Supply Chain Segmentation: why you should segment your supply chain.

Dr. Adrian Reisch
June 14, 2021
Data Segmentation

Increased levels of customization and particularization of every capability have made their way into all forms of business and production. The supply chain has not been able to stay out of this domain of reorganization, and as a result, supply chain segmentation is a hot topic.

But what is supply chain segmentation? Gartner defines it as the employment and management of discretely operating supply chains from the supplier to the customer optimized on several factors revolving around supply, production, service, customer, product, etc., as fits the business.  

Each supply chain segment is streamlined to produce the best results according to the variables or factors it is built around. Supply chain segmentation also allows the business to prevent its manufacturing and supply capabilities from suffering due to being run through cookie-cutter solutions that aid each chain differently.

Leveraging Supply Chain Segmentation To Your Competitive Advantage.

When you compare the best performer in a market niche to those lagging behind, one pervading factor you will notice is that the winner always respects the differences between its customers. But to be truly successful, this differentiation needs to run deeper than just surface-level customer interactions.

Beyond interface-level demand segmentation, the differentiation of the supply chain right down to the suppliers themselves, allows companies to better appreciate the intricacies in the mechanisms that drive the supply chain in the context of their own business.

There are several approaches to segmenting the supply chain effectively: product, manufacturing, risk, market, and customer demands, with most adopting a hybrid approach that prioritizes these to varying degrees.

Moreover, these variables can be profiled in several ways to generate optimum supply chain segments depending on their characteristics and their effect on the business. Accordingly, supply chain segmentation frameworks and practices will look different for different businesses while having the same purpose, process, and endgame.

The fast pace of the modern market demands that manufacturers also up their pace in supply chain segmentation. But speed should not be an excuse for the lack of effectiveness of one’s approach. Doing it right and keeping it right is crucial to not fall behind.

So what makes you gain an edge over your competitors?

  • Leverage data and technology: The modern age is characterized by the availability and access to an infinite reservoir of data. Tools and strategies are available that make it possible to generate real-time supply chain data and process it intelligently to provide complete and dynamic visibility for the entire supply chain. Take full advantage of this to segment the supply chain based on the insights provided by the latest data.
  • Consider maximum influencing factors: Many companies suffer from the inability to factor in more than a limited number of metrics when performing supply chain segmentation. Even though there are multiple ways to segment suppliers, supply processes, and service methods based on what works best for the company, most will prefer to play safe and indulge only one or two factors. This can seriously handicap the segmentation capacity due to short-sightedness and low reaction time to changes. The inclusion of maximum factors contributes to the supply chain staying reactive and responsive at all times.
  • Engage in constant and dynamic analysis: Having complete visibility of your system helps you stay on your toes. But you cannot expect accurate and dynamic data without driving the processes that generate these insights: constant monitoring and analysis. Constant assessment of suppliers, processes, the market, and the overall strategy will allow you to maintain the alignment of your supply chain segments to the right factors. Otherwise, your process will quickly get outdated.

Key Practices And Their Importance

Supply chain segmentation is a continuous process. Consequently, it demands constant engagement for smooth functioning. Researchers have come up with several best practices to ensure that no matter how your supply chain segmentation is implemented, you will be able to stay on top of your planning and operations without any glitches.

When deriving your segments, here are a few points that must be kept in mind for your segmentation to work:

  • Analyze demand dynamics and order channels. Supply chains are affected by various factors, two critical ones being customer demand variations and the order channels provided by the company. Supply chain segmentation should satisfy the needs and changes in these and fluidly allow interoperability to provide a true omnichannel supply chain. Constant monitoring of these two factors also allows you to maintain the flexibility of your supply chain and a low reaction time to market fluctuations.
  • Perform inventory differentiation. Inventory differentiation is the most extensive yet accessible realm to effect segmentation in a common pain point for most observed companies is the unequal maintenance of inventory, whereby some products are left in excess while others face constant shortages. Intelligent differentiation of your inventory based on various external and internal determinants minimizes losses due to excess or shortage by maintaining the optimum stock in the segment.
  • Differentiate customer and supplier replenishment channels. A smart way to ensure sections of the two above points is to differentiate your customer and supplier replenishment channels. Both customer and supplier replenishment are interconnected via inventory management. Intelligent supplier and customer demand segmentation of replenishment channels on both fronts allow for the attainment of omnichannel supply chain capabilities that leads to the automation of the supply chain without extensive intervention. Planners can draw on data from both sides of the supply chain to accomplish this and prevent an unbalanced inventory from occurring.
  • Integrate all involved costs in supply chain decisions. The increased complexity of the market and production processes has resulted in a highly fluid cost model. There are several points in the chain where costs are incurred, but they are also influenced by one another and several other factors to generate a constantly fluctuating system of sourcing costs. Maintaining profitability in such a scenario can be difficult if all cost sources are not included in the segmentation planning process. Moreover, constant vigilance over supply chain data must ensure that the segmentation logic does not become obsolete.
  • Factor in allocation and order promising. For most businesses with high-volume inventory movement, especially in the B2B field, a significant consideration is allocation and order promising. These businesses have customers from whom they can expect a certain order volume or to whom they make assurances of inventory availability when their need arises. As such, inventory allocation forms a significant source of their business in the form of recurring revenue.

When segmenting their supply chain, such allocation must be specially set aside to not get absorbed into the regular supply chain components.  

Why should companies segment their supply chains?

As mentioned in the introduction: a one-size-fits-all methodology for maintaining the supply chain is becoming a futile exercise in a world where every facet of customer service and product provision is getting highly customized. This is why supply chain segmentation will significantly benefit companies of all sizes and types. For instance, to:

  • For accurately servicing every customer. At the end of the day, the entire point of having a smoothly running supply chain is to provide your customers with what they expect when they expect it. The aim of finding the right ways to segment suppliers and supply processes is to align them with the right customer segments and serve each of them with the highest level of quality. If your supply chain is differentiated along the line of your customer segments and optimized as such, your business will develop a higher capability of providing for each customer according to their demands smoothly and uninterruptedly.
  • To simplify the supply chain. A uniform supply chain for all products and customers gives rise to many issues. Longer buying cycles, long lead times, high cycle stocks, stockouts, poor service level, and forecast inaccuracies are just some problems. This is but expected since different customer segments and products are influenced differently by various factors. The best way to troubleshoot these issues is to implement supply chain segmentation and control each segment in correlation with the metrics and values that influence them.
  • To achieve interoperability. Supply chain segmentation has another major advantage. Even though different segments operate independently, many intersection points will exist among them. Segmentation allows identifying these points and achieving a high level of synergy and even symbiosis to achieve interoperability. This can go a long way in saving costs.
  • For a standardized approach. Supply chain segmentation allows you to better standardize the supply, manufacturing, and service process without sacrificing your operation levels. Having a single process for the entire supply chain means that you will have to decide and define operations every time there is a deviation from the basic flow. In an unsegmented supply chain, the deviations become the rule instead of the exception and prevent the standardization of processes for smooth operation.
  • To drive informed product design. Between product design and customer demand comes the supply chain. Supply chain segmentation allows you to keep a keen eye on how your catalogue serves the customers and what they are really looking for. This allows you to design products according to what your customer wants rather than other insignificant factors.
  • For higher process efficiency. Any business aims to expand the demand for their products and, in turn, their manufacturing and supply capacity. However, they want to do it with minimum expenditure of capital, resources as well as effort. In other words, they want to bring about as high a level of efficiency in their processes as is feasible to operate.

One of the means to bring this about is supply chain segmentation. When the supply chain is properly segmented, optimizing each segment to operate at maximum efficiency becomes possible. The same cannot be said about an amalgamated supply chain, as attempting to streamline one section will inevitably lead to the opposite effect in another.

Supply chain segmentation has become more of a necessity than an option in today’s world. Proper segmentation can lead to a company reaping many benefits that an outdated one-for-all supply chain could never have provided.

While most companies are still far from achieving an optimally segmented supply chain, the rise and adaptation of modern technologies and methodologies will definitely make it easier for them to do so.

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Dr. Adrian Reisch


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