You would think that an industry as numbers-oriented as high-tech would have conquered supply chain management. Clearly, Gartner thinks so. Nine of the companies in their 2011 Supply Chain “Top 25” are high-tech firms. But, in fact, many high-tech supply chain executives privately concede they have major challenges with inventory performance.
High-tech businesses often cannot satisfy demand for their most popular products due to availability issues, and also experience inventory overhangs when a slump in demand catches them off guard. The fix for this problem is creating a segmented supply chain based on product lifecycle.
Segmentation has been around for decades as a marketing discipline that targets the subset of prospects most likely to purchase a product or service. But it can also be used in supply chains as a means of aligning sense and respond capabilities to serve customers efficiently and avoid waste or product shortages.
In supply chain segmentation the chain is divided into manageable chunks or categories according to the desired organizational response to demand. To minimize cost and maximize customer value, segments will usually reflect a mix of cost and velocity along with customer and product tiering.
While you can segment many parameters, there is a strong reason to consider focusing on product lifecycle. That’s because 80 percent of availability and overhang issues in high-tech are created by just 10 to 20 percent of products—typically the shorter lifecycle products or components. Fix these and you’ll fix 80 percent of your supply chain problems.
Supply Chain Segmentation and Your Business
Supply chain segmentation has actually been around for many years, but mostly in consumer and retailer organizations in Europe, while it has remained largely off the radar screens of U.S. business.
Even so, most U.S. companies have at some point utilized a basic form of supply chain segmentation, such as segmenting on rate of sale, country of origin, customer tiering, channel to market, or criticality of supply. Dell has taken this a step further by segmenting according to product variety, level of customization, forecast accuracy, volume, and the potential cost of lost sales.
Dell’s approach is a step forward within high-tech, but for most companies the biggest pain point is product lifecycle. Cisco As covered by 2 experienced product lifecycle pains a decade ago and was forced to take a $2 billion write off. Since then it has operated a bearish inventory strategy at the cost of periods of lower product availability. More recently, Acer and Texas Instruments experienced highly-publicized bouts of inventory distress.
How do you know it’s time for your business to assess the ROI of supply chain lifecycle segmentation? The warning signs are clear:
- Complexity is exceeding the capabilities of your software vendors
- Customer satisfaction is eroding because of product availability issues
- Major quarterly stock provision adjustments have become common
- Unplanned rush shipments have increased expenses and created headaches
- More than half of your supply chain planning time is spent fighting fires
Since lifecycle is the primary driver of supply chain in high-tech,
it’s logical to make it the focus of your segmentation model and line up everything else behind it.
Planning and Implementation Considerations
Lifecycle segmentation is surprisingly straightforward—it is a question of which attributes to segment and in which order. The answers will stem from your consideration of the two primary approaches to planning.
The first approach is based on the anticipated length of a product’s life, which is the primary driver of availability as well as obsolescence. Most organizations should be able to segment products into three relative groupings: 40 percent long lifecycle, 40 percent medium lifecycle, and 20 percent short lifecycle.
The second planning approach concerns where the product or product elements currently reside in their lifecycle status. There are three product stages:
- Launched and Live: the stage in which sales are stable or actively growing
- Distressed: the stage in which sales are showing signs of erosion (this is a key area for predictive analytics where subtle changes in demand signals can have great meaning when data is correctly manipulated)
- Obsolete: the stage in which sales have all but ended
This second approach to planning can be highly valuable in the correction of early issues, and also provides more accurate stock valuation than simple stock aging.
For a company looking to prioritize supply chain segmentation it makes the most sense to start with the following:
- First Segmentation: Long-, mid-, and short-lifecycle characteristics, simply because this is where the most pain is delivered
- Second Segmentation: Lifecycle status due to the differing approaches to products as they move through their lifecycle
- Third Segmentation: Volatility’s affect on planning caused by the radical differences between stable and unpredictable products
- Further Segmentation: A combination of customer tiering, channels and various physical attributes according to their relative importance
Segmentation will drive substantial operational changes in your supply chain execution, the most visible of which will stem from your planning approach. It’s likely that 80 percent of your product will slot into the longer lifecycle/lower volatility 3 segments, which is a great fit for highly automated ERP systems. This frees up resources to focus on the 10 to 20 percent of products with shorter lifecycles—the ones likely creating most of your inventory distress. These products are better suited to complex predictive analytics, collaboration tools such as Kinaxis, and a high level of expert intervention.
Product segmentation is a major change in thinking for hightech, which tends to spread supply chain expertise evenly across categories instead of focusing efforts where the most value can be added. It’s also a major change from a systems perspective since most high-tech firms expect ERP to fulfill both of the very different planning approaches, which leads to unnecessary complexity, high implementation costs and underwhelming results.
Borrowing from Other Industries
When you break down the supply chain into segments, hightech starts to look more like other industries, which means the best practices in each segment of those industries can be examined for their relevance.
For example, the auto industry brings established Lean operational excellence to products that repeat reliably for a year or more at the component level. The automotive industry’s supply chain is sufficiently in control to reasonably accept the risk of just-in-time/just-in-sequence delivery line-side.
For expertise in short lifecycle/high volatility products you can look to the retail fashion industry, where styles change seasonally and products can be refreshed in excess of 10 times annually. The industry does this by focusing attention on seemingly miniscule changes in demand across geographies and demographics, providing early alerts to potential rapid swings in taste which can be coupled to ready-to-deploy exit plans for each product. Consider also the example of a well-known European retailer
It has a dedicated supply chain solely for the purpose of singleday lifecycle product—think fresh sandwiches and sushi. Their supply is 100 percent served by contract manufacturers, and they forecast each product in five waves based on up-to-theminute consumption and weather forecasts. As a result, the business enjoys sector-leading low waste levels and improved margins that allow it to reinvest in product quality.
Are the automotive, fashion, and retail businesses different from high-tech? Yes, but there are definitely lessons to be learned and applied. In fact most of the skills, tools, and techniques for segmented supply chain already exist within high-tech. The challenge is to reshuffle and realign these assets with the most appropriate segments.
Next Steps in Making the Shift
There are five steps you’ll need to take as you begin to shift your supply chain thinking. The first is to define your strategy. If done properly, data trawling, cleansing, and manipulation, coupled with segmentation expertise, will result in eight to 12 clear segments, each having differing costs of availability and, as such, different supply chain execution models to maximize value. This first step should take about three months and will result in a rich and detailed ROI assessment.
Next comes organizational buy-in and alignment. The ROI analysis will help justify the need for change within your business. From a supply chain planner’s perspective, efforts will be focused away from repetitive work more suitable for automation and toward predictive analytical roles that are more strategic and impactful. One approach to securing buy-in is to enact supply chain ‘games’ that pit current processes against new processes.
In step three you’ll need to build supplier support, since suppliers will need to see the benefits of the change effort. Removing waste from the supply chain will likely be a refreshing change 4 from typical procurement lead change, which is focused more squarely on reducing direct product costs. It’s a way to make their customer more profitable and to increase volume while sustaining supplier pricing.
Fourth on the list is IT change. Fortunately supply chain segmentation creates the need for systems simplification rather than adding complexity and ‘super-algorithms’. This is a great opportunity to retire overlapping, over-complicated, and overcustomized technologies which carry unnecessary development and support costs. Additional capabilities will focus largely on analytics software, which may or may not already exist in the business.
The final step is to quantify and publish the benefits of the full implementation effort so that change, disruption, and payoff can be best articulated.
Is Lifecycle Segmentation the Right Approach for Your High-Tech Business?
If much of your time is spent addressing supply chain problems, a transition to supply chain product lifecycle segmentation will alleviate the pain. Based on our experience, you should expect to reap some combination of the following benefits:
- Revenue improvement of up to 4 percent of annual sales by focusing high availability where it’s the most valuable to your organization and customers.
- Stock write-off or discount reductions of as much as 50 percent of current levels by exercising a clearer understanding of where inventory distress is likely to occur and applying expertise and tools accordingly.
- Reductions in logistics expediting costs of between 25 and 50 percent facilitated by a move from unplanned rush shipments (a.k.a., firefighting) towards planned rush shipments (a.k.a., targeted stock positioning and redistribution).
- Reduced complexity in systems by automating where appropriate, and applying analytics and planning expertise where they will provide the best result. The potential exists to save tens of millions of dollars in custom development, implementation and support because when you divide the supply chain into segments, complexity falls away.
- Improvement in supply chain talent retention and recruitment due to the reduction in stressful firefighting and the refocus on more interesting analytics and collaboration.
Globally, the combined annual revenue of the top 10 high-tech organizations is approximately half a trillion dollars. But this scale has created huge, and hugely complex, supply chains that often teeter on the edge of control.
By dividing the supply chain into manageable chunks, segmentation can dramatically reduce complexity and customization while delivering sizeable business benefits. But all segmentation is not equal. Product lifecycle segmentation directly addresses hightech’s greatest pain points.
Supply chains should be subservient to product, but supply chain management has become a serious distraction in the high-tech industry. Lifecycle segmentation is an opportunity to reduce that distraction and free up time to let your organization do what it does best: get bigger on big ideas.