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Procurement & Operations

Supply Chain: Customer Segmentation Can Work Wonders

Supply chain teams can help boost revenue and margins by segmenting their customer base

Segmentation has been around for as long as there have been more “things” to organize than resources to devote to organizing them. In the business world, marketing managers have used segmentation for many years to prioritize advertising spend and tailor their message to customers. Sales teams have used it to prioritize accounts and allocate their time accordingly.

Supply chain managers have traditionally used segmentation to focus on their most important suppliers and, again, allocate resources accordingly. But they have been much less effective at segmenting their customer base. At CEB’s Operations Leadership Exchange (OLEx) we see firms missing substantial opportunities by not doing this, and advise supply chain managers to focus on two areas in response.

Segment Customers Based on Objectives Not Size

Typical segmentation strategies follow an 80/20 approach or, even more commonly, some version of the dictum: “our biggest customers, then everybody else”. We’re not going to tell you to stop focusing on your biggest customers, but we are going to tell you that your biggest customers may not be your best.

Through analysis of over a million order lines reaching more than 30,000 customers, we found that although the top 20% of a firm’s customers typically provide 87% of total revenue, they’re also in many cases killing a company’s margins. In particular, nearly 3.5% of a firm’s profits are eliminated because their biggest customers are too expensive to serve.

Smart companies certainly haven’t eliminated their biggest customers but they have developed more nuanced segmentation strategies to tease out these opportunities. Some examples we’ve seen include:

  • Revenue and margin segmentation: to identify where cost-to-serve needs to be lowered among high revenue customers, or where revenue needs to grow among high-margin customers.
  • Strategy/capability alignment segmentation: to identify customers that both have revenue growth opportunity, and can help you develop new operational capabilities; see how food manufacturer Sara Lee does this (for OLEx clients).

Segment How You Serve Your Customers Too

The bigger – but more difficult – opportunity for supply chain executives lies in re-designing how they serve different customer sets across the supply chain. Serving every customer in the same way (ie. the same levels of customization, same response times, same inventory strategies) is expensive, and plain ineffective.

What some of the best executives tell us is that they segment customers by how those customers receive their products. This allows the executive’s firm to profitably serve more than one segment or need simultaneously. Some strategies we’ve seen here:

  • Responsiveness segmentation: Companies such as Syngenta (OLEx clients) use different “tiers” of service based on criteria such as where a product sits in its life-cycle: new products are highly responsive; end-of-life products are as low-cost as possible.
  • Customization segmentation: Others, such as Caterpillar (OLEx clients), focus on how much customization customers want, and identify “menus” of corresponding lead times that take different levels of customization into account.

It’s important to note that customer segmentation in your supply chain shouldn’t necessarily conflict with efforts in sales and marketing or other parts of the firm. In reality, such efforts should be considered complementary or, at times, completely separate. What’s important is that supply chain segments are very clearly communicated to all customer-facing parts of the firm, and that the flows and decision rules that accompany those segments are well understood.

OLEx clients should access this replay of a recent webinar we hosted on supply chain segmentation, if they haven’t already listened to it, and all CEB clients are welcome to contact me for more information or leave a comment below.

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