117
Supply chain 08
segmentation
Introduction
As noted in Chapter 2, a ‘one-size-fits-all’ approach to logistics is not appropriate in most
instances. Some form of supply chain segmentation is therefore necessary for a company to
satisfy the various service and cost needs of its customers. In addition to the channel options
discussed in Chapter 4, this raises the question of exactly how a company’s own supply chain
should be segmented. For example, one type of supply chain may be appropriate for large
bulky items and another for small parcels. Similarly, a supply chain may be necessary for
highly demanding customers separate to that generally available to the market. There are
many different ways in which supply chains may be segmented and this chapter explores
some of the more common segmentation bases that are available.
Product segmentation
It may be necessary to have different supply chains because of the very nature of the products.
For example, when delivering to petrol stations the fuel may be delivered in large road tankers
whereas the food and other items for the petrol forecourt shop would need to be delivered in
clean, enclosed vans or trucks. Some key product characteristics were described in Chapter 6.
Such product characteristics are often an important basis for supply chain segmentation.
Examples include:
•• Size: the size of the product (or the total order) may determine whether it is best suited
to be delivered via a palletized delivery network or by parcel carrier or by post. Another
example is where large items, such as beds or sofas, require two people to unload and,
in such instances, it is often found more cost effective to set up a separate network just
for large bulky items, rather than having two people in a vehicle for all deliveries.
•• Temperature regime: there are three main temperature regimes for food products,
namely frozen (about –18 to –25 °C), chilled (about +2 to +5 °C) and ambient (normal
outside) temperatures. These often form the basis for segmented supply chains,
118 Planning for Logistics
although it is quite common to find chilled and ambient goods combined. In fact, it is
possible to combine all three in a single supply chain that comprises multi-temperature
warehouses and compartmentalized vehicles.
•• Bulk: some products are well suited to bulk handling (eg liquids, powders and granules)
and therefore require specialist storage, handling and transport facilities.
•• Hazard: hazardous goods may require a separate supply chain so that all the necessary
safety measures can be implemented.
•• Contamination: even where goods are not hazardous, they may be able to contaminate
other products (eg by their smell).
•• Pilferable goods: certain goods may be the target of opportunistic or planned robberies
and therefore require greater security. An obvious example of this is where armoured
vehicles are used for bank note and bullion deliveries.
•• Value: the value of goods may be important for segmentation purposes as this affects
how costly it is to hold inventory in the supply chain. For example, goods that are low
in value may be held at multiple locations close to the customers, whereas high value
goods may be centralized so as to reduce safety stocks (as explained in Chapter 13).
This concept can give rise to a segmentation basis as shown in Figure 8.1, whereby
high throughput but low value-density products (ie a low value compared to their
weight or cube) may be dispersed geographically, while a low throughput but high
value-density product may be held at a single global distribution centre and airfreighted
from there around the world. A typical example of the former product type is photo-
copy paper; a typical example of the latter is high-value electronic parts.
Decentralize
VOLUME THROUGHPUT
High Multiple distribution centres Regional stockholdings
Local delivery
Centralize
Low Regional stockholdings Global distribution centre
Airfreight
Low High
PRODUCT VALUE DENSITY
Source: adapted from Lovell, Saw and Stimson (2005)
Figure 8.1 Segmentation by throughput and value density
Supply Chain Segmentation 119
•• Variety: some goods by their nature are sold in a wide variety of forms. For example, a
single shirt ‘product line’ may have many different collar sizes, colours and sleeve lengths.
Each combination of these is significant to the customer and therefore many individual
stock-keeping units (SKUs) need to be made available for sale. It is very difficult to
forecast demand at the SKU level for every geographic region and therefore, as with high
value goods, the stockholding of these may be centralized so as to minimize safety stocks.
Demand and supply segmentation
In addition to the physical characteristics of the goods, there may be a distinction between
whether the goods are ‘functional’ or ‘innovative’ in nature, as noted by Fisher in 1997. Thus,
functional goods may have a steady demand and require a cost-efficient supply chain. On the
other hand, innovative products may be new to the market, may be quite unpredictable in
terms of demand, and therefore require a much more responsive supply chain. This type of
distinction between products with predictable and unpredictable demand is often associated
with the lean and agile concepts respectively, as explained in Chapter 5. A traditional view of
the nature of products was described in Chapter 6 as ‘the product life cycle’.
Demand is, however, only one side of the supply chain. The nature of supply also needs to be
taken into account. An important factor on the supply side is the length of the supplier lead
time – from the time of placing orders on the supplier up to the time of physically receiving
the goods. A segmentation framework using a combination of demand and supply factors is
shown in Figure 8.2.
‘Leagile’
Lean Postponement,
Long if possible –
Plan in advance
SUPPLY LEAD TIME
otherwise substantial
stockholdings
Lean Agile
Short Continuous replenishment Quick response
Predictable Unpredictable
DEMAND PREDICTABILITY
Source: adapted from Christopher et al (2006)
Figure 8.2 Segmentation by demand and supply characteristics
120 Planning for Logistics
Under this segmentation framework, lean supply chain principles can be applied where there
is predictable demand. In the case of long lead times, the sourcing, production, storage and
movement of goods can be planned in advance in the most cost-effective manner. Where lead
times are short, then quick response and continuous replenishment policies can be adopted so
that goods are supplied on a ‘just-in-time’ basis at the last possible moment, again keeping
inventories and waste to a minimum.
However, if demand is unpredictable, agile policies can only be fully adopted where supplier
lead times are short. In this circumstance, supply can flex to meet the rapidly changing
demands of the marketplace, and again inventories can be kept low. However, where supplier
lead times are long, then this is likely to lead to either an oversupply of goods (leading to high
inventories) or an undersupply (leading to lost sales). Other approaches therefore need to be
explored to combat this, such as production postponement, whereby goods are configured to
the actual specification of the customer at the last possible moment – thereby holding goods
in a generic form, which can be more easily forecast than at a more detailed level. An example
of this would be the holding of personal computer components ready to be assembled once
an order is received, rather than manufacturing computers to exact specifications of memory
size, etc and holding a multitude of finished goods SKUs in stock (see Chapter 12 for further
details on postponement). Policies such as postponement that combine elements of lean and
agile approaches are sometimes referred to as ‘leagile’. However, particular circumstances
will dictate whether such approaches are possible, as a combination of long supplier lead
times and unpredictable demand tends to lead to the need for high safety stocks. This has
been found to be the case in many industries following the globalization of supply.
The geographic location of supply is obviously a very important factor in supply chain design.
Separate supply chains will be needed, for example, to bring goods from the Far East to Euro-
pean markets, rather than from local European suppliers. In fact, the decision as to where to
source is often part of the supply chain design process. For example, goods with predictable
demand may be sourced from low-cost suppliers in distant parts of the world (ie part of a
‘lean’ approach) whereas goods with unpredictable demand may be sourced locally where
lead times are generally much shorter and therefore supply can easily be changed to meet
fluctuating levels of demand (ie part of an ‘agile’ approach). Understanding factors such as
these is key to the development of an effective logistics operation and is integral to the logistics
network planning process described in the next chapter.
However, it may be rather simplistic to categorize the demand for goods as being either
predictable or unpredictable. Another approach is to examine whether there is a ‘base’ demand
that can be identified separately from unpredictable ‘surges’. In this circumstance, it may be
advantageous to segment the supply chain accordingly, with a lean supply chain for the base
demand (eg by sourcing in low-cost countries) and an agile supply chain for the surge demand
(eg by sourcing locally).
Supply Chain Segmentation 121
A similar approach could be taken by segmenting in accordance with the Pareto classification
of the goods. Thus, fast-moving goods normally have more predictable demand than slow-
moving goods, as the latter tend to be demanded only occasionally and in small quantities.
A lean approach could therefore be adopted for the fast-moving goods and an agile approach
for the slow-moving goods.
Marketing segmentation
Segmentation has been adopted in marketing for many decades. It is used for demand crea-
tion purposes and it has long been recognized that different classifications of customer require
different marketing approaches. As it is the customer that supply chains are trying to satisfy,
it would be sensible to examine whether marketing segmentation frameworks are relevant to
supply chain design.
There are many categorizations of marketing segments but one such classification is as
follows:
•• Geographic: the location of the customer, eg by continent, country, region or urban/
rural.
•• Demographic: populations are often broken down into categories according to such
factors as age, gender, income, home/car ownership, employment and ethnic origin.
•• Psychographic: this form of segmentation is concerned with the interests, activities
and opinions of consumers, and is often related to lifestyles.
•• Behaviouristic: this relates to how consumers behave, in terms of, for example, how
frequently they buy certain products and whether they remain loyal to particular
brands.
•• Firmographic: in the case of industrial customers, a common form of segmentation is
by such factors as turnover, number of employees and industry sector.
The geographic location of the customer is obviously relevant to supply chain, as well as
marketing segmentation. For example, export orders are often segregated within warehouses
for specialist packing and are frequently dispatched using different logistics companies than is
the case with home orders. Similarly, some companies deliver to the main urban conurbations
using their own vehicles, while they may use third-party logistics companies for more distant
locations (as such companies can combine deliveries with goods from other companies in
order to improve their load factors and routing efficiency).
It may also be argued that the other marketing segmentation frameworks are highly relevant
to the supply chain in that each segment may represent a different demand characteristic that
needs to be supplied in a different way. For example, psychographic factors, such as lifestyle,
are important in the fashion industry. Customers who require standard commodity garments
122 Planning for Logistics
(eg low-price jeans) can probably be supplied using lean principles as demand tends to be fairly
stable. However, the demands of fashion-conscious buyers (ie who seek the latest fashions as
seen on the catwalks or in fashion magazines) need to be satisfied in a much more agile way
– for example, using rapid design and manufacturing techniques, local suppliers and cross-
docking through the distribution network immediately to the stores. Of course, it must also be
remembered that customers may fit into each of these categories depending on the nature
of a particular purchase (eg for everyday wear or for special occasions).
Behaviouristic segments may also be very important for supply chain design. For example,
Gattorna (2006) used personality types to investigate buying behaviours, particularly of
commercial customers, and identified four common categories:
•• Collaborative: this is where customers are seeking a close working relationship
whereby both parties may benefit. It is a common behaviour when dealing with mature
products where demand is fairly predictable and is often associated with a supply chain
design using continuous replenishment principles.
•• Efficient: this is commodity-type buying where price tends to be the ‘order winner’.
A lean supply chain at minimum cost is therefore suited to this segment.
•• Demanding: in this segment, a rapid response is needed, often to cope with unpredict-
able supply and demand situations. An agile type of supply chain is therefore required.
•• Innovative: this tends to be where the customer is continually seeking new develop-
ments and ideas from suppliers. The latter therefore need to be innovative in terms of
supply chain solutions and fully flexible in their response.
Each of these categories of buying behaviour may therefore require a different supply chain
design.
Combined segmentation frameworks
Most segmentation policies involve some combinations of the various frameworks described
above. For example, one that has been proposed (by Childerhouse, Aitken and Towill, 2002)
has been named ‘dwv3’ with the key factors being as follows:
•• Duration: this refers to the length and stage of the product life cycle and may be related
to Fisher’s ‘innovative’ and ‘functional’ product segments.
•• Window: this is the time window for delivery or the delivery lead time that is required.
•• Volume: this relates to the Pareto volume classification, ie whether the products are
fast or slow moving.
•• Variety: this relates to the product range, particularly in terms of the number of indi-
vidual SKUs (eg colours, forms, sizes, etc).
•• Variability: this relates to demand variability and unpredictability.
Supply Chain Segmentation 123
This framework has been applied successfully in a number of case studies but other investiga-
tions have found that additional factors may need to be incorporated, such as order line value
and weight, and the number of customers buying each product, as well as, of course, the
numerous other factors mentioned throughout this chapter.
Implementation
Supply chain segmentation can therefore be very complex as there is a wide range of factors
that could be used as a basis for segmentation. Obviously, if a company decided to use all of
these possible segmentation bases then it would find itself with a multitude of different supply
chains that would be impossible to manage. It is therefore important to choose the segmenta-
tion frameworks that are relevant to the particular product, supply, demand and buying
characteristics experienced. Many of the different segments that could be identified will in
fact require the same or similar supply chain designs and therefore these can be grouped
together. The objective is to have a manageable number of cost-effective supply chain net-
works that adequately meet the different demands of the market.
It should be noted that there are a number of different elements involved in designing a
supply chain, such as:
•• sourcing (eg local supply, ‘near-shoring’, or ‘off-shoring’);
•• distribution network (eg the number, location and role of warehouses);
•• transport modes (eg road, rail, sea or air freight).
The implementation of segmented supply chains requires decisions on all these elements.
For example, a ‘lean’ supply chain may involve ‘off-shore’ sourcing (eg from a distant low-cost
supplier), cross-docking through warehouses to meet a predictable demand and transport by
sea-freight, which is relatively low cost. An ‘agile’ supply chain, on the other hand, may require
local suppliers that can react quickly, a network of local depots holding small buffer stocks to
service the immediate needs of customers and the use of road freight, which tends to be
relatively fast and flexible in nature. There may be synergies that can be gained by merging
certain aspects of segmented supply chains – for example, the use of the same warehouses
for holding buffer stocks and for cross-docking.
The design of segmented supply chains is an important business decision and requires the
involvement of various departments across a company, including marketing, manufacturing,
procurement and logistics. The various elements of supply chain design are described further
in the next chapter.
124 Planning for Logistics
Summary
This chapter examined why a single company may need to have different supply chains,
each operated separately. This may be because of the physical characteristics of the products
themselves, the nature of the demand and supply conditions experienced, or the buying
behaviour of the customers. In fact, it is likely to be some combination of these.
Once the different supply chain segments have been identified it is then necessary to plan
the precise logistics networks required for each segment – and that is the subject of the
next chapter.
