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Steps to Successful Supply Chain Segmentation

In a manner similar to product or customer segmentation, supply chains can be segmented based on service capabilities, says Lalit Wadhwa of Avnet. Identifying different supply chains within an organization through segmentation can help companies improve service levels and lower costs, he says.

Supply chain segmentation involves clustering services or capabilities that together are used to meet a specific set of requirements, explains Wadhwa, vice president of global supply chain operations at Avnet.

While similar in concept to customer or product segmentation, supply chain segmentation is all about capabilities, he says. “How you take a product and get it to the customer involves a unique set of capabilities that are really not about the kind of product or customer involved,” he says.

Wadhwa says supply chain segmentation is important for three reasons: It enables companies to meet customer needs at the lowest possible cost; it creates a framework that focuses the entire organization on delivering value to the customer; and it provides an effective way to manage the entire life cycle of a product.

There are multiple methodologies for approaching supply chain segmentation and “no one is better than others,” says Wadhwa. “Actually segmenting the supply chain is easy. Execution is the hard part.”

Whatever process is used, the first step is to cluster products and cluster the channels through which they are delivered, then create a matrix, he says. Every product/channel combination in the matrix represents an individual supply chain. The next step is to prioritize the supply chains based on attributes like revenue, gross margin and the number of SKUs.

The second step is deciding on the tradeoffs between cost, service and speed, using the early prioritization and customers’ needs and value.

The third step is execution, “which is the hardest part,” says Wadhwa. “This is where you take all the business processes within the company, starting with supply management – how you negotiate contracts with suppliers, how you build products, inventory policies, how and where you stock products, businesses processes and metrics, supply chain performance – these all need to be aligned with the individual supply chains that you have identified. That is the critical piece where most of the challenges emerge.”

Supply chain segmentation is not a static exercise, Wadhwa adds. “Over time customers change and what they perceive as value changes. Supply chain segmentation has to keep pace, so it is something you should revisit once a year or, at least, every couple of years.”

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