article_customer_segmention

Almost all companies have some basic product segmentation. Normally this is an ABC classification by volume, where
A items make up 20 percent of the products but 80 percent of the volume. More sophisticated companies have more
specific ABC coding—by sales dollars, or even by margin dollars. In general companies do not explicitly consider
segmentation for a key metric for the supply chain—that of service. Service segmentation is an important design
strategy that can result in huge savings and ultimately competitive advantage. This segmentation should include a
review of both products and customers to accurately assess the market.

Most manufacturers of Consumer Package Goods (CPG) goods understand the basic idea of service segmentation
by customer—they know that if customers like Wal-Mart don’t get the highest service, the supplier may get penalized
by additional charges, shelf space, or both. Their customer segmentation is simple—the Wal-Marts of the world get
product first, then all other customers. This method is too simple to be effective. In fact, companies should take a
look at both their products and customers in a service matrix to understand how to optimize inventory and other costs.

Products can be split into three categories: High for key products in terms of volume, margin, or innovation; Medium
for steady, core products; and Low for order fillers, low volume or low margin products. Service levels can be set in
varying degrees for this side of the matrix. However, keep in mind that some Low items will be on the same order as
High items, and the minimum service level set may drive all products if backorder policies are not set.

Customers can also be split into several categories, usually between three and five. Partner Customers represent
those with high volumes and margins—those with whom the supplier has a long term growth interest. Core
Customers are those who provide a steady source of income but may not be considered growth opportunities.
Sporadic Customers are those who do not provide a steady volume and are therefore are not given preferential
treatment for service (in some cases additional lead time is given for order fulfillment). Low volume customers require
small lot sizes and multiple items and may be even charged a premium. Finally, Prospective Customers represent
the potential for increased percent volume to the total business and may be given special consideration until they
move into another class.

With product and customer segmentation, a company can review their offerings in 9 to 15 subsets. Partner
Customers ordering High products should follow one strategy. Sporadic Customers ordering High products should
follow another strategy. Each group should be considered to maximize asset utilization and profitability. Managing
product and customer segmentation should minimize cost. Service levels by category can also reduce inventory
without compromising key customers. Note that this analysis can start in the supply chain area, but will need input
and support from Sales, Marketing, and Finance. Ultimately, these policies should be reviewed by management,
customized, and updated frequently.

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