One Size Doesn’t Fit All: 5 Steps to Realize Micro-Segmentation
In the first part of the ‘One Size Doesn’t Fit All’ series we talked about micro-segmentation and its benefits. To give you a quick recap, micro-segmentation or supply chain segmentation is the act of creating a profitable supply chain by breaking it down into smaller (micro) segments, segments that influence buying decision and are created considering characteristics of products, customers, channels, service models etc.
In the previous segment we also listed down the benefits of supply chain segmentation which includes satisfied customers, reduced demand variability, increased economies of scale, well integrated supply chain and increased profitability. You can read the previous installment of the series here.
In this article we will focus more on the steps to be followed to implement micro-segmentation/ supply chain segmentation.
Step 1: Analyze Demand and Profitability Dynamics
Analyzing demand and profitability dynamics could be the first step towards realizing a well segmented supply chain. Both demand and profitability are dynamic in nature and change frequently. It is important that these changes are tracked over time, so as to break down the customer base into multiple segments based on the demand they generate and the profitability they offer. Differentiated service agreements and supply chain policies can be devised to prioritize these segments and offer tailor-made services while minimizing the cost-to-serve.
Step 2: Inventory Optimization and Differentiated Inventory Policies
Inventory optimization is one of the most followed supply chain segmentation strategies. Once you have analyzed your supply chain network and prioritized your customer segments based on their value propositions, you can determine the stocking policies for each of these segments. This approach can be followed for both downstream and upstream inventories. Apart from customer segments, differentiated inventory policies can be designated based on product segments as well, as different products demand different kind of inventory and associated services.
Step 3: Differentiated Replenishment Programs
In order to ensure all-time availability of inventory for all kinds of customers and suppliers, vendor organizations must adopt differentiated replenishment programs. For each customer/supplier the vendor will have a specific replenishment program based on the service required, demand volume, profitability and channels used for replenishment. Taking advantage of this fact, vendors can devise and prioritize differentiated replenishment programs for a set of customer/supplier segments based on their changing dynamics and requirements.
Step 4: Differentiated Allocation and Order Promising
Allocation is the act of reserving a part of the inventory for select customers and order promising is the act of providing a delivery date with high levels of reliability. In order to serve those prioritized customer segments in the supply chain, vendor organizations must employ differentiated allocation and order promising for different customer/supplier segments. Following an integrated allocation and order promising approach which is backed by rich data is the ideal move to realize a well segmented supply chain. This approach enables organizations to provide quality service and ensure timely delivery to all kinds of customers.
Step 5: Keep a track of Total-Landed-Cost
Supply chain cost-structures are very dynamic these days with labor costs, fuel costs and currency exchange rates fluctuating very often. To ensure profitability, the sourcing decisions taken by vendors must be adhering to the supply chain segmentation strategy implemented and the costs involved must be tracked regularly. Total landed cost can involve a number of elements including unit price, transportation costs, inventory costs, duties & taxes, customer service and more. Prioritize your customer segments based on the cost-to-serve that’s involved with each.
A business optimization center that can establish, implement and monitor the segmentation policy needs to be in place for all the above mentioned. The center will also take the onus of creating the analytics behind the policy to track developments and suggest changes to ensure profitability and functional business processes as planned.