Supply Chain Segmentation… Why is everyone so one-size-fits-all?

Pharma. High Tech. Apparel. Consumer Products. Med Devices. Agrochemical. Heavy Equipment. Even Retailers and Grocers.  All working on supply chain segmentation.  Over the last two years, I’ve watched as supply chain has shifted out of first gear on segmentation initiatives.  If we’re going to call it a bandwagon, let’s just say that it’s starting to get crowded in here.

The goal with supply chain segmentation is to move from a “one-size-fits-all” approach to a portfolio of supply chain execution options.  Most “how to” advice on supply chain segmentation focuses exclusively on 2×2 analysis of historical SKU, product or demand data.  Most often, the 2×2 is a compare of volume versus variability or demand predictability.  The result is a distribution of product performance that can be broken into four quadrants.  In general, companies will arrive at something similar to this 2×2:

Once SKUs / products / demand / etc is broken into these quadrants, you can now define the processes and physical supply network best suited for each environment.  High volume / low variability items can be managed “no touch” or efficiently with a focus on lowest possible cost.  AND it’s actually achievable because the supply response is aligned with the demand pattern.  Other strategies include agility (high touch) and resposiveness (low touch).   But isn’t this internally focused?  What if a customer demands 100% availability? Or a born-on date to show freshness? Or a unique route to market?

Is the approach on moving from “one-size-fits-all”… one-size-fits-all itself?

It is the focus on value as defined by the customer that will challenge (NOT invalidate) the 2×2 analysis.  In starting with the value outcome, you must now address more than just volume and variability.  The key is to marry the two together.  The value outcome is a demand segmentation and the volume / variability analysis is the constraint against that outcome.  Even just defining “customer” gets a bit tricky when you look at the demand network … especially in Industrial Manufacturing and Healthcare industries.

Customers are both the channel partners (distributors, retailers, IDNs, doctors) as well as the end users of products (patients, farmers, consumers).  These customers define value in different ways and your analysis must begin by selecting how far into the demand network the value-based segmentation will extend.  To capture all of these requirements, I have defined three forms of supply chain segmentation. 

(detail on these three types, the implications for your initiative, timelines and budgets shared in “Design the Right Type of Supply Chain Segmentation for Your Business“)

1. Internal product/supply network — Using historical SKU data on product demand volume and variability, companies design end-to-end efficient, agile and responsive supply chains. Companies with legacy cost-focused supply chains carve out an end-to-end service-driven supply chain. Organizations that compete with service and differentiation create an end-to-end efficient or low touch network.
2. Channel-back — In order to address varying channel requirements, analysis begins with an understanding of how value is defined by partners or markets. Value attributes include speed to market, freshness, predictability, price (cost), availability, delivery frequency and lead times. The supply chain is then segmented to deliver these value outputs by managing the necessary trade-offs.
3. End-user-back — Analysis of how end users — patients, farmers, consumers, businesses, etc. — define value highlights required trade-offs. Value attributes can include price (cost), on-shelf availability, value-added services, specialty packaging or labeling, seasonal needs and integrated solutions. The supply chain is then segmented, based on these criteria as opposed to regional or industry-vertical customer segmentations.

The analysis, future-state designs, implementation plans and timelines for these three forms vary. While there tends to be a natural progression through the three types, no one form is necessarily better than the other, and not every company will pursue all three.  So why is so much of the supply chain segmentation conversation focused on volume / variability analysis?  

1) It works… and it adds value.  An analysis of the volume and variability is a great way to estimate the complexity required to bring products to market.  It highlights where variability is increasing required resources and shows which products are predictable enough to automate process support.  It is often a first view into the fact that demand is already segmented and that the legacy one-size-fits-all approach only works for a portion of that demand.

2) It’s where you have the most control.  Historical SKU analysis is going to surface constraints of the supply network.  It enables you to create balance internally by managing inventory, cost, forecast accuracy, perfect order and other supply chain metrics with different targets.  When segmentation stretches into demand outcomes (think lowest cost, fastest speed, always available, highest service level, etc), you have less control.  You are extending the need for differentiated processes outside your four walls into the demand channel, which often has multiple layers of distributors and routes to markets.

3) It was a first step.  Supply chain segmentation is far from a new concept and, yet, very few companies have executed upon it.  It is a concept that has had to wait for the rest of the supply chain discipline to catch up in order to become viable.  Many companies have broken down the functional silos, have enabled collaboration with their network partners and have translated customer value requirements into tangible supply chain needs.  All of this activity was needed to show that supply chain could, in fact, manage trade-offs without undoing years of work on cost reductions.  Product / supply network segmentation is a natural extension of this journey as processes and resources are aligned to the complexity needed based on which quadrant they land in.  Great value… but only a first step.

The most advanced practitioners of supply chain segmentation have advanced into channel-back and end-user-back approaches.  It has likely been a multi-year journey.  Gartner has written case studies on a few of these companies to share their stories, but, in general, any “how to” literature is few and far between.  Here’s why.

1) It is THE source of competitive advantage.  While there has been a lot of talk on supply chain segmentation for at least 20 years, very few can accurately lay claim to successful implementations.  Even fewer can show that their work has progressed past internal product / supply network segmentation into truly (and profitably) managing differentiated outcomes.  So for those who have cracked the nut, now is the time to quietly reap the benefits while the rest catch up. 

2) It is pretty darn complicated to explain.  Internal product / supply network segmentation is often boiled down to the 2×2 analysis and is often directly connected with known product segmentation techniques.  When you extend the analysis into the demand channel, you’re now adding in customer segmentation… and a new form of customer segmentation no less.  Rather than the historical splits by geography or business unit, you must now segment customers based on their desired outcomes.  I have found that to have an effective discussion on channel-back and end-user-back segmentation, the only answer is time.  The solutions are often an overhaul to the entire business model.  Time is needed to work through analysis of customer segmentation and product segmentation while showing how segmentation of the supply chain can be the connective tissue between the two.

3) The wave is coming.  I have actively been working with many companies, in every manufacturing industry, on channel and end-user-back approaches.  Many are through the analysis and planning phases and are now running pilots on the proposed segmentation solutions.  This work is largely kept tight to the hip and the pilots are often in one region or on a select few products.  With success will come expansion.  Expect to see a broad swath of case examples emerging in 2014 on “value based outcomes” and “differentiated business models” as that will be the story of success with these latter two forms of supply chain segmentation.  In particular, I expect to see some unique use cases from consumer products, high tech and pharmaceutical companies.

What do you think?  Is supply chain segmentation just more of the same? Or will it be another step forward for supply chain as a facilitator in corporate strategy?

Bottom Line: If the only analysis you see is a 2×2 of SKU data or comparing volume versus variability, you’re only hearing part of the story… And you’re competitors are certainly happy about that.