The key to success lies in a company's ability to meet the demands of different customer and product segments without excessively increasing supply chain costs, explains JDA’s Simon Bowes.
In today’s competitive and cost-conscious marketplace, many businesses are finding it difficult to service all customer demand equally.
End consumers, influenced by technologies and omni-channel commerce expect their orders filled faster than ever.
Automotive, industrial, consumer products and retail companies need to adapt and respond accordingly but due to increasingly complex supply chains, lead time variations, logistics costs and capacity constraints, greater flexibility generally requires higher costs.
Given these issues, it isn’t entirely surprising to see research showing that 30 – 40% of a typical company’s customer and product portfolio is unprofitable.
This figure is clearly too high – so how can businesses go about ensuring that they achieve a profitable customer relationship?
Many organisations need to better understand the profit profile of their customers and products so they then can start tailoring their services accordingly. Ultimately this means moving away from a ‘one-size-fits-all’ supply chain, and adopting a much more personalised approached.
Tailor-made supply chains
At one end of the spectrum you might have a small but important group of customers who require customised products and/or premium delivery and, at the other, a high-volume, low-margin product for which lowest cost is paramount.
One-size-fits-all supply chain is no longer optimal. Segmentation is about configuring the supply chain to provide a differentiated service which balances service and cost in line with these imperatives.
As such, businesses need to start making much better use of their data so that they can group together customers, regions and products to define a market. This then allows them to establish what is the most profitable and effective way to deal with a particular customer.
This strategy has been fundamental in allowing the likes of Dell to successfully expand its customer value proposition to reach different market segments, moving away from its traditional make-to-order model to allow customers to buy in different ways.
Key to the success of this transformation has been the recognition that supply chain policies and capabilities should be different for different customer segments – consumers; corporate customers; distributors, and retailers.
This has enabled the company to save $1.5bn in operational costs while simultaneously increasing customer service levels.
Balancing act
The important thing for businesses is to establish the right policies for how best to serve each customer with each product in their portfolio.
This will allow them to maximise the value proposition and service to the customer, while at the same time maximising profitability for the business.
This can only be achieved through a proper understanding of supply chain ‘cost-to-serve’, i.e. the cost of all supply chain activities associated with taking a customer order and delivering a product associated with that order.
For example, in a growth sector where a company has invested heavily in marketing a product or products to a particular group of customers, high availability along with aggressive lead times and dynamic pricing are required; therefore the supply chain must be configured to support this.
Alternatively, analysis may reveal that there is no commercially sustainable way to serve a particular market segment with certain product or products, so in this case, exiting that market would be the most appropriate strategy.
In some cases, companies might offer the same product in more than one segment, and would therefore need to treat that product differently, in line with the specific requirements of each group of customers.
Finding the right push-pull point
From an inventory management perspective, customer/product combinations with high demand variability present the greatest challenge.
In the segmented supply chain, customers are offered different ordering flexibility with different lead times and different price points for different levels of configurability on the products they order.
Some businesses may also use different segmentation criteria such as product characteristics like dimension, weight and supply lead time as the cost to handle and move the products may significantly affect margin.
This also supports improved forecasting and demand management.
While demand variability coming in from customers isn’t changing, the ability to forecast improves dramatically as the point in the supply chain that is being forecast is different for different products, effectively lowering the uncertainty associated with that forecasting point.
This also has the effect of lowering cost-to-serve while at the same time improving customer service and the delivery of a unique value proposition, supporting the concept of the customer-centric supply chain.
Emerging practice – profitable order promising
The automotive parts supply sector is one industry that has embraced this trend for a unique segmentation strategy.
One leading global automotive and industrial manufacturer has embarked on a transformational process to create a customer-segmented supply chain strategy that allows its customer service representatives to generate accurate delivery promises while maximising profitability.
The company utilises profitable order promising capability that matches each incoming customer order against available and future supply as well as customer segmentation hierarchy.
This differentiating capability allows the company to increase customer service responsiveness, fulfil its delivery promises, but without the costs of disrupting production or logistics.
Of course, the customer-centric supply chain doesn’t mean prioritising customer service above all else. What a customer wants must still be balanced against an organisation’s ability to deliver it in a profitable manner.
Segmentation isn’t about splitting a company into many different ways of working. It still requires integrated business planning to synchronise and co-ordinate business functions to achieve strategic company objectives.
Overall the key to success lies in a company’s ability to meet the demands of different customer and product segments without excessively increasing supply chain costs.
