Going from chaos to order
For many, the inability to align sales, production, supply chain, and company strategy is causing money to haemorrhage fast. Gay Sutton talks to Prof Dr Bram Desmet of supply chain consultancy MÖBIUS to discover how alignment can be made a reality by applying the marketing concept of segmentation.
Does this sound familiar? Your sales team is doing a great job at winning new orders, your demand and supply management processes are reliable and efficient, yet your profits are eroding fast. Perhaps most telling of all, the shopfloor is increasingly under pressure to deliver orders that have individual requirements and higher levels of customisation causing inefficiencies and costs to build up in the system.
“The key issue here is that different functions in the organisation are trying to optimise their part of the equation, without optimising the equation with respect to the company,” explained MÖBIUS consultant, Prof Dr Bram Desmet. The upshot of this mismatch between sales, production and company strategy is that companies are finding themselves increasingly dictated to by high volume customers who deliver little or no profit, and are consequently jeopardising delivery to customers with a high value to the company. “We need to redress this power balance,” Desmet said. supply chain consultancy MÖBIUs has been working with companies to address this issue for a number of years, through a process known as segmentation.
Many companies have tried this in some form, but getting it right is the challenge. The rewards are enormous. It involves dividing the customer base into segments according to the profits they deliver, and then defining the levels of service that each segment will receive. The resulting definitions then form the basis for all company activity and decision making, from the sales teams who deal directly with the customer, through to demand planning, production and the supply chain. As a consequence, high value customers receive full priority and top service levels, while customers who deliver little or no profit may, for example, receive standard specification goods by full truck load, or with a long lead time allowing production to be scheduled conveniently around higher priority orders.
“We believe that by implementing this more strategic marketing view,” Desmet said, “much of the complexity on the manufacturing side can be reduced while costs and inventory can be brought under control. Moreover, this can be done without necessarily limiting the service to the customer.”
Customer service is paramount in manufacturing. Dissatisfied customers have a habit of going elsewhere and perhaps taking future customers with them. Any reduction in the customer service offering is therefore viewed with misgiving. However, in depth analysis has shown that by differentiating customers by their value, and focusing the greatest efforts on those that deliver the highest value, service levels tend to improve rather than decline. This leads to stronger performance in the higher earning marketplace, higher growth and increased profitability.Johan De Wilde, supply chain manager of european carpet manufacturer Associated Weavers, a company that has gone through this segmentation and change process, would agree. “Before we began the process our on-time delivery was around 73%, and today we’re achieving an average of 96%.” Moreover, until the recession knocked consumer confidence, the company had been increasing its market share significantly because of the increased reliability.
Rolling out such a transformation is not for the faint hearted or for the poorly organised. It requires considerable planning and supply chain maturity. If integrated business planning processes are not in place – and these incorporate elements such as good demand planning, supply planning and an s&oP process to ensure the executive team signs off decisions that have financial implications – then these capabilities need to be embedded first.
The segmentation process then begins with analysis of the customer and product portfolio: evaluating variables such as the volumes produced, services provided, inventory held, costs incurred and profits achieved. Finally, the overall profitability of each customer to the company is added to the mix. By contrasting costs with profits across each of these variables, it’s possible to arrange customers and products by their profitability, and then to derive a set of criteria by which customers and products can be allocated into segments.
Using this data, the next step is to define the level of service that will be offered and the reliability that will be promised to customers in each segment. Highly profitable customers may continue to warrant the full range of services and customisations, less profitable customers may have a service offering tailored to reduce costs and inventory, and to be scheduled For many, the inability to align sales, production, supply chain, and company strategy is causing money to haemorrhage fast. Gay Sutton talks to Prof Dr Bram Desmet of supply chain consultancy MÖBIUS to discover how alignment can be made a reality by applying the marketing concept of segmentation easily around the needs of more profitable customers.
These rules are then rolled out across the company, providing stable and strategy driven criteria for decision making. The rules drive sales and inform the shopfloor with regard to priorities for scheduling and allocation of inventory. They provide reliable data on which to tailor the supply according to the segmental needs, and are incorporated as an additional dimension into forecasting, demand planning and supply planning. Finally, should further prioritisation and investment decisions need to be made at s&oP level, these too can take into account margin impacts.segmentation is by no means a new idea, but getting it to work is the challenge. The team likely to face the greatest culture shock and present the greatest resistance is sales. Where previously most account managers focused on sales volumes, they will be faced with completely rethinking their approach to the customer – renegotiating and redefining the services and prioritisations on offer, and resisting the pressure to return to old habits.
During the transformation at Associated Weavers, the company completely reviewed and changed its entire demand cycle and planning logic, right down to how stock was allocated to the customer. “For our sales team, it was ultimately a convincing process,” De Wilde explained. “We began recording our KPIs at the outset of the process, and used them to demonstrate improvements in our business performance. Initially we achieved small increases. But then the KPIs started to seriously reflect the positive impact of the new rules.” For most departments, it is a relief to receive clear and concise rules for prioritisation and service levels. And ultimately sales becomes a strategic function – creating value for the company rather than volume.
Desmet believes, however, that this level of segmentation is just the first step in achieving true maturity. “We call this the ‘defensive mode’,” Desmet said, “where products and clients with a higher profitability justify higher service levels. The next step is the ‘offensive view’ which entails obtaining a better understanding of what customers really require, and what they are willing to pay for those services.”
The offensive view therefore includes an in depth analysis of customer requirements. And the resulting segments are likely to be rather different, some of them incorporating a more proactive and collaborative approach. By better matching requirements and service in this manner, volumes and profitability can be grown in each segment. Many challenges face companies embarking on this process, one of the biggest being how to sustain the improvements. For Associated Weavers, the secret to sustainability “is down to the way you measure progress, follow it up, preach it and convince everyone,” De Wilde said. “once everybody is convinced, it continues with almost no effort - although, it is important to continue monitoring the KPIs.”
“None of this is rocket science,” Desmet concluded, “but it involves formulating fundamental questions which can also be very sensitive, and this has to be handled with subtlety to ensure people realise that they’re not working optimally across functional boundaries of the company.” The rewards for getting it right are very clear.
“I would say we have migrated from total chaos - where the customer who shouted loudest received priority – to a situation where we have predictability and order,” De Wilde commented. “Now, when we promise something to our customer we stick to that promise.”
Article first published in "The Manufacturer", 2010