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Supply Chain Segmentation Journey for Retailers
Ehap Sabri, Ph.D., CFPIM, University of Texas at Dallas
In response to the dramatic changes in the business landscape over the past few years, several retail companies are stepping back and assessing whether they have the right supply chains to support their dynamic businesses and exploring supply chain segmentation to reduce complexity and improve margin. It is crucial to simplify complex, one-size-fits-all supply chains and deliver the right level of service for each customer/channel segment. Taking the journey of supply chain segmentation for retailers is no longer an option - it's a strategic mandate in order to stay relevant in the industry. Other pressure drivers for the increase in supply chain segmentation popularity are:
- Market: consolidation, globalization, product proliferation, compressed supply cycles
- Demand: consumer behavior, multiple views of demand and omni-channel concept
- Supply: dynamic sourcing, outsourcing, complex networks
- Logistics: volatile rates, capacity uncertainty
What is Supply Chain Segmentation?
In their book Lean and Agile Value Chain Management, Sabri and Shaikh defined segmentation as "the stratification of the channel/customer/product portfolio into groups which allows the company to have a different level of service by applying differentiated inventory, supply, and fulfillment strategies." The groups could be based on revenue, margin, variability, profitability, volume of sales, product life cycle, etc.
The concept of segmentation is not totally new in retail - several fashion and retail companies have multiple supply chains, but all of them were developed out of necessity (reactive mode) with manual and inconsistent business practices.
What are the Benefits of Supply Chain Segmentation?
Many retail companies today are still using one-size-fits-all supply chain processes, overserving some channel/product combinations and underserving others since their requirements are different than the "one size." Also, industry research shows that less than 50% of a company's customer and product portfolio is unprofitable.
By understanding the profit profiles of their customers or channels and products, companies can tailor a more profitable supply chain strategy to each of them and thus increase the overall profitability of their portfolios. It also increases inventory turnover through inventory positioning and aligning fulfillment, logistics, demand planning, manufacturing and procurement strategies. For example, an apparel retailer can satisfy the demand for their basic products through an efficient (less costly) 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 has different demand planning and stocking and fulfillment strategies and policies. In addition, it would improve customer service and sales by increasing the reliability of delivering on promises and improving forecast accuracy.
Is There a Framework for the Supply Chain Segmentation Transformation Journey?
The recipe for success in managing the segmentation transformation journey is to master the change transformation cycle and ensure effective change management. A proven and practical framework is explained briefly in this section:
- Alignment. Establish clearly how the supply chain segmentation transformation program is a crucial strategy to achieve one or more corporate goals. It includes developing the vision and objectives of the segmentation transformation program.
- Profiling & Clustering. Conduct demand and cost-to-serve analysis. The objective here is to understand which customer/channel/product combinations are winners and which are losers, and then to structure supply chain policies such that some or all of the losers are turned into winners. This may require changing the replenishment model and service-level agreements for a specific channel/product combination. It also includes process analysis and associating clusters to supply chain models as shown in the following example.
- Identifying Process, Technologies and Governance Changes. It is important to complete detailed, future state design after the approval of supply chain segmentation by key stakeholders. The value stream mapping method can be leveraged to understand cost drivers and come up with a more granular design of the future state. It is also crucial to capture process, technologies and governance (organizational, metrics, and policy) changes and capabilities for every supply chain such as including postponement, changes to logistics modes, new manufacturing or sourcing models, or new inventory practices.
- Capturing the Value of Change. Begin by identifying the critical supply chain metrics to grow the business. Limit the list of metrics to the critical few. Second, capture an accurate baseline for each of these metrics to demonstrate the average performance across your business. Then, explain how the new/updated supply chains will impact the KPIs (positively, negatively, or neutral). Finally, come up with ROI, which must be significant for executives to buy in on for pursuing supply chain segmentation.
- Change Management. Supply chain segmentation is not enabled all at once. Changes/capabilities are enabled individually to segment pieces of the supply chain. Therefore, the transformation program should be broken into multiple phases with definitive outcomes for each to implement manageable change. Technology is typically needed for the implementation since segmentation often uncovers issues and gaps with current tools. Some of the key change management considerations are:
- Certain skills for the transformation team members are required like process design, Lean Six Sigma expertise, data analytics, systems optimization, process automation, program management, organizational influence and communication.
- Segmentation must be a living thing, with the ability to repeat the exercise so the company can rollout other Business Units (BUs) and new products are assigned easily.
- The supply chain segmentation is not just a business initiative - it's a change in the organization culture; therefore, executive commitment and visible support is mandatory to the success.
Segmentation gains ground in manufacturing as well as in retail and the questions around it have evolved from "What is it?" to "How can we do it?" Supply chain segmentation is not a one-time activity - it is a multi-quarter journey - but it does get easier after your first venture through the five steps mentioned above.
Ehap Sabri, Ph.D., CFPIM, is a supply chain expert, Lean Six Sigma Master Black Belt, business professor, and author with 17 years of industry experience. He is a strategy consulting director at JDA Software and an adjunct professor at the University of Texas at Dallas. Ehap is the author of two books: "Purchase Order Management Best Practices: Process, Technology, and Change Management" and "Lean & Agile Value Chain Management: A Guide to the Next Level of Improvement." He can be contacted at firstname.lastname@example.org or email@example.com.