Want higher profits? Segment your supply chain

By James A. Cooke

Are all of your customers equally profitable? If your wholesale electrical distributorship is like most businesses, some customers provide a higher return on sales than others. Assuming that’s the case, then everyone is not entitled to the same supply chain. Shouldn’t better customers get better service?

That’s the idea behind a hot supply chain trend right now called segmentation, which is gaining followers across a number of industries. Instead of one supply chain for all customers, each customer is segmented by profit level. You then set up the supply chain to support that particular business segment. Each business segment would be served with different supply chain processes, policies and operational modes. Each segment would have different forecasting, and stocking and replenishment policies. Since there’s a “cost to serve” any customer, it’s important to recognize that the higher-paying customers deserve gold-plated service.

How does this approach impact supply chain operations? Take a more profitable customer. That buyer would receive prompter replenishment. Orders would be processed, filled and shipped right away. In addition, that buyer would receive faster deliveries, perhaps an overnight express shipment.

On the other hand, a less profitable customer merely gets a promise of shipment at a specified date that would have the item or equipment moved by a less-expensive form of transportation. For an international shipment, that means slower-moving ocean freight rather than higher-cost, quicker-moving airfreight. For a domestic order, that means the goods get moved by rail rather than truck. Although you still make and keep a firm delivery commitment, you align the cost of transportation services to match the profit profile of a customer.

Stocking policies would vary by customer as well. For higher-paying customers, you would reserve a larger amount of inventory in the warehouse. That might mean carrying more safety stock. Or in some cases, you might even re-assign available stock on hand in the warehouse to meet a last-minute order from a good customer. On the other hand, a less-profitable customer may get told to wait until the product is made and available for delivery. Since there’s a cost to carrying unsold inventory, a differentiated service strategy is essential to carrying out supply chain segmentation.

In fact, companies often set up special business optimization centers to establish and monitor supply chain segmentation. The center is comprised of a small team of professionals who do the analytical work to determine appropriate inventory levels for each segment.

As you can imagine this approach requires an analysis of profitability for each customer. It also requires examining the cost to serve a customer, which takes into account volumes and ordering patterns. 

Along with the analysis, these centers also oversee supply chain policies. That way they impose the discipline in the organization to make sure that better customers do get the better service. Many centers also take advantage of software applications to automate the segmentation policies.

In today’s tough economic climate, a one-size fits all approach just does not make good business sense anymore. Supply chain segmentation does. If your wholesale electrical distributorship hasn’t embarked on supply chain segmentation, then it probably should take a good look at this strategy as way to boost its own profit margins.

James Cooke is the editor of CSCMP’s Supply Chain Quarterly magazine, the premiere journal of global thought leadership for supply chain professionals. He has been writing and reporting on the best practices in supply chains for more than 30 years.

Tagged with

Comment on the story

Your email address will not be published. Required fields are marked *