Why Segmentation and Profitability Go Hand in Hand

The Aberdeen Supply Chain Summit in Chicago earlier this month was a productive event for supply chain executives and practitioners. The conference format and size were just right to allow comfortable sharing of ideas and lessons learned about various topics from S&OP and supply chain planning, to inventory optimization and transportation. I personally enjoyed the lunch networking session on the first day, where I joined a discussion that allowed me to become happily immersed in deep conversations about S&OP.

I also had the pleasure of hosting a roundtable session on supply chain segmentation along with Bob Heaney , Aberdeen’s lead analyst for Supply Chain Management. Twenty-five executives from pharmaceutical, CPG, retail, logistics and B2B/industrial industries were part of this insightful and interactive discussion.

It was the general consensus of the group that there is value to be delivered from supply chain segmentation. In many cases, supply chain segmentation is inevitable; as businesses grow and adapt to the changing market landscape, it becomes necessary to develop segmented/differentiated ways to respond to customer demand. The traditional view of serving all demand equally is no longer appropriate because of increased supply chain complexity, lead time variations, logistics costs, capacity constraints, and the impacts on profitability.

The discussion was aligned with the strategy and recommendations that JDA offers and implements with our customers, with additional observations based on the continuous evolvement and adaptation of supply chain management in the marketplace. For example, one of the participants in the session shared that his company has four supply chains. Each supply chain delivers different products for different set of customers, using different supply chain flows and service policies.

There were a lot of good points raised during the session ‒ enough to write a robust report or multiple blog posts! Instead, I’ll just list some of the interesting comments below:

1. Supply chain segmentation is not just about efficiency or customer service, it’s about profitability.

2. Profitability should be the main driver of a segmentation strategy.

3. Typical segmentation starts with the customers, based on profitability or their strategic importance.

4. Segmentation needs to consider the tradeoffs between customer profitability, costs, service and products.

5. The supply chain segmentation discussion is usually initiated by the supply chain group, but it is critical to have everyone in the company aligned and agree to execute according to the segmentation strategy.

6. It is critical to align the whole organization on the right metrics, otherwise the segmentation will fall apart.

7. S&OP should be the process used to align the organization. There may be an S&OP for each segment but companies should also think about a roll-up S&OP at the executive level.

8. Education and training is critical to ensure that execution is aligned across sales, marketing, supply chain, operations, etc.

9. It’s important to get customer buy-in for your segmentation strategy. Show them the shared benefits, perhaps using a scorecard on regular basis, so they support your initiative and even perhaps set goals to enhance the existing partnership.

I’d love to extend the conversation beyond the roundtable by reading your thoughts and comments. Are these on target? What’s missing? I encourage you to post and share your thoughts with me.

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