Supply Chain Segmentation? Bureaucracy Heavy Value Streams


The latest supply chain buzzword seems to be “segmentation”. The basic idea is directly aligned with lean thinking – “…different customers associated with different channels and different products are served through different supply chain processes, policies, and operational modes. The goal is to find the best supply chain processes and policies to serve each customer and each product at a given point in time while also maximizing both customer service and company profitability.”

This from an advertisement for i2 thinly disguised as a technical article in Supply Chain Quarterly.

That is right at the core of the logic behind structuring the business into value streams. The problem with Supply Chain Segmentation is that it simply reinforces silo management. “The goal is to find the best supply chain processes”?

Actually the goal is to find the best end-to-end business processes, not just supply chain, including design, sales, production, accounting and administration … and supply chain. The thinking behind Supply Chain Segmentation is that the massive, one-size-fits-all manufacturing approach remains largely intact, with only the supply chain acknowledging the fact that different customers have different value propositions.

They realize the other important problem with one-size-its-all and that is that the cost is different for different customer types, and traditional accounting can’t solve that problem too well. Formally organizing the entire company along the lines of those “different channels and different products”, instead of in their functional silos, makes it easy to avoid the allocations at the heart of the accounting murkiness. Absent this approach the Supply Chain Segmentation folks fall back on the roundly discredited approach of activity based costing, “a simple model that assigns transportation, inventory, and ordering costs to products based on their volume and other ordering dynamics” – where ‘assign’ is just another word for ‘allocate’. Rather than change the accounting system, they suggest regular analysis to get real information concerning the supply chain.

They say, “This essentially means that there will be multiple, virtual supply chains running against one physical supply chain.” Then allocate the physical costs to the virtual value streams, and control it all with "business optimization centers or supply chain centers of excellence whose mission includes establishing, implementing, and monitoring segmentation policies.”

It all seems rather silly. If we know there are different customer channels with different value propositions, and we know that the business processes and costs are different for each, why hang on to a functionally based organizational scheme? Why hang on to an accounting system that doesn’t acknowledge this? Why create another layer of bureaucracy and more system complexity, rather than simply take the simple step of aligning around the customers?

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