Contemporary firms have embraced the concept of selling their products and services to customers through numerous distribution channels, and this has necessitated the need to deal with multiple channels with detached warehouse operations, where a common inventory is managed within a single facility. Supply chain segmentation mainly focuses on studying the profit profiles of different customers and products, and tailoring the supply chain strategy towards each segment. Supply chain segmentation contributes in attaining the right balance between dexterity and efficiency for every combination of product and channel. Segmentation allows companies to boost their earnings through linking their supply chain tactics to each customer, as well as the investment portfolio. Putting supply chain segmentation strategy into operation in any business is critical because it helps in gaining competitive advantage, reorganizing processes, minimizing wastage, as well as attaining business agility inherent in the contemporary age of globalization.
Why Supply Chain Segmentation is Important
Supply chain segmentation involves matching customer demands with supply response capacities to enhance profitability of a business. According to Sarin, segmentation is an endeavor to bring together like-minded customers into a single group, based on how they utilize certain products (137). For several years, the supply chain study has seen numerous methods of segmentation being tried in the global market, but most of them offered a ‘one-size-fit-all’ strategy, even when they utilized various restrictions for supply chain selection. However, such segmentation strategies failed to acknowledge the essence of supply lead times that has become critical, particularly in the globalization of trade (Roscoe and Baker 137). Apparently, companies cannot treat all customers equally through supply chain strategy, hence the need to segment customers.
Companies need to pay attention to the characteristics of their products, channels, as well as the service models to offer the most lucrative supply chain. The supply chain segmentation accommodates the need to minimize redundancies, which may happen in vertical supply chains, in addition to meeting the customer requirements. Each segment is supposed to meet its targeted goals by tailoring operations. When a supply chain deals with products with numerous characteristics, it becomes obvious that a single supply chain with a single set of operation system may either offer below-par services, or extremely costly products. When dealing with a variety of products, for instance, in the public health services, a supply chain should not be designed to fit every aspect in this sector.
The supply chain segmentation offers an opportunity for the organization to make change in its culture, in addition to establish a business initiative. Many companies do not understand why they require segmentation of their customers, as they treat all customers equally. They fail to set priorities, as they do not underpin strategies to specific actions that contribute to the success of segmentation (Thomason, Green, and Haynes 33-34). While treating customers equally makes things simple, some of the customers may complain that their needs are not met, yet they have the capacity to dig deeper in their pockets to receive special services. Consumers in different countries prefer products that are associated with their cultural, political, and economic environments; hence, companies should consider alignment of products to different culture. Supply chain segmentation enhances customer service, as well as sales, by boosting the reliability of delivering its services on promises and improving forecast accuracy.
The supply chain segmentation assists in reduction of complexity. Although a supply chain company is compelled to undertake an extensive customer analysis, such analysis enables the company to understand how customers are responding to products and services. This practice reduces the complexity in applying the appropriate combinations that enhance profitability. Most companies are avoiding the extremes of complexity scale – homogeneity and heterogeneity – because such extremes do not guarantee sustainability or long-term growth (Blake 10). Reduction of complexity helps in the management of production costs, in addition to improving responsiveness among different customers.
Segmentation plays an essential role in designing of supply chain and business objectives. Companies cannot rely entirely on the contribution of the product teams to realize their objectives. Instead, they can establish processes and tools that can assess the impact of design on their portfolio. The expected benefits can only be achieved through effective designing of the supply chain. In most cases, supply chain objectives do not necessarily offer a link to cost reduction, but has the capacity to raise the company revenue by offering differentiated services that enhance customer experience (Blake 4). Supply chain segmentation permits the supply chain company to attain its objectives without applying too much pressure on its production processes.
Segmentation facilitates boosting of companies’ levels of standardization. It offers the company the opportunity to control its production, with regard to the level of standardization applied to the product design. For instance, a corporate segment ensures that each customer enjoys his/her own product design, but with large consignment sizes, as well as numerous common standard elements. Coca Cola has managed to enhance standardization through centralizing its production process, yet it differentiates its customers through the packaging of its products. Companies that operate online allow their customers to organize their own solutions, depending on standard components. Standardization is a critical marketing strategy in segmentation where a supply chain company gets a chance to increase its market share internationally.
Customer’s value is essential in the supply chain segmentation because it enables companies to choose the appropriate strategy to meet each customer’s needs. Segmentation allows companies to develop a single process that can be replicated in different supply chain models, as well as related clusters (Sabri 111). When a company understands consumer demand, it can align such demand with a particular production process that is applicable in various supply chains. Selecting a production process, based on the customer’s value, assists in meeting the current, as well as future demand.
When companies engage in segmentation, they can discover synergies, which enable them to limit the volume of production and minimize on the production costs. When supply chain companies break down into different segments based on customer needs, they demonstrate immensely how they can minimize costs. Thus, supply chain segmentation is intensely tied to cost-to-serve analysis, where a higher degree of financial management is necessary to understand the aspects of costs (Blake 8). Cost-to-serve analysis evaluates the customer’s profitability, based on how much the customer is likely to bring to the company, and the overhead costs that the company incurs while serving the customer. This implies that segmentation allows companies to operate on economies of scale. For instance, a company can identify a common requirement across its segments, which consequently allows it to establish a manufacturing base, which would be utilized by all supply chain segments.
Major Practices to Enhance Supply Chain Segmentation
Supply chain companies operate in increasingly complex networks that incorporate different channels, products, and customers. Such companies exploit segmentation strategy to shift from one-size-fits-all model to a standardized approach designed to fit different outcomes. To succeed in the process of supply chain segmentation, company managers must strive to understand the transformation cycle that lead to effective change management. Any transformation should start by describing the company’s vision and goals, and matching the goals with customer needs (Sabri 94). Figure 1 below demonstrates a practical segmentation transformation in a supply chain business.
Figure 1: Supply chain segmentation transformation
The supply chain segmentation follows a six-step approach (or Segmentation Targeting Positioning approach). All steps in the STP model are vital, but the starting point should involve the identification of the segments in order to draft the profit estimates for each segment (Sarin 148). The six steps are:
- Identifying segmentation variables that assist in segmenting the markets
- Developing profiles of the emerging segments
- Evaluating the appeal of each segment
- Selecting the target segments
- Identifying possible positioning models for each target segment
- Selecting, expanding, and signalling the chosen positioning model.
The first two steps represent the market segmentation. The company’s products cannot fit every customer, hence the need to divide customers into groups based on their behaviors, demographics, lifestyles, and locations. Every supply chain strategy should be tied to the market sector requirements (Thomason, Green, and Haynes 34). Steps 3 and 4 illustrate market targeting, where attractiveness is used to select the desired segments. The supply chain manager has to analyze the size, as well as the potential growth of every segment to understand which segment is worthy for more investment. The last two steps portray product positioning to establish appropriate communication strategy. The company must establish unique selling proposition that would make customers choose its products and not the product the competitors’ products. It should evaluate carefully on how it can withstand legal, technological, and social limitations, which could interfere with its operations.
Segmentation is perceived as an end-to-end strategy, which has numerous implications in different sectors, starting from the customer to the supplier. The end-to-end strategy influences the capacity to express the need for change (Sabri 112). To realize maximum value from segmentation, companies should establish policies in each of the area that offers value proposition to each customer. One of the policies that the supply chain managers should consider is the implementation of regular demand analysis, which offers the information required to match service agreements with supply chain policies to boost the overall profitability while supplying consistent and appropriate services.
Cost-to-serve analysis presents a comprehensive cost and profitability breakdown in the management of the supply chain. The supply chain managers must evaluate how much money should be invested in serving a particular segment of customers, with regard to the profitability of such customers. Having a cost-to-serve analysis in supply chain segmentation necessitates the company to recognize which customer, product, or channels emerge as winners or losers (Sabri 98). The company can decide on which strategies to transform the loosing segments into winners for profitable gains. Companies should leverage better cost data to enable a more accurate tradeoff analysis. Various costs, which include power, equipment, technology, and overheads costs can be assigned to different segments, based on their usage. In a standard segmentation model, identifying customer cluster enables the company to perform cost analysis.
The supply chain managers should implement differentiated demand policies as they undertake the core functions. Differentiated demand policies incorporate processes that demonstrate the variation between two or more products. Demand signals emanate from orders, forecasts, customers, as well as safety stocks. The demand priorities must be based on the overall segmentation strategy, which is linked to the profitability framework. The adopted system must be strong enough to cater for the changing priorities, and easy to fit the changes in consumer needs.
Differentiated inventory policies are indispensable when dealing with differentiating customers. Implementing differentiated inventory policies can help in rationalizing inventory and subsequently guaranteeing efficient service levels to customers, based on their segment. Inventory optimization has become a process-driven activity where companies have to decide on what inventories to establish, where those inventories would be situated, and how large an inventory should be, based on the supply chains that they serve. According to Sarin, goods produced and are yet to be sold would appear in the finished goods inventories, which indicates a limitation of cash and space (271). Thus, an inventory policy should assess the entire network of segments to ensure that goods produced are reaching the customers on time.
Customer engagement is vital when assessing the effectiveness of segmentation strategies in a changing environment. Implementation of differentiated customer replenishment programs is necessary in segmentation to cater for different customers’ tastes and preferences. Some customers tend to be more valuable than others; hence, companies should treat them differently. For example, customers who purchase products through retail should not be exposed to the same program as those who purchase the same products online. Segmentation based on these channels provides diverse services depending on the customer dynamics. Companies should work continuously to ensure that customer needs are met through collaboration with the suppliers, manufacturers, as well as retailers, as product features and customer characteristics are the first priorities in the supply chain segmentation.
To develop effective supply chain segmentation, companies should consider enhancing existing procedures to increase the speed of clustering customers. They should strive to identify the most essential customer attributes and utilize them to establish a supply chain design. Knowing the core attributes assist managers to develop and synthesize various designs to fit each customer. Companies that have similar distribution models are grouped into one cluster. Improving the collaboration between customers and suppliers can contribute in facilitating the effectiveness of segmentation.
Limitations of Supply Chain Segmentation
Supply chain managers may encounter numerous challenges as they endeavor to establish segmentation models. Globalization has become a threat to segmentation because it intensifies competition and compels companies to consider competitive advantage as part of their operations (Sabri 92). This has made companies to consider outsourcing from different parts of the world to enhance their profitability. In addition, supply chains have become complex, leading to the need to create tighter controls over segmentation models. Managers need to control information flow to avoid interferences and inefficiency in logistics. More segments indicate that more information is required to flow across all segments.
Information delay is a typical concern for the supply chain managers who want to enhance customer needs and profitability. Companies should endeavor to review their business processes, which minimize information delay between segments and business partners. Information delay can limit the sales volume, leading to low profitability and customer frustration. The shift from the traditional vertical integration approach to the horizontal supply chain has necessitated efficient partnership with suppliers and consumers. The contemporary companies have embraced consolidation strategy or buying out competitors who offer the same products or services, in order to survive in the global market.
Dell and Supply Chain Segmentation
Dell is one of the companies that have opted to exploit the supply chain segmentation. For the past two decades, Dell has successfully converted its supply chain business into a segmented model, where different policies are established to serve consumers, distributors, and retailers. The company opted to establish multiple supply chain models, where each model was assigned a different segment within the PC industry (Sabri 107). The company chose segmentation dimensions to establish its market based on the product features, customer characteristics, and channel. The company also used customer data, survey results, as well as business intelligence to enhance its customer value position and operations.
Dell has succeeded in its supply chain because it is managed by a right transformational team, which incorporates individuals with different skills. The company strived to understand its selected clusters of its customers as well as the direction that the market was taking before it began its new supply chain models that focused on balancing agility and efficiency. By communicating with its customers, Dell was able to identify strategies that it could employ in different functions. Consequently, the mixture of such strategies led to the creation of the unique supply chain systems. Some of the skills that the company required are customer care awareness, knowledge of the market, and end-to-end supply chain design.
Dell has a unified business strategy to articulate on culture support. The entire executive leadership team of Dell is involved in the designing of segmentation strategy, together with the potential benefits. The team is quite active in developing the transformation program to enhance the market operations. The customer value in Dell is recognized through product characteristics and supply chain capabilities, rather than diving consumers through geographical locations and corporate strategies. Dell has begun to gain benefits owing to efficient segmentation. The company’s product availability has risen by 37% while order-to-delivery frequencies have become shorter by 33% (Sabri 112). The company has also experienced a reduction of operational cost by 1.2 billion in 2 years. Thus, Dell can claim supply chain segmentation as the main factor for its improvement in the technology industry.
Supply chain segmentation is built on the notion that the common one-size-fit-all approach does not allow companies to offer customers specific needs nor enhance the profitability of the business. Today’s customers have become more informed and, thus, preferring products that fit their characteristics. Segmentation is vital in the commercial sector because it assists in analyzing data concerning customers’ needs, in addition to understanding product characteristics to ascertain which segments of products can be profitable to make an investment. Companies, such and Dell and Cola, have benefited from supply chain segmentation, owing to their vibrant marketing across the globe, and prioritizing on products, channels, and customers. Once the segments are defined, logistic processes are designed to satisfy the needs of every segment, thus reducing complexity in operations. Companies can overcome challenges of segmentation by controlling information flow and striving to understand customer needs globally.
Blake, Barry. “Supply Chain Segmentation: The Key To Future Profitability.” SCM World, Research Report (2013). Web. 4 October 2016
Roscoe, Samuel, and Peter Baker. “Supply chain segmentation in the sporting goods industry.” International Journal of Logistics Research and Applications 17.2 (2014): 136-155.
Sabri, Ehap H. Optimization of Supply Chain Management in Contemporary Organizations. Hershey, PA : Business Science Reference, 2015. Internet resource.
Sarin, Sharad. Business Marketing: Concepts and Cases. New Delhi: McGraw Hill Education (India, 2013. Print.
Thomason, Derek, Martin Green, and Martin Haynes. “Six Practices That Bring Competitive Advantage.” Operations Management (1755-1501) 40.3 (2014): 32-35.Business Source Complete. Web. 3 Oct. 2016.