Supply Chain Segmentation

Stephen DeAngelis

August 8, 2013

A couple of years ago the staff at Supply Chain Standard wrote an article entitled “Ten issues that keep supply chain leaders awake at night.” [8 November 2011] The number four issue on that list was supply chain segmentation. The list was drawn from a survey conducted by the consultancy Crimson & Co. Concerning the list, Crimson director Dave Alberts stated, “For most, the issues included within this top ten will come as no surprise, especially when it comes to Supply Chain Segmentation, given the recent increased emphasis on this subject.” He went on to say:

“There is general agreement on the need to define and execute different supply chains within each organisation. However, what factors should be used to define the segments and how many you should have, is a subject that remains unclear. This confusion seems to have been partly fuelled by poor results from organisations that have relied on customer driven factors to make the segmentation decisions. The subject of supply chain segmentation is clearly on the rise but for most companies it’s not yet real, despite the growing recognition among those interviewed who agreed that ‘one size fits all’ supply chains are a thing of the past.”

Matthew Davis, a Research Director at Gartner, states, “The goal with supply chain segmentation is to move from a ‘one-size-fits-all’ approach to a portfolio of supply chain execution options. Among the industries that are working on supply chain segmentation, Davis notes, are: Pharma; High Tech; Apparel; Consumer Products; Med Devices; Agrochemical; and Heavy Equipment. [“Supply Chain Segmentation … Why is everyone so one-size-fits-all?” Gartner, 10 December 2012] Tom Craig, President of LTD Management, told Dustin Mattison that he believes companies have been segmenting supply chains for years, whether they realize it or not. “There is a myth out there of the supply chain,” he said. “There is no such thing as a single supply chain. It is more complex. There are supply chains within supply chains.” [“Supply Chain Segmentation and the Myth of a Single Supply Chain,” Dustin Mattison’s Blog, 11 September 2012]

Barbara Jorgensen writes, “Many global supply chains have been engineered to manage stable, high-volume production, and to take advantage of low-cost-labor regions such as China. The advantages of China, though, are fading. Wages are increasing, labor practices are under scrutiny, and transportation costs are fluctuating wildly. Other nations are trying to attract manufacturing to their shores, and politically, governments are being pressured to bring manufacturing back home.” [“4 Supply Chains May Be Better Than 1,” EBN, 5 October 2012] All of that complexity makes it abundantly clear that a single supply chain is clearly a myth. She writes that supply chains are more like a “river delta with a series of tributaries.” In her article, Jorgensen reports that “McKinsey & Co. reached a similar conclusion in its study, ‘Building the supply chain of the future.'” McKinsey analysts write:

In such a world, the idea that companies can optimize their supply chains once — and for all circumstances and customers — is a fantasy. Recognizing this, a few forward-looking companies are preparing in two ways. First, they are splintering their traditional monolithic supply chains into smaller and more flexible ones. While these new supply chains may rely on the same assets and network resources as the old, they use information very differently — helping companies to embrace complexity while better serving customers.

Many analysts note that customer segmentation (i.e., segmenting customers by traits such as gender, age, location, path-to-purchase, etc.) requires supply chain segmentation. Jorgensen agrees. She writes, “It is increasingly difficult for manufacturers to meet customers’ diverse expectations.” She continues:

“McKinsey recommends ‘splintering’ the supply chain into smaller, nimbler mini-chains. This reduces complexity, saves money, and better serves the customer base. In one case study, a US-based consumer durable goods manufacturer had offshored the bulk of its manufacturing to China. A smaller presence was retained in the US. All factories relied on a single, unified production planning process and manufactured the full range of products. However, customer demand patterns were changing while, at the same time, SKUs were proliferating. Customer service was being negatively affected. In response, the company examined its portfolio of products and components along two dimensions: the volatility of demand for each SKU it sold and the overall volume of SKUs produced per week. According to McKinsey:

Ultimately, the company decided to split its one-size-fits-all supply chain into four distinct splinters. For high-volume products with relatively stable demand (less than 10 percent of SKUs but representing the majority of revenues), the company kept the sourcing and production in China. Meanwhile, the facilities in North America became responsible for producing the rest of the company’s SKUs, including high- and low-volume ones with volatile demand (assigned to the United States) and low-volume, low-demand-volatility SKUs (divided between the United States and Mexico). Ramping up production in a higher-cost country such as the United States made economic sense even for the low-volume products because the company could get them to market much faster, minimize lost sales, and keep inventories down for many low-volume SKUs. Moreover, the products tended to require more specialized manufacturing processes (in which the highly skilled US workforce excelled) and thus gave the company a chance to differentiate itself in a crowded market.”

Douglas Kent, global vice president for Avnet Velocity, told Bolaji Ojo, Editor in Chief of EBN, “Companies need more than one supply chain system to be effective and cost-competitive.” [“The Case for a Multiple Supply Chain System,” EBN, 1 February 2013] Ojo continues:

“If you’re surprised by this then get ready for another shocker. The proliferation of multiple supply chain systems at manufacturing companies is sure to accelerate in coming years, driven by an ongoing move by enterprises to finesse their operations to use the most efficient and effective strategies. … Forget about creating a unique supply chain system for your company. Instead create supply chains that can most efficiently support the product and markets under consideration. This may mean managing multiple supply chain systems if your company has many products or sells into many markets. This shouldn’t faze you. As I said, the concept of multiple supply chains emerged long ago, and it’s even more valid today.”

Analysis about how best to organize these different supply chains is what has been missing for many companies. Davis’ concern is that too many companies use a similar (i.e., one-size-fits-all) approach when trying to figure out the best way to segment their supply chains. He doesn’t think that makes any more sense than trying to maintain a one-size-fits-all supply chain. He recommends looking at three types of segmentation:

  • Internal product/supply network — Using historical SKU data on product demand volume and variability, companies design end-to-end efficient, agile and responsive supply chains. Companies with legacy cost-focused supply chains carve out an end-to-end service-driven supply chain. Organizations that compete with service and differentiation create an end-to-end efficient or low touch network.
  • Channel-back — In order to address varying channel requirements, analysis begins with an understanding of how value is defined by partners or markets. Value attributes include speed to market, freshness, predictability, price (cost), availability, delivery frequency and lead times. The supply chain is then segmented to deliver these value outputs by managing the necessary trade-offs.
  • End-user-back — Analysis of how end users — patients, farmers, consumers, businesses, etc. — define value highlights required trade-offs. Value attributes can include price (cost), on-shelf availability, value-added services, specialty packaging or labeling, seasonal needs and integrated solutions. The supply chain is then segmented, based on these criteria as opposed to regional or industry-vertical customer segmentations.”

Ernst & Young analysts conclude, “In the end, segmenting a complex global supply chain to create a series of clear pathways, defined by performance metrics that align with specific goals, not only cuts through the complexity associated with achieving those goals (in essence, reducing it), but also generates better information to support corporate decision-making and increases the organization’s overall flexibility. Segmentation achieves all this by aligning and engaging organizational resources optimally to obtain the desired results.” [“Supply chain segmentation: a pathway to efficiency and strategic advantage,” February 2013] With so many respected analysts touting the benefits of supply chain segmentation, companies would be unwise to ignore their advice.