Why advanced supply chain segmentation is a route to profitability and competitive advantage

For manufacturers, every year brings change to the market. Change is happening faster than ever as technology trends such as IoT, virtual reality and big data are providing countless opportunities for manufacturers across the globe. Yet, the cumulative effect of new technology can be increased complexity. It will be those manufacturers who can successfully adapt to and manage this complexity that will realise greater profitability in the future. At the same time today’s manufacturing sector is a world of rapid product innovation, SKU proliferation and channel complexity; which makes aligning strategic goals a challenge. So how can manufacturers ensure their supply chain is mirroring the corporate objectives of the business? The answer is supply chain segmentation in conjunction with a best-in class Sales and Operations Planning (S&OP) or Integrated Business Planning (IBP) processes.

However, many manufacturers continue to use an outdated approach to supply chain segmentation which is more of a hindrance than a help towards their future business success. Recent research by the University of Warwick and JDA found that only eight percent of manufacturers have reached level three out of four in regards to supply chain segmentation maturity, with none of those asked reaching level four. As we move into a new age of greater complexity, manufacturers must ensure that their supply chain is operating in a way that is efficient and above all profitable - only then will they remain competitive. This is only possible when the building blocks and the initial processes are managed dynamically, through automation and predictive analytics.

Effective supply chain segmentation can underpin the advanced manufacturing capabilities promised by trends such as big data and IoT. A new approach to supply chain segmentation will help to enforce business policy from end to end, which promises to deliver greater profitability, service levels and customer loyalty. Despite the clear benefits to the supply chain, the University of Warwick and JDA study found that only 17 percent of organisations currently report a ‘business process orientation’ strategy.

Making supply chain segmentation work

Segmentation is the solution to manage the complexity of innovation, yet it seems to be a capability beyond most manufacturers. So how can manufacturers make ensure supply chain segmentation delivers profitability and competitive advantage?

1) Become more data-driven: Part of the current problem appears to be that 38 percent of manufacturers are still using a static segmentation approach, such as the basic Pareto analysis. A more worrying statistic has shown that 23 percent of manufacturers still use a ‘rule of thumb’ approach to segmentation, over any kind of data-driven methodology, whilst only 39 percent of manufacturers have a data driven segmentation approach.

 2) Break down the siloes: Many manufacturers are making important day-to-day commercial prioritisation decisions based on limited criteria, due to a siloed approach to segmentation. Our research found that only 33 percent of manufacturers are utilising a single criteria to model segmentation, whilst 51 percent are just employing two. The criteria being used is often inconsistent between functions, meaning there is no end-to end strategy driving the supply chain and business decision.

3) Apply a dynamic and predictive end-to-end analytics capability: Without a predictive analytics capability, it is not possible to generate the useful information that helps to develop a strategic segmentation criteria. If the foundations are not solid, then the higher levels of the structure, including reporting, will also be on shaky ground. For example, in fast changing markets, products can rapidly accelerate through their lifecycle, during which time their profitability will be reduced. Yet only 18 percent of respondents consider past, present and future data in their planning process. It appears that more organisations are driving their supply chains forward, whilst looking in the ‘rear-view mirror, rather than looking ahead.

In an age of growing complexity, manufacturers must ensure they understand the importance of an advanced supply chain segmentation strategy. Once mastered, manufacturers will come to enjoy advanced strategic alignment in line with customer centricity, greater profitability and the ability to deliver greater performance through plan adherence. Moreover, advanced segmentation and IBP are underpinning the success criteria for launching other advanced initiatives, such as big data with confidence and commercial success. 

Hans-Georg Kaltenbrunner, VP Industry Strategy for Manufacturing, EMEA at JDA

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