Site icon Tutorial

Supply Chain Segmentation

A ‘one-size-fits-all’ approach to logistics is not appropriate in most instances. Some form of supply chain segmentation is therefore necessary in order to satisfy the various service and cost needs of the marketplace. This raises the question of exactly how supply chain segmentation should be undertaken.

Product Segmentation

It may be necessary to have different supply chains because of the very nature of the products. For example, when delivering to petrol stations the fuel may be delivered in large road tankers whereas the food and other items for the petrol forecourt shop would need to be delivered in clean, enclosed vans or trucks. Such product characteristics are oft en an important basis for supply chain segmentation.

Examples include:

This concept can give rise to a segmentation basis, whereby high throughput but low value density products (ie a low value compared to their weight or cube) may be dispersed geographically, whilst a low throughput but high value density product may be held at a single Global Distribution Centre and air-freighted from there around the world. A typical example of the former product type is photocopy paper and the latter is high-value electronic parts.

Demand and supply segmentation

In addition to the physical characteristics of the goods, there may be a distinction between whether the goods are ‘functional’ or ‘innovative’ in nature, as noted by Fisher in 1997. Thus, functional goods may have a steady demand and require a cost efficient supply chain. On the other hand, innovative products may be new to the market, may be quite unpredictable in terms of demand and therefore require a much more responsive supply chain. This type of distinction between products with predictable and unpredictable demand is often associated with the lean and agile concepts respectively.

Demand is, however, only one side of the supply chain. The nature of supply also needs to be taken into account. An important factor on the supply side is the length of the supplier lead time – from the time of placing orders on the supplier up to the time of physically receiving the goods.

Under this segmentation framework, lean supply chain principles can be applied where there is predictable demand. In the case of long lead times, the sourcing, production, storage and movement of goods can be planned in advance in the most cost effective manner. Where lead times are short, then quick response and continuous replenishment policies can be adopted so that goods are supplied on a ‘just-in-time’ basis at the last possible moment, again keeping inventories and waste to a minimum.

However, if demand is unpredictable, agile policies can only be fully adopted where supplier lead times are short. In this circumstance, supply can fl ex to meet the rapidly changing demands of the marketplace, and again inventories can be kept low. However, where supplier lead times are long, then this is likely to lead to either an oversupply of goods (leading to high inventories) or an under supply (leading to lost sales).

The geographic location of supply is obviously a very important factor in supply chain design. Separate supply chains will be needed, for example, to bring goods from the Far East to European markets, rather than from local European suppliers. In fact, the decision as to where to source is oft en part of the supply chain design process. For example, goods with predictable demand may be sourced from low cost suppliers in distant parts of the world (ie part of a ‘lean’ approach) whereas goods with unpredictable demand may be sourced locally where lead times are generally much shorter and therefore supply can easily be changed to meet fluctuating levels of demand (ie part of an ‘agile’ approach).

Marketing segmentation

Segmentation has been adopted in marketing for many decades. It is used for demand creation purposes and it has long been recognized that different classifications of customer require different marketing approaches. As it is the customer that supply chains are trying to satisfy it would be sensible to examine whether these segmentation frameworks are relevant.

There are many categorizations of marketing segments but one such classification is as follows:

Combined segmentation frameworks

Most segmentation policies involve some combinations of the various frameworks described above. For example, one that has been proposed by Childerhouse, Aitken and Towill, has been named ‘dwv3’ with the key factors being as

Variability: This relates to demand variability and unpredictability.

Exit mobile version