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Customer-Driven Supply Chain Segmentation Makes the Right Customer Your Advocate

There is a sea change occurring in global supply chains and operations, driven by a series of massive environmental shifts – digitization, the "Internet of Things," geopolitical cost and risk structures and, less noticed by senior executives but every bit as important, a huge increase in the power of customers, whether consumers or businesses. This last factor is driven by social media, ubiquitous connectivity and increased communication, and is resulting in decreased brand loyalty and increased demands and expectations across a wide range of service and experience. To respond to, and be ahead of, these changes, companies need to be agile, resilient and low-cost while simultaneously driving increased customer retention and acquisition. No longer is the question "do we prioritize customer intimacy or operational effectiveness?" Now everyone needs both!

Customer-Driven Supply Chain Segmentation Makes the Right Customer Your Advocate

The key to both imperatives lies in the supply chain. However, the traditional supply chain model is monolithic in nature – treating supply lines, service offerings and customers in a “one size fits all,” relatively undifferentiated manner. While simple to understand and manage, such a model tends to under-serve those customers who are strategic, high profit and demand high levels of service and response as a condition of business, and over-serves those whose needs are more modest, who are not very profitable, or are unwilling to pay for additional services. As a result, companies incur both loss of revenue, as under-served potential and existing customers take their business elsewhere, and higher costs, as a consequence of what I call “unnecessary excellence.” On the supply side, the term “supply chain” is often a misnomer as it suggests there is only one chain, when in fact differing product, process, demand and logistics characteristics often require multiple chains. Responding to differing requirements with a monolithic chain reduces the company’s ability to rapidly respond to changes in demand, customers, supply and the environment, while increasing the complexity and cost of doing so.

On the flip side, customer segmentation has traditionally been the domain of sales and marketing.  Rather than looking at the entire customer experience lifecycle, classical customer segmentation focuses only on targeting and selling. For example, many companies sort their customers into classifications based on demographic factors and buying behavior: e.g., female customers aged 21 to 28 tend to buy one kind of product, or respond to a certain type of positioning.  This classic “customer segmentation” approach allows companies to price and sell their products and services in ways calculated to appeal to different types of customer. But this is only about selling to customers, and not about meeting their unique needs and preferences in terms of services, value-add, fulfillment, ordering, information and returns. In many instances, it’s much too easy on the front end to draw in customers by selling inefficient and expensive offerings without worrying about the costs, but the company (and customer) will pay the price on the back end. It’s also far less applicable in a business-to-business setting, where the customers aren’t individuals buying for themselves, but on behalf of a large organization. As I previously mentioned, not all customers are equal. Some require a higher level of service to buy or stay as customers and are willing to pay extra for these services. Turning these customers into advocates requires a differentiated set of service offerings that meets their needs today and tomorrow.

For example, in the model of free two-day shipping popularized by Amazon, many companies adopted similar ordering and tracking services, and offer free shipping both to customers who really do need their items quickly (and might be willing to pay extra to get this level of service) and those who do not (but are understandably happy to get something extra for free). This could work for an online retailer that primarily targets the consumer, but is less likely to be cost-effective in a business-to-business situation, where the customer experience cycle (buying, contracting, product/solutions and configuration selection, pricing, ordering, tracking, fulfillment, service and returns processes) is more complex. Applying the wrong model is precisely how we end up with “unnecessary excellence” (and unnecessary costs). 

Ultimately, a personalized end-to-end customer experience is what drives customer advocacy. Achieving this requires a new supply chain paradigm – one that looks at designing the supply chain both from the customer looking back AND forward from the supplier.  This will enable a company to:

• Learn what the customers really want. Asking customers is a good way to start this – it sounds simple, but it’s amazing how rarely companies do this.

• Group them – or micro-segment – based on their needs and priorities.

• Develop and deliver differentiated service offerings to serve these customers based on the actual costs-to-serve.

• Understand the supply chain products, process, geopolitical, logistics and demand characteristics to segment the supply chain from supply forward for cost efficiency, velocity and simplicity.

• Strategize and conduct “what-if” scenario planning to determine the best operating model, segments and differentiated service offerings

• Apply learnings to revise and re-structure as customers, costs and the environment changes

There are seven critical elements in designing such a next-generation supply chain:

1) An understanding of the end-to-end supply chain, its product and demand characteristics, logistics, costs, times, channels and the customer base

2) Accurate actual data (or good estimates) across the supply chain

3) A structured, business-driven approach

4) An understanding of the customers, and costs of the service offerings

5) Analytical tools and techniques to collect and analyze both structured and unstructured customer data

6) Collaboration among operations, finance and sales and marketing

7) People who have the skills, talent and understanding to develop, analyze and institutionalize the strategic options

Designing and executing customer-driven segmentation requires the capability to model the supply chain from the supplier forward to the channel/last mile and then to the point of sale, and all the way back, to  analyze customer groups/segments, the supply side, and then develop “what-if” scenarios based on costs-to-serve, operational costs, time and customer impact.  Obviously, this necessitates having the appropriate data. Typically, most of this data is resident in ERP systems, but some of the data will have to be estimated and obtained from service providers. 

From a broader perspective, however, it is imperative that a segmentation strategy be a fully collaborative effort involving operations, finance, and sales and marketing to ensure market and organizational-consistent customer segment priorities, services, costs and fulfillment. This is not optional.

The goal here is not a trade-off between operational excellence and customer intimacy – instead the enterprise needs to achieve both, by making the right customer an advocate, maximizing customer advocacy, increasing retention and acquisition, while reducing “unnecessary excellence” and complexity. The company that can execute on this will create a sustainable competitive advantage.

Source: Tata Consultancy Services

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