Segmentation enables the supply chain trifecta: Lower cost, higher revenue and greater flexibility
The pendulum of power is shifting in the B2B supply chain. Driven by factors including increased globalization, greater access to product and market information, increased price sensitivity and the commoditization of many technologies, the B2B buyer/supplier dynamic has changed dramatically.
Meeting customers’ ever-increasing demand for speed, competitive pricing and product personalization is no longer just a challenge for consumer product industries. Today, B2B customers not only want, but demand, the same convenience and ease of use they experience when, as consumers, they order through Amazon or any other advanced e-commerce engine. In fact, according to a report on B2B commerce trends from Oracle, 80 percent of B2B companies “recognize that their customers’ expectations have changed due to B2C retail practices” and are therefore embracing proven B2C best practices such as personalization and online catalogs.
As this pressure ripples throughout the entire supply chain, a new B2B2C (business-to-business- to-consumer) trading model has emerged, according to SCM World. Supporting this emerging model will require the B2B supply chain to be even more agile, cost-effective and responsive than ever.
To maintain market share and protect their brand identity, suppliers/service providers need to ratchet up their focus customer experience management. Accenture’s B2B Customer Experience survey further revealed that customer experience will ‘fundamentally transform’ how B2B companies sell to and service their customers.
Recognizing that no one supply chain model can maximize efficiency and profitability while still meeting the varied needs of a diverse range of customers, members of the supply chain, both upstream and downstream, are embracing supply chain segmentation. Segmentation, according to Gartner, is about understanding what customers value most and building the right supply chain operating model to satisfy these requirements. Through segmentation, companies can better align their resources so that they are not, for example, spending money delivering commodity products ahead of demand or holding up production waiting for custom parts to arrive with a consolidated shipment of standard products from overseas.
Segmentation is not a new strategy, but until recently few companies had managed to successfully break down the traditional monolithic supply chain structure in favour of multiple, smaller and more nimble supply chains. Segmentation replaces the typical ‘one-size-fits-all’ supply chain model with multiple configurations customized to satisfy more targeted goals to avoid over-serving some customers and under-serving others. These objectives can be based on end-to-end metrics such as cost, expected service levels and both manufacturing and final delivery locations.
For some companies, speed is paramount; others may place a higher value on service or differentiation, for other still cost may be the singular target. Whatever the value characteristic may be, supply chain segmentation is about managing multiple supply chain configurations to assure each customer gets what they most value.
Establishing an effective segmentation strategy requires thorough cost-to-serve (CTS) analysis. In its ‘Supply Chain Segmentation’ white paper, OPS Rules lists the following data sources needed for a comprehensive CTS calculation:
* Inventory costs
* Logistics costs, including cost to expedite
* Manufacturing, labor and set-up costs
* Costs to configure/assemble
* Cost of direct materials
* Variability of demand, supply and transportation
* Lead-time analysis
A rudimentary example of segmentation would be grouping high-volume, low-mix customers in a supply chain built for efficiency, while the supply chain for low-volume, high-mix customers would focus on maximizing flexibility. OEMs that configure their supply chains based on these trade-offs can consistently satisfy customer demands without adding cost or risk to the supply chain.
Supply chain professionals must realize that these compromises are not about settling for less; rather, they are about establishing priorities. Gartner provides the following example: “When a customer wants 100% on-shelf availability, the answer can no longer be ‘that’s not possible.’ It has to be, ‘yes, we can make that happen, but here is the new cost and price or trade-off required against product variety.’”
There are a number of reasons why segmentation is being viewed as a crucial strategy for members of the electronics supply chain. For example, delivery performance is increasingly recognized as a key driver of customer satisfaction. According to the PricewaterhouseCoopers (PWC) 2013 Global Supply Chain report, best-in-class delivery was cited as one of the most critical elements of an optimized supply chain by 94 percent of the technology companies surveyed. But, given the diverse size, geography, and product mix of players in today’s supply chain, achieving perfect order fulfilment is more difficult than ever.
In addition, proprietary technology advantage is becoming ever more fleeting. It used to be that a company’s products were so proprietary that once they get into a socket, exorbitantly high redesign costs prohibited part substitutions unless they were absolutely necessary. Today, however, the market for semiconductor IP is so robust, that “just about any large company with a big enough stake at the table can design their own chips,” according to Arteris V.P. Kurt Shuler. So, Shuler contends, either they “get what they want from established chip vendors or they will develop their own design that meets their needs.”
The bottom line is that no matter what industry you are in, how ground breaking or routine your product is, how many items you sell to whom or in what region, every transaction is essentially an agreement between two parties: a seller and a customer. And these days, customer experience (CEX) is the holy grail of profitable growth. Therefore, to remain competitive, companies within the industrial supply chain must put customer experience at the top of their to-do list, and segmentation can be an essential element of the new customer satisfaction profile.
* Gartner Workshop: Conquering the Basics of Supply Chain Segmentation.