Creating value through supply chain segmentation

The business environment remains as challenging as ever. Companies face competing objectives as they seek growth through innovation, while still pursuing cash flow improvements or cost reductions.

Whichever objective a business focuses on, each has a direct effect on the supply chain – the ‘engine of a business’. If this engine isn’t performing effectively, then the implications for the business can be significant.

Focusing on just one objective would certainly deliver benefits, but achieving a balanced trade-off between all three is likely to deliver better results and a significant competitive advantage.

Supply chain segmentation is a tool successful businesses use to achieve this balance. Segmentation is nothing new, and many businesses have recognised the benefits of a segmented approach and even implemented it to some extent.

However, a study from the WMG (Warwick Manufacturing Group, University of Warwick) and US supply chain software and consultancy company, JDA shows that only 8% of businesses have advanced beyond a basic 2-by-2 segmentation, and it is rarely fully integrated with business processes.

Creating a segmentation is relatively easy, providing data is accurate and available. However, for many organisations, comprehensively embedding segmentation into processes so that it informs and enhances key business decisions is where the untapped opportunities lie.

Enabling business decisions

As a first step, businesses must understand that a single supply chain segmentation will:

• Drive decisions across business silos (as opposed to different models and methods across divisions)
• Translate into decisions involving the customers and suppliers (extended supply chain)
• Be relevant to a specific business – the same set of parameters will not be a best fit for all businesses or industries
• Need to be regularly updated and embedded into an organisation’s decision making and day-to-day behaviour across all processes.

Avoiding misconceptions

Companies often have misconceptions about supply chain segmentation. We’ve seen common pitfalls across a wide range of industries:

• Each department creates its own segmentation, based on different parameters which then drives different processes
• Perceived as a data intensive and onerous process – time consuming to set up / maintain
• Failure to update the segmentation as business needs change
• Belief that segmentation will be the answer to every issue – it is actually an enabler for business processes to be designed and applied efficiently.

The most critical aspect of implementation is ensuring segmentation successfully feeds into business processes. The secret to successful segmentation lies in differentiation of processes across the supply chain, including business planning, contingency planning, and the allocation of staff effort to critical parts of the business.

Conclusion

Segmentation is a powerful tool that is significantly under-used by many businesses. Although getting it right should not be underestimated, embedding it into your business can be relatively simple and will create a competitive advantage.

Segmentation benefits include cost reduction, cash release, improved allocation of resources, better flexibility and improved visibility throughout the supply chain.