Supply Chain segmentation : An applied example

Increasing importance of Supply Chain segmentation

Ever evolving consumer and Supply Chain landscape is driving increased complexity into product offerings and distribution channels, which then impacts the effectiveness of the Supply Chain. Supply Chain segmentation is a powerful tool that when leveraged effectively, will allow you to provide a great brand experience to your customers while simultaneously maximizing company profitability. In my mind, it is a very powerful first step in any Supply Chain transformation exercise.

Supply chain segmentation stratifies the end-to-end Supply Chain into logical groups based on the various characteristics of the product, customer, supplier, distribution channel, etc. These grouping are used to optimize demand and supply planning and scheduling by providing differentiated services for each group.

Best in class segmentation approach: An applied example

In this example, we will see how a CPG distributor segmented its Supply Chain to optimize its end to end Supply Chain. Note that this example is a high level overview of the segmentation process. A detailed segmentation exercise can’t be captured in a single post neither it is a generic process that can be applied to any Industry/Company. The granular approach for segmentation needs to be developed/tailored for each individual organization.

Supply chain segmentation is a very comprehensive exercise and data plays a key role in the analysis. However, a key first step that I always recommend is to  map the Supply Chain challenges and drivers that correspond to these challenges. The segmentation strategy then needs to built upon these drivers and challenges, with the goal being eliminating these challenges.

Challenges and drivers

Step 1: Capture the challenges

CPG Supply Chains can have a plethora of challenges but for this example, we will focus on some of the key challenges like:

  • Trade promotions
  • Perishability
  • Demand variation
  • Competitive pricing

Step 2: Determine the drivers behind the challenges

Next step is to understand what are the drivers behind these challenges since the primary focus of segmentation is to manage these drivers optimally. For this example, the drivers are:

  • Product lifecycle stage
  • Life span
  • Lead time
  • Seasonality
  • Contribution margin

Step 3: Zoom in on the focus of the segmentation exercise

It is obvious that segmentation will focus on the drivers, as indicated above but the key idea in this step is to understand what will be the aspects that can be influenced by managing the drivers listed above better? The factors that can be influences are:

  • Inventory related costs
  • Stock outs
  • Operational costs
  • Customer retention

Step 4: Map Objectives, focus areas and benefits for each segmentation option

Generally the following three segmentation approaches are used intandem, or individually in Supply Chain segmentation:

  • Product segmentation
  • Customer segmentation
  • Channel segmentation

An ideal Supply Chain solution will be a holistic solution of the above three types of segmentation structures. However, segmentation can also be achieved with the combination of one or more the segmentation structures. In order to finalize exactly which segment needs to be used,  you need to determine the objectives, focus areas and benefits for each of these segmentation types.

The mapping for our specific example is shown below. This mapping helps you see the holistic picture of Supply Chain segmentation structures


Step 5: Build and execute

Based on the mapping, you then need to re-engineer processes in order to align with your new segments and the corresponding strategies.

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