The topic at hand aims to share the experiences from Supply Chain Segmentation in general but focus on a specific project. The project discussed was conducted within the aftermarket of a heavy machinery brand.
Considerations, market expectations and levers within Supply Chain Segmentation are discussed.
Premium brand – A brand that holds a unique position in a market through the design, engineering and quality that is provided. Price on par with experienced value.
Value brand – A low cost brand that provides quality above its price point, giving the customer value for their money
Ever since the paradigm of “economies of scale” companies have aimed to leverage on size and standard, especially when looking at the development of supply chain management in a global context. In pace with globalization companies have aimed to standardize and homogenize the way they work.
At the moment companies are becoming more and more proficient in structuring and standardizing the supply chain which of course is something positive, however the importance of differentiating the standard is often neglected.
At Capgemini we see that there is a growing need to address the importance of supply chain segmentation.
Supply Chain Segmentation is the dynamic alignment of customer channel demands and supply response capabilities optimized for net profitability across each segment. It is also a strategic tool to move away from one-size-fits-all approach by considering volume, variability and end user value attributes.
By implementing segmented supply chain management there is a range of benefits within reach:
- Optimization of cost-to-serve by prioritization of constraint resources on different customer/product segments
- Improved flexibility and responsiveness
- Complexity reduction by improvement in planning reliability for complex supply chain configurations
- Improved Logistics and Inventory Management
- Improved service levels for customer
An example of implemented segmentation within aftermarket service:
Creating a differentiated distribution model – premium vs value segment
Many premium brand heavy machinery companies have already launched a value brand(s) as a complement to their original product portfolio and even more companies are about to follow. The incentive of course being opportunities for increased market shares and expansion by offering products with a more attractive price without cannibalizing on the premium products. In mature markets it is about capturing sales otherwise lost to second-hand sales, in emerging markets it is most often a necessity to claim market shares in a price sensitive environment.
As expected, the value brand trend comes with a range of considerations with one important aspect being the supply chain set-up of aftermarket services. At Capgemini Consulting, we have seen that the aftermarket service level is a delicate factor to take into account. It can be very appealing to cut cost to a minimum in all aspects of the supply chain, equaling the relatively lower cost of the product with a poor aftermarket support. This leads us into the important question: How can a value brand best be supported by its supply chain while still maintaining the needed margin? In order to find a good solution there is a need to develop a model that handles the value segment, balancing cost-efficiency and market expectations. What are then the characteristics of a segmented distribution model that fits a value segment, and what do you need to keep in mind while designing it?
It is important to consider the value concept “quality above its price point”. Sure, the investment in a value machine is done with the expectation of shorter life span than a premium one and with some of the “bells and whistle” down-prioritized, but when a value machine breaks down the expectations are similar to that of the premium machine. Long breakdowns are most often not part of the equation when considering a value machine and in most cases it is a market expectation that the machine will be supplied with spare parts and be up and running in a reasonable amount of time. Then again customers do have planned spare part needs in parallel to the emergency needs with totally different demands in terms of service levels - and both scenarios need to be handled.
It is a high risk operation to blindly reduce service levels to cut cost. However it is also a fact that value brand spare parts can not carry the same cost of service (e.g. transportation, warehousing etc.) as premium brands. All service cost alike impacts the value spare part harder than the premium one, for the sake of illustration 50% cost increase versus 5%. The challenge is to identify and balance the range of levers at hand.
No one size fits all
As usual when designing the distribution model the mission is to balance the service levels of the set-up with the market expectations, but bearing in mind that it can and often should look somewhat different than the premium one. If possible, it is desired to leverage on the premium brand´s existing supply chain and its scale of economy.
The value distribution model needs to manage customer expectations and at the same time drive cost effective behavior throughout the supply chain. Some of the key levers include:
- Constraints in breadth and depth of offer in order to reduce complexity and cost in delivery, however while not imposing lower performance levels
- Utilization of a higher degree of optional user pay features, in order to either drive behavior toward lower cost of delivery features, or ensure that high cost features are fully funded by the end user
- Centralization of control over spare parts to optimize cost, capital and service levels
Value brand after market is a two faced coin, on one hand it is sensitive to any added surcharge meaning it is important to keep costs down. On the other hand, the low part value can be used as an opportunity since capital cost would be very low as well.
To summarize, the need for a segmented supply chain approach is a reality in the global playing field. In order to stay competitive and cost efficient, there is a need to find a suitable approach by identifying and tuning the levers that fit the market and result in reduced cost while meeting customer expectations.