Focus your supply chain on profitable customers

One of the most popular articles on CSCMP's Supply Chain Quarterly's website is "Supply chain segmentation: 10 steps to greater profits." It's an article on how to implement supply chain segmentation written by Kelly Thomas, an executive with the JDA Software Group.

The article's appeal is that it illustrates a fundamental problem in supply chain strategy today. Manufacturers are being asked to provide higher levels of customer service at a time when customers are unwilling to pay more. On top of that, manufacturers face a looming threat from new technologies like 3-D printing, which make it possible for customers to become competitors. Moreover, retailers today are just as stressed as manufacturers. Merchants face intense pressure to maintain the right amount and type of stock for fickle consumers, who can instantly check with a smartphone whether a competing merchant can provide the same or similar product at a lower price.

In this type of competitive landscape, it makes no economic sense for a retailer or manufacturer to offer high levels of customer service or product availability to low-margin buyers. Supply chain segmentation—a topic I cover in my book, Protean Supply Chains}—allows a company to rank its customers and then align its supply chain strategies based on those rankings. After all, why should a company give inventory priority to a customer that generates little or no profit for the enterprise?

The problem with customer segmentation is that it's extremely hard work. It's not easy to determine which customers are the most profitable. Companies that do supply chain segmentation on the basis of a cost-to-serve analysis must examine a broad range of costs, and then delve down into the expense details. Since existing software systems don't easily categorize all the relevant costs for such an analysis, creating a credible customer ranking involves considerable time and effort.

Despite the difficulty of evaluating customer profitability, it's an exercise that companies will be forced to carry out in the decade ahead. As the retail and manufacturing climate continues its transformation, ushering in a legion of new competitors, the winners will be the companies that successfully segment their customer base. Companies can no longer afford to be all things to all customers.