Danish production company has created a purely customer-driven value chain and leads the way in future supply chain control.
Customer segmentation is one of the newest and most effective approaches to supply chain optimization, and the company described in this case has therefore decided to remain anonymous. We will refer to it as DenPro.
Over the past year, DenPro has rolled out an extensive Europe-wide customer segmentation program.
The purpose of the segmentation program was to provide the right service to the right customers and level out peak production periods.
This included reviewing the numerous special agreements that complicated the daily work or the sales and production departments.
A mass of special agreements replaced by two service tracks
For years DenPro had promised all its customers a two-week lead time. As a result, production was often pushed to its limits, and salespeople resorted to underhand methods as they vied for production capacity.
Delivery times were often delayed, therefore, especially at holiday periods like Christmas and Easter.
But two weeks’ lead time was in fact not what every customer wanted at all.
When DenPro systematically started asking its customers, it emerged that they did not want the same thing.
Customers typically prioritized one of two things:
- Some needed a few days’ lead time, and two weeks was “far too long”.
- To others, it didn’t matter whether the lead time was two, three or four weeks as long as the products arrived at the agreed time.
Customer segmentation helps the sales department improve its customer service
DenPro used ABC Analyzer to segment its customers according to their profitability, and combined the factual basis with the customers’ wishes: Which do you prefer, fast delivery or stable, reliable delivery?
“It’s a win-win situation where it’s a question of providing the right customers with the right service in an efficient way. Customers get the service they ask for and become more profitable for us.”
The sales team embarked on an entirely different form of dialog – consensus-driven negotiation – with each individual customer. Segmentation and service differentiation gave salespeople the chance to negotiate on a wide range of parameters other than price:
“A UK customer offered huge potential, but placed most of its orders with other suppliers. By offering better delivery terms, we won a larger volume of orders from that customer, who thus gained a better segmentation position which in turn justified the improved terms it was given.”
The segmentation process placed customers in four general categories, and salespeople were asked to individually assess them to identify those whose potential – based on greater volume or premium products – qualified them for better conditions.
Closer collaboration with customers creates win-win situations
The solution for many customers was a joint forecasting agreement, which gives DenPro a better idea of demand well in advance and thus a better basis for planning production ahead of time.
Customer collaboration and service differentiation have reduced production readjustments by 20% for key customer orders (orders for AA and AB customers in DenPro’s double ABC segmentation). This frees up lots of production volume, thus enabling better capacity utilization.
Some of the customer negotiations consisted of eliminating special agreements, enabling the use of standard terms and conditions across countries and segments. This has made things easier for everyone:
“A factory manager told me that shift workers can now prioritize their work if a problem arises in the middle of the night. In the past, this was impossible.”
The scenario: A complex supply chain
DenPro produces approx. 10,000 products for 800 European customers. Eight regional sales offices handle the orders, and production is spread across four specialized factories. The specialization means that an order for a single customer sometimes includes products from all four factories.
More than 70 special customer agreements made the complex supply chain very difficult to optimize.
What was the answer?
The production company DenPro segmented the customers into four groups created by combining a classic ABC customer analysis with nine categories and the customer’s service requests. The ABC categories were calculated using ABC Analyzer.
- Forecast++ The most important or key customers. These customers receive premium service and are encouraged to provide forecasts that underpin a short delivery time.
- Forecast Important, smaller volume customers get good service and can provide forecasts for selected products. Approx. two weeks’ delivery time
- Standard Good customers. Receive service corresponding to the former standard service provided to all customers, approx. three weeks’ delivery time.
- Basic Smallest customers. Delivery depends on load.
Interview and case written by Jakob Hessellund, IT journalist