COMPANIES ARE REVAMPING HOW THEY SEGMENT THEIR SUPPLY CHAINS TO SERVE DIFFERENT COUNTRIES MORE PROFITABLY
One of the biggest challenges companies face as they expand operations into new markets and countries is designing a supply chain that takes into account country differences while still being efficient and effective.
“Global companies have thousands of suppliers and dozens, if not hundreds, of manufacturing plants and distribution centers around the world,” notes a report by consulting firm EY. “The sheer product variety, number of business partners and distribution channels adds an order of magnitude of complexity, which is further magnified by continuous innovative product introductions and changing business models.”
This complexity has created a problem. Companies have ended up with multiple, differentiated supply chains with redundant assets, infrastructure, systems and processes. “This is an expensive way to do business,” notes Gary Keatings, VP Solutions Design - Center of Excellence, DHL Supply Chain, “and it only gets more so as companies expand across geographies.”
That’s why leading corporations are re-thinking how they segment their supply chains based on contribution to profitability and growth. And within this framework of smarter segmentation, they are working to standardize supply chain elements.
The idea behind this strategy is to create a Lego-like supply chain that consists of core standardized elements that are augmented by standardized bolt-ons. These bolt-on components are tailored to unique market, customer and product needs. By segmenting and standardizing in this manner, companies avoid having an entirely different supply chain for every country they serve.
Optimizing Cost to Serve
Most global companies have practiced supply chain segmentation for years. They developed differentiated supply chains based on customers, markets, products, service levels or other factors.
But thanks to better data capture and analytics capabilities, they can now be smarter about how they segment. For starters, companies have better information about their total costs. “Leading companies apply cost-to serve methodologies that reveal the true cost of processes and activities in manufacturing (cost-to-make), logistics (cost-to-fulfill), and selling (cost-to-sell),” says Deloitte in a recent report. “Supply chain design and segmentation is based on rolling up all of these cost components in order to evaluate customer profitability.”
All of these cost elements need to be taken into account in a segmentation strategy. This means that companies must collect and understand these costs for every country or market in which they distribute. “The focus should lie on bottom line profitability, not on total revenue or gross margin,” Deloitte continues.
Factoring in Country Differences
Smart segmentation gets more complicated as organizations expand into different regions and countries.
“What’s different about countries and regions are factors like cultural norms and preferences, distribution channels and methodologies, infrastructure, regulations, market dynamics and political environment,” explains Richard Sharpe, CEO of Competitive Insights. “The reality is, you can’t assume the drivers of profitability are the same around the world. You have to consider the market in relation to your business strategy. It may be okay, for instance, to have a lower profitability percentage because you’re trying to capture market share.”
“You also can’t assume that the same channel or distribution model will work in all countries,” Sharpe continues. “You have to understand each market’s unique characteristics and find the best way to service them with as much standardization as possible in your supply chain.”
One global medical device company has been working on intelligently standardizing and segmenting its supply chain for specific markets – not just to reduce costs, but to fuel growth. “Our underlying premise is that because every element of the supply chain is interchangeable, it can be tweaked without much effort to fit specific markets,” says the Supply Chain Director.
The company tested this philosophy in India, one of its target high growth markets. “We devised two different supply chains to serve India – one for premium and one for generic medical devices,” the Director explains. “While these two supply chains were similar in many respects, they were tweaked to offer a different array of products and services to people of different incomes. This was crucial to making our company competitive in the Indian medical technology market.”
The supply chain serving the ‘elite’ market distributes premium products, which have many ‘nice to have’ features and carry premium price points. The higher margins and profitability on these products allow the company to provide a higher level of service to its customers.
At the other end of the spectrum – the ‘generic’ Indian market segment – the manufacturer built a supply chain capable of effectively handling lower-price-point products consistently and efficiently. “We used the same warehouse for both price points – and were able to gain economies of scale simply by creating a value-adding capability via that warehouse. So we optimized our network but still served both spectrums of customers.”
The bifurcated supply chain strategy paid off for the medical device-maker. “Our cost-to-serve was appropriately adjusted to each market segment. This allowed us to compete effectively, and profitably in both segments.”
Boosting Profit Contribution
Effective supply chain segmentation within countries and markets can improve service to customers and reduce costs. “But ultimately, it’s all about making a profit,” says Sharpe. “Yes, you want intelligent supply chain building blocks and add-ons that are tailored to your different ‘lenses’ – country, product, customer and so on. But you never want to miss the underlying reason for doing all of this – the profit contribution.”