DC Velocity - Tip Sheet 2012

others—a practice that leads to significant profitability and cash-flow leakages, and potentially to lost sales. Indeed, research shows that on average, 30–40 percent of a company’s customer and product portfolio is unprofitable.

Segmentation can also help supply chain managers address some of their biggest problems. One example is demand variability, cited by respondents to a recent survey of chief supply chain officers as the biggest challenge driving the supply chain agenda. 2 Properly structured segmentation policies for customers and products can significantly reduce the impact of demand variability. (For a look at how one manufacturer used segmentation to reduce the impact of demand variability, see the sidebar on page 18.)

Another significant challenge for supply chain managers is to simultaneously provide high levels of responsiveness and efficiency. Again, segmentation can provide a solution. In order to maximize sales and profits, some products within a portfolio could be served through an efficient supply chain while others are served through a responsive supply chain. For example, companies that make both basic and fashion clothing will want to deliver their basic products through an efficient supply chain and deliver their fashion products through a highly responsive supply chain. This creates one segment for standard (predictable) products and another for fashion (unpredictable) prod-

[FIGURE 1] RETURN ON ASSETS
(ROA) EQUATION

Value/ROA
=
–Sales
Cost of Goods Sold
and Sales, General
& Administration
Assets

ucts. Each segment will have different forecasting and stocking policies.

For many companies, then, supply chain segmentation would offer significant financial benefits. This article will outline the general principles involved as well as offer 10 recommendations for achieving supply chain segmentation and its goals.

THE PORTFOLIO MANAGEMENT APPROACH The overarching challenge faced by supply chain managers—providing excellent customer service while reducing the cost of goods sold (COGS) and minimizing investment in new fixed assets and inventory—can be summarized in a return-on-investment (ROI) equation that considers such factors as return on assets (ROA), return on invested capi-

[FIGURE 2] ONE PHYSICAL SUPPLY CHAIN, MULTIPLE VIRTUAL SUPPLY CHAINS

Strategy (policy) orchestration Execution orchestration (S&OP)

Differentiated
sourcing
policies
Differentiated
manufacturing
modes
Differentiated
inventory
policies
Differentiated
fulfillment
policies
Differentiated
promising
policies