DC Velocity - Tip Sheet 2012

tal (ROIC), or economic profit (EP). Figure 1 shows the ROA version, which is commonly used as an indicator of a company’s effectiveness in delivering profit against its invested assets.

Segmentation provides a means by which supply chain managers can tailor service agreements with customers to increase sales while reducing operating costs and both fixed and inventory assets. It does this by aligning supply chain policies to the customer value proposition as well as to the value proposition for the company as a whole.

Segmentation is driven by a unique value proposition offered to a given customer for a given product. This value proposition will include the price, the quantity, the delivery times, the degree of flexibility, and the service-level agreement for that customer/product relationship. The supply chain must be aligned to this value proposition with different policies, as shown in Figure 2. This may include unique policies for one or more of the following: promising, fulfillment, transportation, inventory, manufacturing mode, and sourcing. It will also be reflected in the supply chain network and transportation design.

This essentially means that there will be multiple, virtual supply chains running against one physical supply chain. These virtual supply chains will be driven by unique value propositions for groups of customer/product intersections and will be reflected through policies that are managed and administered by supply chain professionals.

Segmentation shows that supply chain management is evolving toward a process similar to portfolio management. Companies have a portfolio of customers and channels, a portfolio of products, and a portfolio of suppliers and supply modes. By matching those portfolios based on the best way at a given time to reliably and profitably serve each customer, companies will see tremendous value potential.

KEY PRACTICES IN SUPPLY CHAIN SEGMENTATION

Segmentation is not just a network strategy, or an inventory strategy, or a fulfillment or manufacturing strategy. Rather, it is an end-to-end strategy for the supply chain that has implications for many areas, from the customer through to the supplier. To achieve maximum value from segmentation for both the customers and the enterprise, companies must have policies in each area that are coordinated to the value proposition offered to each customer/product combination.

Figure 3 summarizes 10 key practices that support a successful segmentation strategy. The discussion that follows describes these practices and their importance in aligning the supply chain to the unique value propositions offered to customers.

[FIGURE 3] TEN KEYS TO SUCCESSFUL
SEGMENTATION

1 Perform regular demand and cost-to-serve analysis to segment 2 Implement differentiated demand policies in core functions 3 Implement differentiated inventory policies 4 Implement differentiated customer replenishment programs 5 Implement differentiated supplier replenishment programs 6 Implement regular total-landed-cost sourcing analysis 7 Implement differentiated allocation and order promising 8 Incorporate monthly and weekly tradeoffs into S&OP 9 Implement a business optimization center for continuous learning 10 Automate policy management S&OP = sales and operations planning SOURCE: JDA SOFTWARE GROUP INC.

1. Perform regular demand and cost-to-serve analysis

The foundation of segmentation is data-driven analysis of demand dynamics and the profitability of customers and products. This analysis provides the information needed to tailor service agreements and supply chain policies in order to raise the overall profitability of the portfolio while providing reliable and suitable service. Because the dynamics of demand and profitability change frequently, particularly in today’s rapidly changing business landscape, this analysis must be institutionalized and performed on a standard cadence.

There are a number of ways to perform demand and cost-to-serve analyses. Financial systems typically do not provide an accurate view of profitability by customer and product, so other tools may be needed. It’s important, however, to avoid complex costing models for the purpose of setting appropriate supply chain policies. Leading companies have started with a simple model that assigns transportation, inventory, and ordering costs to products based on their volume and other ordering dynamics. This type of analysis typically produces data that can be plugged into a decision-making framework such as the one shown in Figure 4.

From this framework, you can see that the A and B customers are profitable and the C and D customers are unprofitable. When you look more closely at a profitable customer like A2, you can see that even among profitable customers there are “winners” and “losers.” This is shown on the right side of Figure 4, where customer A2 is further analyzed using a product-profitability matrix, which shows that products P1 and P2 are profitable, while P3 and P4 are not.