Margarita Protopappa-Sieke

Ulrich W. Thonemann Editors

Supply Chain
Segmentation
Best-in-Class Cases, Practical Insights
and Foundations
Supply Chain Segmentation
Margarita Protopappa-Sieke •
Ulrich W. Thonemann
Editors

Supply Chain Segmentation

Best-in-Class Cases, Practical Insights
and Foundations
Editors
Margarita Protopappa-Sieke Ulrich W. Thonemann
Department SCM & MS Department SCM & MS
University of Cologne University of Cologne
Cologne, Germany Cologne, Germany

ISBN 978-3-319-54132-7 ISBN 978-3-319-54133-4 (eBook)

DOI 10.1007/978-3-319-54133-4

Library of Congress Control Number: 2017934888

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Preface

Products, services, and customers have different requirements, and a one-size-fits-

all approach can result in insufficient supply chain performance and service issues.
A one-size-fits-all approach cannot meet all the varied requirements; companies
therefore need to consider differentiated approaches to customers, products, and
supply. Supply chain segmentation helps reduce the complexity of managing
supply chains and enables companies to respond to varied customer needs in a
timely and profitable manner. In this book, we provide practical insights for
successful supply chain segmentation through best-in-class industry case studies
from Gardena, Philips Luminaire, Siemens Healthineers, and Volvo Construction
Equipment. Through industry examples, we discuss insights, recommendations,
and solutions on how to define supply chain segmentation and set up and implement
a transformation program.
Chapter 1 provides an introduction to the main industries and companies we
discuss. We summarize the industry and company challenges along with their
supply chain segmentation approach.
Chapter 2 is an overview of the segmentation frameworks from academic
literature where we cluster the frameworks according to their choice of segmenta-
tion criteria. The existing frameworks can be categorized into three different
approaches: market, product, and hybrid approaches.
Chapter 3 provides information on a more holistic and practical supply chain
segmentation framework developed by McKinsey. This is a three-step approach
where all relevant performance and cost drivers are analyzed, segmentation criteria
are identified, and last supply chain strategies are defined for each segment.
Chapter 4 provides an overview of Philips segmentation journey. We discuss the
specific challenges and the initial situation. We elaborate on the segmentation
criteria and explain the supply chain strategies for each segment. Finally, we
discuss the implementation challenges and key factors for success and summarize
the benefits for Phillips.
Chapter 5 provides an overview of Volvo CE segmentation journey. Volvo CE
used two broad categories to differentiate its supply chain: (1) Standardized

v
vi Preface

machines characterized by short lead times. These products follow a make-to-stock

(MTS) policy. (2) Customized machines characterized by longer lead times due to
significant configuration possibilities. These products follow a make-to-order
(MTO) policy. In practice, Volvo CE created a supply chain that serves MTS
products in less than one month while MTO products can take up to four months
to deliver.
Chapter 6 introduces Husquvarna Group main challenges and supply chain
segmentation approach. Gardena has been a core brand of the Husqvarna Group
since its acquisition in 2007 and generates 80–85% of its sales in Western Europe.
Gardena faced several challenges regarding its supply chain performance: (a) high
sales seasonality with volatile demand during the season and (b) a legacy rigid
supply chain structure. To decrease the number of simultaneous virtual supply
chains and thereby the supply chain complexity, the segments were grouped into
three types of supply chains: flexible, responsive, and efficient.
In Chap. 7, we discuss Siemens Healthineers who is one of the world’s largest
suppliers of technology to the healthcare industry and a leader in medical imaging,
laboratory diagnostics, and healthcare IT. This chapter describes the service parts
supply chain segmentation initiative at Siemens Healthineers where we present the
background of the company and the industry. We describe the initial situation and
the challenges that lead to the segmentation initiative and discuss the segmentation
criteria that have been defined.
Chapter 8 concludes with the main findings summarized from the previous
chapters. We introduce the key success factors that underlie the segmentation
process, starting with the development of the framework and continuing through
implementation. We highlight the prerequisites for deriving a company-specific
segmentation, describe the diagnostic phase, and provide recommendations for a
practical, end-to-end segmentation approach.

Cologne, Germany Margarita Protopappa-Sieke

Cologne, Germany Ulrich W. Thonemann
Contents

1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Knut Alicke, Margarita Protopappa-Sieke, and Ulrich W. Thonemann
2 Supply Chain Segmentation Scientific Frameworks . . . . . . . . . . . . . . 5
Knut Alicke and Maren Forsting
3 McKinsey Supply Chain Segmentation Framework . . . . . . . . . . . . . . 15
Knut Alicke and Maren Forsting
4 Philips Segmentation Case Study . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Sanchay Roy, Knut Alicke, and Maren Forsting
5 The Supply Chain Segmentation Journey of Volvo CE . . . . . . . . . . . . 37
William Gu, Albert Thome, Knut Alicke, Ines Haller,
and Margarita Protopappa-Sieke
6 Gardena’s Segmentation in a Volatile and Seasonal Market . . . . . . . . 47
Valentin Dahlhaus, Sascha Menges, Knut Alicke,
and Christoph Lennartz
7 Supply Chain Segmentation at Siemens Healthineers . . . . . . . . . . . . . 55
Simon H€
oller, Peter Schneller, and Ulrich W. Thonemann
8 Steps to Success . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65
Knut Alicke and Ines Haller

Appendix A: Description of Segments (McKinsey) . . . . . . . . . . . . . . . . . . 71

Appendix B: Supply Chain Strategy per Segment (McKinsey) . . . . . . . . . 73

vii
Chapter 1
Introduction

Knut Alicke, Margarita Protopappa-Sieke, and Ulrich W. Thonemann

1.1 Introduction

These days, companies have realized that different customer value propositions
require a differentiated supply chain strategy. Products, services, and customers
have different requirements, and a one-size-fits-all approach can result in insuffi-
cient supply chain performance and service issues. Using the same transactional
relationships for all products and demand types, the same manufacturing strategies
or lead-times for all types of products, and/or the same forecasting intensity for all
customers, markets, and products can result in excess inventories, long lead-times,
poor service, and high costs. A one-size-fits-all approach cannot meet all the varied
requirements; companies therefore need to consider differentiated approaches to
customers, products, and supply.

Segmentation needs to be tailored and pragmatic, and add value to the

supply chain without increasing complexity significantly.

Supply chain segmentation helps reduce the complexity of managing supply

chains and enables companies to respond to varied customer needs in a timely and

K. Alicke
Supply Chain Management Practice, McKinsey & Company, Inc., Birkenwaldstraße 149,
70191 Stuttgart, Germany
e-mail: [email protected]
M. Protopappa-Sieke (*) • U.W. Thonemann
Department of Supply Chain Management and Management Science, University of Cologne,
Albertus-Magnus-Platz, 50923 Cologne, Germany
e-mail: [email protected]; [email protected]

© Springer International Publishing AG 2017 1

M. Protopappa-Sieke, U.W. Thonemann (eds.), Supply Chain Segmentation,
DOI 10.1007/978-3-319-54133-4_1
2 K. Alicke et al.

Table 1.1 Supply chain segmentation examples

Company Industry and company challenges Supply chain segmentation approach
Gardena, High sales seasonality which Flexible supply chain strategies for all
Husqvarna strongly dependents on local products with low predictability and
Group uncertain weather conditions low stock risk
Rigid supply chain structure and a Responsive supply chain strategies to
complex material flow respond to existing demand without
creating excess inventories of highly
expensive products
Nonaligned supply chain processes Efficient supply chain strategies for
and performance management standard products with predictable
demand
Philips Complex distribution structure and The “Buy” supply chain for mainstream
Luminaire material flows functional luminaries delivered into the
DIY channel
High portfolio complexity and low The “Regional” supply chain for
forecast accuracy regional products, both mainstream and
decorative. These products flow into the
life style & specialists, the DIY, and
brand stores channel
Unreliable suppliers and high The “Global” supply chain delivers
stockouts Disney products and connected
luminaires into the store channel
Siemens Complex distribution network with Combination of manual explicit
Healthineers several hundred entities segmentation that is reviewed regularly
and automated implicit segmentation
with respect to service level efficiency
Size and dynamic nature of the Safety stocks are chosen low for parts
system and service parts portfolio with low service level efficiency and
high for parts with high service level
efficiency
Development of markets and specific High value parts are replenished less
customer requirements frequent than low value parts
Volvo High product complexity and low Supply chain with steady flow and
Construction forecast accuracy active replenishments for products with
Equipment high volumes, and either stable or
volatile but predictable demand
Long and rigid Order-to-Delivery Supply chain with high responsiveness
processes for products with high volumes and low
forecast accuracy
Mismatch between offerings and Make-to-Order strategy for products
customer requirements with low demand and volatile demand

profitable manner. Best practice segmentation considers several dimensions when

deriving appropriate supply chain strategies. Among others it considers: (1) Product
attributes, e.g., product life cycle, product type, product complexity, and level of
customization; (2) Channel and customer characteristics, e.g., channel type,
customer priorities and characteristics, and lead-time requirements; (3) Production
processes, e.g., manufacturing and execution processes, manufacturing strategy,
1 Introduction 3

production technologies, and sourcing strategy; (4) Distribution, e.g., volume to

value ratio, special requirements, regulations, and value-adding activities; and
(5) Sourcing, e.g., the feasibility and reliability of suppliers.
Despite the benefits of supply chain segmentation, many companies still struggle
to identify the main drivers that define the right segments, match customer value
propositions and operations strategy, and design a holistic end-to-end supply-chain
segmentation framework that meets business needs (Simchi-Levi, 2010). This book
provides practical insights for a successful supply chain segmentation and presents
the benefits this can yield for a company through best-in-class industry case studies
from Gardena, Philips Luminaire, Siemens Healthineers, and Volvo Construction
Equipment, as summarized in Table 1.1. Through industry examples, we discuss
insights, recommendations, and solutions on how to define supply chain segmen-
tation, and set-up and implement a transformation program. We also provide
insights on what proved to be successful. We offer specific, pragmatic guidance
around the main challenges and opportunities and provide ways to measure
efficiency and performance. We conclude with the do’s and don’ts and key things
to keep in mind when considering an end-to-end segmentation. Furthermore, we
provide an in-depth discussion of the current theoretical background of supply
chain segmentation, where we introduce the current trends and available
frameworks.

Bibliography

Simchi-Levi, D. (2010). Operations rules: Delivering customer value through flexible operations.
Cambridge, MA: MIT Press.
Chapter 2
Supply Chain Segmentation Scientific
Frameworks

Knut Alicke and Maren Forsting

Supply chain segmentation describes an approach for developing differentiated

supply chain strategies. This differentiation is based on the creation of distinct
segments. A segment comprises a set of products that are allocated according to
certain criteria, for example product characteristics or customer requirements. For
each of the segments, a unique supply chain strategy is derived that fits the
products’ or customers’ needs (Childerhouse, Aitken, & Towill, 2002; Godsell,
Harrison, Emberson, & Storey, 2006; Lovell, Saw, & Stimson, 2005). In this
chapter, we give an overview of the segmentation frameworks from the academic
literature. We cluster the frameworks according to their choice of segmentation
criteria. The existing frameworks can be roughly categorised into three different
approaches: market-, product-, and hybrid approaches.

2.1 Market-Driven Segmentation

The market-driven segmentation frameworks seek to define supply chain segments

according to market-related criteria.
One of the first market-driven segmentation approaches was introduced by Hill
(Hill, 1985), who suggested delivering differentiated customer service by
employing different manufacturing strategies. The author characterised different
market segments according to Order Qualifiers (OQs) and Order Winners (OWs).

K. Alicke
Supply Chain Management Practice, McKinsey & Company, Inc., Birkenwaldstraße 149,
70191 Stuttgart, Germany
e-mail: [email protected]
M. Forsting (*)
Cologne, Germany
e-mail: [email protected]

© Springer International Publishing AG 2017 5

M. Protopappa-Sieke, U.W. Thonemann (eds.), Supply Chain Segmentation,
DOI 10.1007/978-3-319-54133-4_2
6 K. Alicke and M. Forsting

OQs are the prerequisites that suppliers need to fulfil in order to be considered as a
supplier by a customer. OWs are the critical factors that influence the customer’s
final decision and contribute to winning the order. These OQ/OW criteria may
include cost, availability, and delivery lead-time, for instance. According to Hill,
manufacturing needs to establish appropriate responses to each segment’s require-
ments. Hence, the author suggests differentiated manufacturing strategies that meet
the segment-specific requirements, rather than one single strategy.
While Hill solely focuses on manufacturing strategies (Hill, 1985), the theory of
strategic alignment proposed by Gattorna, Chorn, and Day involves the organisa-
tion as a whole (Gattorna, Chorn, & Day, 1991). Gattorna, Chorn, and Day
recognise that the organisational structure needs to be changed until it aligns with
the market or customer segment. Moreover, Gattorna and Walters state that cus-
tomer service policies are often generic and fail to add any value or competitive
advantage (Gattorna & Walters, 1996). The authors propose that customers should
be segmented based on their service requirements, and that a differentiated
customer service response should be developed (Walters, 2006a). Walters devel-
oped the alignment of supply chain processes and market orientation further by
introducing a set of customer value drivers (Walters, 2006b). These customer value
drivers describe the customer’s demand chain profile, which covers the customer’s
requirements across his entire demand process. Walters furthermore suggests
relevant supply-chain response issues for the entire supply chain, from product
design to after-sales services (Walters, 2006a, 2006b). Although the alignment
theories recognise the importance of identifying the market’s needs and responding
to them, they remain very theoretical and do not explain how the supply chain
strategy could be operationalised in practice.
Christopher and Gattorna contributed to the alignment approach by introducing
distinct market segments and proposing specific supply chain types for each
segment (Christopher & Gattorna, 2005). The authors segment the market
according to customer buying behaviour, including the customers’ price sensitivity
and demand predictability. The supply chain strategies assigned to the segments
range from fully flexible, agile1 and lean2 supply chains, to continuous replenish-
ment (Christopher & Gattorna, Supply chain cost management and value-based
pricing, 2005).
Finally, Hjort, Lantz, Ericsson, and Gattorna provide a very specific segmenta-
tion example in the e-commerce business (Hjort, Lantz, Ericsson, & Gattorna,
2013). The authors propose segmenting customers based on their buying and
returning behaviour, and developing a differentiated returns service.
To sum up, the market-driven segmentation frameworks seek to understand
customers’ requirements and to address them through differentiated service

1
Agility includes strategies that exploit flexibility in order to respond to volatile markets (Naylor
et al., 1999).
2
Leanness refers to cost-efficient value streams that eliminate waste and ensure a level schedule
(Naylor et al., 1999).
2 Supply Chain Segmentation Scientific Frameworks 7

responses. Customer orientation is an effective means of serving a market and

creating value. For instance, a study showed that customer alignment in Supply
Chain Management (SCM) has a positive effect on business performance
(Skipworth, Godsell, Wong, Saghiri, & Julien, 2015). However, solely focusing
on customer requirements neglects other important criteria. Customers are not the
only dimension that brings different requirements; products also have different
characteristics that require a certain strategic fit.

2.2 Product-Driven Segmentation

In contrast to the market-driven segmentation approach, the product-driven

approach focuses on product and demand characteristics.
The product-driven approach was initiated by Fisher’s theory of functional and
innovative products (Fisher, 1997). According to Fisher, functional products are
stable demand products that have a rather long product life cycle (PLC), low
contribution margins, and low product variety. Innovative products are
characterised by unpredictable demand, a short PLC, high contribution margins,
and high product variety. Fisher matches different supply chains to the different
product types. Functional products should be served with a physically efficient
supply chain that focuses on decreasing cost. Innovative products, however, require
a market-responsive supply chain that enables responses to unpredictable demand.
This minimises stock-outs, forced markdowns, and obsolete inventory. This is
achieved by keeping sufficient stock of components or finished goods, by ensuring
short production lead-times, and/or by using modular product design and postpone-
ment—as well as other means (Fisher, 1997).
Lee proposes to segment products not only according to demand uncertainty
(i.e., low vs. high), but also by supply uncertainty (i.e., stable process vs. evolving
process) (Lee, 2002). The latter segmentation criterion adds the dimension of
supply to Fisher’s framework (Fisher, 1997). The stable supply process is
characterised by fewer breakdowns, fewer quality problems, more supply
resources, more reliable suppliers, more dependable lead-time, and fewer capacity
constraints. The evolving process depicts the contrary, including a greater vulner-
ability to breakdowns and more quality problems. By combining supply and
demand uncertainty in a 2  2 matrix, four corresponding strategies are derived.
Efficient supply chains are assigned to low supply and demand uncertainty. A risk-
hedging supply chain is proposed for high supply uncertainty and low demand
uncertainty. The risk-hedging supply chain uses inventory pooling and resource
sharing (e.g., sharing component safety stock with other companies), as well as
multiple sourcing to minimise risks due to supply disruptions. A responsive supply
chain deals with low supply uncertainty and high demand uncertainty. This supply
chain uses mass customisation processes in order to gain flexibility, for example
assemble-to-order (ATO) production policies. Finally, the agile supply chain is
used for high supply uncertainty and high demand uncertainty. This combines the
8 K. Alicke and M. Forsting

risk-hedging and responsive supply chains so that it can respond to demand changes
as well as minimise the risk of supply disruptions. Consequently, it covers uncer-
tainties on both ends of the supply chain.
Another framework that simultaneously addresses supply and demand charac-
teristics is the three-dimensional classification system, proposed by Christopher and
Towill (Christopher & Towill, 2002). The authors classify products according to the
product type (standard or special), its demand (stable or volatile), and its replen-
ishment lead-time (short or long). However, demand predictability and product type
tend to be related, i.e., standard products have predictable demand. Hence, the
authors only used the two dimensions of predictability and replenishment lead-time
in a later publication (Christopher, Peck, & Towill, 2006). They proposed a
continuous replenishment strategy for predictable demand and short lead-time,
e.g., one that uses point-of-sale (POS) data or vendor managed inventory. The
assembly or distribution of the product is postponed for unpredictable demand and
long lead-times, the lean strategies are used for the predictable and long lead-time
segment. The last segment, characterised by unpredictable demand and short lead-
times, requires an agile solution.
If needed, the tactics can be adapted for each product type (standard/special)
within the four strategies. In this way the third segmentation criterion of product
type can be taken into account. The authors provide an example of this further
differentiation in a case study. For the segment of unpredictable demand and short
lead-time, a company applied different supply chain strategies for standard and
special products. For special products, it employed an innovative agile pipeline and
postponement. For standard products, the demand was separated into base and surge
demand. While the base demand was fed by a lean pipeline, the unexpected top-up or
surge demand could be served in a quick response pipeline. Thus, one major
contribution in contrast to Fisher’s framework (Fisher, 1997) is that the authors
acknowledge the existence of standard products with volatile demand.
Christopher and Towill also developed the DWV3 market characteristics
(Christopher & Towill, 2000). This classification system also seeks to assign
lean and agile principles to different product types. The products are classified
according to five variables: Duration of PLC; time Window for delivery; Volume;
Variety; and Variability. These variables have different impacts on the required
supply chain strategy. A short PLC, for example, will require a rapid time-to-
market strategy. A short time window for deliveries and low volume will require
agile strategies. Products with a long time window for delivery and high volume
make lean strategies feasible. A high degree of SKU variety often goes in hand
with lower volume per SKU and higher demand variability, which then requires
agile strategies.
In summary, the product-driven segmentation frameworks seek to segment the
product range according to different product, demand, and supply characteristics.
These characteristics mainly include product type (standard/special) and demand
type (volatility and volume), but also comprise supply characteristics (replenish-
ment lead-time, and supply risk). While recognizing the differences between
2 Supply Chain Segmentation Scientific Frameworks 9

products and the impact these have on the required supply chain strategy, the
frameworks neglect the customer orientation that we discussed in Sect. 2.1.

2.3 Hybrid Market- and Product-Driven Segmentation

In the hybrid market- and product-driven approach, customer requirements and

product characteristics are jointly used to segment products.
Fuller, O’Conor and Rawlinson recognised that companies need to develop
market-specific supply chain strategies, but also recommend the use of product
characteristics (e.g., sales volume or unit value) when segmenting the product range
(Fuller, O’Conor, & Rawlinson, 1993).
Childerhouse, Aitken, and Towill made a major contribution to this approach
(Childerhouse et al., 2002). The authors integrated the concepts of DWV3 market
characteristics and OW/OQ into a single segmentation framework. First, they
employed only three of the five DWV3 variables (duration of PLC, volume, and
variety) when segmenting the product range. Then, they added a market-
perspective by linking the OQ/OW criteria to the segments. They applied the
framework to a case study in the lighting industry (Aitken, Childerhouse, & Towill,
2003; Childerhouse et al., 2002). In the case study, four clusters were defined. The
first cluster constituted products with a long PLC and low volume, where the OW
was availability. Availability was ensured by make-to-order (MTO) policies with
common raw material stocks and shared manufacturing resources. The second
cluster comprised products with a long PLC, high volume, and low variety. For
these products, the OW was short lead-time. Accordingly, a lean demand channel
and make-to-stock (MTS) policies were employed to leverage the high volume and
low variety of the products, and to ensure short lead-time. The third cluster
comprised all products with a short PLC, which were mostly innovative or
customised products. For this product segment, agile strategies were used that
designed and built the products in short development lead-times. The fourth cluster
contained products with long PLCs, high volume, and high variety. A “leagile”
strategy was used for these products. We briefly explain the meaning of “leagility”
in the following.
Leagility is a combination of agile and lean strategies which Naylor, Naim, and
Berry proposed (1999). Agility includes strategies that exploit flexibility in order to
respond to volatile markets. Lean refers to cost-efficient value streams that
eliminate waste and ensure a level schedule. Leagility integrates both ideas as
follows: upstream of the decoupling point, the supply chain is designed lean,
while the downstream supply chain is designed agile. Leagility thus focuses on
low cost in the upstream part of the supply chain, while at the same time achieving
downstream agility to ensure market-responsiveness. Mason-Jones, Naylor, and
Towill demonstrate the relevance of leagile strategies by linking the Leagility
paradigm to the OW/OQ criteria (Mason-Jones, Naylor, & Towill, 2000).
According to the authors, the OW in an agile supply chain is the service level
10 K. Alicke and M. Forsting

whereas the OW in the lean supply chain is cost. However, cost is also an OQ for
the agile supply chain and availability is an OQ for the lean supply chain.
Combining the advantages of both strategies is of crucial importance because
customers often require either the leanest agile pipelines or the most agile lean
pipelines.
Coming back to the lighting case study, the leagile strategy allowed the company
to exploit high volumes through lean strategies, but at the same time ensured
enough flexibility to serve a large product range (Aitken et al., 2003; Childerhouse
et al., 2002). However well defined these strategies may be at a certain point in time,
the authors also recognise that OWs are dynamic and may change throughout the
PLC. As a result, they suggest that companies monitor the OWs throughout the PLC
and shift products to the evolving strategy.
Aitken, Childerhouse, Christopher, and Towill further developed seven generic
delivery pipeline strategies (Aitken, Childerhouse, Christopher, & Towill, 2005),
based on a continuum of strategies (Lampel & Mintzberg, 1996), the one-size-does-
not-fit-all approach (Shewchuk, 1998), and postponement/speculation strategies
(Pagh & Cooper, 1998). These seven strategies range from pure standardisation
to pure customisation. The authors support their argumentation by retrospectively
fitting the four strategies of the lighting case study (Childerhouse et al., 2002) into
their framework. However, the authors do not provide an approach on how to
segment products and assign the strategies.
The demand profiling approach by Godsell, Diefenbach, Clemmow, Towill, and
Christopher is another framework that is based on the OQ/OW criteria and DWV3
market characteristics (Godsell, Diefenbach, Clemmow, Towill, & Christopher,
2011). The authors propose to develop a supply chain strategy customer-backwards
in a four-step approach. In the first step, customer requirements are analysed using
the OQ/OW criteria. The authors then segment customers based on common
groupings of the OQ/OW criteria. The third step understands the strategic response
from the supply chain. Finally, the last step develops a supply chain strategy aligned
to the customers’ requirements. However, the authors found that, understanding the
customer requirements by using OQ/OW criteria was not feasible in practice. In a
case example from the fast-moving consumer goods (FMCG) industry, managers
thought that all customers equally wanted the right product for the right cost in the
right quantity to be delivered to the right place. Instead of using the OQ/OW criteria
to create segments, they conducted a volume-variability analysis, singling out
volume and variability as the primary drivers of the DWV3 variables. All SKUs
were plotted in a 3  3 matrix that characterised SKUs according to their volume
and variability, ranging on a low-medium-high scale. The products in the resulting
nine demand profiles were assigned to lean or agile strategies, so that the target of
serving 70% of demand by a lean solution and 30% of demand by an agile solution
was met. This target was in line with the pareto-curve, which indicated that roughly
20% of the SKUs accounted for 80% of the demand. For the high volume SKUs that
accounted for the majority of the demand, lean strategies should be used; for the
slow movers, agile solutions were more suitable (Christopher & Towill, 2011). In
order to improve the decisions, Godsell, Diefenbach, Clemmow, Towill, and
2 Supply Chain Segmentation Scientific Frameworks 11

Christopher apply additional filters like margin, growth, or strategic alignment at

the SKU level. For example, a low volume, high variability product with low
margins was delisted. The authors suggest that this SKU “health check” is
performed quarterly as part of continuously reviewing supply chain strategy
decisions. Demand profiling at the individual SKU level also establishes the link
between customer segmentation and product characteristics (Godsell et al., 2011).
Instead of using the DWV3 market criteria to derive a segmentation approach,
Lovell, Saw, and Stimson analysed cost/performance trade-offs in the supply chain
(Lovell et al., 2005). The authors identified three primary cost drivers: throughput
level, availability, and product value density (PVD). These three key cost drivers
constitute a three-dimensional segmentation framework that can be depicted as a
cube. For all possible two-dimensional slices through the cube, the authors derived
segment-specific network design strategies. While this framework contributes a
different set of segmentation criteria, it does not provide a coherent strategy for all
segments: the segments that are difficult to deal with are eliminated. With regard to
availability and throughput level, they state that higher availability requires higher
safety stock. As a result, they recommend centralised inventory holding as it will
decrease inventory-holding cost. To offset higher transportation distances, faster
transport modes must be utilised. Higher throughput levels, on the other hand, make
decentralised inventory and slower transport options more feasible. Looking at
availability and PVD, the authors state that high availability and high PVD require
centralised inventory because of the high amount of tied-up capital. With regard to
the combination of throughput and PVD, the authors recommend decentralised
inventory for high throughput and low PVD. For low throughput and high PVD,
they recommend centralised inventory because it generates cost savings in inven-
tory holding costs. Products that require high availability but have low PVD are not
included in the strategy. According to the authors, companies should question
whether they should offer this type of product (Lovell et al., 2005).
In summary, the market- and product-driven segmentation frameworks seek to
segment products based on a combination of product characteristics and customer
requirements. Most of the frameworks use product characteristics like the DWV3
criteria to segment the product range and add OQ/OW criteria that consider
customer requirements.
The overview of segmentation frameworks makes it clear that the combined
market- and product-driven approaches have an important advantage over the other
two approaches because they integrate both perspectives. However, the proposed
frameworks have three main disadvantages. Firstly, only a few frameworks
consider the supply characteristics of the products’ components. In general, the
range of considered segmentation criteria is narrow. Secondly, many theories try to
find universally applicable, generic frameworks with fixed segments. From the
variety of industry case studies and proposed frameworks, it can already be seen
that there is no generic approach to supply chain segmentation. Circumstances
differ greatly among various industries and organisations. Hence, the frameworks
need to be individually adapted to the respective industry and organisation. Thirdly,
the derivation of segment-specific supply chain strategies needs to focus on
12 K. Alicke and M. Forsting

assigning a lean, agile, or leagile operational focus. Further strategic supply chain
elements are only considered to a smaller extent (e.g., supply planning, forecasting,
and distribution). We concluded that the literature lacks a holistic segmentation
framework that integrates all potential segmentation criteria as well as all potential
strategic responses across the entire supply chain.

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Chapter 3
McKinsey Supply Chain Segmentation
Framework

Knut Alicke and Maren Forsting

The academic literature lacks a segmentation framework that provides a truly

holistic approach to supply chain segmentation. In this chapter we introduce a
more holistic and practical supply chain segmentation framework that McKinsey
developed. The framework is based on the governing principle that segmentation
should add value to the supply chain without increasing its complexity cost
significantly. McKinsey achieves this by addressing customer and supply chain
requirements systematically in a three-step approach. In the first step, which we
describe in Sect. 3.1, McKinsey identifies and analyses all relevant performance
and cost drivers that could serve as segmentation criteria. At the end of the analysis,
McKinsey obtains a set of two to three segmentation criteria. The second step in
Sect. 3.2 is to analyse the SKU portfolio using these segmentation criteria. The aim
is to define the supply chain segments, to determine segment boundaries, and to
allocate the products to the segments. In Sect. 3.3 we elaborate on how to derive a
supply chain strategy for each defined segment. As companies and their products
and requirements differ widely, there is no universally applicable segmentation
strategy. Hence, McKinsey customises this three-step approach to each company.
Finally, in Sect. 3.4 we introduce a few key learnings and success factors that apply
to implementation.

K. Alicke
Supply Chain Management Practice, McKinsey & Company, Inc., Birkenwaldstraße 149,
70191 Stuttgart, Germany
e-mail: [email protected]
M. Forsting (*)
Cologne, Germany
e-mail: [email protected]

© Springer International Publishing AG 2017 15

M. Protopappa-Sieke, U.W. Thonemann (eds.), Supply Chain Segmentation,
DOI 10.1007/978-3-319-54133-4_3
16 K. Alicke and M. Forsting

3.1 Performance and Cost Drivers

McKinsey bases the segmentation of the supply chain on its performance and cost
drivers. These drivers provide a range of potential segmentation criteria and are
later used to define the segments. In this section we describe the most common
performance and cost drivers. For each driver we also provide an idea of how it
might necessitate a specific supply chain strategy; this emphasises its relevance as a
segmentation driver. Afterwards, we explain how to select the final segmentation
criteria from the list of all potential performance and cost drivers.
Performance and cost drivers are considered that cover the entire supply chain
from customer to supplier. Table 3.1 gives an overview of the product and demand
characteristics, channel and customer characteristics, and supply characteristics.
Product and demand characteristics are an important group of segmentation
drivers. Products differ with regard to their demand volume and volatility. Demand
volume affects how production is set up and inventory managed, and influences the
way a company interacts with suppliers. Demand volatility is an important driver
that affects the positioning of the decoupling point. For example, a high volatility
product might require an agile supply chain with the decoupling point positioned
close to the customer. This supply chain could respond flexibly to demand changes.
However, a product’s demand does not necessarily need to be either high/low or
volatile/stable. The demand volume and volatility can vary with the product’s stage
in the product lifecycle (PLC). It may be necessary to monitor the PLC stage and
the according changes in the demand characteristics.

Table 3.1 Segmentation criteria (author, based on McKinsey)

Segmentation criteria
Product & demand characteristics Demand volume
Demand volatility
Product lifecycle
Forecasting ability
Product complexity
Product value
Product relevance
Contribution margin
Channel and customer characteristics Customer type
Customer specifics
Customer priority
Customer requirements
Channel type
Order type
Supply characteristics Component supply flexibility
Component lead-time (LT)
Component supply reliability
Supply process volatility
Supply capacity constraints
Component value
3 McKinsey Supply Chain Segmentation Framework 17

The length of the PLC is also considered a segmentation criterion. For example,
products with a short PLC require rapid time-to-market, as opposed to products
with a long PLC.
Demand characteristics, especially demand volatility, also influence organisa-
tions’ ability to forecast. Ways to measure this forecasting ability include the
average forecast error, the average stock-out rate, and/or the average forced end-
of-season markdowns. Whether or not a company is capable of forecasting (espe-
cially in the face of highly volatile demand) strongly influences its replenishment
strategies inventory targets.
Various product characteristics also contribute to product complexity. Complex
products might come with higher handling requirements than less complex ones.
For instance, hazardous goods require special handling. Other goods might have
special regulations with regard to exporting and the tracking of batch and serial
numbers, or might require value-adding activities such as labelling. The number of
product variants and the level of customisation affect the production set-up, the
positioning of the decoupling point, and the forecasting accuracy. Moreover, the
production set-up is influenced by the complexity of the production process and
the raw materials and components, as well as production capacity constraints and
the process’s production risk/vulnerability. Another important product character-
istic is the product value or the product value density (PVD). The value density
influences the product stock risk, which has an impact on target inventory levels.
Furthermore, product relevance can affect the service level (SL) targets. For
example, critical products might be more relevant because they come with certain
availability requirements. The product’s contribution margin is also relevant.
Another group of segmentation drivers are the channel and customer charac-
teristics. The customer types (i.e., government or private) and specifics (i.e.,
demographics, region/country, lifestyle, and behaviour) influence the organiza-
tion’s relationship and interaction with the customer. Furthermore, the customer’s
priority level may also require a differentiated customer service offering. The
characteristics that help determine customers’ importance include: sales volume;
the customer’s profitability/margin; their market (focus/non-focus); and their
strategic importance. Regardless of the customer’s priority, different customers
might require different service level or lead-time agreements. For example, some
customers might depend on express deliveries, rush orders, or flexible delivery. The
channel (indirect, direct, online, value-added resellers, multi-channel) and order
types (single/multiple SKU(s) from the same or different SKU groups) are also
considered.
The last group of segmentation drivers is supply characteristics. These impact
the risk associated with supply. They include the component supply flexibility,
replenishment lead-times, supply reliability, supply process volatility, supply
capacity constraints, and component value. Supply characteristics influence the
choice of suppliers and the ways that the company interacts with suppliers to
minimise supply risk. Because the production process directly depends on supply,
these characteristics also impact production and vice versa.
18 K. Alicke and M. Forsting

Fig. 3.1 Analysis of key drivers (McKinsey)

We can see from the previous description that the list of potential segmentation
criteria is extensive, although these criteria do not claim to be exhaustive. As it is
impossible to consider and analyse all potential segmentation criteria, McKinsey
selects key characteristics that drive each company’s individual supply chain
performance and cost and reflect the organisation’s individual circumstances. It
then creates a grid based on the selected key characteristics. The key characteristics
are listed in the columns of the grid, and the supply chain elements in its rows (see
Fig. 3.1). In this example, the supply chain elements include overall set-up and
distribution, forecasting and demand planning, customer management/SL,
inventory management, production set-up, production planning, scheduling, and
capacity/supply planning. The company then completes the fields in the grid with a
description of the optimal supply chain design for the combination of each element
and characteristic. The key shapers of the designs are the characteristics, which
drive the difference between the designs for the supply chain elements.
In the example in Fig. 3.1, the following three characteristics are considered:
country type, demand type, and volume type. Comparing the different combina-
tions of a key characteristic with each supply chain element (i.e., picking a row and
comparing the different columns in that row) highlights the main drivers of supply
chain design. In this case, they are demand type and volume type. Because the
design of forecasting and demand planning does not differ between large and small
countries, country size cannot be a key performance driver.
After the analysis of performance and cost drivers is complete, the organization
has a set of two to three key drivers that will serve as segmentation criteria.
3 McKinsey Supply Chain Segmentation Framework 19

3.2 Supply Chain Segments

After obtaining the segmentation criteria, the supply chain segments are defined
based on these criteria. In this section we explain how McKinsey determines the
segments and how they allocate products to these segments. We then explain
methods to assess segment performance and set target KPIs.
First, the organisation defines the number of categories per segmentation
criterion. For example, if the segmentation criterion is demand volume, the scale
could be segmented into three categories (e.g., low, medium, and high).
After that, the parameter value that marks the boundaries between the segments
is defined. These segment boundaries set the value up to which a product is assigned
to a specific segment. The complexity of the segment (i.e., the number of SKUs)
should be low. This ensures that one segment contains similar products for which a
suitable strategy can be derived. At the same time, the sales volume of the segment
should be high enough for the segment to have significant impact. To analyse the
optimal breakpoint, the parameter value of the threshold is gradually increased. For
each parameter value, the number of SKUs and the volume share for the segment is
calculated and evaluated. Figure 3.2 shows an example of the analysis’ outcome.
The volume share on the y-axis is plotted against the threshold on the x-axis. The
number of SKUs is noted below. Optimally, the breakpoint should be set at the
tipping point of the curve. At this point, a further increase of the threshold would
not significantly increase the volume share of the segment anymore, but rather
increase the number of SKUs and thus complexity.

Fig. 3.2 Analysis of segment boundaries (McKinsey)

20 K. Alicke and M. Forsting

A grid is then set up that shows all possible combinations of the segmentation
criteria. Although creating differentiation is the main idea of supply chain segmen-
tation, the segmentation should be simple enough to allow for a feasible, pragmatic
solution. Each segment needs to be large enough to have an impact.
The next step is to define segments by clustering the elements of the grid. The
following five principles serve as a helpful guideline.
1. Segments must have significant differences in the way the supply chain should
be designed. More than one of the strategic elements (which we will discuss in
Sect. 3.3) should differ.
2. Segments must be mutually exclusive. If an attribute could be applied to
products in multiple segments, then this should be a variation or filter applicable
to any segment, rather than a segment in itself.
3. Segmentation must be kept simple in order to be understandable and applicable.
4. Segmentation must be universal. Segments and their strategies should be
interpreted equally by different functions like Purchasing, Sales, and Logistics.
Furthermore, segmentation should serve the majority of managers. If there are
outlier products that represent a small volume share and are managed by small
groups of managers, these outlier products should not be included in the
segmentation.
5. The segmentation must create significant value in terms of service improve-
ments or cost reductions.
Once the segments are defined, the SKUs are allocated to the segments. Each
segment can be characterised in terms of sales volume, number of countries/
markets, and number of SKUs (see Appendix A for an example).
At this stage of the process, a matrix showing the supply chain segments, based
on the two to three segmentation criteria selected earlier, is defined. It includes the
allocation of the SKUs to the segments.

3.3 Supply Chain Strategy per Segment

After the segments are defined, a differentiated supply chain strategy is developed
that addresses the needs of each supply chain segment, while taking the strategic
implications for all supply chain elements into account. The strategy is based on:
(a) Segmenting and integrating suppliers,
(b) Producing according to segment needs,
(c) Designing the distribution network to balance service needs and cost, and
(d) Planning and forecasting according to segment needs.
In the following section we first provide a comprehensive overview of these
strategic elements (see Table 3.2). However, the strategic elements are carefully
selected when differentiating segment strategies and only some may be chosen.
Because each company has certain circumstances, it is not always possible to
3 McKinsey Supply Chain Segmentation Framework 21

Table 3.2 Overview of strategic elements (author, based on McKinsey)

Supply chain element Strategic element
Supply Contract type
Ordering (frequency, volume)
Replenishment delivery
Supply planning
Single/dual/multiple sourcing
Production Product design and portfolio
Operational focus (efficient, responsive)
Production strategy (MTS, MTF, DTO, MTO, ATO)
Production planning
Inventory levels
Distribution SL
Customer order lead-time
Delivery reliability rates
Frequency of delivery
Distribution network
Transportation modes
Delivery type (direct/indirect)
Delivery speed
Order management
Planning & forecasting Forecasting time horizon
Forecasting level
Forecasting method

change every element of the supply chain. For example, it may be impossible to
restructure the production network if there is no budget for setting up new plants.
Appendix B offers an example of a differentiated supply chain strategy.
In the rest of this section we select some strategic elements of Table 3.2 and
cover them in detail.
In terms of supply, the delivery lead-time and frequency varies per supply chain
segment. Segments with rather stable demand could align their delivery frequency
with the production plan through standardised deliveries in a fixed schedule. For
segments with critical products that require a responsive strategy, short committed
lead-times and/or short-term flexible deliveries are more appropriate. However, it
may not always be possible to agree on short replenishment-delivery lead-times
with a supplier. In these cases, the downstream production lead-time is longer than
the supply replenishment lead-time and a sufficient component/raw material
inventory needs to be created. It is also important to monitor the supplier’s
reliability in fulfilling delivery agreements.
The general production set-up should be differentiated based on segment needs.
This includes the definition of product design and portfolio, operational focus,
production strategy, production planning, and inventory levels.
With regard to product design and portfolio, organisations need to make
fundamental decisions about the degree of customisation and number of product
variants. Although a differentiated supply chain strategy helps manage complexity,
it does not justify maintaining non-value-adding complexity. The product portfolio
22 K. Alicke and M. Forsting

should be rationalized and needless product variants eliminated. The SKUs that are
going to be delisted should be verified by sales and marketing. Implementing the
consequences of these decisions in production requires close coordination with
operations.
Late customisation and software-based customisation is often an appropriate
way to manage the remaining complexity. Late customisation means that the point
of customisation is moved closer to the customer, which increases agility. A
platform product-design approach should also be introduced to manage complexity.
Another fundamental strategic decision is the selection of an operational focus
on either efficiency or flexibility. An efficient supply chain optimises utilisation and
minimizes cost, even if this reduces the supply chain’s speed. This strategy is
suitable for functional products with relatively low margins and predictable
demand. For innovative products with volatile demand and higher margins, a
responsive supply chain is more suitable. The focus on flexibility ensures that the
supply chain can adapt to rapid demand changes. These two basic supply chain
strategies, also proposed by Fisher, represent the extremes on a scale (Fisher, 1997).
However, a continuum of strategies exists because many products combine
functional and innovative traits. Such products require more customised strategies.
The operational focus does not have to be on just cost or speed, but can align the
production strategy, production planning, inventory levels, and the general set-up of
the production and distribution network. The following paragraphs explain these
elements in more detail.
The production strategy relates to the positioning of the decoupling point in the
supply chain. The decoupling point is the point where a product receives its final
customisation based on the order.
For make-to-stock (MTS) and make-to-forecast (MTF) policies, the decoupling
point is placed at the finished product level. For MTF-driven production, the
replenishment is triggered by a forecast. For MTS-driven production, the replen-
ishment is pull-based and triggered by a sales order. MTS should be used for stable
demand products with low forecast accuracy, while MTF fits products with fluctu-
ating demand patterns that can be captured in a forecast.
In contrast to the MTS and MTF production strategies, design-to-order (DTO),
MTO, and ATO production strategies place the decoupling point and final product
customisation further upstream in the supply chain. MTO and DTO production
strategies place the decoupling significantly further upstream. In DTO, the company
starts to design the product only when the order comes in. In MTO, the company has
already designed the product, but starts to manufacture it when the order is placed.
The final customisation can be postponed if the decoupling point is moved closer to
the customer. The positioning of the decoupling point determines the opportunities
to postpone the final customisation. For example, an ATO production strategy based
on semi-finished stock can postpone customisation. Because products are assembled
to order, this strategy avoids high inventory levels. This is especially important for
product segments with high demand volatility, which require high safety stock.
Product segments with a high degree of SKU variety also result in high inventory
levels because each product variant has to be kept in stock. Final product
3 McKinsey Supply Chain Segmentation Framework 23

Fig. 3.3 Production wheel

(Mckinsey)

customisation should be postponed for such products because this helps manage
inventory levels.
However, the production strategy depends not only on opportunities for post-
poning customisation, but also on the value of raw materials, components, and the
final product. The decoupling point also depends on the customer’s requirements. If
a customer requires short lead-time, the decoupling point needs to be positioned
closer to the customer. Decoupling at positions after a long lead-time process also
increases the overall process stability, which decreases downstream inventory
requirements. The positioning of the decoupling point also influences the customer
order lead-time.
Production planning and scheduling should be aligned with the segmentation
approach. In the case of stable demand, production planning and scheduling is not
required if a ‘production wheel’ approach is used. Based on the demand, fixed slots
are allocated in a fixed sequence. The slots need to be reviewed frequently, but
provide high predictability and stability during production. This concept is shown
in Fig. 3.3.
Furthermore, inventory levels need to be defined for each segment. Segments
with critical products, volatile demand, high supply risk, or short customer order
lead-time require higher inventory levels. Segments with products in the late stages
of their PLC require strict management of end-of-life-inventories to avoid inven-
tory obsolescence.
When defining the strategy for the latter two elements—production planning
and inventory levels—inter-dependencies between inventory levels, production
capacity, and make-frequency need to be considered and optimised.
A well-defined distribution and sales strategy balances distribution costs with
customer requirements. The customer requirements include service level,
customer-order lead-time, delivery reliability rates, and delivery frequency. The
distribution cost drivers are items like the set-up of the distribution network,
transportation modes, delivery types (direct/indirect), and delivery speed. The
order management processes, including order taking, minimum order quantities
24 K. Alicke and M. Forsting

(MOQ), first-in-first-out order processing, and spot order management, are also
considered.
Planning and forecasting processes should be as standardized and simple as
possible for each segment. By evaluating the purpose of the forecast (e.g., to predict
market changes), the company can determine how accurate the forecast needs to
be. The forecasting time horizon (e.g., weekly/monthly/seasonal), level (e.g.,
component, SKU, and product group), and method (e.g., bottom-up/top-down,
directional/conventional, and statistical/manual) are chosen based on the required
accuracy.
At this stage of the process, the organisation should have obtained an optimal
strategy mix for each segment. This strategy mix should address segment-specific
needs and differentiate segments sufficiently. At the same time, it should keep
complexity low.

3.4 Lessons Learned and Success Factors

In this section we summarise some lessons learned in defining a segmentation

strategy. However, defining a supply-chain segmentation strategy is just one step in
successfully improving and optimising a company’s supply chain. Implementing
the segmentation approach the next—and major—challenge on the way to success
because it entails major changes. We also discuss some success factors for the
implementation. Finally, we highlight the value that the McKinsey segmentation
framework adds to the frameworks discussed in Chap. 2.
An important lesson learned is that the segmentation should address business
needs and support the existing business strategy. It is imperative that the managers
developing the supply chain strategy understand the business, i.e. the product range,
the supply base, and the customers’ requirements. Weaknesses that currently
impede the attainment of strategic goals must also be identified. These managers
should also keep in mind that not all customer requirements need to be fulfilled to
the same extent. While some requests are necessary to meet threshold requirements,
others are not essential and customers can be satisfied without them. Managers need
to identify the real customer requirements and address them proactively in order to
not over-deliver or deliver on incorrect services.
The segmentation strategy should be kept as simple as possible by introducing a
limited number of two to three segments—and should be continuously reviewed to
reflect a changing environment.
The success factors for the implementation of the segmentation strategy
include:
(a) Governance and stakeholder management,
(b) Effective programme management, and
(c) Integration in normal processes and working mode.
3 McKinsey Supply Chain Segmentation Framework 25

Implementing a segmentation strategy requires effective governance and

stakeholder management. A senior business sponsor should drive the implemen-
tation of new supply chain processes. This conveys importance, visibility, and
acceptance of the proposed change in and outside the organisation. Internal and
external stakeholders should cooperate closely. For instance, this can be achieved
by actively involving suppliers in the implementation of the new, segmented
processes. Internally it is crucial to foster collaboration, e.g. between Commercial
and Operations. Sound communications is also crucial in ensuring successful
implementation.
Effective programme management is essential to the implementation of a
segmentation strategy. A clear, well-defined project plan needs to be present
throughout. The organisation can use this plan to monitor and manage the project.
All other efforts that affect the supply chain need to be aligned and monitored
closely in an integrated reporting system. This reporting system would document
the impact of the change programme at monthly and quarterly financial reviews.
Companies should also systematically address potential gaps in their employees’
skills.
Finally, it is crucial to integrate the segmentation practices into the
company’s normal processes and day-to-day working mode. Every business
function should differentiate their KPIs by segments rather than tracking the
segmentation performance in a parallel system. Very important for the success is
to Establishing a feedback loop that continuously improves the solution is incred-
ibly important if the implementation is going to succeed and the segmentation is
going to become part of the way the organisation does business.
Concluding the description of the McKinsey segmentation framework, we
discuss what value this framework adds to previous academic research. In the
literature review in Chap. 2, we stated that there are some major weaknesses in
the frameworks proposed so far. These issues included: (1) a narrow range of
segmentation criteria; (2) an inability to customise the frameworks; and (3) a
focus on assigning lean or agile strategies. The segmentation framework developed
by McKinsey addresses these weaknesses in three ways: (1) it includes a wider
range of segmentation criteria, for instance supplier characteristics; (2) it describes
an approach for defining unique segments, as segmentation criteria and segment
boundaries are determined for each case; and (3) it comprises a more specific
supply chain strategy that goes beyond defining an operational focus (lean/agile)
to consider planning, forecasting, and/or sourcing activities.

Bibliography

Fisher, M. L. (1997). What is the right supply chain for your product? Harvard Business Review,
75(2), 105–117.
Chapter 4
Philips Segmentation Case Study

Sanchay Roy, Knut Alicke, and Maren Forsting

In the following chapter, we provide a concrete example of a successful supply

chain segmentation project that was implemented by Philips.1 Section 4.1 provides
an overview of the company background. Section 4.2 discusses specific challenges
and the initial situation. We elaborate on the segmentation criteria in Sect. 4.3 and
explain the supply chain strategies for each segment in Sect. 4.4. Finally, we discuss
the implementation challenges and key factors for success in Sect. 4.5 and sum-
marize the benefits for Phillips in Sect. 4.6.

4.1 Company Background

Philips is one of the largest electronics companies worldwide and is headquartered

in Amsterdam. The company was founded in 1891 in Eindhoven, the Netherlands,
by Gerard and Frederik Philips. In 2014, Philips generated an annual sales volume
of €21,391 million and a net income of €411 million (Philips, 2015a). The founders
initially produced light bulbs, following the commercialisation of electricity. Over

1
This chapter is based on internal sources from Philips.
S. Roy
GM Continuous Improvement, Shell International, Rijswijk, The Netherlands
e-mail: [email protected]
K. Alicke
Supply Chain Management Practice, McKinsey & Company, Inc., Birkenwaldstraße 149,
70191 Stuttgart, Germany
e-mail: [email protected]
M. Forsting (*)
Cologne, Germany
e-mail: [email protected]

© Springer International Publishing AG 2017 27

M. Protopappa-Sieke, U.W. Thonemann (eds.), Supply Chain Segmentation,
DOI 10.1007/978-3-319-54133-4_4
28 S. Roy et al.

Fig. 4.1 Lighting market (Philips)

the years, more products and innovations such as X-rays, TV sets, electric shavers,
etc. were introduced (Philips, 2015b). Philips strives to attain its vision of making
the world healthier and more sustainable through innovation. Today, the company’s
product portfolio covers products in the sectors of health care, consumer lifestyle,
and lighting. The segmentation in this case study was carried out in the lighting
sector.
Philips Lighting generates 32% of the group’s sales and is the largest lighting
company in the world. Philips sees three major trends in the lighting industry. First,
the market will grow by 3–5% per annum between 2013 and 2018 because
population growth and urbanisation will create the need for more lighting. Second,
resource scarcity and climate change will increase the need for more energy-
efficient lighting. Third, the shift from conventional to light-emitting diode
(LED) lighting will drive the need for digital lighting. The Philips Lighting sector
covers Light Sources and Electronics (e.g., light bulbs), Professional Lighting
Solutions (e.g., road lighting), and Consumer Luminaires (CL). In this case study,
we will focus on the CL branch. CL accounts for 6% of Philips’ total lighting sales
(Philips, 2015a). The CL business has historically had a large sales base in Europe
(51% of its sales). However, the Asian market is growing fast and the renewal of the
North American sales channel is creating opportunities. Furthermore, CL represents
31% of the total lighting market. The significant growth rates and the large but
fragmented market (see Fig. 4.1) create an opportunity for leadership. Philips aims
to be the leader in the CL sector.

4.2 Challenges

However, Philips faced several challenges regarding its supply chain performance
in the CL sector. These included: (a) a complex distribution structure; (b) high
complexity in its portfolio; (c) low forecast accuracy, and (d) unreliable suppliers.
4 Philips Segmentation Case Study 29

First, the distribution structure led to a complex material flow. Philips sourced
nearly 100% of the products from China and delivered them to a central distribution
centre (DC) in Belgium. A forecast was used to send the products out to the regional
distribution centres (RDCs) and then to customers.
Because Philips shipped the products by sea freight, shipping to Europe took 4–5
weeks. However, Philips’ customers demanded a delivery lead-time of 2–7 days.
Consequently, Philips had to keep the products on stock in order to ensure timely
delivery. Philips operated 12 warehouses (one DC and eleven RDCs) in Europe and
every warehouse stored every product. This resulted in high inventories and
required frequent inventory rebalancing between the RDCs. The complex distribu-
tion structure had two major consequences: (1) every delivery had three to four
touchpoints before it arrived at the customer’s store; and (2) inventory levels were
very high.
Moreover, the high portfolio complexity of approximately 15,000 SKUs aggra-
vated the high inventory risk. In addition, Philips did not employ any standardised
phase-out process for products it no longer manufactured. Because of this, it
incurred penalties for missed deliveries and had multiple long-tail SKUs that
were hard to manage.
The low forecast accuracy (30–40%) also caused significant problems. The
main drivers of this issue were the lack of an integrated planning process, the
short product life cycles (PLCs), and the necessary promotional activities. Despite
this uncertainty, Philips used the forecast to manufacture its products and distribute
them to the RDCs. Because of the low forecast accuracy, the demand had already
changed by the time the products arrived at the RDCs. This led to stock out
penalties from customers and obsolete inventory.
Unreliable suppliers intensified the problem of high inventory levels and stock
out situations. Sometimes, the actual delivery lead-time was up to 7 weeks longer
than the agreed delivery lead-time. This increased the need for high inventory levels
and caused continuous crisis management during peak seasons.
The challenges had a direct negative impact on three major types of perfor-
mance. Firstly, Philips had to deal with very high inventory levels2—a turnrate3 of
three. Secondly, the supply chain cost4 was nearly double that of the competitors’
supply chain cost of 8–12%. Thirdly, the customer service level5 (SL) of only
60–70% was extremely low. Three of the key customers even considered delisting
Philips, which required an intervention from the CEO of Philips Lighting.

2
Inventory levels were measured in percent of material sales.
3
The turnover rate indicates the number of times that the inventory is sold per period. Slowly
turning inventory has two main negative impacts: inventory holding costs are higher and the
company is less responsive to changing customer requirements.
4
The supply chain cost, measured in percent of sales, included import duties, warehousing,
transportation, and administrative cost.
5
The service level was measured as “on time in full” (OTIF) delivery. This measure indicates how
many orders are delivered on time and without any articles missing.
30 S. Roy et al.

To sum up, the initial situation was characterised by high costs, low customer
service levels, long lead-times, and high, often incorrect inventories. Because the
supply chain did not support the performance Philips required, it became clear that
the set-up needed to be changed. Philips decided to set up a supply chain transfor-
mation program. The project’s original objective was to restructure the network.
Philips’ goal was to improve the complex material flow and reduce the number of
touchpoints. The overall aim was to balance service, cost, and inventory. However,
when looking at the material flows through the network, Philips made an important
observation: different material flows had different requirements. To be precise, the
material flows required a different focus on cost or service. Consequently, a
one-size-fits-all approach was insufficient for the current business situation. The
idea for a segmentation approach was born.

4.3 Segmentation Criteria

Philips decided to follow a segmentation approach that would meet the challenges
that the CL sector was facing. Defining segmentation criteria was the first step in
segmenting the supply chain. In this context, Philips had to consider and understand
all the parameters influencing supply chain performance. These included the cus-
tomers and their requirements, e.g., lead-time and service level requirements. It also
focused on product characteristics like the complexity of the product portfolio,
product margins, the product’s current position in the PLC, and its demand volume,
seasonality, and volatility. Philips also paid attention to the value chain set-up,
including plants, suppliers, and the distribution network. Production and supply
planning, forecasting, and sales and operations planning (S&OP) were also param-
eters. Finally, Philips considered additional enablers like the IT-systems, the supply
chain organisation, and the capabilities of the supply chain team.
Philips then identified the parameters that influence the supply chain perfor-
mance, but are difficult to change. These parameters needed to be treated as the
baseline for segmentation—the segmentation criteria—and used to develop the
segmentation strategy. The two segmentation criteria are product type and customer
channel.
Philips differentiates the CL portfolio into five major product types.
Mainstream functional luminaires are indoor lighting products that fulfill the
basic function of providing light (e.g., a basic ceiling light). These luminaires are
global products because they are designed the same way for all markets and can
only be differentiated by their price, the amount of light emitted from the light
source—its lumen—and their power. Consequently, this product type is extremely
price-sensitive. Customers do not find many points of differentiation between
different brands and focus on comparing prices. The supply chain for these products
therefore needs to function on a competitive cost level.
For indoor mainstream decorative luminaires, the decorative element of the
product is more important than the luminous output. The luminaire is supposed to
4 Philips Segmentation Case Study 31

look equally nice if not switched on. For example, this could be a nice lighting over
the dining table. Customers in different regions of the world have different tastes
with regard to decorative elements. Thus, the product design depends on the
specific market. As a consequence, this product type is regional and characterized
by a huge variety in the product portfolio.
Outdoor decorative luminaires comprise decorative lighting products that are
used outside of the house, e.g., garden luminaires. This product type is also regional
and also has a huge product variety. Demand is characterised by two major peaks in
spring and autumn.
Disney luminaires are LED-based lighting products with Disney characters. The
main lighting module for these luminaires stays constant globally. The only com-
ponent that changes between the countries is the power supply.
Connected luminaires are also globally constant products. This LED-based
luminaire has additional features: the user can change the colour temperature, the
brightness, or the red green blue (RGB) value of the light. On top of the light
engine, this product is provided with connectivity. The user can control the lumi-
naire, for example with a smartphone, tablet, or remote control.
These five product types are distributed in different customer channels. The
customer channels have different lead-time requirements. To ensure that the
requirements are adequate, Philips reviewed the lead-time in a customer survey
and compared them with competitors’ lead-times.
The Do-It-Yourself (DIY) store is the main channel and has the majority of sales.
This channel is characterised by high price pressure and short lead-time require-
ments of 2–7 days.
The brand stores channel is similar to the DIY channel and also has lead-time
requirements of 2–7 days.
The lifestyle and specialists channel serves stores that specialise in luminaires
and consequently sell a wide range of products. These stores are small and order
their luminaires in an irregular pattern, with a lead-time requirement of 14–21 days.
The store channel comprises all stores that sell Disney and connected lumi-
naires. As these are specific products, the lead-time is individually based on the
order.
To sum up, Philips identified two main segmentation criteria: (a) product type
(mainstream functional, mainstream decorative, outdoor decorative, Disney lumi-
naires, connected luminaires) and (b) customer channel (DIY, brand store, lifestyle
and specialists, store).

4.4 Segmentation Strategy

Philips derived a segmentation strategy based on the two segmentation criteria of

product type and customer channel. The product types flow mainly into specific
customer channels (see Fig. 4.2). Philips sells mainstream functional products to
DIY customers. Mainstream decorative and outdoor decorative products flow to
32 S. Roy et al.

Fig. 4.2 Supply chain segments (author, based on Philips)

lifestyle and specialist stores as well as to brand stores and large DIY customers.
Disney and connected luminaires flow to the store channel. This led to the devel-
opment of three segments with distinct supply chains, Buy, Regional, and Global.
The three supply chain segments were designed following a customer-back
approach based on the customers’ requirements. Consequently, Philips placed the
decoupling points such that the required delivery lead-time could be met (see
Fig. 4.3). Downstream of the decoupling point, Philips designed a responsive
supply chain. Upstream of the decoupling point, Philips designed a lean supply
chain.
Philips used the Buy supply chain for mainstream functional luminaires that
were delivered into the DIY channel. These products have a longer production lead-
time than the required customer-delivery lead-time of only 2–7 days. Because of
this, the mainstream functional luminaires had to be kept on stock in order to fulfil
the customers’ requirements. In the initial situation, the DIY channel lacked an
efficient design. The inventory was replenished based on forecasts with poor
forecast accuracy. This led to obsolete inventory and lost sales. To avoid this and
to control the inflow a supermarket principle was introduced. Products are only
replenished when an order comes in and products are sold. As the mainstream
functional products are very basic products with few elements it was decided to buy
them instead of manufacturing them. Consequently, Philips did not have many
opportunities for differentiating its brand. The prices in this segment, especially for
LED-based luminaires, were also rapidly decreasing.
4 Philips Segmentation Case Study 33

FG Component
Inventory Inventory
Segment Buy
1. Mainstream • Make To Stock
Shipping &
funconal (Global) Component sourcing Assembly DIY • Customer LT : 2-7 D
distribuon

10 weeks

2. Mainstream
deco
(Regional) Regional Lifestyle & • Make To Order
specialist • Customer LT : 14-21 D

3. Outdoor deco Component sourcing Assembly S&D

(Regional) DIY/Brand • Make To Stock
Store • Customer LT : 2-7 D
3 weeks

4. Disney
(Global)
Global
Shipping & • Make To Stock
Component sourcing Assembly Store • Customer LT = tbc
distribuon
5. Connected
luminaires
8 weeks
(Global)

Accommodate uncertainty (lowest cost)

Fig. 4.3 Supply chain strategies (Philips)

The Regional supply chain was used for regional products, both mainstream and
decorative. These products are distributed into the lifestyle and specialists, the DIY,
and the brand stores channels.
The regional products are characterised by small quantities but large product
variety. In the former value chain set-up, these products were produced in China
and kept on stock in the European RDCs. The production in China was problematic
because the demand peaks of the outdoor luminaires coincided with the Chinese
New Year, which led to capacity problems. Furthermore, typhoons caused down-
times in production. It did not make sense to keep these products on stock in the
European RDCs because of the products’ low volume and high variety; this caused
high inventories and obsolescence. At the same time, it was not possible to make
these products to order because the shipping from China to Europe already took
longer than the required customer order lead-time of 14–21 days. Airfreight was too
expensive. Philips decided to move the assembly of the product closer to its market
by building a new production facility in Poland. An assemble-to-order (ATO)
production strategy was introduced, based on a platform-product-design approach.
Philips kept the light source, fixtures, and cables common across all products and
only varied the visible, decorative part of the luminaire. The common parts were
sourced from China based on forecasts and kept on stock as these parts are not prone
to obsolescence. The ordering of components was decoupled from the ordering of
finished goods (FG). The decorative parts were made locally in the new plant in
Poland, or sourced from local suppliers. This platform-product design approach
allowed Philips to postpone the final product configuration. Assembly in the
warehouse was triggered by the customer order, just before the delivery. As a
consequence, the purpose of the RDCs changed from pure stocking points to
warehouses with final assembly/localization. The total cost of ownership of the
34 S. Roy et al.

products made in Europe was as competitive as products made in China. Conse-

quently, the production of the entire decorative portfolio was shifted from China to
Poland. The ATO production strategy and the insourcing of the production back to
Europe enabled Philips to respond flexibly and quickly to changes in demand and
to serve the market with much shorter lead-times.
However, the big DIY customers and brand stores required a shorter delivery
lead-time of only 2–7 days. For these customers, Philips kept the products on stock,
using the same supermarket principle as in the Buy supply chain.
The Global supply chain delivered Disney and connected luminaires to the store
channel. As Disney and connected luminaires are very specific products, the lead-
time is based on the individual customer’s requirements. However, the products
have a long production lead-time. As a consequence, these products need to be
made to stock to avoid long customer-order lead-times. It was decided to source the
core light engine for Disney and connected luminaires from China and Poland and
to keep it as component inventory enabling postponement—the replenishment of
the light engine was based on forecasts and decoupled from the ordering of FG. As
this product segment is still growing, the production was placed in both China and
Poland. This way, the production capacity could be scaled up as needed.
With the development of three distinct supply chains, Philips acknowledged the
diverse requirements of different product types and customer channels. The Buy
Supply Chain meets short delivery lead-time requirements from MTS strategies but
controls the inventory inflows with a supermarket principle. The Regional Supply
Chain avoids high FG inventories of regional, high variety products by using ATO
strategies and postponing the final product configuration. The Global Supply Chain
meets short delivery lead-time requirements from MTS strategies but leverages the
global product nature by building common component stock and decoupling the
component ordering from FG ordering. In essence, Philips succeeded in designing
differentiated supply chains based on an understanding of the products’ nature and
customers’ requirements.

4.5 Steps to Success

Designing differentiated supply chain strategies for different segments was only the
first step toward success. As Philips implemented the segmentation approach, it had
to deal with a number of challenges. The key enablers for success included the
restructuring of the distribution network, the optimisation of the supplier base, the
set-up of a new production facility, the establishment of a supermarket pull-
principle, and working on the mind-set of the involved teams.
As part of the implementation of the segmentation strategy, Philips had to
restructure its distribution network. The former distribution network with
12 warehouses in Europe was far from optimal. Before the restructuring, all
goods sourced from China were shipped to the central DC and from there to the
RDCs. Philips decided to split every order and send the goods directly to the RDCs.
4 Philips Segmentation Case Study 35

Inventory balancing took place before the shipment, based on improved forecast-
ing. This reduced the orders’ and products’ lead-times and their additional handling
in the central DC. Philips also closed down 9 of the 12 warehouses. The remaining
three RDCs were in Poland, the Netherlands, and France. These RDCs cover the
market in Europe and can ensure the right lead-time performance.
The restructuring of the distribution network had several consequences. The
handling cost in China increased because orders were no longer shipped to a central
DC but to three RDCs. However, the trade-off was still in favour of the new
distribution structure. Closing nine warehouses also led to conflicts and discussions
with the unions. To help manage this situation, Philips kept up consistent commu-
nication with key stakeholders; the messages showed how the decisions improved
the situation, e.g., the increase in customer service level from 60 to 97%.
Finally, Philips optimised its supplier base, reducing the number of suppliers
from 50 in 2013 to 35 in 2015 and continues to work on improving suppliers’ lead-
time and reliability.
Philips also had to overcome some obstacles as it set up its new production
facility in Poland. First, it had to develop a sound business case to move the
production from China to Europe. Local component suppliers in Poland had to be
found, qualified, and scaled up. Due to low-cost competition from China, most
suppliers in Poland, Hungary, and Romania had already shut down their facilities.
Finding and persuading partners to build a local supply base, even though Philips
would source some components from China, was a major factor in its success.
The establishment of a supermarket pull-principle helped ensure that inven-
tory was replenished based on consumption, not forecasts. This decreased internal
sources of variation and steadied the supply chain with stable orders, reducing the
bullwhip effect. One challenge was keeping the sales team, an important stake-
holder, on board. It was essential to understand their concerns and to show that their
forecasts were used for supply planning. Sharing their forecasts with the suppliers
enabled better component planning and production planning preparations.
Finally, working on the staff’s mind-set turned out to be essential to the success
of the entire transformation. Philips started a survey among the team members and
used it to calculate a net promoter score. This score answered the question of “how
many employees would promote or recommend Philips CL.” The survey showed
that people were frustrated about the performance of the organisation. It was
important to involve the employees and to carry out a sound change process. Philips
communicated the importance and the benefits of the new system in face-to-face
sessions that allowed open dialogue and feedback from the teams. The
non-attendance of some S&OP market leaders in important meetings posed yet
another challenge. Having the CEO, CFO, and the global Supply Chain Manage-
ment leader in the meetings created enough pressure for the S&OP market leaders
to start collaborating and join in. Another crucial mind-set change—from serving
established processes to serving customer requirements—took time. Philips also
dedicated itself to improving the capabilities of the SCM team members, e.g., with
training. All SCM team members received a Lean or Green Belt training that
created a common language of improvement.
36 S. Roy et al.

In summary, Philips met the following key challenges: restructuring the distri-
bution network, optimising the supplier base, setting up a new production facility,
establishing a supermarket pull-principle, and working on the mind-set of the
involved teams. Because it mastered these steps to success, Philips not only
improved its supply chain, but also increased employees’ capabilities and
satisfaction.

4.6 Outlook

Philips achieved major benefits by implementing the segmentation strategy. These

benefits were measured by three main KPIs: service level, inventory reduction, and
supply chain cost.
Philips was able to increase its service level from 60 to 95% in Europe. The key
European DIY customers even had a fill rate of 99%. By providing a consistently
high service level and proving the positive changes to the DIY customers, Philips
averted the delisting discussions. Inventory was reduced by roughly 30% with the
potential for further reductions.
Philips cut supply chain costs by nearly half, with a significant impact on net
income. By 2018, Philips wants to achieve a further cost reduction of 30%. An
important lever for the cost reduction was the decrease in touchpoints (from up to
four to only one) for the majority of flows. The reduction in warehouses and
inventory further decreased cost. Regional sourcing also reduced the mainstream
supply chain costs and import duties.
The Philips case study highlights three key learning points. First, supply chain
segmentation turned out to be a highly effective tool for improving service,
reducing cost, and reducing inventory simultaneously. Second, pursuing a clear
orientation on customer requirements had a significant impact on the overall
transformation. It made operations simpler and helped guide discussions among
the team, suppliers, and internal stakeholders. Third, the case shows the challenges
of managing a highly complex system. If a well-working system disappears in the
background, leadership and other stakeholders might neglect the end-to-end nature
and the complexity of the system that must be continuously resolved by the
SCM team.

Bibliography

Philips. (2015a). Annual Report. Innovation for a healthier, more sustainable world. Philips,
Koninklijke.
Philips. (2015b). Our heritage. Philips, Koninklijke.
Chapter 5
The Supply Chain Segmentation Journey
of Volvo CE

William Gu, Albert Thome, Knut Alicke, Ines Haller,

and Margarita Protopappa-Sieke

Volvo Construction Equipment (Volvo CE) is one of the world’s largest manufac-
turers of excavators, road development machines, and compact construction equip-
ment. It generates annual global net sales of approximately 53 billion Swedish
kronor (SEK) (around €5.67 billion) and offers its products and services in more
than 125 countries through proprietary or independent dealerships. It is recognized
as a premium, high quality player and is ranked third in a global comparison with
approximately 5% market share.
Volvo CE is a full subsidiary of the Volvo Group, a Swedish multinational
manufacturing company. In 2014, this business area accounted for 19% of the
total group’s net sales, ranked second after Group Trucks (67%) (Fig. 5.1).

W. Gu
Global Commercial Management, Sales & Marketing, Volvo Construction Equipment,
10, Avenue du Hunderenveld, 1082 Brussels, Belgium
e-mail: [email protected]
A. Thome
Global S&OP Development, Sales & Marketing, Commercial Management, Volvo
Construction Equipment Germany GmbH, Max-Planck-Strasse 1, 54329 Konz, Germany
e-mail: [email protected]
K. Alicke
Supply Chain Management Practice, McKinsey & Company, Inc., Birkenwaldstraße 149,
70191 Stuttgart, Germany
e-mail: [email protected]
I. Haller (*)
Cologne, Germany
e-mail: [email protected]
M. Protopappa-Sieke
Department of Supply Chain Management and Management Science, University of Cologne,
Albertus-Magnus-Platz, 50923 Cologne, Germany
e-mail: [email protected]

© Springer International Publishing AG 2017 37

M. Protopappa-Sieke, U.W. Thonemann (eds.), Supply Chain Segmentation,
DOI 10.1007/978-3-319-54133-4_5
38 W. Gu et al.

Fig. 5.1 Share of segments 2%

3%
on Volvo Group’s global 3%
net sales in 2014 (Volvo). 6%

Trucks
Construction equipment
19% Buses
Customer finance
Volvo Penta

67% Other

Volvo CE’s headquarters are located in Brussels, Belgium. Its global presence,
however, is much more far-reaching with production and R&D facilities in the U.S.,
Brazil, Scotland, Sweden, France, Germany, Poland, Russia, China, India, and
South Korea.
Volvo CE can look back on a corporate history of over 170 years. The
company’s foundation was laid when Johan Theofron Munktell opened a mechan-
ical workshop in Eskilstuna in 1832. In 1932, this company merged with the
machine shop of the two brothers Jean and Carl Gerhard Bolinder under the name
AB Bolinder-Munktell. After several alliances, the Volvo Group incorporated the
company in 1995 and named the business Volvo CE. Product innovations and
strategic acquisitions made Volvo CE a major player in the construction industry,
with a comprehensive product portfolio operated under the three brands Volvo,
SDLG, and Terex Trucks (the latter newly acquired in 2014).
Volvo CE provides machines and services for construction, extraction, waste
processing, and material handling industries. Its core products are articulated
haulers, wheel loaders, and excavators. The product range comprises 18 machine
types that can be modified in numerous ways. The company also offers customer
support agreements, attachment, financing, leasing, and used equipment sales.
Based on its range, Volvo CE views itself as a total solutions provider (Fig. 5.2).
Its corporate core values are safety, quality, and environmental care, all of which
are deeply anchored in its corporate strategy.

5.1 Initial Situation and Challenges at Volvo CE

Volvo CE has continuously developed and upgraded its product line and is known
for its highly customized machines. It has around 250 active models that can be
tailored in over 1000 ways. The degree of customization can range from simple
adaptations (e.g., attaching a different type of bucket) to fundamental adjustments
(e.g., changing the dimensions of the hydraulic system and the boom). This
flexibility meant that Volvo CE built only 1.25 machines with exactly the same
specifications from 2011 to 2014. During the assessment of the as-is situation, it
5 The Supply Chain Segmentation Journey of Volvo CE 39

Financial
Services
Attachments
Used
Equipment
Customer Offer

Rental Services
Business Solutions

Parts

1991 2007

2003
Total solutions
1997
provider

2002

1990 1991 1996 2006

1966 Multi-Specialist

1954
Specialist

Time

Fig. 5.2 The evolution of Volvo CE (Volvo)

became evident that the complex nature of machines affected Volvo CE’s supply
chain in several ways.
First, high complexity and low forecast accuracy resulted in poor operational
efficiency. Over the years, Volvo CE had developed a one-number forecast process
in order to link different prognoses (e.g., operational forecasts, financial forecasts,
business plans, and targets). Every month dealers provided a 16-month estimate for
each of the approximately 250 models. As a result, Volvo CE collected more than
one million data points every month. The data passed through a system that
performed the operational and business forecasting. Even though, the one-number
approach yields benefits from a theoretical point of view, in practice it led to
inaccurate forecasts and high complexity. The main reason was that all the dealers
tried to meet the business plan numbers. Low, intermittent sales volume further
complicated the forecasting process. Dealers often sold a particular model only
once every 6 months. Because of this, the manual process resulted in forecasts with
error rates as high as 60–80% on a dealer level and up to 30% on the aggregate
level. Despite these error rates, Volvo CE used these estimates to allocate produc-
tion slots to dealers. Even though the forecasts were acceptable on an aggregate
level, the way they were used operationally created multiple problems and rework
when orders came in. They led to operational inefficiencies and variability in
production. This was particularly true for models that were produced in low
numbers but had components with long lead-times. Environmental factors such as
seasonality and demand uncertainties aggravated the problem.
The complexity of the different machine types caused long lead-times. At the
beginning of the project, Volvo CE conducted a detailed survey with the members
from the regional sales teams and the dealer network so it could better understand
40 W. Gu et al.

customer needs. The examination proved that market conditions had changed. By
now, both dealers and end customers expected lead-times for compact machines of
less than 4 weeks. In this case, they would tolerate standardized machines with
package options. For bigger, customized machines, they were willing to wait up to
8–10 weeks. Only in very rare cases would they wait longer. At that time, Volvo
CE’s lead-times typically ranged from 8 to 14 weeks depending on the machine
type. Dealers carried up to 2 months stock to ensure timely sales to end customers;
as a result, they held approximately 80% of Volvo CE’s total inventory. Although
the supply chain had high overall inventory and aged stock, the more serious issue
was the fact that Volvo CE was not meeting customer service expectations.
The 2006–2008 economic crisis aggravated this situation and Volvo CE’s
investments in working capital were scrutinized.
Early in 2014, Volvo CE started a strategic project to introduce a segmented
approach to its supply chain. They realized that the only way to bridge the gap
between actual and desired lead-times was to segment the supply chain and offer
off-the-shelf standardized machines through a make-to-stock (MTS) policy. It also
understood that all supply chain processes had to be optimized and aligned to
segment-specific requirements.
The overall goals of the strategic realignment were to: meet shifting customer
requirements; optimize the deployment of working capital; and further improve
operational efficiency.

5.2 Segmentation Criteria

The segmentation was part of a larger transformation project and was only applied
to Volvo-branded machines. The project covered three steps: the introduction of a
MTS policy; the optimization of supply-chain processes; and the better alignment
of sales and operations planning (S&OP) with senior management and the Board.
The introduction of the MTS policy was enabled by the applied segmentation
approach, which we discuss in more detail in the rest of this chapter.
Volvo CE used two broad categories to differentiate its supply chain:
1. Standardized machines characterized by short lead-times. These products follow
a make-to-stock (MTS) policy.
2. Customized machines characterized by longer lead-times due to significant
configuration possibilities. These products follow a make-to-order (MTO)
policy.
The project team allocated products according to demand characteristics, cus-
tomer requirements, and strategic input from the management team. The main
product segmentation criteria were volume and demand fluctuation.
At first, all product model versions in all geographical hubs were analysed. The
basis for this was historical sales data from dealers after it had been cleaned and
adjusted. In total, more than 3000 combinations were considered. During the course
of the project, the geographic scope was changed from hubs to aggregated sales area
5 The Supply Chain Segmentation Journey of Volvo CE 41

Fig. 5.3 Decision framework (Volvo)

to reflect other business constraints like financial terms, regulations, and machine
standards.
Based on these analyses, the combinations of the product model versions/
aggregated sales areas were allocated to three broad segments—A, B and C. All
A-products were part of the standardized category, all C-products were part of the
customized category, and all B-products were allocated to either the A or C
category based on case-by-case decisions. Volvo CE used a decision framework
to place each combination in one of these segments (Fig. 5.3):
1. If the volume was low, the product was allocated to segment C. If the volume
was high a second decision rule was applied:
2. If the demand fluctuation was less than 50%, the product was allocated to
category A. If this was not the case and the forecast accuracy was high, the
product was still allocated to category A. If the forecast accuracy was low the
product was allocated to category B.

Personal experience and business intuition were important factors in determining

the boundaries of the decision framework. The statistical analysis was supplemented
by strategic overlays and customer requirements to ensure an appropriate product mix
in all segments. These tools could help ensure that strategically important products
are moved to segment A.
A separate sales team created a design for the products in segment A, which would
be offered as part of a standardized portfolio. This helped reduce complexity. The
team analysed the configuration trends for each product model over the last 3 years
and defined a base machine that included those options that customers were most
likely to request. A field team, who conducted interviews with customers and dealers
so Volvo CE would better understand their requirements, supplemented these ana-
lyses. The standardized configuration was designed and tested during a pilot phase to
assess market acceptability and pricing. In the end, Volvo CE defined several basic
42 W. Gu et al.

configurations for each model that met varying industry needs. Each basic configu-
ration can be enlarged by configure-to-order (CTO) options and special attachments.

5.3 Segmentation Strategy

Volvo CE developed strategies for the segments A, B, and C based on the needs of
the supply chains for standardized and customized products. The goal was to
implement a segmented supply chain throughout the company, which would sup-
port both MTO and MTS policies. The characteristics of the A, B, and C products
were analysed and then used to derive appropriate strategies for each segment.
Segment A products have high volumes, with stable or volatile demand and high
forecast accuracy. Because of their sales volumes and frequent orders, these
products are strategically relevant with short lead-times. Volvo CE selected a
supply chain with steady flow and active replenishment. A products are offered in
standard configurations as well as with package options that serve as potential
add-ons. Because volume is high and predictable, statistical methods are used to
generate forecasts. Additional dealer input is limited. A MTS policy allows level-
ling of production and guarantees frequent network replenishment. Stocks are
pushed downstream and inventory pooling is set on a regional or hub level. As a
result, lead-times to the customer are short (i.e., less than 4 weeks).
B products also feature high sales volumes. However, demand is volatile and
hard to predict. Because of this, Volvo CE implemented a highly responsive supply
chain. B products follow a MTO policy where production is triggered through
actual dealer orders. Product specifications are offered based on customer require-
ments. The lead-time for B-product machines comprises 8–10 weeks. In order to
keep high service levels, production sites reserve capacities for MTO products.
Strategic safety stocks on parts and high-running options are also kept on hand for
important dealers. Supplier management is also very responsive. Because forecast
accuracy is often quite low, Volvo CE applies manual dealer input, which is often
aggregated over dealers and model versions. Statistical methods may supplement
this data.
C products have low and, in most cases, volatile demand. Lead-time for C
products is significantly longer and depends on the customization requirements.
Network replenishment follows pull-logic (MTO) and machines are produced only
after actual dealer orders are received. Due to low demand, inventory is not built up
strategically. Still, safety stocks for critical materials are built to protect against
high fluctuation and forecast inaccuracies. In order to achieve higher efficiency,
pooling concepts are considered for both inventories and production sites among
logically related low-volume products. As volume is low and difficult to predict
statistically, Volvo CE applies manual forecast methods. Volvo CE also practices
active demand shaping in this segment to help keep complexity low. Its objective is
to shift demand toward segment A (e.g., by package offerings and the prospect of
shorter lead-times for standardized machines). Figure 5.4 summarizes the key
aspects of the segments’ strategies:
5 The Supply Chain Segmentation Journey of Volvo CE 43

Fig. 5.4 Volvo CE segmentation strategies (Volvo)

In practice, Volvo CE created a supply chain that serves MTS products in less
than 1 month while MTO products can take up to 4 months to deliver.

5.4 Steps to Success

Once the pilot phase for selected products in North America and EMEA (Europe,
Middle East, and Africa) was successfully completed, Volvo CE initiated global
deployment in the first quarter of 2015. The rollout followed a three-wave
approach. Each wave was divided into three parts: standardization, inventory
build-up, and sales ramp-up. By the completion of Wave Three in the beginning
of 2017, the target sales volume of 30% standardized machines is expected to be
achieved.
Volvo CE highlights three success factors concerning the implementation:
appropriate change management, alignment with external stakeholders, and sus-
tainability assurance.
One of the major challenges is consistent communication to every stakeholder
affected by the segmentation. The project team considers change management a
crucial factor for the success of the transformation. The goal is to create a common
understanding, convince early resistors, and create acceptance throughout the
company. The pilot showed that strong communication efforts are particularly
needed in the EMEA region. Consequently, Volvo CE aimed at involving all parties
44 W. Gu et al.

Fig. 5.5 Steps to success (Volvo)

early in the process during the global rollout. Besides a communication plan, the
business area provided information material on the concept, definitions, and gov-
ernance to its employees to better guide them through the change. Additionally,
Volvo CE defined and executed training plans on all organizational levels to
familiarize employees with the new processes, the changed scope of their tasks,
and revised roles and responsibilities.
Besides the internal communication, Volvo CE involved external stakeholders
early in the process, which was time consuming and required a high degree of
flexibility. It was crucial to highlight benefits of the segmentation towards the hubs,
order management, (sub)-dealers, and salespersons in order to promote the project.
Furthermore, formal alignment with dealers and sub-dealers had to be ensured.
First, Volvo CE clarified new core processes from a dealers’ point of view and
provided clear and regular communication. Second, a seamless integration with
dealers’ management systems, e.g., to display the available machines in stock, was
ensured. System support was implemented in case of questions or problems.
Besides the technical conformity, Volvo CE aligned the incentive program to the
MTS concept and agreed with dealers on targeted MTS shares.
The segmentation process is an on-going effort and needs continuous review. It
is essential to find a solution for future business needs and not just catch up with
reality. As described before, Volvo CE allocated products according to demand
characteristics. Since customer requirements and market conditions constantly
change, the segments and allocated model versions will need to adapt. Due to its
strategic importance, the concept is settled in the corporate strategy to secure
sustainability. It ensures that future considerations are in accordance with the
segmentation idea. Moreover, the project team aims to work in close cooperation
with the manufacturing engineering and R&D department to establish better design
conditions for MTS options in future (Fig. 5.5).
5 The Supply Chain Segmentation Journey of Volvo CE 45

5.5 Benefits and Outlook

Volvo CE started the implementation of the segmentation concept at the beginning

of 2015. The final benefits are expected after the rollout of the Third Wave in the
beginning of 2017. However, several conclusions regarding future outcomes can be
drawn from the successful test pilot.
In the end state, the standardized product portfolio benefits all business stake-
holders: end consumers, dealers, and suppliers as well as Volvo CE itself. The
results of the pilot test showed that both end consumers and dealers find it
convenient to order standardized products. End consumers can order these
machines on short notice, which increases service levels. Dealers, on the other
hand, gain faster returns since buy-to-sell periods decrease. Dealer’s inventories
also declined from more than 2 to less than 1 month during the pilot phase, resulting
in lower stock costs. A significant decline in lead-time reduced the need to block
capital for procuring machines in advance. Likewise, suppliers profited from
decreased complexity and demand variability of parts. Overall, all stakeholders
benefited from higher sales, lower operating costs, and reduced overall inventory.
The results of the project affect multiple areas and all supply chain core
processes at Volvo CE. It implies a transformation for the whole company and
particularly affects the Finance department through a working capital transforma-
tion. Volvo CE highlights three major improvements that are likely to be achieved
by the segmentation approach: incremental sales and market shares, higher opera-
tional efficiency, and more relevant inventory.
The MTS policy for finished goods and parts leads to high product availability.
Consequently, lead-times for MTS and MTO volumes decrease. This implies
higher customer satisfaction since the delivery expectations of end customers are
met. As a result, sales increase.
Furthermore, the implementation of a standardized product portfolio leads to
higher operational efficiency. Deployment of the MTS policy ensures a load level at
the production facility. A leveraging effect in manufacturing occurs and lost
production slots are avoided. There is excellent potential for more efficient use of
capacity as well as increased flexibility in manufacturing. The standardized
machine models also lead to decreased variability in demand, making planning
and inventory management easier at Volvo CE. In the long-term, the improved
ability to plan and the more efficient processes reduced cost.
Although stock levels at Volvo CE may increase, the inventory is more balanced
than it was before and the total pipeline stock is reduced. On the other hand, there is
higher inventory turnover for segment A. Volvo CE also realized a reduction of raw
material inventory for production volume, which positively impacted working
capital.
Volvo CE needs to rethink its internal structures to capture the full potential of
the segmentation approach. Changes are required regarding the inventory strategy
and ownership, forecasting methodology, slot management, and product offering in
terms of the configuration options. The study of Volvo CE highlights three lessons.
46 W. Gu et al.

First, segmentation is an on-going process. The analysis and allocation of products

has to be done periodically to ensure market coverage. Second, the concept needs to
be grounded in the business strategy. Only if this is done will sustainability be
possible. Third, the project team has to consider regional particularities. The
applicability of MTS policies clearly differs by country and market. In North
America, for example, the acceptance of this concept was very high from the
beginning. In Europe, on the other hand, more change management was needed
in order to convince affected stakeholders.
Overall, this segmentation approach helped Volvo CE reduce complexity with-
out cutting any model options and maintain its reputation as a highly customized
total service provider.
Chapter 6
Gardena’s Segmentation in a Volatile
and Seasonal Market

Valentin Dahlhaus, Sascha Menges, Knut Alicke, and Christoph Lennartz

The Husqvarna Group is the world’s largest producer of outdoor power products. It
generates annual global sales of approximately 32 billion Swedish kronur (SEK) in
over 80 countries (around €3.4 billion). Gardena has been a core brand of the
Husqvarna Group since its acquisition in 2007 and generates 80–85% of its sales in
Western Europe. Its main markets are Germany, France, Austria, the Netherlands,
Belgium, Spain, and Italy. The history of the Swedish firm Husqvarna starts in 1689
with a state-owned, weapon-producing plant in the city of Husqvarna. In 1897
Husqvarna AB was incorporated; Electrolux acquired it in 1978. At the end of 2006,
Electrolux spun off Husqvarna, which was listed at the NASDAQ OMX Stockholm.
In 2007, Gardena became the 20th acquisition in the company’s history. This
acquisition increased Gardena’s global focus, which had previously been national.
In 2014, Husqvarna celebrated its 325th anniversary.
Husqvarna’s core brands are Gardena and Husqvarna, which are where the
Husqvarna Group focuses its business and development. These brands follow the
Group’s image of technological leadership with premium products for professional,
demanding consumers. The products, which offer high quality, professional

V. Dahlhaus
Group Operations, Husqvarna AB, Stockholm, Sweden
e-mail: [email protected]
S. Menges
GARDENA Division, Husqvarna AB, Ulm, Germany
e-mail: [email protected]
K. Alicke
Supply Chain Management Practice, McKinsey & Company, Inc., Birkenwaldstraße 149,
70191 Stuttgart, Germany
e-mail: [email protected]
C. Lennartz (*)
McKinsey & Company, Inc., Sophienstraße 26, 80333 Munich, Germany
e-mail: [email protected]

© Springer International Publishing AG 2017 47

M. Protopappa-Sieke, U.W. Thonemann (eds.), Supply Chain Segmentation,
DOI 10.1007/978-3-319-54133-4_6
48 V. Dahlhaus et al.

Fig. 6.1 The Gardena products (Gardena)

performance, are sold in a high price segment that generates 54% of Husqvarna
Groups sales.
The Husqvarna Group mission is to provide innovative quality products for
gardens, parks, forests, buildings, and roads that facilitate construction. The main
product categories are irrigation, pumps and ponds, hand tools, and power tools, as
seen in Fig. 6.1. Brand images are a key success factor for Husqvarna’s premium
sector. The company brands include a portfolio of regional and core brands. The
regional brands were acquired to increase product range and market distribution
possibilities. However, Husqvarna does not plan to expand its range any further.

6.1 Initial Situation and Challenges

Gardena faced several challenges regarding its supply chain performance: (a) high
sales seasonality with volatile demand during the season; and (b) a legacy rigid
supply chain structure.
High sales seasonality strongly depends on uncertain weather conditions. The
beginning of the selling season fluctuates every year, and the weather conditions
affect product sales. Figure 6.2 visualizes the strong fluctuation in sales during
2007–2010 and demand’s seasonality within these years. Even the average product
sales per year fluctuated by +/ 10%, often experiencing two annual peaks. While
the sum of sales for 1 year has low variability, the variation in monthly sales is
significantly higher, approximately 1:10. For example, the demand in August 2006
was relatively low, with an average of around 15  C and 135 l/m2. However, the
demand in August 2012 was very high, with an average of approximately 18.5  C
and 63 l/m2 (average data for Germany). This leads to monthly demand variations
of 1:20 on the product level.
The legacy rigid supply chain structure of Gardena led to a complex material
flow. Production sites were in Germany and Asia, and both component and finished
products lead times were very long which led to a long total lead time. Production
was done in a Build-to-Stock setting, which created very high inventory levels,
unaligned supply chain processes, and poor performance management.
6 Gardena’s Segmentation in a Volatile and Seasonal Market 49

When and how strong does it hit

Seasonality and weather impact
2007
2008
Monthly sales development, example GARDENA 2009
EUR millions 2010

70 Total sales
variation between
60 weak vs. strong
month of 1:10
50
On product level,
40 variations
in season of up to
30 1:20 month on
month and vs.
20
month up to 1:10
0
Feb March April May June July Aug
How to manage stock and availability
under these circumstances?

Fig. 6.2 Monthly sales at Gardena (Gardena)

To sum up, the initial situation at Husqvarna was characterised by high costs,
poor service levels, long lead-times, and high inventories—the focus needed to
change. Husqvarna started a supply-chain transformation program to increase its
flexibility. The main focus was on restructuring the global footprint and considering
warehouse consolidation. Second, they had to change the way the products were
made by moving towards pull-production strategies and implementing a design-for-
supply-chain strategy that incorporated late postponement in product development
and production. They also wanted to integrate supply chain processes that would
align key performance indicators and performance management.

6.2 Segmentation Criteria

Gardena identified product relevance and product characteristics as the main product
segmentation criteria. The product relevance depends mainly on service levels, sales,
margin, and the ratio of strategy-to-system relevance. Personal experience and
business intuition are important factors in setting service level targets. Business
intuition took Husqvarna’s long-term company vision and mission strategy into
account. They divided products into six categories according to their different service
levels: * (>98%); A (>96%); B (>94%); C/D (>92%); and Exclusive (96%).
Categories *, A, and B corresponded to 44% of the SKUs and 79% of sales. Gardena
discussed and agreed on these targets with a team of representatives from all
company functions. The joint solution creation increased its acceptance across the
organisation significantly. The product characteristics were mainly driven by labour
50 V. Dahlhaus et al.

content, cubic volume/transport units, seasonality, predictability, option complexity,

production knowledge, intellectual property protection, and the life cycle phase. The
implications of these characteristics for the supply chain were investigated and two
dominant categories were identified—predictability and stock risk—which could be
either high or low.
Gardena then further divided the segmentation into structural and operational
dimensions. The structural direction asked the questions: “from where should we
source our materials” and “where should we produce.” The answers were specific
sourcing strategies. There were three initial plans for Germany, the Czech Republic,
and China. Germany focused on bigger products and flexibility. Its products were
voluminous, needing variant management and more individual packaging. This
strategy used pull-production and supported new product introductions. The Czech
Republic strategy produced smaller products and had an efficiency target. Products
in this category were labour intensive with low variance. Gardena wanted to
produce them at a high volume. The main criterion was their transaction cost.
The China strategy was responsible for entry-level volume products and standard
components. In this case, products were less voluminous and were labour-intensive
finished goods. Some required sub-assembly. Gardena used standard variants with a
combination of pull- or push production that depended on demand predictability.
The operational segmentation direction asked the question: “how should we
handle supply.” To answer this question, Husqvarna analysed production, order,
distribution, supply management, and planning. Figure 6.3 summarizes the segmen-
tation criteria in a two dimensional matrix.

Fig. 6.3 Segmentation criteria (Gardena)

6 Gardena’s Segmentation in a Volatile and Seasonal Market 51

Some products were not covered by the segmentation criteria or needed to be

supplemented with a strategic perspective. For instance, the hose connector is in the
* category, with low predictability and low stock risk. Although the data-driven
clustering approach would recommend a lower service level, the management team
made the connector a * product due to its complementary and strategic importance,
as it is essential for several other watering products. Being out of stock would have
a significant impact on the sales of these other products. Additional examples are
the automatic lawnmowers and petrol lawn cutters. These products are produced in
China and margins are low. Gardena keeps these products in order to be present in
the market segment. The knowledge gained from the automatic lawnmower also
supports the development of new products. The segmentation process identified the
major premium products that are the key drivers of Gardena’s sales.

6.3 Segmentation Strategy

Gardena selected its strategies based on researched needs and selected segmenta-
tion criteria. To decrease the number of simultaneous virtual supply chains and
thereby the supply chain complexity, the segments were grouped into three types of
supply chains: flexible, responsive, and efficient, as seen in Fig. 6.4. All strategies
followed the Gardena supply chain mission of meeting customer expectations,
ensuring late product variation, and supporting a customer-understanding
workforce.

Fig. 6.4 Segmentation strategy (Gardena)

52 V. Dahlhaus et al.

The flexible supply chain includes all products with low predictability and low
stock risk that have a product relevance of *, A, or B. Service requirements are high
and, due to the low stock risk, the orders should be fulfilled from stock. This type of
supply chain combines make-to-stock (MTS) and make-to-order-income (MTOI)
policies. By focusing on design-for-flexibility and investing in “over-capacities”
that ensure appropriate flexibility, Husqvarna can avoid increases in the finished
stock levels in the warehouses. Gardena regularly evaluates the trade-off between
costs and the performance of these segments and adjusts things as required. A
typical product for this supply chain type is the hose connector.
The responsive supply chain aims to meet demand that has low predictability
and high stock risk. The low predictability requires a fast supply chain to avoid
excess stock, especially with high stock risk at the end of the season and lost sales
due to out-of-stock situations. This supply chain combines the following segments:
(1) products with low predictability and high stock risk of product relevance *, A,
and B; and (2) Exclusive products with low predictability. Gardena implemented
make-to-order (MTO) and MTOI policies that had the highest demand-tracking
intensity. Their fast reaction to changes in demand is possible because of postpone-
ment and keeping stock of standardized components in a preferably central loca-
tion. Product design is “non-verbal,” using pictograms for different countries.
Gardena also invested in “over-capacities” to avoid creating a bottleneck. A typical
product for this supply chain type is the hose trolley.
The efficient supply chain targets high standardization for products with well-
known demand. It combines all products with high demand predictability and the
C/D products. Policies of make-to-forecast (MTF) and MTS help build the inven-
tory with large production batches. A Kanban system manages production and
suppliers are tightly integrated. To keep inventory low, the company focuses on
SKU reduction and some investments in “over-capacities.” Longer lead-time
sourcing enables low prices for premium products. A typical product for this supply
chain type is the water pump.

6.4 Key Learnings from Implementation

After defining the segmentation strategies, Gardena started real-world implementa-

tion. They chose to implement incrementally which enabled on-going production
with continuous improvements and—very importantly—facilitated employees’
understanding of the “why” and “how” of segmentation. Five steps were highlighted
during the implementation: (1) production site decisions; (2) outsourcing decisions;
(3) vertical integration; (4) customer management; and (5) employee involvement.
Gardena’s production site decisions depended on the strategy expectations of the
new flexible, responsive, and efficient supply chains. Husqvarna mainly produces
the parts for the flexible segments in Ulm (Germany). Besides big runs and high
flexibility, they have more control and are in charge of the product development.
Orders are processed in 1 day and delivered in 2–3 days. Responsive parts are
6 Gardena’s Segmentation in a Volatile and Seasonal Market 53

produced in the Czech Republic, which is geographically close and offers cheap
and large capacities in production and warehousing. Suppliers and plants are
combined worldwide to produce parts for the efficient segment. A big part of this
production takes place in China with delivery times of 3–4 months. The low
production costs are necessary for low margin products and make highly predict-
able demand products more competitive.
Outsourcing decisions can be considered a sub-category of the production side
component. Products with a high percentage of material-driven value are part of the
efficient supply chain production. Normally these parts are without special work-
force requirements. For example, Gardena’s electronic products are produced by
third-party suppliers. This enables lower, fixed-per-piece prices.
Vertical integration is a significant factor in the company structure. Gardena
produces all products that contain plastic in company-owned plants. The reasons
are historical and strategic. It strongly reduces the reliance on suppliers with regard
to these key components. Plastic products are part of the flexible supply chain and
need a highly predictable service level. Furthermore, the complexity of managing
multiple suppliers with different production and distribution systems was over-
whelming for Husqvarna. Gardena treats customers equally. Orders are served in a
first-in-first-out system. If the order cannot be fulfilled by more than 60% at the
requested delivery day, Gardena postpones it. Consequently, customers often
cancel the order.
One of the biggest implementation challenges and priorities was employee
involvement. They needed to understand the reasons behind the segmentation.
Initially, opinions about the new concept were very diverse. However, the imple-
mentation demonstrated segmentation’s advantages step-by-step. Pushing the sys-
tem by hierarchy power was never considered. The company’s family business
structure and a long-term perspective on segmentation’s success strengthened this
approach. Gardena supports continuous communication and careful changes in
information technology systems. The clear communication of product priorities is
already visible throughout the supply chain and the involved functions.

Supply chain segmentation should not be a pure marketing tool anymore, but
an essential component of the company’s strategy and philosophy.

6.5 Benefits

Gardena’s supply-chain transformation achieved many benefits. On-time and

in-full orders (OTIF) increased by 10%, stock on hand fell by 15%, and logistic
costs decreased by 5% as a percentage of net sales. Service levels have improved
and sales have increased by approximately 25% over the last years while inventory
54 V. Dahlhaus et al.

capital has decreased. For the company, supply chain segmentation was a big
enabler and differentiator for competitive advantage. They have observed the
reduction of complexity through lean, flexible, transparent, and product-tailored
mechanisms. The company’s philosophy has changed and influences the supply
chain processes. For Gardena, supply chain segmentation is an on-going journey to
meet market needs and increase customer satisfaction.
Chapter 7
Supply Chain Segmentation at Siemens
Healthineers

Simon H€
oller, Peter Schneller, and Ulrich W. Thonemann

This chapter describes the service parts supply chain segmentation initiative at
Siemens Healthineers. In Sect. 7.1, we present the background of the company and
the industry. In Sect. 7.2, we describe the initial situation and the challenges that
lead to the segmentation initiative. In Sect. 7.3, we discuss the segmentation criteria
that have been defined. In Sect. 7.4, we explain the strategy that Siemens
Healthineers applies in their segmentation approach. In Sect. 7.5, we discuss the
critical success factors of the initiative. In Sect. 7.6, we present the main benefits
that have been realized by the supply chain segmentation initiative at Siemens
Healthineers.

7.1 Company Background

Siemens Healthineers is one of the world’s largest suppliers of technology to the

healthcare industry and a leader in medical imaging, laboratory diagnostics and
healthcare IT. All supported by a comprehensive portfolio of clinical consulting,
training, and services available across the globe and tailored to customers’
needs.
In fiscal 2015, Siemens Healthineers had around 44,000 employees worldwide
and posted revenue worth 129 billion euros, and profits of more than 21 billion

S. H€oller (*) • U.W. Thonemann

Department of Supply Chain Management and Management Science, University of Cologne,
Albertus-Magnus-Platz, 50923 Cologne, Germany
e-mail: [email protected]; [email protected]
P. Schneller
Siemens Healthcare GmbH, Hartmannstr. 16, 91052 Erlangen, Deutschland
e-mail: [email protected]

© Springer International Publishing AG 2017 55

M. Protopappa-Sieke, U.W. Thonemann (eds.), Supply Chain Segmentation,
DOI 10.1007/978-3-319-54133-4_7
56 S. H€
oller et al.

Fig. 7.1 SOMATOM

Force CT Scanner
(Siemens)

Fig. 7.2 MAGNETOM

Aera MRI Scanner
(Siemens)

euros. Figures 7.1 and 7.2 show two exemplary products of Siemens Healthineers’,
the CT Scanner, SOMATOM Force, and the MRI Scanner, MAGNETOM Aera,
which represent their newest generation of products. Further information about
products and services as well as the company background are available on the
Internet at http://www.healthcare.siemens.com.

7.2 Challenges

Siemens Healthineers has faced several challenges to maintain its superior supply
chain performance. Among these have been the complex distribution network, the
size and dynamic nature of the system and service parts portfolio, the development
of markets and specific customer requirements and the use of advanced decision
support by the planning software employed.
7 Supply Chain Segmentation at Siemens Healthineers 57

To keep system downtimes low, Siemens Healthineers operates a global service

division with hundreds of service engineers who maintain and repair systems at
customer locations. To supply those engineers with service parts, a global network
of distribution centers and depots is used. This results in a complex distribution
network which was partly controlled by decentralized decisions in the past.
Another service challenge is that service parts are highly specialized, with few
potential suppliers that can sometimes provide parts only at long replenishment lead
times. The synergies between components of different systems are limited, which
results in a large variety of service parts that have to be kept on stock to provide
high customer service. In addition, short product lifecycles in combination with
mandatory support timeframes and high unit costs emphasize the challenge
resulting from the size and dynamic nature of the system and service parts portfolio.
The development of markets and specific customer requirements also has to be
addressed. In established markets, like Europe, the demand for medical equipment
is stable and demand increases are expected to be primarily satisfied by higher
utilization of installed systems. Higher utilization leads to shorter service intervals
and an increase in technical failure rates for some components. Cost efficiency in
developed, competitive economies is essential. Siemens Healthineers is increas-
ingly confronted with customers demanding short response times at low cost. In
settings where Siemens Healthineers owns the equipment and customer payments
are based on operating hours, a high availability rate is desirable but needs to be
traded off against inventory costs. In emerging markets, Siemens Healthineers is
observing increasing demands due to the expansion of infrastructure in countries
like China. But also new competitors from emerging economies are entering the
market with low equipment prices and thus putting pressure on established players
like Siemens Healthineers.
In order to adhere to the structured processes in supply chain planning, Siemens
Healthineers constantly strives to use advanced decision support through the
planning software it employs. Due to its mergers and acquisitions its system
landscape was rather heterogeneous, and did not offer the functionality required
to successfully fulfil the complex planning tasks.
To meet these challenges, Siemens Healthineers made changes in their system
landscape and the planning for their service parts supply chain. These included the
segmentation approach that we will describe in the following sections.

7.3 Segmentation Criteria

Siemens Healthineers introduced a segmentation concept in which the planning of

each warehouse location is based on segments of service parts at that location. The
segmentation follows a clear structure and still allows for flexibility with respect to
the definition of segments. The concept includes two stages of segmentation, the
explicit segmentation and the implicit segmentation.
58 S. H€
oller et al.

Table 7.1 Segmentation criteria used in Siemens Healthineers’ explicit segmentation

Segmentation criteria
Product & demand characteristics Demand volume
Demand pattern (stable, trending, . . .)
Product lifecycle
Unit cost (valuation price)
ABC-Classification
XYZ-Classification
Business line/division
Bill of materials
Channel and customer characteristics Demand planner information
Service part type
Supply characteristics Lead-time
Vendor information

In the explicit segmentation, Siemens Healthineers’ planners choose among

criteria that are related to product characteristics, channel and customer character-
istics, and supply characteristics. Table 7.1 provides a categorized overview of
these criteria.
The criteria are used by Siemens Healthineers to define for each service part at
each location which segment the service part belongs to. Thus, Siemens
Healthineers is able to define very specific segments covering not only their own
but also their suppliers’ and customers’ needs. These explicit criteria have different
value ranges over which the service parts portfolio is segmented. The demand
volume value range as well as the thresholds of segments are based on historic
demand information. Similarly, the demand pattern is derived from patterns that
have been observed in the past. For the product lifecycle, Siemens Healthineers
differentiates between new parts, regular or mature parts, and parts that run out of
service. The latter may either be the case when Siemens Healthineers discontinues a
system or when there is no supply option available anymore. The unit cost value
range and thresholds depend on the values found in the service parts portfolio. The
ABC-Classification reflects the importance of a service part in the portfolio with
respect to the demand value and includes classes from A (high demand value) to
C (low demand value). The XYZ-Classification contains three classes that rank
demand variability on a scale from X (low variability) to Z (high variability). The
values that specify the Business line/division follow immediately from master data
and depend on the equipment portfolio. Also the bill of materials comes from
master data information and follows from the technical specifications of the
systems. The demand planner information considers special requests from cus-
tomers and includes the identifiers of specific planners and key account managers.
Similar to that, the service part type refers to logistics categories that relate to the
distribution channel. Here Siemens Healthineers uses categories from the master
data of each service part. The lead time that is needed to obtain a part from an
external supplier is also used for the definition of segments. Here, the planned
delivery lead time is used that Siemens Healthineers agreed on with the supplier.
7 Supply Chain Segmentation at Siemens Healthineers 59

Finally the vendor information may be used to incorporate special needs by the
vendor. This criteria refers to an identifier of a supplier which is taken from supplier
management systems.
There are no default segments in the explicit segmentation stage. The central
planning department of Siemens Healthineers defines these segments. These defi-
nitions are regularly reviewed and adjusted, according to managerial decisions or
requests from local experts. The most common segments are those based on special
systems to bundle service parts of a system into one segment.
Before further planning processes are started, the second step of the segmenta-
tion structure, the implicit segmentation, is conducted. In this step, service parts are
segmented according to two criteria, the part’s importance for a segment’s perfor-
mance and its unit cost. These criteria correspond to two important factors in the
evaluation of the service parts supply chain performance: service and cost. To
achieve high levels of customer service towards customers while keeping supply
chain costs low, these factors must be considered. The cost category corresponds to
the unit cost of the service part, and the importance of a segment’s performance
corresponds to the parts’ contribution to the segment’s average service level. While
looking at a single part, this contribution to the segment’s service level is described
by the improvement of the average segment service level when the service level of
the considered part improves. The relation between both service level figures will
be described in Section Segmentation Strategy. The improvement of service for a
single part depends on the average demand rate, demand variability and the
replenishment lead time of the service part. The estimated demand rate and
variability during a replenishment cycle were chosen to technically define the
criteria reflecting importance for performance. This segmentation step was
conducted automatically and required the support from an advanced planning
software.
The two-stage segmentation approach was directly linked to the applied stock-
keeping strategies that are described in the following section.

7.4 Segmentation Strategy

Siemens Healthineers’ segmentation goal is to achieve target service levels for

different segments at minimum cost. It aims to achieve this goals without changing
the overall structure of its supply chain and the segmentation focuses on improving
the inventory planning within this scope. The main decisions are to determine
where to place safety stock in the network, how much inventory to keep at each
location, and how frequently to replenish locations.
The decisions on where to place safety stock and how much inventory to keep are
driven by the service requested for each segment. For a given target service level of
a service part at a location, a stock keeping policy and parameters can be identified,
such as the reorder point, under which the target service level for the service part is
achieved at minimum cost. If such a policy and the corresponding parameters are
60 S. H€
oller et al.

determined for each service part at each storage location, both decisions, that is, the
safety stock locations and inventory levels, are covered.
While Siemens Healthineers uses service level targets for segments, such as
locations, target service levels for individual service parts are not defined explicitly.
Instead they must be chosen such that the segment’s target service level is met. The
service level of a segment is a function of the service levels of the individual service
parts included in the segment and the part service levels must be weighted
according to their demand in relation to the overall demand within the set. Example
7.1 illustrates this observation.
Siemens Healthineers decided that segmentation strategies should be driven by
setting differentiated target service levels for each segment defined in the explicit
segmentation described above. These service levels should then be used in the
implicit segmentation to derive inventory decisions for each service part at each
location. As a result of the implicit segmentation each service part is assigned an
individual service level figure such that the average figure of the segment is met.
This service level target should then be used to determine the stock keeping policy
and the according parameters.

Example 7.1 Weighting Service Levels Within a Segment

Consider two service parts with service levels SLA ¼ 90% and SLB ¼ 98% and
demand rates DA ¼ 10/year and DB ¼ 20/year. Then the service level of the
segment is SLAB ¼ DA SL A þDB SLB
DA þDB ¼ 1090þ2098
10þ20 ¼ 95:33%.

In order to obtain individual service levels for each service part at each location,
decisions are based on the service level efficiency of stocking the respective part.
This means that the decision of whether to keep stock of the respective service part
at the considered location depends on the expected increase in average service level
for the segment, the part belongs to, per monetary unit that Siemens Healthineers
would have to invest to keep this item on stock. By using this criteria Siemens
Healthineers concentrates on the most relevant parts for achieving superior service
on average while also keeping stock values low. Example 7.2 illustrates the idea of
service level efficiency.
This procedure which has been referred to as “system approach” (Sherbrooke,
2006) results in inventory planning that trades off service against cost across a
portfolio of service parts. Its use is appropriate if the targets of inventory manage-
ment focus on average service instead of individual service. However, it also leads
to a polarization of inventory towards specific parts in the segment while other parts
may be disregarded completely. In practice it is not feasible to generate trade-offs
between arbitrary couples of parts. Especially trade-offs across criticality classes
are questionable. Siemens Healthineers therefor decided to conduct stock keeping
decisions within the implicit segmentation separately for each class of technical
criticality.
7 Supply Chain Segmentation at Siemens Healthineers 61

Example 7.2 Service Level Efficiency of Service Parts

Consider a segment that consists of two service parts with demand rates DA ¼ 10/
year and DB ¼ 20/year and unit costs CA ¼ 10€ and CB ¼ 100€. The initial target
inventory levels are SA ¼ 0 and SB ¼ 0. Accordingly, the initial expected service
levels are SLA ¼ 0, SLB ¼ 0 and SLAB ¼ 0. If SA is increased by 1, the expected
service for part A becomes SLA ¼ 76%. This would also change the expected
average service of A and B to SLAB ¼ DA SL A þDB SLB
DA þDB ¼ 1076þ200
10þ20 ¼ 25:33%. This
implies an average improvement of service by 10 ¼ 2:53 for each Euro
25:33

invested in part A. If we set SB ¼ 1 instead, we obtain SLB ¼ 85% and

SLAB ¼ 56.67%. However, this also implies an average improvement of only
100 ¼ 0:57 for each Euro invested in part B. In this exemplary segment and
56:67

under the initial target inventory levels stated above, it is more efficient to
increase the target level of part A than to increase the target level of part B.

A different approach is used to decide how often to replenish a location with

service parts. The interval at which a location is replenished with a specific service
part depends on the part’s order lot size and on its demand rate. The appropriate lot
size for a service part with respect to the service maximization and cost minimiza-
tion goals at Siemens Healthineers depends on the demand of the part, the costs for
placing a replenishment order, handling the corresponding shipment, and the costs
for storing the part at the location. For instance, high-value parts are usually
expensive to keep on stock. As a result, they are often ordered in smaller lot sizes
and are replenished more frequently than low-value parts. This strategic element is
purely driven by implicit factors, not by decisions from the explicit segmentation.
The segmentation strategies are controlled by defining service level targets for
explicitly defined segments. These targets are reviewed monthly and adjusted if
necessary.

7.5 Success Factors

Siemens Healthineers identified four major success factors that they consider to be
essential for successfully implementing their segmentation approach: Centralized
planning, a dedicated team with experienced employees, advanced planning soft-
ware, and data quality management.
Before the segmentation approach was implemented, parts of Siemens
Healthineers’ service parts inventory network were planned decentralized. Different
approaches and tools were used to plan warehouse operations. Interdependencies
between different echelons were not considered and standardized segments could
not be maintained with reasonable effort. Centralized planning was seen as a
prerequisite for implementing the segmentation strategies successfully, which
required organizational changes.
62 S. H€
oller et al.

The centralized planning also required adaptations in the Siemens Healthineers

headquarter. Siemens Healthineers decided to set up a dedicated team with
experienced employees to take responsibility for the centralized inventory plan-
ning. This team knew the company’s processes and internal structures, but also
had a good sense for the industry and the market situation. This team was
responsible for the parameterization of the global Enterprise Resource Planning
(ERP) system in which the Material Requirements Planning (MRP) was
conducted. The team was also responsible for scenario analyses with respect to
changes in the supply chain setup.
In order to provide the team with the necessary planning tools, an advanced
planning software was introduced. Siemens Healthineers analyzed several standard
software packages but decided to implement a flexible planning software called
Service Chain Optimizer (SCO) that has been developed at the University of
Cologne. The flexibility and modular structure of the planning software enabled
an adaptation to the specifics of Siemens Healthineers’ warehouse network. Also
the specific segmentation approach was integrated to the tool. The tool provides the
planning team with the functionality to explicitly define segments and to define the
according target service levels for each segment. Based on these settings, SCO
conducts the implicit segmentation and determines ERP parameters, taking the
interdependencies in the network into account. It provides optimal reorder points
and optimal lot sizes for Siemens Healthineers’ inventory control policies, which
are then transferred to the MRP systems. The planning team uses the tool also for
scenario analyses, such that they are able to quickly evaluate the effect of scenarios
(e.g., changes in network structure or lead time) on cost and/or service levels.
To provide the new planning software with reliable information, data quality
management is essential. While the planning team was experienced with planning
processes and organizational tasks, they didn’t have much experience with techni-
cal characteristics of the service parts. It is crucial that information on internal
replenishment times, bills of material, etc., is accurate and available in the IT
systems, and that this information is maintained properly. Other parameters, e.g.,
lead times for externally sourced parts or demand data, are equally important and
also needed to be taken care of initially.

7.6 Benefits

The segmentation initiative produced three types of benefits for Siemens

Healthineers. The first and most important was an immediate improvement in
inventory efficiency along the service parts supply chain. Siemens Healthineers
maintained its overall investment in inventory while simultaneously improving the
service it provided to customers and patients that relied on the equipment for their
medical treatment.
7 Supply Chain Segmentation at Siemens Healthineers 63

Another benefit came from the successful implementation of the advanced

planning software. Siemens Healthineers has been able to analyze the effect of
changes to their supply chain on performance with low effort. By evaluating
scenarios in SCO, decisions on strategical, tactical, and operational levels could
be supported. Siemens Healthineers, for example, used SCO to analyze the effect of
additional inventory in central warehouses that was needed due to volcanic
eruptions in Iceland which caused disruptions of air freight operations in all of
Europe. Changes in the global delivery structure were also analyzed using SCO.
Finally, Siemens Healthineers improved transparency within its own processes.
Due to the fact that implementing a new planning software required intensive data
maintenance tasks, both data quality and the awareness of the importance of data
quality management increased significantly. This visibility provided Siemens
Healthineers with the information needed for other structural optimization
initiatives.

Bibliography

Sherbrooke, C. C. (2006). Optimal inventory modeling of systems: Multi-echelon techniques (Vol.

72). Springer Science & Business Media.
Chapter 8
Steps to Success

Knut Alicke and Ines Haller

This chapter introduces the key success factors that underlie the segmentation
process, starting with the development of the framework and continuing through
implementation. We highlight the prerequisites for deriving a company-specific
segmentation, describe the diagnostic phase, and provide recommendations for a
practical, end-to-end segmentation approach. We then focus on the segmentation’s
real-world implementation, exploring the success factors for organization, man-
agement, performance measurement, communication, and information technology.

8.1 Key Enablers for Defining the Segmentation Approach

A systematic assessment of the initial situation is critical to developing a tailored

segmentation approach. This section lists our key learnings about defining appro-
priate segments and optimal product allocations.
Conduct a Holistic Analysis of the As-Is Situation As seen in the previous case
studies, supply chain solutions are company-specific and depend on numerous
internal and external factors. Their segmentations need to follow a data-driven
approach that reflects their customers, products, and supply. Conducting an exten-
sive analysis prior to the supply chain segmentation will help the team understand
the company’s current and future business needs. It will also ensure the

K. Alicke
Supply Chain Management Practice, McKinsey & Company, Inc., Birkenwaldstraße 149,
70191 Stuttgart, Germany
e-mail: [email protected]
I. Haller (*)
Cologne, Germany
e-mail: [email protected]

© Springer International Publishing AG 2017 65

M. Protopappa-Sieke, U.W. Thonemann (eds.), Supply Chain Segmentation,
DOI 10.1007/978-3-319-54133-4_8
66 K. Alicke and I. Haller

segmentation is aligned with the corporate strategy. These findings will influence
both the segmentation approach and the final supply chain solution.
The diagnostic phase comprises an internal and an external view. The internal
view measures the company’s actual and expected resources, capabilities, and
strategic direction. This analysis evaluates core elements like forecasting and
planning, supplier management, production, and distribution and sales. It highlights
potential supply chain issues and their root causes, and measures key performance
indicators (KPIs) and compares them to industry best practices. Finally, it makes
the company’s product portfolio more transparent, including its long-term goals and
strategic direction, the number of active products, their cost structure and supply
chain requirements, and these factors’ implications for supply chain design.
The external view provides insights into the company’s business environment
and market conditions. It defines the firm’s market position and surfaces implica-
tions for operations. The organisation has to understand customers’ requirements
for supply chain performance (e.g., service level and lead time). Detailed interviews
with the customer supply chain department and customer surveys (e.g., the Voice of
the Customer—VoC) can help build a better understanding of customers’ needs.
Other external parties, e.g., suppliers and service providers, can also provide
valuable insights during the diagnostic process.
This evaluation of a company’s internal and external conditions is the starting
point for an appropriate end-to-end segmentation approach.
Use a Structured End-to-End Segmentation Approach A structured approach
underlies a successful, holistic segmentation process. The company should leverage
the diagnostic findings to identify its performance and cost drivers prior to starting
the segmentation. These drivers can include:
• Customers: requirements, service levels, lead-time expectations, strategic
importance, and relevance
• Products: product portfolio, margins, current position in lifecycle, demand
characteristics, and value density
• Physical supply chain setup: suppliers, plants, stocking points, and distribution
network
• Planning: forecasting, supply and demand planning, as well as S&OP
• Enabling factors: information technology systems, organizational and supply
chain capabilities, employees’ mind-set
After careful consideration, the company needs to prioritize those drivers that
create the greatest differences between the supply chain elements. The prioritization
must remain simple, as segmentation’s goal is to add value to a supply chain—not to
make it more complex. Segmentation should drive feasible solutions that have a
limited number of segments and corresponding strategies. In practice, segmenta-
tions are successful when they have three to five segments that are large enough to
have an impact.
Segment boundaries are defined by plotting the key drivers and identifying the
breakpoints. The cut-off points are also company-specific and need to be very clear.
8 Steps to Success 67

A criterion might follow an 80:20 Pareto distribution for some companies, but a
50:50 distribution for others. It is crucial that the cut-off points align with the
business’ current situation and expected development. We strongly urge teams to
recognize and keep in mind the importance of business experience and intuition
during this step.
When developing the segments, we have found six key principles that provide
valuable guidance:
1. Differentiation: Single segments are clearly separated from each other and have
different implications for the supply chain and operations management
2. Value creation: Each segment creates significant value for the supply chain and
consequently for the company as a whole
3. Mutually exclusive: If an attribute can be applied to products in different
segments, it should be treated as a variation that can be applied to any segment;
it is not as a segment in itself
4. Simplicity: Segments are simple to communicate and can be applied to both
internal and external parties
5. Universal: Segments should be equally understood and serve the majority of
managers from different functions like Sales, Demand Planning, and Purchasing
6. End-to-end: Segments should reach throughout the entire supply chain
Because the segmentation needs to affect the entire supply chain, the best way to
design the supply chain is customer-backwards, based on the defined segments.

8.2 Success Factors for Implementation

The crucial success factors for all phases of the implementation relate to the
company’s approach to this phase, its alignment of internal and external pro-
cesses, its change management, top management support, and its realization that
segmentation is an on-going process. We also highlight segmentation-specific
considerations.
Ensure a Structured Implementation Process Once completed, the segmenta-
tion needs to be put into practice with an implementation plan that has clear
deliverables and responsibilities. All involved parties need to agree upon binding
deadlines and milestones. Monitoring the implementation process and adapting the
plans as needed is also crucial. In addition, companies should consider parallel
projects that may have interdependencies with the segmentation (i.e., could support
or hinder it). It is also extremely important for the company to highlight risks (e.g.,
scarce resources) and create mitigation plans.
Some of the best implementations employ a systematic approach that begins
with a pilot. The pilot helps evaluate the adequacy, effectiveness, and feasibility of
the segmentation approach. It also reveals any issues with the solution and identifies
regional characteristics that need to be taken into account. The organisation can
68 K. Alicke and I. Haller

gain a perspective on the end-to-end transformation by examining different pilot

areas across the value chain. For example, it could pilot new forecasting processes
for different segments in several countries, or pilot manufacturing processes on
production lines at different sites.
Information System Support and Performance Measurement Play a Major
Role During the Implementation Companies need to ensure that they have the
appropriate in-house data analytics capabilities. Their information technology
infrastructure and systems must fulfil both the organisation’s and the segmenta-
tion’s specific requirements. The complexity of the system depends on the segmen-
tation drivers and the respective data volume and sources. To capture their full
potential, companies will need to train key staff on how to use the new components
and/or capabilities of the information technology system.
Performance measurement is also essential for the success of the segmentation
approach. Organisations need to define key performance indicators for the most
important drivers for each segment and integrate these into daily business
processes. The financial targets must also reinforce the segmentation implementa-
tion, demonstrating its importance and impact. It is crucial to include both key
performance indicators and financial targets in the operating plan and to implement
a feedback loop in case the targets are not achieved.
Guarantee Appropriate Alignment Between Business Processes and External
Partners The segmentation strategy’s achieves its impact by optimising supply
chain elements. It can modify the distribution network, shift from a decentralised to
a centralised warehouse system, and/or open new production facilities. Companies
almost always revise their current supply chain set-up and processes. They also
reassess their supplier structure and relationships with external stakeholders (e.g.,
third-party service providers). Volvo CE, for example, developed a new forecasting
methodology during its transformation. The new, hybrid system, which was based
on dealer and sales team input, statistical analysis, and management predictions,
was tailored and deployed to the segment. Gardena, on the other hand, used its
strategy for a supply chain segment to make decisions about production sites and
outsourcing. In the future, Gardena’s production sites will be equipped to
manufacture components while reducing reliance on suppliers and meeting high
service-level requirements.
However, as organisations adopt similar strategies, they must ensure that their
processes are aligned with their external stakeholders. They need to define the pro-
cesses from their stakeholders’ point of view and seamlessly integrate the management
and information technology systems. Support systems will help resolve problems and
provide information and transparent communication at all times.
Lead Internal and External Stakeholders Through the Change One major
challenge of transformation projects of this scope is changing the mind-set of the
people involved. Most of the interviewed companies considered sound change
management a crucial success factor in their implementation. Proper stakeholder
management is critical. They ensured strong project sponsorship, which was
8 Steps to Success 69

visible, enthusiastic, and served as a good role model for staff. Such sponsorship
helps convince early resistors and increases acceptance within and outside the
company. Transparent communication is just as important. Prioritizing quick
wins over complex solutions is essential throughout implementation. An early
success story about the project helps build and sustain motivation and commitment
among those who are involved.
Organizational change typically means that people are doing different tasks and
have revised roles and responsibilities. An appropriate communication plan and
regular information sharing create understanding and help reduce the anxieties
associated with the change. Demonstrating the benefits of the new system for
both individuals and the company can increase enthusiasm among employees.
Workshops and regular meetings can serve as a platform to exchange experiences.
They help management understand the staff’s attitudes towards the transformation
and identify potential improvements. Training helps prepare employees for their
new tasks and addresses skill deficits. Because the formal structure of the company
often needs to change, the incentive system and organizational structure may be
redesigned.
The organisation also has to gain its suppliers’ and other external stakeholders’
cooperation. Explaining new core processes from their perspective makes this
possible, while regular communication can help build their commitment.
Explaining the continuing changes and highlighting the benefits of these to them,
the company can promote its improvements and help win them over.
Ensure Top Management Support and Cross-Functional Cooperation The
implementation leads to tremendous change in how the organisation functions
and in its structure. Such a project must have visible, significant Top Management
support. In only this way can the company build acceptance and remove possible
obstacles. Top Management champions the effort and ensures the sustainability of
the changes and the performance improvements. They also foster cross-functional
collaboration across all supply chain functions (e.g., sourcing, production,
planning, warehousing, distribution, and sales). The supply and demand sides
have to work closely together to achieve supply chain excellence. Regular meetings
and working groups, where representatives of particular segments present their
implementation status, help make this happen. They also exchange experiences and
best practices and collaboratively problem-solve.
View Segmentation as an On-going Process The implementation of the segmen-
tation approach does not end the segmentation process. Customer demands and
market conditions continuously change; these are the basis of the performance
drivers and segmentation criteria. As a result, the supply chain needs to be reviewed
and re-segmented at regular intervals. The re-segmentation requirements depend on
the characteristics of the industry and products. For example, the semiconductor
industry might need faster adjustments than slower-moving industries with rather
long PLCs. By basing the segmentation concept in the corporate strategy, the
company can also help ensure its sustainability. This step helps align the segmen-
tation approach with the organizational structures and functions.
Appendix A: Description of Segments
(McKinsey)

© Springer International Publishing AG 2017 71

M. Protopappa-Sieke, U.W. Thonemann (eds.), Supply Chain Segmentation,
DOI 10.1007/978-3-319-54133-4
Appendix B: Supply Chain Strategy per Segment
(McKinsey)

Steady flow Responsive large Responsive small

Leverage stable Flexibly respond to Reduce complexity

demand demand and lead time

Overall ▪ Simple pull-based ▪ Package to order ▪ Package to order

set-up replenishment ▪ Reduce lead time ▪ Reduce lead time
▪ Cyclic customer ▪ Reduce sources of ▪ Reduce sources of
replenishment volatility volatility
▪ Finished goods ▪ Keep additional ▪ Create fast track
inventory only safety stock of with suppliers for
driven by safety printed packaging printed packaging
stock material material
Forecas- ▪ Use statistical fore- ▪ Actively forecast ▪ Attach forecast to
ting casting only large SKUs
▪ Define order & in- (piggyback) to
formation flow for minimize effort
small countries

Customer ▪ Maximize ▪ Maximize ▪ Maximize

service availability and availability availability
minimize stock
…

© Springer International Publishing AG 2017 73

M. Protopappa-Sieke, U.W. Thonemann (eds.), Supply Chain Segmentation,
DOI 10.1007/978-3-319-54133-4
74 Appendix B: Supply Chain Strategy per Segment (McKinsey)

START

Steady
flow

Synchronized Fixed Automated

production forecasting
sequence
START

Respon-
sive
large
Standardized inventory Dedicated Manual
policies timeslots forecasting

START

Respon-
sive
small
Quick-track Dedicated No forecasting -
timeslots Attach to large SKUs
forecast (piggyback)
Suppliers Production Customers

Suppliers Ferment/ Purification Filling and Packaging Country Distrib- Phar- Patient
recovery tabletting utor macy