Today I can personalise anything from custom-made trainers and clothes, personalised cosmetics, drinks and, of course, my laptop. Supply chains are having to combine existing cost-effective mass production with less efficient mass personalisation and order size of 1. My sister recently tried to order a pair of trainers customised to her tastes, going through the whole process with growing excitement until the point where she found it was six weeks to delivery. We are all expecting more and more from supply chains especially when it comes to speed. Amazon Now’s one-hour grocery delivery time is one of the latest examples of this with next day already the ‘norm’.
New market trends and the growth in omnichannel
The variability of supply chains has increased immeasurably due to new market trends. A growing middle-class, new markets or geographies and new routes to customers have added ‘multichannel’ complexity where each demand may have a different expectation regarding product, price and service. Combine this with the above examples of product personalisation and consumer expectation, plus shorter innovation cycles for products only means one thing, demand cannot be predicted, volatility is the norm and supply chains need to offer differentiated response to meet demand expectations, whilst also growing their business profitably. For example, companies need to differentiate when a very costly 1 hour service should be offered or when a lower cost regular service is equally as effective.
The new ‘Digital Economy’
A parallel trend is the new ‘Digital Economy’ we all live and breathe every day. We are all connected in our personal lives with our employers and businesses. Omnichannel and new buying behaviour has fuelled an explosion in the amount of data at a business’s fingertips yet only 13% of Supply Chain / Marketing Executives claim their processes can take advantage of this potential (McKinsey and Company). I believe this is where the opportunity lies. How can companies better use data to understand demand, define segmentation strategies that feed throughout the supply chain and hence respond in the most appropriate way?
Take the example of collaboration, which is not new in supply chain. Historically, collaborative initiatives such as customer replenishment or supplier and outsourcing manufacturing collaboration are used to better manage the boundaries of the supply chain network with other organisations. However cycle times are typically weekly or monthly, demand is aggregated and collaboration only covers a small percent of total trading partners or products, hiding the true characteristics of demand and supply and ultimately leaving a supply chain to respond to old data. In a new digital economy, where we are all connected through improving technologies and network services, latency of these cycles can be removed and information shared automatically across organisations in near real time. This enables the physical and digital supply chain to become much more aligned. Companies that master this ’Digital Supply Chain Transformation’ are becoming increasingly successful by better matching demand and supply faster than their competitors, and I see a major capability behind this as a ‘new’ segmentation approach to this demand and supply problem.
A ‘new’ segmentation approach
Segmentation is not a new topic in Supply Chain. Characteristics of products in terms of cost and flow, and of demand in terms of volatility are typically used in ‘best practice’ segmentation examples, such as a monthly review of where to hold products and how much safety stock to hold.
Consider some of the transformational leaders in our new ‘Digital Supply Chain World’ like Uber for taxi services and Autolib’s shared electric car scheme in Paris. Uber needs to know the geo-location, passenger numbers and destination of demand, and the cost and geo-location of supply. Autolib needs to manage peak times of the day for demand by location, and match this to its supply factoring in the vehicle’s location and battery life remaining. There is no chance for daily or weekly response cycles. Their ability to harvest the characteristics of both demand and supply, match this 1:1 and do so in real time is at the heart of their operations.
In a digital supply chain we can use the same principles, expanding the use of characteristics in demand and supply segmentation. Firstly, we could consider to ‘tag’ demand with as many characteristics that makes sense to a supply chain. Adding attributes such as channel, customer priority, geo-location, margin and size to often available quantity, price and due date. Similarly, we can tag products for lifecycle or promotion status, cost, supply characteristics like source, production type, temperature or technology.
Secondly, we can use this in tactical planning processes to determine not only where to position inventory and how much, but to design differentiated supply strategies. I can stage inventory based on the ‘expected lead time’ characteristic such that I can serve 72 hour lead time demands at lower cost than 24 hour. I can use the ‘margin’ characteristic to assign a higher safety stock. I can use the ‘priority’ or ‘channel’ characteristic to allocate constrained supply to important customers. I can use source, volume and capacity information to decide if I should make to order, or offer local final assembly. Hence, new segmentation can utilise any range of characteristics, from highly personalised segments of 1, to aggregated segments that balance supply chain and business priorities without losing important context.
This means that companies are able to define groupings of customers, products, suppliers, transportation lanes, orders, etc. according to a wide variety of analytical and logical selection criteria, and then apply actions to these groupings. Actions can be assigning a forecast model, assigning priorities, defining a replenishment strategy, adopting make to order, adjusting lead times, economic order quantities, sourcing decisions and allocations approaches. These topics will ultimately drive supply chain response behaviour and cost therefore ‘new’ segmentation moves beyond setting where to hold inventory and how much, to driving the policy management process across a supply chain.
Considering this in the context of performance management and continuous improvement, segmentation characteristics can be used to analyse Key Performance Indicators such as Service Level, Cost to Serve, Margin and Inventory Turns across different geographies, plants, warehouses products, suppliers and customers. Where some segments perform and others do not, analysis of the parameters and policies in place can highlight necessary changes. Importantly in our ‘Digital Supply Chain World’ companies can move away from manual quarterly or ad-hoc stocking policy reviews to a standard regular closed loop processes that cover all aspects of supply and demand. This reduces expense/working capitol, maximises service and provides a more nimble supply chain behaviour.
The potential benefits of characteristics-based ‘new’ segmentation
The focus of the supply chain has shifted from product and cost to customer and service, more demand driven and responsive whilst still maintaining a sharp focus on profit. Digital transformation of the supply chain will allow leading companies to correlate ‘demand’ priorities with logistics, manufacturing, supply and financial data across the supply chain to enable differentiated fulfillment strategies. As in the Uber and Autolib examples, organisations that can best align the digital world and the physical world, even across organisations and networks, will be able to offer new services and match supply and demand faster.
At the heart of this will be the ability to manage the response behaviour of a supply chain to each unique demand, and companies that master using all relevant supply chain characteristics and a ‘new’ segmentation approach will be able to differentiate themselves with faster response at lowest cost. By combining ‘new’ segmentation with performance management, supply chain policy management and planning companies can quickly re-configure their supply chains to fix performance issues, take advantage of new opportunities and to differentiate service, reducing cost and driving profitable growth.
For my part, I see segmentation as one of the major business practices that can grow and evolve if we can master this digital world, and through it a company will shine by offering impatient teens their trainers when they want them!