DC Velocity - Tip Sheet 2012

SEGMENTATION REDUCES DEMAND UNCERTAINTY

An engine manufacturer that makes a full line of engines for multiple applications, including energy, marine, and transportation, recently segmented its supply chain in order to offer different options for its customers. The engines are highly configurable, meaning that customers can order a base configuration and then select from a menu of options.

Figure 7 provides an overview of the different segmentation strategies the engine manufacturer put in place to serve its customers.

The goal of the segmentation program was to offer different value propositions to its customers based on the type of product ordered. The supply chain fulfillment, inventory, and manufacturing policies would then be aligned to each value proposition. The value propositions were primarily driven by how much flexibility the customer wanted to have in the ordering process. For different levels of flexibility, the manufacturer offered different price points and lead times.

As shown in Figure 7, the manufacturer established four basic segments:

• Standard configurations

• Standard configurations, but greater choice

• Customer-configured from a catalog of options

• Customer-specific requirements that must be ana-
lyzed and quoted
Based on this restructuring of the ordering process,
the manufacturer then established different push-pull
points in the supply chain from which each of the seg-
ments would be served. This dramatically reduced
demand uncertainty by providing different forecasting
points in the supply chain, thus taking advantage of the
pooling effect.

For standard configurations, the manufacturer would forecast end items. For standard configurations with greater choice, it would forecast the options that went into the end item. With each level of increasing flexibility the manufacturer was able to move the response buffer and associated forecast item upstream in the supply chain. This had the effect of dramatically improving forecast accuracy. Prior to implementing this approach, the manufacturer had only been forecasting a wide variety of end items, which had resulted in very low forecast accuracy.