Supply Chain Segmentation Strategy: Moving Towards a Precise Future of Supply Chain Management
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2024-11-06
Introduction: Driven by globalization and digitalization, corporate supply chains are facing unprecedented challenges in complexity. The traditional "one-size-fits-all" approach to supply chain management not only leads to resource waste but also risks missing crucial market opportunities. The core logic of the supply chain segmentation strategy lies in breaking down seemingly impossible objectives into a series of achievable small goals, enabling differentiated services with limited resources. Effective segmentation must be based on clear business objectives, designed and implemented through systematic approaches, ultimately leading to sustainable behavioral change. This shift in strategic thinking is helping companies find the optimal balance in complex market environments.
In today's era of globalization and digitalization, supply chain management is facing unprecedented complexity. Take a typical multinational company as an example—it may need to simultaneously manage multiple business units, product lines, regional markets, and sales channels. As business models evolve, companies must continually expand their capabilities, add new services, offer personalized customization, and build more partnerships. This complexity is making the traditional "one-size-fits-all" supply chain management approach increasingly inadequate.
In practice, we often observe situations where companies, in order to ensure service levels, apply the same high standard of service to all customers. On the surface, this approach seems to guarantee customer satisfaction, but in reality, it leads to significant hidden costs. Let’s understand this with a simple analytical framework: For any supply chain process, the service outcomes can be divided into three categories:
Over-servicing: The service provided exceeds the customer's actual needs or importance.
Adequate servicing: The service level matches the customer’s needs.
Under-servicing: The service fails to meet the customer’s critical needs.
Studies show that in supply chains that adopt uniform standards, only about 25% of the service outcomes genuinely align with customer needs, while the remaining 75% are either over-serviced or under-serviced. This means a large amount of resources is misallocated, creating no value and, in fact, increasing costs.
For example, some customers may place more value on delivery speed and are willing to pay a higher price for faster delivery, while others may be more focused on cost control and are willing to accept longer delivery times. If the same fast delivery model is applied to all customers, the overall operational costs will inevitably rise, and this investment is unnecessary for some customers.
This is why supply chain segmentation becomes so important. By establishing differentiated service models, companies can:
Reduce the resource waste caused by over-servicing.
Improve customer satisfaction in areas of under-servicing.
Achieve optimal resource allocation.
However, it’s important to note that supply chain segmentation is not simply about categorizing customers or products. It must be based on a deep understanding of business objectives and customer needs, designed and implemented through a systematic approach.
Building an Efficient Supply Chain Segmentation Framework
How to Build a Segmentation Framework That Provides Differentiated Services Without Overcomplicating the Supply Chain?
The Outcome-Segment-Model (OSM) framework proposed by Gartner provides excellent guidance. This framework emphasizes three core elements:
Outcome-Oriented: Clearly define the specific business goals that each segmentation plan is intended to achieve.
Segmentation Basis: Group items based on relevant attributes.
Operating Model: Design matching operational plans for each segment.
In practice, a key finding is that most successful supply chain segmentation projects limit the number of segments to between 2 and 5. While this number may seem simple, it reflects profound managerial wisdom. Too few segments fail to meet the needs for differentiation, while too many segments lead to uncontrollable complexity. For example, in retail, a typical supply chain segmentation might include:
Efficient Supply Chain: For stable demand, high-volume products, aiming for the lowest cost.
Responsive Supply Chain: For high-value products with fluctuating demand, emphasizing quick response.
Agile Supply Chain: For innovative products or customized demands, offering flexible services.
Each segment has its clear value proposition and corresponding operating model, which can meet different market demands while maintaining overall operational efficiency.
Key Considerations When Designing Segmentation Plans:
Segmentation Must Be Based on Customer Needs, Not Just Internal Operational Convenience: Many businesses tend to segment based on product categories or customer size. However, this approach often overlooks the true differences in service needs. For instance, even for large customers, some may prioritize stable supply, while others may emphasize rapid response.
Segmentation Plans Must Be Sustainable: This means that, in addition to designing differentiated service processes, there must be corresponding management mechanisms in place to ensure that these differences can be maintained over time. This includes clear responsibility divisions, effective performance metrics, and appropriate incentive systems.
Segmentation Plans Must Be Adaptable to Change: The market environment and customer demands are constantly evolving, and supply chain segmentation needs to be flexible enough to respond to these changes. This requires considering the adjustability of the segmentation plan during the design phase.
Key Success Factors from Design to Implementation
In my experience working with numerous companies, I've found that even with a well-established segmentation framework, the process from design to implementation remains highly challenging. According to statistics, at least one-third of supply chain segmentation projects fail to meet their expected outcomes. This isn’t due to flawed concepts, but rather because of the difficulties encountered during the implementation process.
Key Elements to Ensure the Applicability of Segmentation Plans
The most crucial factor is that the segmentation plan must closely align with specific business goals. For example:
If a company’s strategic focus is on increasing market share, the supply chain segmentation should emphasize service response speed and flexibility.
If the focus is on improving profitability, the segmentation plan should prioritize balancing cost efficiency.
Cross-Functional Collaboration
Another critical factor is cross-functional collaboration. Supply chain segmentation is not just the responsibility of the supply chain department; it requires cooperation from sales, marketing, finance, and other departments. For example:
The sales department needs to understand and communicate the value propositions of different service models to customers.
The finance department needs to establish cost-accounting mechanisms that reflect the different service models.
The marketing department needs to incorporate service differentiation into product positioning.
Clear Performance Metrics
In the implementation phase, one of the most important tasks is to establish a clear set of performance metrics. This system should:
Accurately reflect the service performance across different segments.
Support cross-segment cost-effectiveness comparisons.
Help identify areas in need of improvement.
Effective Incentive Mechanisms
Equally important is the implementation of effective incentive mechanisms. People tend to stick to familiar working methods, and without appropriate incentives, it's difficult to maintain differentiated service models over time. These incentives do not necessarily have to be financial; they can include career development opportunities, recognition, or other non-monetary forms of reward.
Real-World Example:
For instance, one company encountered resistance from their sales team when trying to implement the standard service model for low-priority customers. The salespeople were concerned that this would harm customer relationships. The issue was effectively resolved by breaking down customer satisfaction metrics into different tiers and linking them to performance evaluations. This allowed the sales team to understand that different service levels for different customer segments did not negatively impact relationships and could actually lead to greater overall efficiency.
The success of supply chain segmentation relies on the alignment of strategic goals, clear performance measurement, cross-functional collaboration, and effective incentives. While challenges in implementation are common, addressing these key factors can significantly improve the likelihood of achieving the desired outcomes.
Digital Empowerment of Supply Chain Segmentation
Digital Transformation in Supply Chain Segmentation: The Impact of Big Data and AI
In the era of big data and artificial intelligence (AI), digital technologies are fundamentally reshaping the way supply chain segmentation is implemented and its effectiveness. Based on relevant case studies, digitalization brings revolutionary changes to supply chain segmentation in at least three key areas:
1. Precise Customer Demand Insights
Traditional supply chain segmentation often relied on limited historical data and subjective judgment. Today, by analyzing vast amounts of transaction data, customer behavior data, and market information, companies can more accurately identify customer demand patterns. For example, by analyzing order characteristics, service requirements, and cost sensitivity, businesses can automatically identify high-value customer groups that require fast response or stable customer groups that are more suited to standardized services. This data-driven segmentation is far more objective and accurate compared to traditional methods.
2. Dynamic Segmentation Optimization
Digital technologies have transitioned supply chain segmentation from a static to a dynamic model. By leveraging real-time data analysis, businesses can continuously monitor the performance of each segment, detect issues early, and make adjustments promptly. For example, some customer demand patterns may vary seasonally, and dynamic analysis allows businesses to adjust their service strategies accordingly, applying different supply chain models during different periods. This enables businesses to maintain a more responsive and adaptive approach to customer needs.
3. Automated Execution Assurance
Digital systems can convert segmentation strategies into standardized execution rules, which are then automatically executed by the system, reducing human judgment and intervention. This not only increases execution efficiency but also ensures consistency in service standards. For instance, an order management system can automatically allocate appropriate inventory strategies, delivery methods, and service standards based on pre-defined segmentation rules for different orders. Automation ensures that the execution of segmentation strategies is both efficient and consistent across various customer segments.
Challenges Brought by Digitalization
However, it is important to recognize the challenges that come with digital transformation:
1. Data Quality Issues
The effectiveness of supply chain segmentation depends heavily on the accuracy and completeness of the data. Enterprises need to establish stringent data governance mechanisms to ensure the reliability of decision-making bases. Poor data quality can lead to incorrect segmentation and flawed decisions, undermining the potential benefits of digitalization.
2. Complexity of System Integration
Supply chain segmentation often involves multiple business systems (e.g., CRM, ERP, WMS, TMS, etc.). Integrating these systems seamlessly remains a significant technical challenge. Effective system integration is essential to ensure that the various functions of segmentation (from demand forecasting to inventory management and logistics execution) work together smoothly and efficiently.
3. Challenges in Change Management
No matter how advanced the digital tools, they ultimately rely on people to use them. Helping employees adapt to new ways of working and ensuring that they understand how to leverage digital technologies effectively is critical to the success of implementation. Training, clear communication, and ongoing support are essential to ensure that employees can embrace digital tools and integrate them into their daily workflows.
Conclusion: Digital Transformation as a Means, Not an End
Digital transformation is not an end goal in itself, but rather a means to achieve greater operational efficiency and enhanced customer satisfaction. Successful supply chain segmentation requires a careful blend of digital technologies with business strategies and organizational capabilities. By focusing on using digital tools to create tangible value—such as offering more personalized services, increasing responsiveness, and reducing costs—companies can truly unlock the potential of their supply chain segmentation efforts. The key is to integrate digital technologies with the broader strategic objectives and to ensure that all levels of the organization are aligned and empowered to adapt to these changes effectively.
Case Study Analysis - The Transformation Practices of Grupo Boticário
There is nothing more convincing than a real-world case. The supply chain transformation of Grupo Boticário, Brazil’s largest cosmetics company, provides an excellent reference.
The company faced typical supply chain challenges: 8 brands, over 8,000 SKUs, and 17 beauty campaigns every year. The traditional uniform inventory policies and planning processes could no longer accommodate the complexity of the business. They needed a solution that would both improve efficiency and meet differentiated demands.
Boticário adopted a phased implementation strategy: starting with 200 SKUs as a pilot, they designed and validated four different supply chain models:
Efficient Model: Targeting stable, high-volume products, focusing on high profitability.
Responsive Model: Targeting fluctuating, high-value products, emphasizing rapid response.
Static Model: Targeting stable, low-volume products, balancing service and cost.
Dynamic Model: Targeting flexible, low-volume products, emphasizing agility.
Each model had clear service levels, inventory strategies, and flexibility positioning. More importantly, they not only focused on service differentiation but also established a comprehensive supporting mechanism, including procurement strategies, quality control, production planning, and logistics management.
The results of the implementation were remarkable: in the pilot phase alone, they saved approximately $4 million, primarily from optimized supply chain service configurations. More importantly, this solution demonstrated its scalability, laying the foundation for full-scale implementation.
The success of Boticário offers us several important lessons:
Executive support is crucial: Supply chain segmentation is not just a process change but a shift in mindset. Without firm support from top management, it is difficult to drive change across various levels.
Change management is key: Boticário placed particular emphasis on cultivating a "segmentation culture" within the organization, ensuring that all relevant stakeholders understood and embraced the new way of working.
A scientific evaluation method should be established: Boticário developed a specialized framework to simulate and compare business results before and after segmentation, providing essential data for ongoing optimization.
These insights offer valuable lessons for any company looking to implement supply chain segmentation successfully.
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The content of this article is reprinted from the official account: Wendao - Supply Chain Thinking. The article represents the author's personal views. For any suggestions or inquiries, please feel free to contact me.
Wendao - Supply Chain Thinking is dedicated to gathering top domestic experts in digitalization and supply chain management to explore professional issues, emerging trends, and the future direction of supply chain development in the digital age.
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