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com

G00265253

Apply Supply Chain Segmentation for Business

Value
Published: 26 November 2014

Analyst(s): Jennifer Loveland

This research guides strategy, centers of excellence and functional leaders

in applying segmentation as a tactic to efficiently handle complexity. It
outlines how to scope, sequence, and coordinate multiple applications of
supply chain segmentation.

Key Challenges
■ Supply chain and business leaders lack familiarity with the difference between end-to-end
supply chain segmentation and targeted supply chain segmentation.
■ Companies pursue end-to-end supply chain segmentation before they are ready, contributing
to the 28% of companies that have failed to sustain supply chain segmentation.
■ Companies struggle to properly identify the right mix of shared and dedicated resources
required to achieve desired supply chain segmentation outcomes.
■ Supply chain segmentation impact is limited when segment definitions are based on
characteristics not tied to supply chain efficiency. This most often occurs when segments are
defined by other parts of the company (i.e., product development, sales, marketing, finance).

Recommendations
Strategy, centers-of-excellence and functional leaders:

■ Identify an inside-out or outside-in supply chain segmentation scope based on your current
level of supply chain maturity.
■ Define your end-to-end supply chain segmentation aspiration. This will align with your Stage 4
or 5 demand-driven value network maturity.
■ Develop a portfolio of differentiated supply chain capabilities by repeatedly applying targeted
supply chain segmentation to various supply chain processes.
■ Use end-to-end segmentation to knit together existing segmented capabilities when
appropriate maturity and prerequisites exist.

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■ Segment based on supply chain relevant characteristics. These include items meaningful to
supply chain metrics, costs and operations, such as product characteristics, complexity,
variability, risk, technology or methodology used.

Table of Contents

Introduction............................................................................................................................................ 2
Analysis.................................................................................................................................................. 3
Identify an Inside-Out or Outside-In Supply Chain Segmentation Scope........................................... 3
Define Your End-to-End Supply Chain Segmentation Aspiration....................................................... 5
Develop a Portfolio of Segmented Supply Chain Capabilities............................................................ 8
Use End-to-End Segmentation to Knit Together Segmented Processes........................................... 9
Gartner Recommended Reading.......................................................................................................... 10

List of Tables

Table 1. Example Segmentation Description by Maturity.........................................................................7

List of Figures

Figure 1. Top Drivers for Supply Chain Segmentation............................................................................. 4

Figure 2. Common Supply Chain Segmentation Focus Based on Demand-Driven Value Network
Maturity.................................................................................................................................................. 6
Figure 3. End-to-End Supply Chain Segmentation Leverages Targeted Supply Chain Segmentation...... 9

Introduction
Supply chain segmentation (see Note 1) is widely recognized as a tactic for achieving efficiency in
the midst of operational complexity. However, without a clear understanding of how you are using
the term and what you are trying to achieve, chances for success decrease. In fact, 28% of
companies responding to our survey failed to sustain their segmentation programs.

There is no one-size-fits-all application of supply chain segmentation. Some leaders refer to it as

strategy or how they go to market. Others take a more narrow view such as customer
segmentation, differentiated service, regional differences between developing and developed
markets, or a traditional ABC classification. One reason for so many different descriptions is the
variety of valuable supply chain segmentation types.

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Given the variety of applications, how should you approach supply chain segmentation to create the
most business and customer value? The answer is to develop, manage and apply it as a capability
to design, improve and execute your supply chain. Similar to Lean Six Sigma, segmentation
becomes part of your toolkit.

You can apply the concept to processes in any functional area to optimize execution and deliver
different outcomes by segmenting on different business and process aspects. You may segment
suppliers based on spend or risk criteria such as component criticality. You may pursue both make-
to-stock and configure-to-order approaches to offer speed and customization on different products
or in different locations. You may categorize products and change the methodology and resources
in demand planning and inventory management to improve forecast accuracy or lower costs.

This research will help you understand how to scope, sequence and coordinate multiple
applications of supply chain segmentation as a tactic to achieve your business and supply chain
strategy

Analysis
Identify an Inside-Out or Outside-In Supply Chain Segmentation Scope
The reasons to pursue supply chain segmentation and the benefits achieved through it vary greatly.
Every supply chain is starting from a different place, operating in a different environment and
targeting goals specific to its company. In alignment with the Gartner demand-driven value network
(DDVN; see Note 2) five-stage maturity model (see "Supply Chain's Journey Through the Five
Stages of DDVN Maturity"), some segmentation is used to focus inside-out to improve functional
excellence and some is used to be demand driven and focus outside-in to improve business and
customer value. This is due to both the priorities and capabilities of the organization. Some
applications of supply chain segmentation are most appropriate to organizations at particular
maturity levels.

Figure 1 highlights top drivers for supply chain segmentation tied to the stages of supply chain
maturity. The two supply chain segmentation scopes pursued by companies are:

■ Inside-Out: Within a particular process or group of processes, can segmentation help you
do more with less?
■ It creates the ability to handle increasing complexity with more efficiency.
■ Outcome priorities are driven by supply chain strategy and metrics.
■ Examples include applying segmentation to processes, such as inventory management,
forecasting or supplier management.
■ 31% of companies pursued segmentation due to inside-out, operational excellence drivers.

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■ Outside-In: How can you align your resources and processes to what the customer and
company cares about?
■ It enhances capabilities in areas important to customers or the business and deprioritizes
others.
■ Outcome priorities consider business priorities, customer values and supply chain strategy.
■ Examples would include accepting a reduced service level for regions or products that are
of low importance to company growth or providing customers with more choice given a
longer lead time or higher cost.
■ 53% of companies pursued segmentation due to outside-in drivers to improve alignment to
demand and customer profiles, and enhance value creation.
Figure 1. Top Drivers for Supply Chain Segmentation

Source: Gartner (November 2014)

One reason many companies have failed in sustaining supply chain segmentation is that many are
pursuing an outside-in segmentation before they have maturity required to successfully implement
and sustain new approaches to a process.

Recommendation:

Utilize recommendations in "Are You Ready for Supply Chain Segmentation?" and align with your
supply chain priorities to determine the scope of segmentation to pursue now:

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■ When in Stage 1 to 3, focus inside-out to align resources, activities and costs to balance
internal complexity with efficiency within the supply chain.
■ When in Stage 3 to 5, focus outside-in to achieve alignment of supply chain inputs, effort, and
outputs with business and customer value criteria.

Define Your End-to-End Supply Chain Segmentation Aspiration

The goal of a mature supply chain is a profitable perfect order. The integrated capabilities required
to achieve that equate to Stage 4 and 5 maturity. Most of the companies we have seen successfully
implement end-to-end supply chain segmentation (see Note 3) have used two to five end-to-end
segments to help propel them from Stage 3 to Stage 4 maturity. Given that more than two-thirds of
companies fall below Stage 3, how do those companies leverage segmentation?

End-to-end segmentation will generally impact processes from product development, throughout
supply chain, in the commercial organization, within finance, and potentially, directly with
customers. The most common examples of end-to-end segmentation involve giving a menu of two
to five options of trade-offs between cost, lead time to customer (speed) and service or product
options (choice). One example is offering next-day availability for a higher cost than a large order
with weeks of lead time.

Gartner recommends first completing a high-level analysis in relation to your overall supply chain
outcomes, starting from what the customer values. This analysis describes your aspiration of end-
to-end segmentation and DDVN maturity Stage 4. Once you have defined your aspiration, you can
determine the gaps from your current state and develop a change road map to reach this goal. This
will include repeated application of segmentation techniques on subsets of supply chain processes.
The processes selected for segmentation will be those that enable implementing your end-to-end
aspiration.

Figure 2 highlights that, although end-to-end supply chain segmentation is the goal, your process
should begin by building the foundational readiness for segmentation at Stages 1 and 2, beginning
multiple targeted supply chain segmentations (see Note 4) beginning in Stage 2, and pursuing end-
to-end segmentation beginning in Stage 3. For lower-maturity targeted supply chain segmentation,
your scope will be narrower, including a few processes and teams. As you mature toward Stage 3
and 4, you will have a broader scope spanning multiple functions, requiring more robust
collaboration.

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Figure 2. Common Supply Chain Segmentation Focus Based on Demand-Driven Value Network Maturity

Stage 5
Aspiration Network Value
Stage 4 End-to-End

End-to-End Enterprise

Supplier Customer
Outside-In Customer Order Demand Supply End User
Experience Customer Value
Value Product
Creation
Business Value

Stage 3
Mindset

Targeted
Process Process
Process
Model Model
Model Model
Model Model

Stage 2
Targeted
Internal Process Stage 1
Process Process
Inside-Out Model
Model
Model
Model
Foundation

Model Model People Process

Operational Corporate
Excellence Structure Tools Data

Cost Target Service

Source: Gartner (November 2014)

Targeted segmentation will generally impact a subset of related supply chain processes. It will have
the goal of improving efficiency by shifting from a one-size-fits-all approach to a portfolio of
standardized methodologies. Each approach is optimized to handle a subset of items within those
processes. A classic example is pursuing make-to-stock versus build-to-order. This does not need
to impact sourcing or delivery, but will most likely impact product, planning and manufacturing.
Targeted segmentation could be even more localized as in the case of applying different forecasting
methodologies (a statistical model versus using a demand planner) based on the demand profile
and forecast value-add that can be achieved with manual intervention.

The difference between end-to-end segmentation and targeted supply chain segmentation is a
matter of scope. The difference lies in which metrics will be impacted, which resources, and which
physical, information, and financial processes will change. In each, you identify a menu of outcomes
and align supply chain processes to optimally deliver those outcomes. Table 1 provides more detail
on the type of segmentation pursued based on maturity.

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Table 1. Example Segmentation Description by Maturity

Segmentation Low Maturity Mid Maturity High Maturity

DDVN Stage 1 to 2 2 to 4 3 to 5

Scope Inside-Out Inside-Out Outside-In

Focus Corporate Structure Internal Process Customer and Business Value

Type Targeted Targeted End-to-End

Examples ■ Market, ■ Inventory ■ Customer Order

Geography
■ Business Unit
■ Channel
■ Product
Management Experience
■ Supplier ■ Business Profit
Management Pool
■ Manufacturing ■ Business Priority
■ Demand Planning
■ Risk Management

Source: Gartner (November 2014)

While you may not be ready for an outside-in, end-to-end supply chain segmentation today, it does
provide the most value by truly integrating trade-offs across the entire company and value network.
It should be your long-term aspiration, but it may take multiple years to achieve. You can reap
benefits from segmentation more quickly by beginning with a targeted segmentation focus.

Recommendation:

Utilize "Customer Value Analytics for Supply Chain Segmentation" to identify end-to-end supply
chain segments:

■ Your end-to-end segment description should:

■ Be based on the customer-desired experience at the order level. An order signifies the
solution bought by the customer and committed by the company. This may include both
products and services.
■ Highlight the relative importance of cost, speed and choice. This can be done by ranking 1,
2, 3 or indicating a competitive parity or advantaged approach. Ultimately, you will want to
assign specific metric targets matching these relative relationships.
■ Define the main characteristics of your current end-to-end supply chain model. Focus on the
majority of volume, revenue and profit.

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■ Define the ideal, polar opposite to your current supply chain. For instance, if you have an agile,
configure-to-order supply chain, design an ideal efficient, build-to-stock supply chain.
■ Fill in additional supply chains on the spectrum between these two definitions to handle
demand not effectively handled by the above. Most companies require two to five total end-to-
end segments to efficiently handle their demand.

Develop a Portfolio of Segmented Supply Chain Capabilities

Logically, if you operated two to five different, stand-alone end-to-end supply chains, you would
have two to five times the cost. To manage costs and achieve scale while pursuing different
outcomes, end-to-end supply chain segmentation uses a mix of shared and dedicated resources
(footprint, technology, people, and processes) and defines a different flow or mix of capabilities to
achieve the outcomes. Thus, your end-to-end segmentation aspiration will leverage a series of
segmented capabilities you have created for key levers in your supply chain.

The columns of Figure 3 show the methodology applied to the segments defined within five distinct
supply chain function specific processes:

1. Product Line Management: Three segments were identified based on technology applied.
2. Planning: Demand Management was divided into four segments.
3. Sourcing: Four segments were identified based on SKU type.
4. Manufacturing: Build to stock is the single, common approach.
5. Delivery: Three segments are based on location of origin.

Figure 3 shows an example of how end-to-end supply chain segmentation leverages targeted
supply chain segmentation.

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Figure 3. End-to-End Supply Chain Segmentation Leverages Targeted Supply Chain Segmentation

Targeted Supply Chain Segmentation

PLM/NPI Plan Source Make Deliver
End-to-End
Segment 1 Standard High Touch Strategic Local

No Touch Commodity
Innovative BTS Distributor

Agile Bottleneck
End-to-End
Segment 2 Custom Regional

Modeled Transactional

PLM = product line management; NPI = new product introduction; BTS = build-to-stock

Source: Gartner (November 2014)

Use End-to-End Segmentation to Knit Together Segmented Processes

The horizontal lines of Figure 3 show the flow across the portfolio of a segmented process for two
distinct supply chain models optimized for two end-to-end segments:

■ Segment 1: Efficient Supply Chain Model — Flow uses one product, one planning, three
sourcing, one manufacturing, and three delivery segments.
■ Segment 2: Choice Supply Chain Model — Flow uses one product, one planning, two sourcing,
one manufacturing, and one delivery segment.

It is common to see a third segment prioritizing lead time to customer utilizing inventory (responsive
supply chain model). Rather than segmenting delivery services, companies often will treat them as
SKUs that can be selected by order across any segment. Note that some capabilities are unique to
a supply chain model and some are shared. This may lead to shared personnel, sites and
infrastructure. You will not need to segment each process in your supply chain. You must focus on
those that are critical to the target outcomes you have identified.

The definition of standard flows through the capabilities segmented allows the financial implications
of each operational method to be applied to orders in each end-to-end supply chain model. The
procedures, resources, and decisions used in the end-to-end segment can be optimized end to end
to increase information speed and decrease waste. The processes to apply targeted segmentation
toward and which resources are shared versus unique will be determined by the cost profile of your
supply chain and ability to make and measure changes in behavior required to achieve your
outcome.

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It is important to note that segmentation is not focused on rationalization or the reduction of

complexity. It is focused on how you can handle complexity better by creating clusters that are
handled differently. Instead of having one complex process trying to manage everything, you create
a standardized menu of multiple approaches to that process that are tailored to each cluster. The
result of identifying these clusters may lead you to pursue rationalization such as reduction in SKUs,
suppliers or services as you more clearly understand where value is created, but that is not the goal
of segmentation.

Once you face the challenge of balancing the competing priorities of increasing complexity and
improving efficiency, you will need to create a series of initiatives related to segmentation. This
challenge generally arises due to new products, channels, markets or customer requirements in a
competitive environment. The segmentation-related initiatives may focus on improving your
foundational skills (people, process, data and tools), creating a portfolio of segmented processes
through targeted supply chain segmentations, or enabling your end-to-end supply chain
segmentation aspiration (see "Are You Ready for Supply Chain Segmentation?").

Recommendations:

When creating your portfolio of segmented supply chain capabilities:

■ Address any foundational gaps in people, processes, data and tools. Focus on collaboration,
decision-making clarity and accurate measurement.
■ If you are approaching Stage 3 maturity, focus on creating segmented capabilities within key
processes and functions using targeted segmentation. These will be those with the highest
costs and most complexity that you can influence.
■ Take care that any segmentation focused on a subset of supply chain processes does not
suboptimize the overall supply chain performance. Examples might include when a change in
planning leads to an increase in unusable inventory or a more variable lead time in
manufacturing that must be met with additional lead time or capacity. Use your cross-functional
metrics and your end-to-end segmentation aspiration to help with this.

Acronym Key and Glossary Terms

Segment Gartner uses segment in its verb form to mean dividing something into separate parts; in its
noun form as each of the parts that something is divided into.

Gartner Recommended Reading

Some documents may not be available as part of your current Gartner subscription.

"Supply Chain's Journey Through the Five Stages of DDVN Maturity"

"Are You Ready for Supply Chain Segmentation?"

"How to Define and Brand Supply Chain Segmentation"

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"Design the Right Type of Supply Chain Segmentation for Your Business"

"How Consumer Products Companies Can Achieve the Right Supply Chain Segmentation"

Evidence
In 2012, we surveyed 101 global supply chain leaders around segmentation within their company.
We then conducted interviews with 28 companies identified as segmentation leaders to identify
best practices. This was combined with more than 200 advisory conversations between 2011 and
2014.

Note 1 Supply Chain Segmentation

Supply chain segmentation is a systemic, repeatable capability to deliver differentiated outcomes,
within and across supply chain functions, based on options selected from a menu of capability
variants. Differentiated outcomes for supply chain segments are reflected in significantly different
financial and operational performance metric targets. The scope of application may be targeted to a
subset of processes or end-to-end across the value chain.

This will:

■ Have a defined supply chain business or customer value objective

■ Align supply chain delivery to a portfolio of targeted outcomes
■ Include a defined scope of physical, informational and/or financial processes
■ Define the standard operating procedures for capability variants
■ Require changes in employee and/or customer behavior
■ Require changes in process and/or organizational infrastructure
■ Focus on critical decisions to achieve desired financial and operational metrics

Note 2 Demand-Driven Value Network (DDVN)

DDVN is a business environment holistically designed to maximize the value of and optimize risk
across the set of extended supply chain processes and technologies that senses and orchestrates
demand based on a near-zero-latency demand signal across multiple networks of corporate
stakeholders and trading partners.

Note 3 End-to-End Supply Chain Segmentation

End-to-end supply chain segmentation is the most complex application of supply chain
segmentation. It is identifying, designing and operating the end-to-end value chain (from customers
to suppliers) to deliver distinct, defined order through aftermarket experiences based on customer
and business value feasible within company constraints. It:

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■ Identifies trade-offs for defining, delivering, and sustaining profitable perfect orders and service
■ Coordinates both across and outside of supply chain activities
■ Defines distinct end-to-end operational models or flows through the physical, information and
financial supply chain

Note 4 Targeted Supply Chain Segmentation

Targeted supply chain segmentation is an application type of supply chain segmentation. It is
identifying a menu of target outcomes and optimizing the design and operation of a subset of
supply-chain-owned processes and metrics to deliver those outcomes. Examples may be specific
to a supply chain function such as logistics or procurement, process such as demand management,
or by a business consideration such as product, geography or customer.

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