SUPPLY CHAIN MANAGEMENT
The Right Fit
Segmentation enables companies to define supply chains based
on customer requirements, which leads to lower cost and
higher service levels.
A segmented supply chain allows a companys business units
to grow at varying rates and provide better response to markets
and cost control.
BY LUC KREMERS, ICOGNITIVE
F
ood and beverage companies have seen a greater complexity
in every link of their supply chain that involves distribution
and retail channels, factories and raw material supply.
Consumers who demand products that match their needs,
tastes and lifestyles are also driving such complexity. This has led
companies to encounter a wide range of variants and packaging types
for a product, which makes it difficult for them to anticipate demand.
This may result in unpredictable demand due to the production
of short-lived seasonal products and short-term price promotions
by retailers. Besides modern and general retail, distribution to
markets is also becoming more complex with new channels such as
convenience stores in Asia.
Retailers add complexity to the supply chain by raising their service
expectations the major ones are demanding delivery performance
of over 98%. Supermarkets are under working capital pressures and
are demanding reduced inventory levels, thus eroding the buffers
that had traditionally protected against stock-outs.
Global manufacturing and sourcing have also contributed to supply
chain complexity, as companies juggle the tradeoffs in global,
regional and local production, the modes of transport and the
challenges of sourcing from low-cost countries. For many, the social
and environmental impact of these areas adds another layer of
complexity in the supply chain.
And with these challenges, more companies are abandoning their
one-size-fits-all model for a segmented supply chain strategy. For
example, Unilever Thailand runs separate supply chain channels
for its locally produced and imported goods. The company delivers
More companies are rethinking
their supply chain organization, as
they realize one size does not fit all
their customers requirements.
www.asiafoodjournal.com Asia Food Journal 9
 SPECIAL REPORT
Figure 1: A simple matrix of customer priority versus product
demand behavior.
Figure 2: Factors that drive complexity in a supply chain.
locally produced goods from its main factory to stores in Thailand,
while imported products and those manufactured by subcontractors
enter a central distribution center before hitting the stores. This
has led to reduced inventory levels and stock-outs in stores, and
increased sales.
Besides improving service and reducing costs, a segmented supply
chain allows a companys business units to grow at varying rates.
The company can offer a better response to fast-growing channels
and product lines while providing better cost control in mature and
stable segments. It can also understand the elements in the supply
chain that matter the most to specific customers. Based on customer
requirements, companies can design and run differentiated supply
chains effectively.
The logic of segmentation
Supply chain segmentation discovers what matters the most to a
particular customer segment and tailors the operations to deliver
the goods and meet requirements, as not all customers have the
same preferences for a particular level of service. For example, while
flexibility in volume and supply chain responsiveness are important
to temporary price discounts at the retail channels, such attributes
are not critical to everyday low price retailers. Similarly, quick time-
to-market matters more to fashion-oriented, short-lifecycle products
than long-lasting, core products.
Figure 1 shows a simple matrix of customer priority versus product
demand behavior with six segments.
1. High-volume, low-variability demand: a company can design
a cost-efficient supply chain smooth production, minimized
changeover and dedicated production lines to drive costs down.
10 Asia Food Journal July-August 2010
2. High-volume products with high variability: priority A and B
customers may be offered a responsive service as the margin
justifies the additional cost involved.
3. For the less profitable C customers, providing a limited menu of
service options can help companies reduce variation.
4. Low volume, low-variability products can be supplied to high-
priority customers using a basic replenishment service.
5. Lower-priority customers should be offered a limited number of
stock keeping units (SKUs).
6. The difficult segment of low-volume, high-variability products
should best be offered only to high-value customers. A company
may decide to offer high service levels if it can obtain other
benefits such as access to test markets for new product launches.
Rationalizing SKUs should be considered for B and C customers.
A 3-step approach
Companies who are adopting a segmented supply chain should
adopt a three-step approach. Here are more details.
1. Identify drivers of supply chain complexity
Supply chain segmentation must be part of a corporate strategy and
business context. One that is used to drive a greater market share
in a high-growth industry would appear different from another that
is geared for cost efficiencies in a declining or mature industry.
Companies should uncover the underlying business dynamics that
drive the supply chains complexity (see Figure 2).
Figure 2 lists the criteria for segmentation that can be narrowed
down by filtering out the less important variables and combining
inter-related ones. The company should finally have a list of
operationally relevant criteria to either reduce costs or enhance
customer satisfaction.
2. Design differentiated supply chain segments
Next, define the segments. While companies would often want to
create many segments to reflect diverse needs, it can however be
impossible to manage all. To successfully implement a segmentation
strategy, there should be four to six segments for a reasonable
match to the various customer and product requirements without
introducing a high level of complexity. Each segment can include
enough SKUs to represent sufficient revenue to justify the time and
effort required for its implementation as a supply chain.
3. Implement processes for each segment
Finally, create a supply chain infrastructure for each segment. This
can include having different organization structures, processes
and business rules such as inventory policies and minimum order
quantity or MOQ requirement.
While in some cases each segment can share the same organization
and core process for ordering, production, logistics and sourcing,
implementing the requirements of each segment is done through
different business rules. Companies typically make changes to
processes such as sales and operations planning (S&OP) process,
production and distribution.
Conclusion
In the food and beverage industry, where the seasonality of supply
and demand is often important, segmentation can result in inventory
reductions of up to 20% and raising service levels for various customer
segments.
It is not surprising therefore that even in the midst of an economic
downturn, more companies are rethinking their supply chain
organization, as they realize one size does not fit all their customers
requirements.
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