One Size Doesn’t Fit All: Why Supply Chains Need Micro-Segmentation?

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In the 1990s Dell stirred a revolution in the computer and supply chain sector when it segmented its supply chain into multiple smaller segments to serve customers of varied interests, eventually resorting to a direct-to-customer model to deliver customized services to all of its customers, be it serving consumers, corporate customers, retailers or wholesalers. This revolution helped Dell to save $1.5 billion on operational costs and gain the number 2 spot on Gartner’s ‘Top 25 Supply Chains’ list.

What Dell did here is popularly known as ‘Supply Chain Segmentation’ or ‘Micro-segmentation’. A concept that’s defined by Gartner as “Designing and operating distinctly different end-to-end value chains (from customers to suppliers) optimized by a combination of unique customer value, product attribute, manufacturing and supply capabilities, and business value considerations”. In essence, supply chain segmentation or micro-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.

Traditionally, supply chains believed in a “one size fits all” concept which eventually translated in few customers being over-served and few customers being under-served. Micro-segmentation on the other hand believes in the contrary by taking all the customer segments into consideration, enabling the creation of an efficient supply chain that’s customer friendly. However, one shouldn’t mistake ‘Micro-Segmentation’ for an altruistic endeavor that only benefits customers. Here’s how it mainly benefits supply chains in actuality.

1. Happy Customers
Different customers have different requirements and organizations have to ensure that their value proposition is in sync with these requirements. It is not possible to appease all customer segments with a common value proposition. Micro segmentation enables organizations to divide its customer base into smaller buckets which can be catered according to their respective requirements. Supply chain segmentation enables organizations to serve all kinds of customers and live up to their expectations.

2. Reduced Demand Variability
Demand variability has always been one of the biggest challenges faced by the supply chain industry. It is a measure of the difference between the expected and actual customer demand. Micro-segmentation offers greater visibility into the demands of the customers and helps in realizing a demand-driven supply chain with reduced demand variability.

3. Increased Economies of Scale
Apart from customer segments, supply chains can be segmented based on product demand, channels, regions served, service models etc. Owing to micro-segmentation, when there is clear visibility on the different segments that an organization has in its supply chain, it is easier to leverage volume in those segments where the demands are higher. Leveraged volumes across the right segments and reduced demand variability drive economies of scale across the supply chain. The end result being lower manufacturing costs and increased output.

4. Creates an Integrated Supply Chain
Micro-segmentation allows organizations to create a well-integrated supply chain which helps in aligning the demand, supply and inventory of all the micro-segments and rightly prioritizing a handful of them based on their demands. When there is clear distinction between the actual and forecasted demand, resources within a well-designed supply chain can be effectively distributed on priority basis, rather underserving one segment and overserving another.

5. Increases Profitability
A demand-driven supply chain, increased economies of scale and deeper insights into the segments of a supply chain… all of these contribute towards creating a profitable supply chain. Profitability is encouraged by reduced overheads, systematic processes, systematic inventory management, reduced demand variability…all of them owed to segmentation of the supply chain to mine deeper insights of the segments/micro-segments included.

To summarize, the end goal of supply chain segmentation or micro segmentation is to create multiple segments that have specific processes and policies in place to deliver the promised value proposition to customers of all kinds. In the next part of this series, we will discuss the various approaches one can apply to realize supply chain segmentation and provide a step-by-step guide to ensure flawless implementation of the same.

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