BUSINESS BRIEF THE THREE STAGES OF SUPPLY CHAIN SEGMENTATION

Transcription

1 BUSINESS BRIEF THE THREE STAGES OF SUPPLY CHAIN SEGMENTATION

2 2 BUSINESS BRIEF THE THREE STAGES OF SUPPLY CHAIN SEGMENTATION The art and science of supply chain segmentation is evolving from a rather simple approach based on averages and aggregates, to a more scientific method that now hinges on advanced data capture, analytics and modeling. Global enterprises realize that to compete they must develop and execute a smart supply chain segmentation strategy. Such strategies, when combined with process and operational standardization, create the essential foundation for the plug-and-play supply chain. 1 This business brief explores the segmentation maturity curve, and specifically looks at what make up the three stages of supply chain segmentation. It serves as a companion piece to the latest white paper from DHL Supply Chain The plug-and-play supply chain: Beyond efficiency to growth The traditional supply chain focus of having the right product at the right time at the right place at the lowest possible cost-to-serve is no longer the primary mission for the supply chain. With the availability of global SKU-level visibility to cost, service, risk and profits, the new mission of the supply chain is to support the generation and protection of enterprise profits. Richard Sharpe, CEO, Competitive Insights SEGMENTATION DEFINED MATURITY CURVE: STAGE ONE Before discussing the segmentation maturity curve, we must first pinpoint what segmentation means when applied to the supply chain. Stage One or traditional segmentation involves categorizing your supply chain activities by some or all of four basic elements, based on their high-level value to your business: Simply put, segmentation involves designing and operating the supply chain by understanding the specific performance characteristics of your products, channels, manufacturing and supply capabilities, and service models in order to create the most profitable supply chain. n Channels n Customers n Products Many companies are not aware that they need to segment their customers, and they currently treat everyone with the same supply chain strategy [a one-sizefits-all approach]. While this helps keep things simple, the needs of some customers may not be met and for others the cost of meeting their needs is too high. 2 n Regions The recent DHL survey of more than 400 supply chain executives around the world indicates that this type of segmentation is still widespread. 1 The plug-and-play supply chain is defined as a supply chain consisting of core standardized, easily replicable solutions, augmented by standardized, process-proven bolt-ons that are tailored to unique segment or market needs. 2 Alexander Bender 6 Reasons to Consider Supply Chain Segmentation, Gartner, 2013.

3 3 FIGURE 1 HOW DOES YOUR COMPANY SEGMENT ITS SUPPLY CHAIN? (CHECK ALL THAT APPLY) Product 65.3% However, without appropriate visibility and data capture tools, these costs are exceedingly difficult to ascertain. Thus, Stage Two maturity requires an investment in supply chain technology capable of providing a global view into these cost components. 4 Customer Region Channel Other 54.3% 66.2% 39.3% 3.2% Because each segment represents a unique value to the organization along with the corresponding standard costto-serve, second-level segmentation requires a strategic defining and ranking of these values. From these informed rankings, management then develops policies and processes to support these tiered groupings. Source: DHL Supply Chain, 2016 Within these general categories, explains Richard Sharpe, CEO of Competitive Insights, an enterprise profit insights solution provider, companies typically look at product categories and customer channels in terms of revenue, percentage of growth in revenue, and some form of profit allocation. But the numbers they base their decisions on are aggregates, estimates or averages. Or they keep it even simpler, and just segment by region, for example. The trouble with this simplified approach and its reliance on aggregated or averaged data is that it doesn t tell you why some products, customers, regions or channels are more profitable than others. Nor does it tell you why one segmentation approach outperforms another. MATURITY CURVE: STAGE TWO Stage Two segmentation adds more refined analysis and additional information elements to the process. In particular, this includes standard cost-to-serve data and weighted strategic importance of customer types or product categories. Determining a standard cost-to-serve across extended supply chains requires visibility of many cost factors, such as production, transportation, distribution and government import/export fees. With this visibility, organizations can begin to perform segmented demand planning, replenishment strategies, setting inventory levels, order promising and the like. 3 Stage Two segmentation represents a major advance from Stage One. But it still lacks the granular information and smart analytics needed to go beyond managing based on certain aggregates or averaged assumptions. That s where Stage Three comes in. MATURITY CURVE: STAGE THREE At its highest level Stage Three segmentation becomes a means to orchestrate and balance both the cost and the revenue side of the enterprise. Sophisticated analytics tools at this level capture cost and revenue data down to the SKU level, regardless of where in the organization it resides. The tools and their users then validate, systematize and repurpose the data to create a total cost to serve for every SKU going to every customer no matter what path, Sharpe explains. The same thing happens on the revenue side factoring in discounts, price and so on. That s how we get to a very accurate, specific cost and profit number for every product sold to every customer. There s minimal allocation or approximation. With such tools, companies can diagnose in detail why customers are profitable or unprofitable, and then tweak the segmentation strategies for their supply chain to make them more profitable. We can uncover the root cause of why they are either unprofitable or insufficiently profitable compared to other similar customers, Sharpe continues. Then the company can standardize the supply chain appropriately by defined segments to make them more profitable. 3 Leveraging Supply Chain Segmentation for Profitable Growth, JDA Software Group, Ibid.

4 4 FIGURE 2 CUSTOMER SEGMENTATION BY EXACT PROFIT CONTRIBUTION Unprofitable 3,812 Profit contribution of the group to total profit Least 5 th 20% 4 th 20% 1,795 3 rd 20% nd 20% ,517 65,845 Top 20% ,000 20,000 30,000 40,000 50,000 60,000 70,000 Number, Customer delivery locations Source: Competitive Insights, 2016 Figure 2, which illustrates this kind of analysis, shows how a company can segment customer delivery locations into profit contribution groups. In this example, analysis reveals that less than 5 percent of customer delivery locations represent 80 percent of profit. Conversely, 95 percent of customer delivery locations are only marginally profitable. The company takes this information and uses diagnostic analytics to pinpoint the root cause of performance issues. Once we understand what s driving these performance results, explains Sharpe, we can use predictive and prescriptive analytics to test out various operating changes and define standardization procedures that effectively create sustainable growth. The same types of analyses can be done on a broader scale, with channels, regions and products. And with descriptive and diagnostic clarity, the organization can begin to move to predictive insight and, ultimately, more profitable operations. None of this is possible without knowing exactly why something is occurring on the cost and/or revenue side, all the way down to the SKU level. Based on this level of smart supply chain analytics, says Sharpe, you can take two marginal but similar customers, do your analysis, and find out that boosting these two customers profitability requires two very different solutions. But these solutions, while different, are also standardized into intelligent segments that are based on complete and accurate information. PREDICTIVE AND PROFITABLE The end result is that companies, and their supply chain partners, armed with full, vetted and synchronized cost and revenue data, can create and execute the nextgeneration, predictive and profitable supply chain. This supply chain drives profitability and growth on an enterprise level and earns the supply chain executive a seat in the Board Room. That s the beauty of Stage Three segmentation.

5 BUSINESS BRIEF THE THREE STAGES OF SUPPLY CHAIN SEGMENTATION NOVEMBER 2016 By Lisa Harrington, President, lharrington group LLC and Senior Research Fellow, Supply Chain Management Center, Robert H. Smith School of Business, University of Maryland For further information For the latest supply chain insight and resources, visit dhl.com/supplychain