BUSINESS SCHOOL

DEPARTMENT OF PROCUREMENT AND SUPPLY CHAIN

MANAGEMENT KUMASI.

MASTER OF SCIENCE PROCUREMENT, LOGISTICS AND

SUPPLY CHAIN MANAGEMENT KUMASI (MSc) (LEVEL 500)
FIRST SEMESTER

LECTURER:
ALEXANDEROTCHERE FIANKO
(THE GREAT OFA – PhD, CMILT, MGIPS, SMCISCM, SEFM, LFISDS)
 COURSE:

STRATEGIC SUPPLY CHAIN

MANAGEMENT

TOPIC:

Supply Chain Segmentation

COURSE CODE: MSPS 557

 Learning Objectives
After discussing this unit you should be able to:
2.1Critically compare the main approaches to
segmentation in designing supply chains
• Approaches to segmenting customers and
suppliers
• Managing the product and service mix
• Creating strategies for the different tiers of a
supply chain
 Learning Objectives
After discussing this unit you should be able to:
Analyse the main approaches to developing
networked supply chains
• Tiering in supply chains and the use of network
sourcing
Develop/design a strategic supply chain plan that:
• Justifies how different aspects of supply chain
design can influence the supply chain
 Supply Chain Market Alignment
Tang and Gattorna argue that:
• 'By understanding buyer values,
organisations will be able to establish
clear responses to buyer needs and
thereby create value for the customer.
• This approach enables the supply chain
to offer differentiated service offerings,
automatically reducing the likelihood of
over-servicing or under-servicing
customers.
•Achieving market alignment
overcomes one of the major
pitfalls of driving a supply chain
strategy: that is, treating all
customers as equal, through a
primary focus on reducing costs
or building service
satisfaction...'
• Portfolio analysis and segmentation
involves categorizing and dividing the
firm's customers and suppliers into
different classes, according to relevant
criteria such as:
▪volume and value of business,
▪profitability,
▪market complexity and risk-or,
▪broadly, 'importance' to the firm's
strategic objectives.
• The segment into which a given
supplier falls: indicates the purchasing
resources, sourcing approach and
relationship type that will be most
important, as a basis for sourcing and
relationship action plans.

• Similarly, the segment into which a

given customer falls indicates the
marketing and distribution resources,
approach and relationship type that
will optimise value.
Portfolio segmentation on the upstream
side (supplier segmentation) allows the
supply chain function to:
▪ Focus and leverage available resources,
while minimising identified supply and
supplier risk factors
▪ Follow a standardised framework for
decision-making and action planning in
regard to portfolio management of
supplies and suppliers
▪Justify portfolio management
decisions on the basis of
robust criteria and analysis.
We will look at a number of
segmentation techniques - some
of which may be familiar.
Customer segmentation.

Sales and marketing segmentation

❖ A market consists of both current
and potential customers with the
ability to buy a product or service.
❖ Market segmentation is defined by
Schiffman and Kanuk as 'the
process of dividing a potential
market into distinct subsets of
consumers with common needs or
characteristics'.
❖

❖ Small market segments may be

identified as 'niches'.
• The term 'target marketing' is given
to the process by which
organisations segment their
markets, decide which segments to
aim for ('market targeting'), and
• develop a marketing mix (decisions
about product, price,
place/distribution and promotion)
tailored to targeted segments
('product positioning').
•
There are three broad targeting strategies
• Segmentation supports the
organisation in understanding the
needs of its customer groups, and
• defining 'value' from the point of
view of its customer, so that its
strategic capabilities can be
developed and directed to
positioning the organisation to meet
those needs (more effectively and
efficiently than competitors).
The PADI buyer value framework
Integration
Core buyer value: 'Understand
me' Caring; interaction;
teamwork; participation;
partnership; joint development;
loyal/long term; lower price
sensitivity
Administration
Core buyer value: 'Be consistent'
Accuracy; no frills; reliable/
consistent; predictable/routine;
regular/planned; account
administration; very price
sensitive; discounts/ reduce
costs; efficiency/ savings; no
surprises
Development/Divergence
Core buyer value: 'Surprise me'
Innovative, creative,
entrepreneurial; flexible; what's
new/different?; ideas; new
technology; individualistic; better
ways of doing things; lower price
sensitivity
Production/Pragmatic
Core buyer value: 'Respond'
Demanding; urgency; time sensitive;
want one person to solve problems
quickly; VFM/price sensitive; not
loyal (shop around); results-driven,
not procedures-driven; competitive
Most customers should fit into three or
four segments, which should be:
❖Sufficiently large to allow profitable
targeting
❖Distinctive: with unique, identifiable
needs and characteristics that can be
targeted with supply chain strategies
❖Actionable: suggesting service value
propositions that are economically and
technically for the supply chain to
implement.
Managing the product/service mix
The phrase 'product/service mix' covers a
number of strategic decisions. In relation
to supply chain segmentation and design,
the main areas of interest include:
• Developing a strategic response to meet
the needs and values of target supply
chain segments.
• Using customer segmentation as the
basis for generic directional strategies
about what products and services to
offer in what markets or segments
• Managing the organisation's
portfolio or mix of products and
services to optimise revenue,
profitability, re-investment and
portfolio development
• We will look at each of these issues
briefly in turn,
 Developing a strategic response to supply
chain segments
• On the basis of supply chain
segmentation, the organisation can
develop distinct supply chain service
propositions to meet the needs and
values of each target segment.
• Detailed understanding of segment
characteristics can be used to develop
and define supply chain strategies that (a)
meet specific buyer needs and drivers,
while (b) avoiding resource-wasteful
over-servicing.
 Customer segments for a global dairy ingredients company
SEGMENT DYNAMIC CONSISTENT COLLABORATIVE FLEXIBLE

Rapid response Consistent Close working Supplier-led

to unpredictable response to relationships for development
Descripti
supply and largely mutual gain and delivery
on
demand predictable of new ideas
conditions demands

Uneven demand, Predictable Mostly Unpredictabl

commodity demand (with predictable e demand,
relationship, contract), demand (regular flexible
urgent delivery regular delivery), delivery,
requirement delivery, mature/augmente innovation/s
Charact once order efficient d products, olution focus,
eristics agreed, focus, primary supplier, augmented
opportunity multiple teamwork/relatio products, low
focus, Ad hoc suppliers, nship focus, joint price
supply, low price sensitive customer/supplier sensitivity,
loyalty, price initiatives rapid change.
awareness
Developing product/service mix
strategies
• Strategic decisions at the corporate
level of strategy include decisions about
the range and diversity of the
organisation in terms of its products,
services and markets: often identified
as diversification or directional
strategies.
Ansoff (Corporate Strategy, 1965)
originally developed the product/market
growth matrix tool for marketers making
long-term strategic decisions about the
product portfolio:
❖ auditing the existing range of products
and
❖ planning future developments, using
two simple dimensions –
• the product and
• the market
The Ansoff matrix Adapted for wider strategic choice
• You may already be familiar with these concepts
from your studies in Corporate and Business
Strategy but briefly:

• Withdrawal may be desirable if the organisation has

been unable to develop sufficient resources and
competencies to compete successfully; or if its
priorities have changed (e.g. if short-term
objectives for the market have been satisfied); or if
divestment is required to fund investment
elsewhere.
• Consolidation is a strategy of protecting and
perhaps strengthening the organisation's
position in its existing markets. Holding
market share may be important to maintain
a company's return on investment (ROI), e.g.
by allowing scale economies and competitive
sourcing. Consolidation may also be
investment (ROI), e.g. by allowing scale
economies and competitive sourcing.
Consolidation may also be required to
establish brand identity, refine technologies
and processes, or embed changes.
• Market penetration is a growth strategy, based
on gaining greater market share in an existing
market, with an existing product. This may be
done to secure dominance of a growth market,
or to drive out competitors from a mature
market. Market penetration can be
accomplished in a range of ways: increasing the
amount of product used, or repeat purchases;
competitive pricing; advertising and sales
promotion; or more intensive distribution
strategies.
• Product development is a growth strategy,
based on introducing new (or modified or
complementary) products to existing
markets. For instance, an organisation might
introduce a conditioner to its established
market for shampoo. Some form of product
development will be necessary for long-term
survival in fast-changing markets. Product
lifecycles are getting shorter as consumer
tastes change, products become
technologically obsolete (or simply
unfashionable) and existing markets get
saturated: organisations must anticipate
future needs and trends.
Product development should be a strategic
process, co-ordinated by the marketing
department. Its objectives may be not only to
increase market share, but to: develop or
enter new markets or segments (a strategy of
diversification, discussed below); hold
position as a leading innovator; spread
investment risk; exploit strong distribution
channels, relationships and customer
knowledge; and/or utilise production capacity
more efficiently.
• Market development is a growth strategy,
based on finding new markets for existing
products. This may be achieved by:
expanding into new regional markets,
exporting goods previously sold
domestically, targeting new market
segments (e.g. consumer electronics
products to B2B markets) or developing
new uses for the product (e.g. marketing a
baby lotion to people with sensitive skin).
An organisation might consider this
strategy if it is restricted in its current
markets:
perhaps they are nearing saturation, or
the product is becoming obsolete. There
is risk and investment involved, however,
because of the need to find new
methods of communicating effectively
with relatively unknown customers. JSW
emphasize that: 'It is essential that
market development strategies be based
on products or services that meet the
critical success factors of the new
market'.
• Diversification involves the development of
new products for new markets. The firm
may seek to enter new markets or
segments within the same industry, or with
other relationships to the existing business
(related diversification), in order to build on
the assets, activities or supply capabilities it
has already developed, or they may acquire
(or partner with) other companies already
in the market. Alternatively, a firm may
embark on unrelated diversification:
'development beyond the present industry
into product markets which at face value
may bear no close relation to the present
product market' (JSW). This allows risk to be
spread over several businesses, and may
offer opportunities to capture markets
through innovation or lower entry barriers.
However, there is the risk of unfamiliarity,
and resources may be spread too thinly over
multiple areas.
 Portfolio management
• Portfolio matrices are a range of tools and
models which can be used by managers to
make decisions about strategic priorities
within and across their business portfolio:
that is, about which SBUs and products or
services to invest in.
• The Boston Consulting Group (BCG) matrix
is one of the most popular and influential
methods for analyzing the strength and
balance of a portfolio of products. It maps
them on two dimensions: market share
and market growth (Figure 6.4).
Looking at the four quadrants in turn:
• Stars are products within a portfolio with
a high market share in a growing market.
Such products are likely to require heavy
spending to maintain their market
position, but high market share should
make them profitable enough to fund
their own development, with the
promise of high future returns.
Recommended strategy: build. Stars
eventually 'wane' as market growth
slows on maturity.
Figure 6.4: The BCG growth/share matrix
Question marks (or problem children) are
products within a portfolio which have an
as yet relatively low market share in a
growth market. The question is: should the
organisation invest heavily to increase
market share (build strategy) or reap
immediate returns as the product is
squeezed out of the market (harvest
strategy)? The organisation will want some
question marks, at least, to develop into
stars, and the recommended strategy is to
nurture several at once.
Cash cows are products within a portfolio
which have a high market share in a
mature (low-growth) market. There is
potential to reap high profits from the high
market share and low investment needs
(hold strategy), in order to finance the
nurturing of stars and question marks. The
BCG model usefully reminds corporate
strategists to distribute product profits for
the development of the portfolio as a
whole.
Dogs are products within a portfolio which
have a low share of a static or declining
market: e.g. cash cows that have declined
in the face of new or reinvigorated
competition. They may be a drain on cash,
effort and resources with little return
(recommended strategy: divest). However,
they may have a useful role within the mix,
maintaining barriers to entry or completing
a portfolio range or brand family (strategy:
hold).
 The strategies for the overall portfolio are
generally concerned with balance. Objectives
might include:
• Development of cash cows of sufficient
size and/or number to support other areas
of the portfolio investment in question
marks)

• Development of stars of sufficient size

and/or number to provide future cash
cows
• Nurturing of clusters of stars with
reasonable prospects of becoming
future stars

• Disinvestment from dogs, or creation

of a good business case for retaining
them.
 Supplier segmentation
➢Supplier segmentation is the basis for
strategic relationship development.

➢Some suppliers may be strategically

significant to the buying organisation for
any of the following reasons.

• supply items are strategic or critical to

the performance of the business
processes or to the manufacturer's
product and brand
• If there are few suppliers in the
market, offering few alternative
sources of supply for critical items

• If they supply rare, distinctive, hard-

to-imitate, value-adding
competencies

• If contracts with them represent a

significant proportion of the buying
organisation's external spend
• If their resources and competencies mitigate
significant supply risks - or potentially enable
the supply chain to capitalize on opportunities

• If there is potential for synergy for collaborative

development, competitive advantage and
innovation through long-term partnership

• If significant investment has already been made

in partnership and relationship-specific
adaptations and assets (such as systems
integration).
Other suppliers may be identified as of
more tactical or operational utility.
• If they supply items which are routine and/or
non-critical to business processes, brands and
supply chain competitiveness - such as
maintenance, repair and operating (MRO)
supplies

• If they are unable to offer any unique, value-

adding, competitive competencies which would
contribute to the strategic resources and
direction of the organisation.
• If there are multiple suppliers in the
market offering roughly equal products,
resources and competencies, supporting
opportunistic switching between suppliers
to take advantage of price
competitiveness, availability, capacity and
other operational factors.
➢The key point is that strategic suppliers warrant
significant investment in relationship and
performance management and development -
whereas operational suppliers generally do not.
➢Supplier relationships may also be classified and
prioritised using more analytical tools such as:
1. Pareto analysis
2. Supply positioning (supplier portfolio analysis
using such tools as the Kraljic matrix)
3. Supplier preferencing
We will look briefly at each of these key tools in turn.
 The Pareto principle
• Italian economist Vilfredo Pareto formulated the
proposition that: 'In any series of elements to be
controlled, a selected small factor in terms of
number of elements (20%) almost always accounts
for a large factor in terms of effort (80%).‘

• The Pareto principle (or '80/20 rule') is a useful

technique for identifying the activities that will
leverage buyers' time, effort and resources for the
biggest benefits.
• It is a popular way of prioritising between tasks or
areas of focus.

• In the context of supply or supplier positioning,

the Pareto principle can be interpreted as 80% of
spend being directed towards just 20% of the
suppliers.

• This elementary form of segmentation can be

used to separate the critical (vital) few suppliers
(who supply important, high-value, high-usage
items, which can only be sourced from a limited
supply market)
• from the trivial many (who supply
routine, low-value supplies which
can easily be sourced anywhere).

• Most relationship management

resources need to be focused on
the critical or category 'A' suppliers
and the products procured from
them.
 Supply positioning
• A supply positioning model is a tool for
determining what kind of supply
relationships and sourcing approaches a
buyer should seek to develop, in relation
to the various items he procures for the
organisation.
• The aim is to assess the importance or
'criticality' of the different items in the
purchasing portfolio, and to prioritise
contract and relationship management
effort accordingly.
It is a costly and time-consuming
exercise to carry out a supply
positioning analysis - so such an
exercise must itself be prioritised
and justified according to potential
benefits and value.

Some of the target outcomes of

supply positioning are summarised
in Table 4.2
 Table 4.2 Target outcomes of a supply positioning exercise

OUTCOME EXPLANATION
The exercise forces buyers to think very carefully
Better understanding of
about important aspects of each item they buy, such
relative importance of
as supply risk, and relative cost and value to the
items in the portfolio
organisation.

Decision rules for sourcing Segmentation on the nature and importance of the
and relationship item provides a framework for determining the most
approaches, as a basis for appropriate sourcing approach and supply
developing action plans relationship.
Items of low cost are relatively inexpensive to
Better understanding of
hold in stock, and if they are items with high
stock requirements,
supply risk this suggest a deliberate policy of
supporting effective
stockholding (contrary to modern thinking in
demand and inventory
management most cases, but indicated by the results of the
analysis).
 Peter Kraljic Matrix
• Peter Kraljic (1983) developed a tool of
analysis that seeks to map two factors.
• The importance to the organisation of the
item or category being purchased (annual
expenditure on the item, and its profit
potential)
• The complexity of the supply market (e.g.
supply risk, the difficulty of sourcing the
item, the vulnerability of the buyer to supply
or supplier failure, and the relative power of
buyer and supplier in the market).
The Kraljic procurement portfolio matrix
At a strategic level, the Kraljic is used to examine
an organisation's procurement portfolio, its
exposure to risk from supply disruption, and the
types of supplier relationships that are most
appropriate for different types of purchases.
• For non-critical or routine items (such as
common stationery supplies), the focus will be
on low-maintenance routines to reduce
procurement costs.
• This suggests the use of arm's length,
transactional approaches such as blanket
ordering
(empowering end users to make call-off
orders against negotiated agreements) and e-
procurement solutions (e.g. online ordering
or the use of purchasing cards) to provide
routine efficiency.
The main focus of management will be
monitoring expenditure against regular
reports received from vendors, end-users
ore-procurement systems.
• For bottleneck items (such as proprietary
spare parts or specialised consultancy
services, which could cause operational
delays if unavailable),
the buyer's priority will be ensuring control
over the continuity and security of supply.

The need for security may suggest

approaches such as negotiating medium-
term or long-term contracts with carefully
pre-qualified and selected suppliers;
developing alternative or 'back-up' sources
of supply; including incentives and penalties
in contracts; and performance monitoring
and expediting, to ensure the reliability of
delivery.
• For leverage items (such as local produce bought by
a major supermarket), the buyer's priority will be to
use its dominance to secure best prices and terms,
on a purely transactional basis.
• Leveraging buyer power may mean multi-sourcing;
taking opportunistic advantage of competitive
pricing (e.g. through competitive bidding, tenders
or e-auctions); standardising specifications to
make supplier switching easier;
and consolidating orders or engaging in
buying consortia to enhance buyer power
(where necessary) and secure economies of
scale.

• For strategic items (such as key

subassemblies bought by a car
manufacturer, or Intel processors bought
by laptop manufacturers), there is likely to
be mutual dependency and investment,
and the focus will be on the total cost,
security and competitiveness of supply.
The recommended approach may be to
develop long-term, mutually beneficial
strategic relationships and relationship
management disciplines (e.g. cross-
functional teams; vendor management;
executive sponsorship); collaborative
planning; data sharing and systems
integration; and so on.
 Cox and Lamming similarly propose
four generic strategies.
• Supplier selection
• Supply chain sourcing
• Supplier development
• Supply chain management
• Supplier selection: for routine items where supplier
and buyer are independent and the aim is routine
efficiency. A reactive strategy, where the buyer
merely has to select the best supplier for a given
transaction (perhaps via competitive bidding)
Supply chain sourcing: for leverage items where the
buyer is dominant and the aim is cost reduction.
Again, an essentially reactive strategy, but the buyer
sources in a more integrated way across the supply
chain (through a number of tiers).
• Supplier development: for bottleneck items, where
the supplier is dominant, and the aim is reduced
risk. A more proactive strategy involving joint
investment in the capability of preferred first-tier
suppliers.
• Supply chain management: for strategic items,
where supplier and buyer are interdependent
• and the aim is competitive advantage. A proactive
strategy of integration and collaboration across the
supply chain
Applying Kraljic's matrix to a particular
context is a fairly straightforward process
that offers a useful general framework for
action planning. However, it does have some
limitations.
• The analysis largely ignores the fact that
not all supply risks arise within the buyer-
supplier relationship, or can be mitigated
by developing and managing such
relationships. External environmental and
competitive factors can also create risk, as
you should be aware from your study of
Managing Risks in Supply Chains!
• The analysis applies primarily to supplies,
rather than to suppliers. A supplier of non-
critical items may also supply strategic
ones, for instance - and treating such a
supplier as 'non-critical' (on the basis that
some transactions with it appear in this
category) would be a clear mistake...
• The perceptions of a buyer and its suppliers
(eg in relation to the importance of the
business, and the relative power and
leverage of each party in the relationship)
may differ. A given item may be a 'leverage'
item for a buyer (as a high-spend
procurement within its portfolio) - but this
may not represent high or significant spend
for a large supplier with many other
customers: a 'leverage' approach would
therefore be ineffective. The 'supplier
preferencing approach, discussed a bit full
on, is one way of taking the supplier
perspective into account.
The supplier preferencing model
• Procurement or supply positioning models
illustrate the buyer's perspective: how
important is a given supply category or
supplier in the buyer's portfolio, and how
can procurement processes and
relationship best be managed to maximise
value and competitive advantage for the
buying organisation? However it may be
equally important to see the other side of
supply chain relationships
A buyer may find it desirable to leverage (or
coerce) a supplier, or to enter into a
collaborative long-term relationship with
supply chain partners - but what is the
supplier's view? Is the buyer's business
sufficiently important for it to make
concessions? Will it want or accept the
buyer as a long-term customer or partner?

• The supplier preferencing model is

another matrix, this time illustrating how
attractive it is to a supplier to deal with a
buyer,
, and the monetary value of the buyer's business to
the supplier: Figure 4.6.
Figure 6.6: The supplier preferencing model
Attractiveness of buying organisation
Looking at each quadrant in turn:
• Nuisance customers are neither attractive
nor valuable to do business with. Suppliers
practicing customer relationship
management will regularly review their
customer base and downgrade or case
service to unprofitable customers - or raise
their prices (in such a way as to turn them
into exploitable customers).
• Exploitable customers offer large volumes
of business, which compensates for lack of
attractiveness. The supplier will fulfil the
terms of the supply contract - but will not
go out of its way to provide to extras (and
any extras demanded will be charged at
additional cost).
• Development customers are attractive,
despite currently low levels of business.
The supplier may see potential to grow the
account, and may court extra business by
'going the extra mile' in fulfilling contracts: if
all goes well, the customer may be
converted to 'core' status.

• Core customers are highly desirable and

valuable for suppliers, who will want to
establish long-term, mutually-profitable
relationships with them if possible.
Group Assignment (all Groups)

73
END OF CLASS
THANK YOU