Structuring Supply Chains Based On Product Segmentation Commerce Essay

The world has just gone through one of the worse problems because the Second World Conflict. In order to reduce the negative impact, companies have attempted to reduce cost by any ways, by freezing all expansion, by reducing the amount of employees, by introducing quick wins project in order to free-up cashâto summarize nothing sustainable. To be able to catch a ecological growth that will certainly reduce the impact of any future turmoil, to obtain a competitive advantages, companies need to design an optimized supply chain. This marketing will lead to a source string that are forget about a cost but an competitive advantage, a supply chain that brings value, a source string that become tactical. Enough time and the cash spend to source; to create and to disperse product and services are so huge that companies can't find the money for to ignore it. When designing its supply string, companies need to keep in mind that "ONE SIZE WILL NOT FIT ALL", meaning that one supply chain settings can't fulfil each customer's requirements. Indeed, each customer has different needs which can not be fulfil just as. One customer may seek for a company in a position to provide reactive resources, while another company is seeking for minimum amount purchasing costâ Providing different product/service suggests having different supply chain configuration. The objective then is to provide different global services which go far beyond the merchandise itself. Nowadays, companies can't provide a product only. They have to provide a global service - meaning that they have to provide quality service which complements the product. The level of quality that should be reached is then dependant on the customers' need and determination to pay a certain price. Customers may want look for a good quality/price product, some other may want to have a extremely high quality and ground breaking product, various other are looking to receive the merchandise at their place the very next day they purchased it, â And in order to be in a position to provide this global service that includes the merchandise, companies need to design their supply string accordingly.

This thesis is focusing on understanding different choice a company can make when making its tailored source string. Each product was created in another way, and each product (or service) is intended to be for one specific customer. Enough time when Ford was making a unitary car for everybody has ended. We will focus on how to design its supply chain based on product segmentation.

We will first identify different type of source chain configuration a firm can choose predicated on its corporate strategy. We will try to define this is of the segmentation and what exactly are the main conditions to perform it. This will lead us to identify the several models that presently exist, models that will assist companies to segment, categorize and design customized source chains. Then we will attempt to apply the models on a genuine case and make an effort to redesign the company supply chains going from an AS IS statement to a TO GET ideal situation.

Product Segmentation and Supply Chain Segmentation

Segmentation Definition

Segmentation can be explained as: "Procedure for defining and sub-dividing a sizable homogenous market into clearly identifiable sections having similar needs, wishes, or demand characteristics. " [http://www. businessdictionary. com/definition/market-segmentation. html].

The main reason for segmentation is to help to decide what settings of the business enterprise is the most suited to what customer. The idea of "one size will not fit all" has for meaning that each customer has another type of need which need can't be fulfilled in the same way the other customers need are satisfied. In supply string the goal of segmentation is to configure the processes in a manner that will lead to a competitive benefits and then to income. However, we can not fulfill in a different way each solitary customer as this will increase the cost very much that the company won't endure. Thus, it's important to build categories which have similar needs and provide a unitary service because of this group.

Different kind of Supply Chain

Functional Product VS Innovative Product

The idea of categorizing product to be able to identify the best option supply chain is not new. In 1997, Fisher presented a new principle in order to raised serve the clients. Fisher said that "the first step in devising an effective supply string strategy is therefore to consider the type of the demand for the product one's company equipment", [Fisher]. He determined several factors that will affect the design of the most suitable Supply String, factors such as Product life pattern, demand predictability, Product variety and market standards for lead times and services. Thus, he began by categorizing product predicated on theirs characteristics. He discovered two types of products: Functional Product and Impressive Product. The main difference of these two types of product influence the type of supply chain needed to optimize the supply of these products. Fisher defines Functional Products are products with long life cycles and with low demand uncertainty. Conversely, ground breaking products are products having a short life cycle with popular uncertainty. Fisher proceeded to go event further as you can see on the Table 1 below in the differentiation between Functional and Innovative Products

Figure 2: Matching resource chains with product characteristics (Source: Fisher, 1997)

Hau L. Lee also developed Fisher's idea on the distinction between Innovative and Practical Products as you can see up for grabs below

Table 1: Demand Characteristics

The impact of the difference on the Supply String type is tremendous. The choose to build up a Lean Source String or an Agile Source Chain is easier thanks to this new difference as we will have on another part.

Lean, Agile, Leagile Source Chain

Based on the practical and impressive products idea, we can now introduce different source chain strategy. Each companies' targets will vary, thus when designing its supply chain, the aim of this new firm changes. We are adding here different strategy when making its supply chain: The Lean Supply Chain aims to reduce the waste and thus the price while providing high quality products/services. The Agile source chain's goal is the versatility to fulfill the customer demand while this one's predictability can be very low. The Leagile strategy is a cross solution, combining the Slim and Agile strategy in a single.

The first-time we found out about Lean Manufacturing was at 1988 by John Krafcik in a article he wrote in the Sloan Management Review: "Triumph of the Low fat Development System" when he was talking about the Japanese development model which is essentially the elimination of misuse. Naylor et al provided with a interesting meaning: "Leanness means developing a value stream to get rid of all waste materials including time, also to enable a level schedule" [Naylor et al. ]. Since then, the idea becomes much broader. Indeed, Christopher and Towill highlighted the fact that the Trim Supply Chain increases results with a well balanced demand and where variety is low : which match the functional products. From this assertion we can already learn to have a clearer view on what supply string for what products; thus, efficient products need Low fat Supply Chain. The lean supply chain will target "on cost reduction for standardized mass-products" [Volker Stich, Jan Christoph Meyer].

The source of agile strategy "lie partially in flexible processing systems (FMS)" [M. Chritopher, D. Towill]. The Agile Supply Chain allows by using a highly flexible supply chain in order to better help the customer. As for the Lean explanation, Naylor et al. add a definition for agility concept: "Agility means using market knowledge and a electronic corporation to exploit profitable opportunities in a volatile market place" [Naylor et al. ]. With an Agile Resource Chain it is a lot more efficient and effective for product with high volatility in the demand and high variety which correspond to the impressive products.

In the stand below, Chritopher and Towill travelled even further in the difference between a Lean and an Agile Resource Chain

Table 3: Comparison of Lean Resource with Agile Resource: The distinguishing Attributes

Distinguishing Attributes

Lean Supply

Agile Supply

Typical Products


Fashion Goods/Innovative

Marketplace Demand



Product Variety



Product Life Cycle



Customer Drivers



Profit Margin



Dominant Costs

Physical Costs*

Marketability Costs**

Stockout Penalties

Long Term Contractual

Immediate and Volatile

Purchasing Policy

Buy Materials

Assign Capacity

Information Enrichment

Highly Desirable


Forecasting Mechanism



*Physical Costs: All Production costs, distribution costs and safe-keeping costs

**Marketability Costs: All obsolescence costs and stockout costs

If only, both agile supply string advantages and Low fat Supply String advantages could be placed together to build a perfect supply chain, it would be the best of both world. Via this pursuit of perfection, the idea of "Leagile" [Naylor et al] source chain appeared. This idea suggests using low fat supply string for the upstream moves and the agile source string for the downstream moves. In practice, this plan is using what is called "The decoupling point" or "Postponement". This concept concept is to keep sub assemblage inventory and produce completed goods only once the order is know. Chritopher and Towill described one important fact is the information "de-coupling point": they argue that "the furthest point upstream to which information on 'real' demand moves i. e. information which has not been distorted by inventory plans such as re-order points and re-order quantities" plays a part in the Agility of an company.

Figure 1: "The decoupling point"

Stable and Evolving Source Chain

As described Volker Stich and Jan Christoph Meyer, all the strategy discussed earlier are focusing on the demand aspect. Hau L. Lee released a new principle called Steady and Evolving supply processes. This idea is focusing on the supply aspect of the source chain. Hau L. Lee provided a good definition the following

"A stable source process is one where developing process and the main technology are older and the resource base well established. " [Hau L. Lee]

"An evolving supply process is where the processing process and the underlying technology are still under early development and are rapidly changing, and because of this the supply base may be limited in both size and experience. " [Hau L. Lee]

There is more difference between steady supply techniques and evolving supply processes, the number 2 is summarizing some of these differences. The link should be produced with Fisher's Functional and Progressive products: Functional products have a tendency to use a far more mature and steady supply process but this isn't always the real. Hau L. Lee provides several example summarized in the physique 3.

Figure 2: Source Characteristics. (Source: Hau L. Lee)

Figure 3: The uncertainty Framework: Examples. (Source: Hau L. Lee)

Segmentation Factors

Determining the Customers Needs: Order Victor and Market Qualifier

The definitions of "Order Winner" and "Order Qualifier" found in the APICS dictionary are very interesting

Order winners are "those competitive characteristics that cause a firm's customers to choose that firm's goods and services over those of its challengers. Order winners can be considered to be competitive advantages of the firm. Order winners usually focus on one hardly ever more than two) of the following proper initiatives: price/cost, quality, delivery swiftness, delivery trustworthiness, product design, overall flexibility, after-market service, and image. " [APICS Dictionary 2008]

Order qualifiers are "those competitive characteristics a firm must exhibit to be a viable competitor in the marketplace. " [APICS Dictionary 2008]

When Terry Hill invented this new concept of "Order Victor" and "Order Qualifier", he directed to linked procedures' aims with Marketing's one. The operations individuals were then in charge of managing the supply chain in a way that the business will obtain a competitive advantage and win the market.

As you can see on the APICS description, several proper initiatives have been identified: price/cost, quality, delivery speed, delivery dependability, product design, overall flexibility, after-market service, and image. Based on that, R. Mason-Jones et al. put together the Fisher notion with Hill theory as you can see on the shape 2. The key information is that companies need to excel and focus on the marketplace Winners factors while being highly competitive available on the market Qualifiers. The number 3 implies that the business is focusing on Cost and obtained a competitive benefit on the price. The important point is that company is not neglected others key competitive factors and its own performance is often above the critical minimum performance which if it could have been below, it would have taken out the benefice obtained from the competitive advantages.

Figure 2: "A good example of using the classification matrix based on market winners and market qualifiers" [Source: R. Mason-Jones et al. ]

Figure 3: "The performance matrix" [Source: Nabil Montassir]

Another concept that should be took into consideration is the difference with "Importance" and "Performance" BLABLABLABLABLABLA

Corporate Strategy (Operation Excellence, Customer Intimacy, Development Excellence)

When designing a new Supply Chain or even redesigning an existing one, it's important to be regular with the organization strategy. The supply chain must be aligned with the entire company strategy. We are able to summarize nowadays strategies by three main one: Operation Quality, Customer Intimacy and Innovation Excellence.

The operation excellence meant to provide the best quality/price ratio. The target is to diminish the cost to be able to sell it at most competitive price without reducing the quality. The marketplace winner is definitely the price. This plan is likely to suit a Lean Supply String which aims to reduce the waste and then the cost.

The Customer intimacy is concentrating on providing the highest service level to its customers. Agility, versatility, reactivity are suited adjective to describe the aim of this strategy. The purchase price is no more the market winner but the Service level is. Agile and Leagile Resource Chain may very well be the best strategy to compete upon this market.

Innovation Quality as the name implies has to be at the cutting edge of innovation. The company desires to provide always the most upfront product. The cost is greater than the other product and the business aim to touch the first Adopters who are prepared to pay an increased price to get an advanced product, thus the market winner is Technology. The forecast for these types of products are difficult and the stockout as well as the obsolescence can be very high. So that it requires a rapid time-to-market if the merchandise knows an instant growth.

Supply String Key Classification Variables

From the desk 2, A. Lovell, R. Found and J. Stimson recognized key cost drivers of the supply chain. They conclude that "all costs apart from manufacturing you can find a small group of drivers: throughput level and variability; product size and weight; value and the demand variability/service factor" [A. Lovell, R. Found and J. Stimson]. They even go further by reducing this quantity to three by merging the value with size and weight to create product value density" [A. Lovell, R. Observed and J. Stimson]. Using these three key cost motorists, supply chain segmentation can be carried out. Each band of products resulting from this segmentation will promote common characteristics.

Table 2: Principal Cost Individuals in the Source String" [Source: A. Lovell, R. Found and J. Stimson]

In the same spirits, J. Aitken, P. Childerhouse, M. Christopher and D. Towill identidfied five key market characteristics that'll be use to create Supply Chains. They use the word "DWV" [Christopher and Towill (2005)]: Duration of life cycle, Time Window for delivery, Volume level, Variety and Variability. They dispute that for Brief life cycles products, the end-to-end resource chain business lead time must be reduced and optimized which will allows an increased overall flexibility and a faster time-to-market. Volume level and Variability are similar to Lovell et al throughput level and demand variability. However, variety has been taken into account in Lovell strategy: Higher the variety is lower the common demand by SKUs will be as the demand will be spread across a lot more SKUs. It should take a higher versatility to create the right product at the right moment. A postponement strategy is well designed to this kind of environment.

Before going further, the stand below summarized the main element factors that will effect supply string segmentation

Table 2: "Factors influencing Source String Segmentation" [Source: A. Lovell, R. Noticed and J. Stimson]

Segmentation Methods and Model: Choose your source chain strategy

From the prior part on the segmentation factors, we've found different requirements

From these different criteria, many people developed different model and matrix to help them in segmenting the supply chain. In this particular part we will create those models, make an effort to explain their benefits and disadvantages. By the end, we will choose the one we think the most complete and use it during the sensible part of the thesis.

Many of the models we will add use the same concept

Volker's 4 fold's model

The criteria utilized by Volker will be the Demand predictability and the customer needs. The demand is either easy to forecast or non-predictable. The clients require low cost or high overall flexibility. From this matrix, we can obtain 4 different type of Supply String: the Accurate SC, the Agile SC, The Cost-Efficient SC and the Reactive SC. The cost-efficiency represent to the Lean Supply Chain we released before. A predictable demand which allows "high planning accuracy and reliability and therefore permits the most effective design of the engaged procedures" [Volker] combines with the price as the order Victor in clearly reveals that a Lean SC (or Cost-efficient SC) as the best fit. At the opposite, when the demand is non-predictable and the order Victor is the service level (through the high flexibility) the most suitable Supply Chain will be the agile one. Once the demand is predictable and the client requires high overall flexibility, it needs the "highest accuracy in the planning processes, to ensure the required availability and flexibility". The final part is the reactive one the Supply Chain must be cost effective while the demand is unpredictable which claim that a Leagile Source Chain is the most suitable one.

Figure 5: "Resource Chain segments and Supply Chain phenotypes" [Volker]

Advantage: The primary gain is its convenience, easy to understand also to use. It includes the customers' needs.

Disadvantages: From the desk "Factors influencing Resource String Segmentation", we can see that this model is only using Market's criteria. It generally does not include any product requirements or source conditions. The throughput level is also lacking which makes difficult to determine the value of the product and the creation strategy that we use. Therefore, this model is missing key decision factors. This model is limited to the strategy level and doesn't continue the functional level making difficult to configure the resource chain.

Hau L. Lee's model

Same type as the Volker's model, Lee's model is using one same criterion: the demand predictability (or the demand certainty). The other criterion is the Resource Uncertainty. The segmentation prospects: Efficient, Risk-hedging, responsive and agile corresponds at the same notion we released before.

Advantage: Simple and look at the supply area.

Disadvantage: For Volker's model, it doesn't include any product factors. And it generally does not are the throughput level. This model is limited to the strategy level and doesn't continue the operational level which makes difficult to configure the supply chain.

REL's 9Box

This model use two factors: the Throughput level (in value) and the demand variability

It divides the merchandise in three major teams and three different supply chain strategies

Green group: The characteristics of this group are a higher throughput level and a minimal variability in the demand. Easily to forecast using statistical methods, the exactness needs to be very high as the service level should be high. The worthiness of these product are high therefore the DIO "Days of Inventory Remarkable" must be low in order to avoid to have too much cash tangled up in the supply chain. This group is the major group and needs to get the entire attention and the top priority from the business.

Orange group: As for the green group, MTS "Make-to-Stock" strategy will be privileged with an average or medium customer service level. The main concern is given to the inexperienced group. The forecasting method used will be a statistical method or a smoothing average. The forecast precision must be high and the days of inventory goal should be put typically: again the top priority is directed at the inexperienced group. This group's demand certainty is overall lower than green groupings and the throughput level is leaner as well.

Red group: This group's main feature is the low demand certainty that produce difficult to operate a vehicle the supply chain. Thus the creation strategy privileged is the MTO "Make-to-Order" strategy. Since it the fluctuation popular is too high, the forecast become highly challenging and the exactness target should be Medium/Low and the DIO focus on near none.

Advantages: Much more functional than the other model we have viewed so far. It goes in a more deeply level than the other model. It really is as well easy to use and easy to talk.

Disadvantages: It generally does not include product characteristics into consideration. It doesn't are the supply side factors and doesn't include customer's needs. In addition, it offers us information on the supply chain configuration but ignore to identify the supply chain strategy: Low fat, Agile, Leagileâ

Product Value Density Model

The main difference of this model with others is that you are using three segmentation factors while the other methods were utilizing only two. Indeed, this model is using the Product Value Density, the throughput level and the demand-service factor (variability of the demand). Through the table displaying the supply chain cost (see chapter "Supply Chain Key Classification Variables", table XXX), Lowell identified four major factors that impact cost all across the Supply String: the Throughput level, the product size and weight, the merchandise value and the demand variability. These four factors become three by merging product size and weight and the product value forming the merchandise Value Density (PVD). This model can be representing in a 3d graph but for ease of comprehension only two dimensional graph will be utilized (see Body XXX). Thus, we will consider: the demand variability-service and the throughput; the PVD (product value density) and the throughput; the PVD and the demand variability-service.

When producing his model, Lowell concentrates on the inventory and the vehicles side of the source chain as you can see o n the amount XXX below.

Advantages: Take into account product and market factors.

Disadvantages: Mainly focus on functional level and focuses on the inventory and travel area of the supply string.

DWV's model

This model is the main one I chose for the sensible part. This model is more helpful information when compared to a matrix. With the characters DWV, we always take into account all the primary factors when deciding the supply string design and construction.

Duration of life circuit, Time Screen for delivery, Volume level, Variety and Variability

Variety = postponement

The chosen model

The model decided for the practical part is the first one we have shown, the Volker's model. But we will change it a little so it range from the throughput level (in value) as well as the variety level. So this new model is using four different facets: The customers need, the demand Uncertainty (or variability), the throughput level and the variety level. The throughput level helps us to prioritize the resources through an ABC evaluation of the worthiness per product or category of product (ex; Do we should build an agile resource chain for a C category product?). It's important to understand the customer needs but business is business of course, if one customer is not really profitable then the importance for us reduce up to the throughput level lower. The variety level helps us to recognize the product which may need a postponement strategy.

Key Performance Indicators

Before to go forward, it's important to introduce the main element Performance Indicators (KPIs) that we could/should/will use to keep presence on the source chains. KPIs are like a speedometer on a car that helps us to know at what quickness we are driving.

When coping with an Agile Supply Chain, the shows that people need to keep a close eye with them are

OTIF (PROMPTLY In Full): Companies setup Agile strategy to fulfill a particular needs because of their customers. They need to get something when they want, where they want and at the right number. And these customers are willing to pay an increased price to get their suppliers that flexible. So any companies establishing an agile resource chain need to make sure that the OTIF performance are really high never to disappoint their customers.

Forecast Precision: If our goal is to have a Lean strategy, then the forecast accuracy needs to be high. Generally, when having a lean supply string, companies have a "make-to-stock" creation configuration which is equivalent to a "forecast-to-stock". Developing a bad forecast correctness will lead to mismatch between demand and offer. Either the company will wrap up having excessive inventory or not lost sales.

This KPIs analysis can be done for each of these. Every time we will expose a fresh KPI, we will attempt to describe how important it is for one or another supply chain settings.

Supply String Design - Sensible Example

The supply string design consists how to structure its resource chain. It entail the construction of your sourcing ("Source") strategy, the development ("Make") strategy and the circulation ("Deliver") strategy. All these strategy together stand for the Supply Chain Settings or design.


"Make" configuration

In this part, we must take different decision, like the production configuration MTS, MTO, ETO, Batch Size, Prioritization, Temporal & Physical Postponementâ)

"SOURCE" Strategy

(Suppliers Partnerships, Suppliers Selection, Suppliers Performance & Service Levelâ)

"DELIVERY" Strategy

(Delivery Lead Time, Transportation Methods, Service Levelâ)

Inventory Strategy

(Safeness Stock Level, Inventory Level, Inventory Location, Physical & Spatial Postponement)

Segmentation Model (Nine Container, Product Value-Density Model, Agile & Trim Matrixâ)

Nous effectuerons

Case study

Ce que je pense faire, c'est en effet d'utiliser les matrices prédirectedés dans la deuxième partie et les appliquées a cette entreprises put restructurer sa supply chain. Les indicateurs de performances seront également intégrer.

Ce cas doit être l'illustration des choix faits en fonction de ce que vous avez trouvé en II ( la fameuse matrice de décision)

SNECMA Presentation

Industry Specification

SNECMA current strategy

SNECMA "TO-BE" Source Chain based on product Segmentation Model

Case Analysis Conclusion

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