An evaluation of managing diversity in the supply chain : a case study of an electrical wholesale distributor in the UK

Purpose The method of understanding and managing the diversity within a business is at the heart of the reasoning behind the concept of ‘supply chain segmentation’. The overarching principle is to find economical segments within the diverse product and customer mix and to match differentiated strategies accordingly. In essence the strategy balances supply chain costs for individual products against their value to the business. The strategies are selected depending on the properties of each segment. The aim is to prioritise resource to the products and customers which contribute the highest proportion of sales and to reduce operational costs to those that contribute the lowest proportion of sales, whilst matching service level requirements. As a result overall costs are reduced and subsequently profits are increased. The research project aims to show how a segmentation methodology can be applied to all planning levels, strategic, tactical and operational and the extent of which this can improve service levels and reduce operational costs. Research Approach The research project is based on a UK company operating in the electrical industry. A case study research strategy is appropriate in this context due in part to the complexity of the problem but also because it is the most feasible way of testing the efficaciousness of the strategy employed. Furthermore, a working supply chain provides the platform to implement new solutions where observable results can be examined. It is not possible to form a supposition of the benefits of such a strategy without carrying out a project of this kind. The inventory system is modelled using a discrete event simulation (DES) method and this provides the platform to test a number of segmentation strategies. Findings and Originality Uniform policies have created high volumes of stock obsolescence and logistics costs that exceed product margins and these have left many products and customers unprofitable. When segmentation strategies were employed within all levels of the business it was shown to create significant improvements. The results from the DES model showed that by aligning appropriate inventory strategies to sectors of products which are categorised by volume and variability there was a reduction in overall stock holding and an increase in service levels. Extensive documentation is available regarding many of the concepts and principles which are adopted as part of the supply chain segmentation methodology; however, little information has been published regarding a specific approach, the financial justification, and measurement of supply chain performance improvements of segmentation strategies. Research Impact The impact of research has been to show the use of segmentation using multiple variables throughout the supply chain. Building on the six segments proposed by Smith and Slater (2001) an extra dimension is added for lead time variability. Furthermore, it shows which specific strategies and respective parameters are suited to each segment. Practical Impact The adoption of a supply chain segmentation methodology has real benefits for companies. The importance of segmentation has been stressed for some time (Fuller et al., 1993; Fisher, 1997; Lee, 2002; Payne & Peters, 2004) and the application of this strategy can provide a method which provides businesses with a great opportunity to use smarter ways of purchasing, storing and delivering their products.