should segregate products based on their finished product state, semi-finished state, or components state.

This is done to reduce the costs of products that have higher service requirements and reduce the mix-up of processes and increase efficiency.

e. Replenishment Strategy

Restocking of goods with both the suppliers and warehouses depends on factors like volume required, profitability, and type of product (build-to-stock or configure-to-order) in demand.

Replenishment can be from owned or outsourced manufacturing units.

The factors that come into play when deciding the replenishment strategy include lead time, the storage capacity of the storage unit both offshore and nearshore, costs to be incurred, the urgency of the requirement, and customer demand.

5. Benefits of Supply Chain Segmentation

The benefits of supply chain segmentation are reaped from the demand planning stage to production and eventually up to the transportation stage. Let’s look at some advantages:

a. Better Accuracy in Forecasting

With segmentation, packaged goods companies can focus their attention on key segments like high-volatility products and improve forecasting accuracy.

The use of historical data combined with system-generated forecasts for stable segments gives accurate forecasting and frees employees to focus on high-priority segments and increase supply chain profits.

b. Cut back on Inventory Waste

A segment-specific inventory strategy reduces inventory waste and product delays.

Inventory can be stocked depending on inventory target, demand in different categories, and demand forecast.

For example, companies can stock high-volume and high-volatility items for increased inventory efficiency and faster delivery.

c. Reduce Transportation and Logistics Costs

Smart and strategic decisions about transportation and logistics depend on product segment priorities like cost, speed to market, etc. by segmenting the supply chain.

Segmentation optimizes the entire process of transportation, from deciding the right mode of transport, to network, and to the number of delivery points.

Reliability of the product and delivery schedule increases sales, which is achieved through supply chain segmentation.

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.

Need help segmenting your supply chain based on demand forecast and inventory status to reduce your supply chain costs? Book a free demo with Sifted now.

Topics: Carrier Optimization, Distribution Network, Supply Chain Operations

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