Good S&OP starts with good segmentation!

Olivier Neutens
Jan 12, 2018 1:00:00 PM

Why is good segmentation the basis of good Sales & Operations Planning? Because you need to make customer and product decisions throughout your complete S&OP cycle. Without effective insight into your customer-product portfolio it is impossible to do so correctly.

Let’s start with what is traditionally the first step of the S&OP cycle: the product management review. I often notice a lack of decisiveness inhibiting product innovation. Organizations are masters of creating new products but can find it very difficult to cease production of older products. Why? From the point of view of the product management and sales division, phasing out an old product can mean loss of service and turnover. But turnover should not be a goal in itself, you should also take into account the costs associated with an end-of-life product. Typically, end-of-life products are ordered in lower volumes, have a slower rotation and increased competition from parties focusing on lower-priced commodities. The return on the capital employed drops sharply. That’s the moment to pull the plug of your end-of-life product.

However, I’ve noticed that it’s very difficult to create awareness about this end-of-life product management without having the underlying discussion about product segmentation at a higher level. Which are our strategic products? And which service level do we offer for each kind of product? By segmenting your customers and products in advance on both a strategic and tactical level, you create a strategic canvas for better follow-up to your product management. You will achieve suboptimal results if you only start segmenting your customers and products when the forecast requires you to do so, because I doubt that all relevant parameters will be taken into account in that case.

The next step in the S&OP cycle is the demand review. An accurate forecast is crucial in this phase. In my opinion, it is logical to try to set up an active collaborative forecast with your best customers. Your A-category customers usually order the highest volumes and provide the greatest margins. If your forecast for an A customer is wrong it can have a dramatic impact on your service level, unless you keep a high safety stock. But how can you set up a collaborative forecast with your best customers if you don’t know who they are?

And what about the inventory review? Reliable product segmentation helps you to monitor your inventory. Just as not every customer has the same worth, nor does every product. Clearly defining which products are strategic and which are not makes it a lot easier to manage your safety stock.

Finally, segmentation also proves its value during the supply review, especially when you’re having capacity issues. At that moment, you have to make choices and carefully thought-through segmentation supports your decision-making. Obviously, you’ll first try to serve your A customers with A products and you’ll probably be more opportunistically towards your C customers and C products. While C products have a low strategic fit, they sometimes have a high production fit. Commodities are a good example. Organizations are happy when producing these, because they are used to it and it feels familiar. As a result, commodities are often scheduled months in advance. Without customer and product segmentation at a higher level, supported by the management board, organizations are naturally inclined to squeeze out the A customers and A products in favor of the C range. The segmentation framework will prevent organizations from doing this and in that respect, I’m convinced it is a perfect guideline not only for distribution, production and supply planning, but throughout the entire S&OP process.

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