DC Velocity - IdeaBook 2014

one manufacturer used segmentation to reduce the impact of demand variability, see the sidebar.)

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) products. 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 manag-
ers—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
capital (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 agree-
ment for that customer/product relationship. The supply
[FIGURE 1] RETURN ON ASSETS (ROA)
EQUATION
[FIGURE 2] ONE PHYSICAL SUPPLY CHAIN, MULTIPLE VIRTUAL SUPPLY CHAINS

Cost of Goods Sold
and Sales, General
& Administration
Value/ROA
=–Sales
Assets
Strategy (policy) orchestration
Execution orchestration (S&OP)

Differentiated
sourcing
policies
Differentiated
inventory
policies
Differentiated
fulfillment
policies
Differentiated
manufacturing
modes
Differentiated
promising
policies
S&OP = sales and operations planning