Supply Chain Segmentation: One Size Does Not Fit All

Stephen DeAngelis

July 31, 2012

Last October, Dan Gilmore, Editor in Chief of Supply Chain Digest, asked, “How Many Supply Chains Do You Need?” [14 October 2011]. Gilmore’s follow-up question was, “Is it time to start chopping your supply chain up?” His short answer, “Perhaps so.” He penned his article because there has been “a lot of emphasis lately on ‘segmenting supply chains,’ or some related concept.” That led to a third question, “What does that mean?” He explains:

“Pretty simply, it means that a company rarely has just a single supply chain – even though it may think it does. Rather, a company has multiple supply chains based on a variety of mostly customer-driven factors, and that supply chain organizations must define and execute those different supply chains in different ways, logically enough.”

Supply chain segmentation is particularly appropriate for multinational corporations that sell regionally. Robert J. Bowman, managing editor of SupplyChainBrain, writes, “Companies dream of one cohesive supply chain that can harmonize information and business processes worldwide. But what if your customers’ needs in regional markets are so different as to make that dream impossible?” [“,” 2 July 2012] Some analysts believe that segmenting supply chains can reduce supply complexity. I’m not sure Bowman agrees — at least for the pharmaceutical industry. He indicates supply chain segmentation is more of a burden because in that sector each country deals with drugs differently. For example, he writes, “Say you’re an American traveling in Germany, and you drop your iPhone and crack the screen. You can quickly remedy the problem by going to any local Apple Store, because the product is the same in all markets. Now try filling your American-issued prescription for Lipitor, one of Pfizer’s biggest-selling products, at a German pharmacy. You won’t get a single pill until you’ve seen a doctor and fulfilled that country’s regulatory requirements.” Fortunately, most companies don’t face quite that extreme level of regulation. Nevertheless, some amount of supply chain segmentation may still make sense. Gilmore continues his discussion of the topic by reviewing some of the current views concerning segmentation. He writes:

“‘Segmenting supply chains’ is currently a major area of research and analysis from Gartner. Dr. David Simchi-Levi of MIT focused a good portion of his excellent book Operations Rules on the subject. A … key element of Dell’s supply chain transformation over the past two years was segmenting its supply chain to meet the different market needs of its traditional make-to-order supply chain and its much newer retail store channel market. … In 1997, Marshall Fisher of the Wharton Business School wrote an article for Harvard Business Review on What is the Right Supply Chain for Your Product? He said that ‘The first step in devising an effective supply-chain strategy is therefore to consider the nature of the demand for the products one’s company supplies. … I have found that if one classifies products on the basis of their demand patterns, they fall into one of two categories: they are either primarily functional or primarily innovative. And each category requires a distinctly different kind of supply chain. The root cause of the problems plaguing many supply chains is a mismatch between the type of product and the type of supply chain.’ In the early 2000s, the consultants at AT Kearney wrote a white paper called How Many Supply Chains do You Need? … In that white paper, Kearney noted that while most recognize the different supply chain needs of different industry sectors (say grocery versus apparel), many individual companies fail to recognize they have such differences within the different products and markets they have within their own enterprises. Kearney added that ‘choosing the right chain for the right business requires strategically thinking about how your business operates and what your company needs, which includes how many supply chains it takes to serve your customers.’ But from that point until fairly recently, the subject seems to have somewhat disappeared from the overall supply chain dialog, only to resurface more recently.”

Gilmore believes that the concept may have been ahead of its time when first introduced (because, as supply chains have become more complex, the need for segmentation has increased). On the other hand, he writes, the technology to support implementation may not have been available. “While the concept was valid,” Gilmore writes, “technology just wasn’t ready to well support its execution.” He continues:

“The bottom line is that there is a growing consensus from the pundits that a ‘one size fits all’ supply chain won’t cut it anymore. And I agree. In Operations Rules, Simchi-Levi noted that common segmentation attributes include customer value proposition (e.g., value versus innovation, similar in a sense to Fisher’s perspective), market channels, product characteristics such a demand uncertainty and logistics costs, and more. Among many other considerations, Simchi-Levi observed that perhaps the key decision that needs to be made based on those attributes is whether to construct an individual supply chain using a ‘push’ strategy, a ‘pull’ strategy,’ or hybrid push-pull approach. Gartner’s Matt Davis, who worked at Dell before moving to Gartner, … [asserts] that different market segments tend to value either cost, responsiveness / speed, or level of service / agility, and that supply chains should often be segmented accordingly. Key there he said is differentiating performance metrics: if you build a supply chain focused on agility for one group of customers, you can’t expect the same type of cost performance for a supply chain that is built primarily to minimize cost. An iron law of supply chain is that such trade-offs can’t be eliminated. I will agree many companies forget this.”

It’s clear from Gilmore’s discussion that companies need to determine the optimal goal of a supply chain before they can determine whether they need to segment it. For example, Jim Cafone, Pfizer’s vice president of supply chain network services, told Bowman that Pfizer is developing a hybrid strategy. “Pfizer is tooling up for ‘hyper-segmentation’ on the customer side,” he said, “while continuing to streamline and centralize processes further up the supply chain. The ultimate goal, he said, is ‘true demand sensing.’ Which, for a highly regulated, multibillion-dollar pharma company with a universe of external partners, is a lot easier said than done.” Gilmore continues his discussion.

“Then there is the perspective of Dr. John Gattorna, based in both Australia and the UK, who also argued in his book Dynamic Supply Chains that customers and hence supply chains should be segmented based on what they value from you as a supplier, but with a unique twist. He identified four ‘metatypes’ for such a segmentation based on a customer’s buying behaviors. That includes some notion of how much different segments are interested in collaborating: (1) Continuous Replenishment: Predictable demand, a lot of collaboration; (2) Lean: Focus on supply chain efficiency; (3) Agile: Pull-oriented supply chains to meet unpredictable demand; (4) Fully Flexible: Sort of an agile supply chain on steroids; some maintenance and repair operations come to mind. What somewhat differentiates Gattorna’s view is that he notes that a given customer may have several of these buying behaviors operating at once, complicating matters for suppliers, and that a customer’s needs for a given product may change over time – in fact likely will.”

Mickey North Rizza, a Gartner Supply Chain Research analyst, told the SupplyChainBrain editorial staff, “Creating real differentiated supply base value starts with supplier segmentation.” [“Create Differentiating Value in the Supply Network Through Supplier Segmentation,” 22 March 2012] The article continues:

“Gartner Supply Chain Research finds a detailed analysis and a segmented approach to your supply base is an important aspect of building a resilient and secure supply chain while reducing complexity. Supplier segmentation is a critical and necessary tool for visibility; it provides a standardized simplified foundational approach for supplier relationship management. To deliver real differentiated value, these aspects must be considered in supplier segmentation:

“• Not all suppliers are created equal. Supplier segmentation provides a methodology and fundamental advantage to organize the supply base and the supplier information. It provides a common language for procurement to manage suppliers globally.

“• Technology is nascent answering the call for supplier segmentation visibility. Spend analysis tools provide visibility to identify the large-volume-spend suppliers. However there is currently no technology tool that brings in the additional supplier attributes and information that provide strategic value, such as scale; unique components, features and/or functionality; supplier/buyer power; and geographic location to markets, or high risk.

“• Supplier relationships and the resulting supplier contracts must be aligned to supply chain types. Using a low-volume / high-mix supplier for a high-volume supply chain will only create frustration for the customers, buyers and suppliers. Creating supplier value requires a focus on optimizing the trade-offs of delivering unique customer value, low price, faster speed to market, and enhanced differentiation and services.

“• Supplier segmentation is not a rigid siloed business process done every few years. The high-tech, consumer products and retail verticals find supplier segmentation must be done every 6 months to ensure sourcing strategies stay current and are aligned with their market expectations.

“• Recognize that the basic supplier segmentation types of transactional, commodity, strategy and bottleneck suppliers are just a baseline. Real advantage is achieved when the supplier segmentation baseline is compared to the supplier’s demand characteristics that they need to execute against (i.e., low price, cycle time, personalization, etc.). This advanced segmentation then aligns the sourcing and supplier relationship management strategy accordingly.

“• Creating a supplier segmentation framework that delivers differentiating value requires a long-term strategic organization direction and outlook. Utilizing a sole-source and bottleneck supplier that provides unique product functionality can bring real market value for the customers, buyer and supplier in the short term. However, the ability to create additional sources of supply for these unique items while satisfying increased market demands requires a supplier segmentation framework to manage this shifting supply base. Innovation, strategic advantage, joint profitability and market share opportunities can be uncovered with a strategic long-term approach.”

After having surveyed the literature, Gilmore returns to his original conclusion, “One size very rarely fits all; different customers or products clearly do have different supply chain success requirements.” Obviously, all of the considerations that must be taken into account before one decides how to segment a supply chain can’t be discussed in a single blog post; however, the considerations discussed above can start you thinking about whether supply chain segmentation could benefit your organization.