Supply chain segmentation: Divide and conquer

  • September 05, 2023
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Your organization responds to customer preferences while dealing with various distribution channels and far-flung suppliers. So, relying on a single approach to your supply chain may not be the best way forward. Segmentation divides your network into sections that align supply response capabilities and channel demands for optimized net profitability.

The value of segmentation

Segmentation allows you to have diverging plans for products with varying degrees of importance and complexity due to different:

  • Demand characteristics
  • Profitability
  • Seasonality and demand uncertainty
  • Distribution channels and service requirements
  • Procurement logistics and lead times
  • Business strategies

These variables use diverging performance benchmarks for each segment.

Segmenting your supply chain

You can apply segmentation to various product and consumer combinations at appropriate hierarchies:

  • Segment products based on their relevant attributes
  • Segment specific supply chains based on, for example, customers, channels and markets, or any combination thereof

Segmenting specifics

  • Understanding the variables. An often-undervalued part of this process is grasping the needs of stakeholders. What challenges are they facing? What objectives do they have? The answers provide a starting point for defining what attributes to segment for.
  • Criteria selection. The right criteria depend on your understanding of the business and the available data:
    • Operational attributes — volume, variability and size
    • Financial attributes — price, margin and cost
    • Supply chain complexity — number of parts, vendors and supply chain nodes
    • Transportation and warehousing needs — cold chain, ambient, bulky and such
  • Criteria shortlisting. Closely related attributes may be removed to reduce complexity. Approaches like principal component analysis (PCA) can help reduce the number of criteria used to determine segmentation.
  • Deciding on the optimal number of segments. Use both qualitative and quantitative techniques to arrive at the ideal number of segments. These should be statistically different so you can manage them operationally. (You may find this requires a statistical analysis and additional input from stakeholders.) The number of segments will depend on the objective:
    • A reduced number of segments for strategic planning
    • Additional sub-segments for operational planning
  • Defining segments. You can use multiple techniques — such as Pareto analysis or machine learning-based clustering algorithms — to examine unique segments as well as their cutoffs and logic.

Aligning segments to strategy

Determining the proper segments is only the first step in the process. Aligning the correct segments with complementary supply chain strategies is vital for value realization and a successful segmentation exercise.

The best place to start is aligning segments along the cost-efficiency trade-off curve, then link the segments based on their positioning on the curve. Those linked segments should connect with appropriate supply chain strategies to maximize the benefits of the exercise.

For example, plan segments that consist of high volume but stable elements for service efficiency. Use SKU- and item-level forecasting, high service levels and inventory positioning across all distribution centers.

Conversely, plan highly volatile segments — those that are difficult to predict or forecast — for higher cost efficiency. Forecast these at the category level, maintaining a balance between service levels, inventory costs and inventory consolidation opportunities.

 Aligning segments along the cost-efficiency

Aligning segments along the cost-efficiency trade-off curve is the best place to start.

Segmentation impacts all functions of the supply chain

Segmentation impacts all functions of the supply chain.

As shown above, multiple functions can bring their own segmentation techniques, leading to competing priorities. This method yields solutions that are suboptimal. Gains realized from one function are lost in the next. The best solution is to take a holistic approach and define a segmentation strategy that aligns your supply chain from end to end. This case is only one instance where a trusted consultant can help your organization choose the approach that’ll work for you.

Segmentation is often mistakenly considered a sales and marketing function that’s applied to the segmentation of customers to make marketing decisions. This isn’t the case. It is, in fact, a core supply chain exercise. An optimized segmenting strategy allows you to divide and conquer — achieving increasing efficiencies in all areas of supply chain design, planning and execution.

Get in touch with a supply chain expert.

— By Prateek Shulka and Akshaydeep Singh

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