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G00271285

Use the Outcome Segmentation Model in


Supply Chain to Communicate Design and
Benefits
Published: 6 March 2015

Analyst(s): Jennifer Loveland

Gartner's Outcome Segmentation Model assists heads of supply chain


functions, strategy and centers of excellence in defining and quantifying
benefits and communicating segmentation within supply chain.

Key Challenges
■ Eighty-four percent of companies pursuing supply chain segmentation capabilities cite lack of
buy-in and breakdown in communication across organizations, functions and teams as critical
drivers of failure to achieve objectives.
■ A common source of confusion between groups regarding segmentation arises when supply
chain and business leaders refer to segmentation as product, customer, geography or channel
segmentation, regardless of why they are segmenting. Most companies will subdivide each of
these populations multiple ways to support different goals.

Recommendations
■ Define 12 facets within the Outcome Segmentation Model as a repeatable, consistent way to
design and communicate segmentation within supply chain.
■ Communicate about segmentation based on the reason for applying the tactic not on the action
of segmenting itself.

Table of Contents

Introduction............................................................................................................................................ 2
Analysis.................................................................................................................................................. 3
Introducing the Outcome Segmentation Model.................................................................................3
How the Outcome Segmentation Model Works................................................................................ 5
Frame Communication About Segmentation Based on Value........................................................... 7

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Summary..........................................................................................................................................9
Gartner Recommended Reading............................................................................................................ 9

List of Figures

Figure 1. Outcome Segmentation Model................................................................................................ 4


Figure 2. Outcome Segmentation Model Targeted Example: Differentiated Supplier Relationships to
Manage Sourcing Risk........................................................................................................................... 6
Figure 3. Outcome Segmentation Model End-to- End Example: Differentiated Supply Chain Models to
Maximize Gross Margin in a Market........................................................................................................ 7
Figure 4. Outcome Segmentation Model Business Value Scope Alignment Example.............................. 8
Figure 5. Outcome Segmentation Model Product Segmentation Examples............................................ 9

Introduction

"Would you tell me, please, which way I ought to go from here?
"That depends a good deal on where you want to get to," said
the Cat.
"I don't much care where," said Alice.
"Then it doesn't matter which way you go," said the Cat.
"— so long as I get SOMEWHERE," Alice added as an
explanation.
"Oh, you're sure to do that," said the Cat, "if you only walk long
enough."

Lewis Carroll's "Alice's Adventures in Wonderland"

Most leaders could not imagine responding as Alice does to the above questions. But, do we
unconsciously send teams on a similar journey? When we asked companies how supply chain
segmentation (see Note 1) activities started at their company, we found it was often a leader
gathering resources and telling the team to do segmentation with little or no direction, other than it
is a leading practice. Thus, teams pursuing segmentation often start by asking: Why would I do
segmentation? What data should I start with? The answers are exactly as the Cat replies to Alice —
that depends on your goal.

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Segmentation helps you handle complexity more efficiently and effectively by targeting specific
differentiated outcomes and creating a portfolio of approaches optimized to deliver them. As the
complexity within supply chain increases, the importance of segmentation to enable profitable
growth increases. However, building the common understanding and language among the variety of
stakeholders required for a single application of segmentation is often a challenge. In fact, 84% of
companies pursuing supply chain segmentation capabilities cite lack of buy-in and breakdown in
communication across organizations, functions and teams as critical drivers of failure to achieve
1
objectives.

Additionally, the variety and value of potential applications for segmentation within the supply chain
and company mean that most stakeholders will interact with multiple uses of segmentation. The
activities to deliver products and services to customers across all processes within planning,
sourcing, manufacturing, delivery and service include an almost limitless number of things that you
can divide and conquer with segmentation. Whether achieving your goal requires segmenting
customers, suppliers, products, channels, markets, process methodologies or some other
population of items related to your supply chain, there are many potential ways to divide the items
into groups and a variety of ways to tailor your approach to each group.

With so many possible important "SOMEWHEREs" to get to with supply chain segmentation, how
can supply chain leaders increase the successful design and adoption of segmentation? The top
1
three enablers cited by 101 companies pursuing supply chain segmentation highlighted
communication. Gartner's Outcome Segmentation Model (OSM) provides a systematic, repeatable
way to define, design and communicate segmentation capabilities that will be relevant to your
supply chain and its specific objectives. The model helps you:

1. Determine where to apply segmentation


2. Identify the operational changes required due to segmentation
3. Articulate the trade-off decisions across the defined segment menu
4. Communicate the impact that segmentation has on operational and financial metrics

You can then clearly articulate the business and customer value the segmentation enables.

Analysis
Introducing the Outcome Segmentation Model
Successful teams of all types start with the objective in mind. For segmentation, that objective then
narrows down the population you should segment (see Note 2), how you should define the various
clusters within that population, as well as the best treatment for each group within the relevant
supply chain process.

The 12 facets (see Figure 1) of the Outcome Segmentation Model guide you from your objective
through three questions. They identify the items you must clearly define in order to apply

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segmentation in a way that delivers value to your business and your customer, and they highlight
what will be done differently in a segmented environment.

Three Key Questions

■ Outcome: Why are you pursuing segmentation? You will determine your objective and
identify significantly different financial and operational performance metric targets.
■ Segmentation: Where within your process will you divide items into groups? You will divide
a population into clusters based on characteristics relevant to your objective.
■ Model: How will you change activities due to segmentation? You will tailor the treatment of
each segment based on options selected from a menu of capability variants.

Four Layers of Detail

■ Describe: What is this application of segmentation? Describe the objective, the scope and
the general focus for operational changes.
■ Focus: What measures will be impacted? Translate the general description of this
segmentation into a set of relevant measures.
■ Quantify: Trade-offs are assigned to each measure. Assign numerical values to measures.
■ Detail: Decisions are summarized into menus. Assign decisions to people for specific action.
Figure 1. Outcome Segmentation Model

Source: Gartner (March 2015)

The OSM is not all that is required to create the capabilities and changes you identify; it is not a
business case to justify investment for segmentation in and of itself. However, it ensures you can
clearly articulate your proposed changes and their relevance to your business, and you will use the
information and decisions from the OSM as inputs to complete your organization's funding,
prioritization and business case processes.

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How the Outcome Segmentation Model Works


The OSM helps you to sequence discussions, analysis and decisions related to a specific
application of segmentation. The answers to your outcome (why), segmentation (where) and model
(how) are deeply interdependent. Organizations find that they must iterate between the different
questions to identify a segmentation solution relevant to operational and financial measures that
can be executed within resource and technology constraints of the supply chain (see Note 3).

The OSM uses the four layers of detail to refine and increase detail specificity as you iterate across
why, where and how you will segment. The 12 facets are numbered to indicate the sequence in
which they are most often initially defined to handle these interdependencies. You may refine the
definition of earlier facets as you complete the model.

To apply the OSM, you first outline the Describe and Focus layers of detail. The lead coordinator of
the exercise varies based on the culture of the organization and the scope of the specific
segmentation. The key is that senior leadership will support the leader with the cross-functional
changes that will inevitably be required.

Use the six completed OSM Align facets to align opinions on what a successful segmentation will
look like. They narrow the scope to specific processes and stakeholders and allow you to discuss
and agree on the definition of measures that will quantify changes.

For a simple application of segmentation in supply chain, teams can complete the definition of the
first six facets and align stakeholder opinions in a few days. Imagine a case where a worker strike at
a site or an armed conflict in a country disrupted the flow of inbound material for a period of weeks
or months. No matter how effectively the organization responded to this situation, leaders will often
use the incident as a "burning platform" to reassess and improve sourcing risk mitigation. However,
this usually comes as a request to better mitigate risk with the same or only slightly increased
supplier management resources. This provides a straightforward, targeted problem for
segmentation to address. The stakeholders you will ask to change behaviors will have just lived
through an emergency environment and will likely immediately grasp the need for change. Figure 2
shows the six OSM Align facets for a simple application of segmentation in supply chain such as
segmenting suppliers to manage risk.

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Figure 2. Outcome Segmentation Model Targeted Example: Differentiated Supplier Relationships to Manage
Sourcing Risk

Source: Gartner (March 2015)

For companies that look end-to-end across the value chain from what they sell through all steps of
plan, source, make, deliver and service, gaining stakeholder opinion alignment may take weeks. The
timing is driven by the complexity of scope and stakeholders. The "burning platform" and potential
business value will not be as simple or clear to the various stakeholders when a series of small
changes must be coordinated across many different steps within the supply chain.

One consumer products company created three end-to-end supply chain models in India by
differentiating the approach of six key processes, touching hundreds of employees. The net result
was gross margin improvement of 21% for the efficiency-focused supply chain, 10% for the agile
supply chain focused on product choice and 22% improvement on high priority parts available on
time and in full for the speed-focused supply chain. These impressive results are consistent in
magnitude with those companies find with successful end-to-end supply chain segmentation (see
Note 4). However, showing a specific stakeholder how a change in something as explicit as a
production strategy will help overall is more challenging. The OSM model will still provide the
framework to successfully navigate these discussions, but it will take longer and may require
focusing on different aspects of the model with different stakeholders. Figure 3 shows the six OSM
Align facets for creating a differentiated end-to-end value chain model to maximize gross margin in
a particular market.

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Figure 3. Outcome Segmentation Model End-to- End Example: Differentiated Supply Chain Models to
Maximize Gross Margin in a Market

Source: Gartner (March 2015)

Once you have general agreement with your leadership on the scope and stakeholders of the
segmentation exercise, you define the six Design facets during the Quantify and Detail layers of the
OSM. You use the information from the six Align facets to help identify which data to analyze. Use
the data to identify distinct inputs, activities and outputs to make that segmentation a reality. You
define what options are available at specific points within the supply chain and how and with whom
the choice among those options will be made, as well as the trade-offs inherent in selecting a
specific option.

As you understand more about the specific situation within your supply chain, you may find that you
cannot implement the segmentation as you envisioned. A common constraint that companies find is
that bills of material and financial structures dictate the level at which you can divide up products,
customers, channels or markets. For instance, you may be able to execute a process differently at a
family level, rather than at an SKU level. As you learn more about the critical leverage points for your
segmentation and the constraints you must operate within, you may go back and refine facets one
through six.

Frame Communication About Segmentation Based on Value


In addition to giving you a road map of how to apply segmentation, the OSM also helps address a
major cause of supply chain segmentation failures — communication. Segmentation ultimately
requires changes in behavior. The number of stakeholders can be quite large, and the behavior
change required by each may be different. Including those who will ultimately need to change
behavior early on in discussions is an important part of socializing and improving support for the
change.

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Teams that are deep into the design work of a segmentation initiative often adopt convenient
language shortcuts to simplify communication that can cause confusion in a wider audience. The
most common simplification is to simply call something product, customer, market or channel
segmentation. The difficulty with this is that most companies will divide these populations in
different ways, in different parts of the organization or process. The examples in Figures 2 and 3
could both be referred to as product segmentation, and both could exist within the same
organization. However, the stakeholders and scope of changes will be different or even overlap. For
instance, both of the above examples may have an operational impact on the approach to
inventory. The actual definitions of the segments will be different, and the operational and financial
metrics impacted may be different or overlap.

Once you have the six Align facets of the Describe and Focus layers in the OSM model, you have
the detail needed to clearly communicate the scope of a specific segmentation and the why of the
activity. This can help show alignment to your corporate and supply chain strategy and minimize
unproductive analysis and discussions that will not help achieve the stated goal.

A best practice is to use the structure of the OSM model to create a common understanding of the
goal of applying segmentation and then add in the facet information from your specific
segmentation application. Figures 4 and 5 highlight this best practice using the OSM examples
introduced above.

Figure 4. Outcome Segmentation Model Business Value Scope Alignment Example

Source: Gartner (March 2015)

Note that these specific examples highlight the business value of segmentation. Twenty-one
percent of companies pursue end-to-end supply chain segmentation to gain better alignment to
customer demand. In these instances, the OSM may focus more on customer value. For instance,
you might instead frame the segmentation as Differentiated Supply Chain Models to Align to
Customer Demand for XYZ Line of Business. In the business value version, the outcome metrics of
focus might be on revenue and cost to deliver. In the customer value version, the outcome metrics
of focus are often different targets across lead time from order to customer, cost to the customer
and choices available to the customer. Neither version is inherently better or worse, but the framing
will influence how success is defined, perceived and achieved.

To achieve these objectives, the identified approaches both required segmentation of products —
however at two different levels of granularity. This can be highlighted by refining the above
description.

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Figure 5. Outcome Segmentation Model Product Segmentation Examples

Source: Gartner (March 2015)

Summary
The first step in planning a journey is to know the destination. The Outcome Segmentation Model
provides a structured way to define the destination and plan the journey. Unlike Alice in
Wonderland, when you utilize the OSM, you will not have teams wandering aimlessly to get to
"SOMEWHERE." Instead, they will know where they are trying to get to and why.

Gartner Recommended Reading


Some documents may not be available as part of your current Gartner subscription.

"Apply Supply Chain Segmentation for Business Value"

"Targeted Supply Chain Segmentation Examples by Function"

"Three Skill Phases Required for Supply Chain Segmentation"

"Best Practices in Defining Supply Chain Metrics"

"How to Define and Brand Supply Chain Segmentation"

Evidence
1In 2012, we surveyed 101 global supply chain leaders about segmentation within their company.
Twenty-eight indicated they had a failure in attempting supply chain segmentation. This was
combined with more than 100 advisory conversations regarding supply chain segmentation in 2014.

Note 1 Supply Chain Segmentation


Supply chain segmentation is a systemic, repeatable capability to deliver differentiated outcomes
within and across supply chain functions, based on options selected from a menu of capability
variants. Differentiated outcomes for supply chain segments are reflected in significantly different
financial and operational performance metric targets. The scope of application may be targeted to a
subset of processes or end to end across the value chain.

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This will:

■ Have a defined supply chain business or customer value objective


■ Align supply chain delivery to a portfolio of targeted outcomes
■ Include a defined scope of physical, informational and/or financial processes
■ Define the standard operating procedures for capability variants
■ Require changes in employee and/or customer behavior
■ Require changes in process and/or organizational infrastructure
■ Focus on critical decisions to achieve desired financial and operational metrics

Note 2 Segment
Gartner uses segment in its verb form to mean dividing something into separate parts; in its noun
form as each of the parts that something is divided into.

Note 3 End-to-End Supply Chain Segmentation


End-to-end supply chain segmentation is the most complex application of supply chain
segmentation. It is identifying, designing and operating the end-to-end value chain (from customers
to suppliers) to deliver distinct, defined order through aftermarket experiences, based on customer
and business value feasible within company constraints. It:

■ Identifies trade-offs for defining, delivering and sustaining profitable perfect orders and service
■ Coordinates both across and outside of supply chain activities
■ Defines distinct end-to-end operational models or flows through the physical, information and
financial supply chain

Note 4 Targeted Supply Chain Segmentation


Targeted supply chain segmentation is an application type of supply chain segmentation. It is
identifying a menu of target outcomes and optimizing the design and operation of a subset of
supply-chain-owned processes and metrics to deliver those outcomes. Examples may be specific
to a supply chain function such as logistics or procurement, process such as demand management,
or by a business consideration such as product, geography or customer.

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