oaioait2 ‘wow supplychainsegmentation.comindex impl=%h2Fsystomik2Fanpi2Fte Supply Chain Segmentation - an approach to develop your business case Forward ‘One size does not fit all’; this has long been recognized by supply chain lectures, consultants, and practitioners. In an increasingly competitive environment the need for supply chain segmentation is critical to develop winning supply chain strategies that successfully balance the cost of inventory and the cost of service. Extensive documentation is available regarding the concept and principles of supply chain segmentation; however little information has been published regarding a specific approach, the financial justification, and measurement of supply chain performance improvements of segmentation strategies. This site presents a practical 5 step approach to develop the business case for your supply chain segmentation initiative and successfully balance inventory ~ and service cost The presented approach consists of the following key steps; 1, Select segmentation category 2. Develop and visualize segmentation 3. Determine baseline performance of inventory cost and service cost 4. Develop segmentation strategies 5. Model baseline performance vs. strategies to determine financial justification For more information or support with developing your supply chain strategy please contact: info@supplychainsegmentation.com Forward ww supplyhainsegmentaton comlindex?Ampl=%2Feystomik2Fapoti2Fte,o2r12 ww supplychainsegmentaton comselect_ segmentation_categoryimpl= 1. Select segmentation category Forward Home Supply chain segmentation design is generally influenced by four key categories; product, demand, supply, and the organizational environment. Below figure presents a conceptual model of these four segmentation categories. Organizational Environment Examples of product factors include; product life cycle, product group within the portfolio, quality expectations, and product features (such as shelf-life, physical appearance - e.g, gasses vs. bulk materials). For example customer replenishment cycles for products with short shelf-lives are typically shorter compared to products with longer shelf-lives. These shorter replenishment cycles may require unique order fulfilment and transportation policies. Segmentation factors on the supply side include; raw material types (e. commodities vs. specialised materials), lead-times, and production flexibility. For example production environments with a high level of flexibility and short lead-times for raw materials are more appropriate for a make-to-stock environment. Also, due to the supply certainty of commodities (i.e. you can buy them from many suppliers and typically there is no market shortage), low inventory policies are typically less risky for commodity materials compared to specialised products, Demand factors include; demand volatility, demand volume, and service ‘expectations. For example products with high demand volume and low demand variability may be best replenished with regression techniques as apposed to replenishment based and demand planning routines (i.e. sales forecast). Environmental factors include; geographical location, infrastructure, transport mode availability, customs, tax and goverment policies, etc. For example tax and government policies are important decision criteria to select the location of new manufacturing sites. Infrastructure and available mode of transport will impact a distribution centre network. For a broader discussion on supply chain segmentation categories refer to http://www. clearpepper.com/supplychain/Managing%20Diversity%20through%20Supply%20Chain%20Set wn supplychainsegmentation comiselec_segmentation_catogony imple 1oaiozii2 ‘wow supplychainsegmeniaton conseleet segmentation category?imel= Segmentation based on product, supply and environmental factors is typically quite intuitive. For example it would not require much analysis to justify that in a diverse product portfolio, short self life items require unique replenishment and inventory policies to ensure product freshness and minimize obsolescence of aged products. However developing segmented supply chain strategies based on product demand appears to be much more challenging for organizations. Typically demand for individual items within a product portfolio varies widely. Some high volume products have a constant demand and other products experience low volume demand that fluctuates significantly. When both demand volume and demand variability are taken into account for each SKU and / or customer the segmentation effort becomes less intuitive and highly analytic. Below describes a practical approach to develop the business case for supply chain segmentation based on these demand factors. That is, it will make an effort to answer the trade-off between inventory and service levels based on demand volume and variability. Forward Home wn supplyhainsegmentation comiselec_ segmentation_catogory imple 22.oaroart2 Develop and visualize segmentation - www 2. Develop and visualize segmentation Back Forward Home ‘After selecting the segmentation category (demand factors) you have to develop a ‘current state’ segmentation diagram for your product or customer portfolio. The segmentation diagram consists of a scatter plot with the demand volume on the X-axis and a measure of the demand volume variability on the Y-axis. Dependent on your objectives you can develop a single diagram for your total product portfolio or separate scatter plots for each customer (key) account. If you are in the early stages of your supply chain segmentation initiative it is recommended you start with gaining insights and developing strategies for your total product portfolio. The developed strategies for the total product portfolio can be validated and adjusted based on customer account analysis in a next step. Demand volume is determined as the total volume for the period of analysis. The period of analysis depends on your customer order pattern; however you want to ensure your period of analysis is a good representation of your actual demand variation (e.g. includes your typical seasonality). There are different ways to present the demand variability, Most research and documents propose the standard deviation as the measure of variability, The standard deviation is a statistical measure of the spread of a data population. The limitation of the standard deviation for our purpose is that within a high volume versatile product portfolio the standard deviation is not a useful measure to compare (relative) variation between different SKU's. For example a SKU (A) with a weekly average volume of 2000 units and a standard deviation of 500 is arguably more volatile then a SKU (B) with an average weekly volume of 5000 units and a standard deviation of 700. (Despite the standard deviation of SKU B being higher). To overcome this issue, I propose to use the coefficient of variation (CV). The coefficient of variation allows you to compare variation of each SKU as a ratio or percentage. Refer to the following link for more details on the CV http://en.wikipedia.org/wiki/Coefficient_of_variation Coefficient of Variation is defined as: cv BIO Where; wn supplychainsegmentation comidevelop_and_visualze_ segmentation 18sroaii2 Develop and visualize segmentation - www g = standard deviation ot demana = mean of demand Both the standard deviation and mean can easily be calculated in MS- Excel using the following formula functions respectively; STDEV, AVERAGE. The time scale to determine your standard deviation and mean depends ‘on your order cycle. As a rule of thump the scale should be at least as long as your typical order replenishment cycle. For example if your typical customer places an order on Monday and Thursday, a weekly variability is probably sufficient. If your customers order only once or twice a month you may want to choose a monthly variability. You may want to do some tests to select the optimal time scale. If your selected time scale is too short your results will inherent higher variations that belong to your order cycle Below depicts a sample of your data file layout based on the chosen time scale and the list of SKU’s in your portfolio. Note that the matrix layout has the SKU’s listed in the rows and the columns representing calendar weeks. The matrix is filled out with the demand volumes for each SKU / week. After the volume and volatility are determined for each SKU a scatter diagram can be created in MS-Excel as shown below. ‘ott rout Forts ‘otune ve Gouin of Warton cont et Vnee Finally the scatter diagram is divided in four quadrants. There are no rules regarding the split between quadrants. One approach is to split low and high variability at 100%, however this does not provide a split for low vs. high volume yet. Often trial and error is the best approach to find a desired split. The 80/20 rule can be used as a starting point. That is; mova tha harizantal lina nti! 80h af unser nnrfnlia vnlima ic ranracantad wn supplychainsegmentation comigevelop and. visualize. segmentation 268oaroart2 Develop and visualize segmentation - www Imuve the HunZunta: Wie Unt U7 UF You! PUILIONY VOIUnNTe 1 fepreserten by quadrant A and D. Next move the vertical line until and 80% of the portfolio volume is represented by quadrant A and B. Per definition this approach will result is an equal volume share for quadrant 8 and D. After finding the desired split the portfolio will be divided in four quadrants with the following generic characteristics: Quadrant A: high volume, low variability SKU’s This quadrant usually includes the core products of a company's portfolio. These are your products that turn over very quickly. Typically the ability to forecast demand is high and as a result service levels are optimized Profit share is proportionally higher then the volume share (i.e. these are your highly profitable products). Quadrant B: low volume, low vai SKU’s This quadrant represents your average products. Typically the number of SKU's in this quadrant is high compared to other quadrants. These are not your top sellers but still deliver a relative high volume and profit due to the number of SKU's. Products at the end of their life cycle could move from quadrant 8 to quadrant C and eventually by identified for deletion. bility Quadrant C: low volume, high variability SKU’s This is the tail of your product portfolio. These are the products with low volumes and high variability. The margin contribution per SKU is typically lowest in this quadrant. This quadrant represent the SKU's that should be reviewed regularly for portfolio rationalization. Quadrant D: high volume, high variability SKU’s These are the products that create the highest disruption to your supply chain operations. High demand variability often results in inaccurate forecasts, followed by emergency orders to avoid out of stocks. These products usually create the biggest challenge in relation to service levels. (Le. customers expect high service levels, however due to the demand variability the cost to deliver these service levels is typically high) Back Forward Home Acceder | Actividad reciente del sitio | Condiciones | Informar de abuses | Imprimir pagina | Tecnologia de Google Sites ww supplychainsegmentation comidevelop_and._visualze_ segmentation 33