Where the transformation begins: Creating a customer-centric supply chain strategy (2023)

One of the few constantsthe consumer goods industry is changing. The industry has always evolved, especially in the years leading up to the COVID-19 pandemic. Consumer preferences are changing for a variety of reasons: e-commerce has gained momentum, established players are using scale and reach to unseat family-owned businesses, and malls have lost ground as a primary shopping destination. The pandemic has not only accelerated these trends, but has also added new layers of complexity. Today's consumers expect more convenience, increased cost competitiveness, and fast delivery to complement their omnichannel shopping journey.

What does this mean for commercial and consumer goods companies today? Everyone wants to get the right products sustainably and deliver them at the lowest possible cost, at the right speed, and with a great customer experience. However, to succeed in the omnichannel world, the traditional one-size-fits-all approach is no longer enough. The key to success in today's environment lies in a segmented approach that clearly differentiates offerings between consumer segments based on their respective needs, product preferences, and location, and tailors the supply chain structure to enable a differentiated strategy. . And this segmented approach must go beyond consumers. Any retail and CPG business that owns physical stores or works with wholesale and marketplace partners must segment these channels and customers to serve the end consumer holistically and across channels.

In this article, we articulate a three-step approach to creating and implementing this consumer-facing segmentation:

1. Define target end-user segments for the future supply chain as a combination of consumer requirements, product features, and supply chain structure.
2. Define the customer-focused "North Star" vision and differentiation dimensions for each segment.
3. Create a differentiated supply chain strategy that includes the right network strategy, best-in-class planning and allocation forces, omnichannel fulfillment capabilities, and the right omnichannel operating model to support each consumer-facing segment.

1. Define target segments for customer return

The anchor of a customer-centric strategy is a deep understanding of consumers. However, to develop the right differentiated strategy, companies must understand not only consumer needs and preferences, but also how these factors intersect with product features and supply chain structure.

Consumer requirements and preferences

Developing a segmentation strategy starts with a clear understanding of who the relevant consumers are, including whether they are digital end users, stores, or wholesale partners. It is also important to understand factors such as demographics, geography, and product preferences (Figure 1).

(Video) Start your journey to a customer-centric supply chain today

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Therefore, companies must consider what consumers demand. Are they cost conscious or premium shoppers? Do they prioritize speed of delivery or are they more concerned with sustainability? For example, consumers looking for sustainably produced organic cotton clothing are likely to value sustainability over speed of delivery. This could be backed by the promise of a slower but low-carbon mode of transport and efficient packaging.

product properties

Once there is a clear understanding of consumer needs and preferences, it is important to understand how they intersect with key product features. Characteristics to consider are speed of sale and volatility (for example, ebbs and flows in demand for seasonal products); the type of product and availability, including how the product flows and how it is replenished; and how demand is tracked with different consumer segments.

supply chain structure

Based on consumer needs and preferences and product characteristics, the final element in understanding consumer segmentation is the current structure of the supply chain. Given the existing framework, including node structure and fulfillment methods, what customer needs can you satisfy and what customer return segments can you serve without changing the supply chain? Does this align with your priority consumer segments for the company?

Delivering optimal value in the omnichannel world requires custom strategies for each part of this framework. This is the core of the segmented supply chain strategy.

2. Define the vision of North Star and the differentiating dimensions of each segment

Once retail and consumer goods companies have a clear understanding of consumer segments, they need to define the vision and differentiating dimensions for each priority segment. In today's environment, it is crucial to define which expectations are met and which customers to avoid common and costly mistakes such as providing speed at a premium price to low-cost consumers, or creating offers that quickly become outdated and irrelevant. For example, the traditional model of promising free seven-day shipping on a wide variety of products and channels may be faster at steering consumers away from certain types of products they need.

Therefore, companies must tailor the promise to each product segment. Four differentiating dimensions are usually taken into account.

Service

The proliferation of comparable products across channels and brands makes the retail experience a crucial dimension for differentiation. Three key service factors must be carefully considered and defined. Each has “hygiene” elements, which should be included in the offer, as well as elements that provide opportunities for competitive differentiation (Figure 2):

• Speed.While many companies are adopting a three- to five-day delivery standard in the United States and a two-day delivery in the European Union, there is an opportunity to further differentiate in this dimension. For example, for select products and geographies, consumers with Amazon Prime can get 1-2 day delivery (along with other exclusive member benefits). As another example, Gorillas, a Germany-based startup expanding into the United States, offers ultra-fast delivery (15 minutes or less) for groceries and convenience items as a differentiator.
• optionality and flexibility.In the omnichannel world, there are many ways to receive and return products, for example, door-to-door pickup, curbside pickup, or buy online and pick up in store or at a locker. The ability to choose from a menu of options and the flexibility to change that decision can also be a key differentiator. Target, for example, was quick to set up curbside pickup during the pandemic. It offers this option for many categories in the store and also maintains a simple system for changing pickup dates and times based on customer preferences.1
• Convenience.Increasing consumer convenience through incremental offerings is another potential point of differentiation. A large hardware store offers white glove service and instructions for assembly or installation in different price ranges. Instacart offers the convenience of precise delivery windows, including the option to pay for faster delivery times; On the other hand, DoorDash, which recently partnered with Safeway for grocery delivery, determines an estimated delivery time without the option to choose an exact time. For some consumers, this level of differentiation is crucial when choosing one service over another.

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Availability

A deep understanding of consumers and their core products generates savings and allows conscious adjustment of availability and supply. While best-in-class planning and allocation helps companies provide SKUs to different stores that are selected based on geospatial demand (instead of keeping every SKU in every store), additional options to differentiate from the competition include the following:

• availability at the end of life.What do you do with a product at the end of its life cycle? Are you serving loyal customers while maintaining availability, or are you shutting down production to reduce cost and supply chain complexity?
• Restricted access.This involves providing different levels of access to products with limited availability based on the expected long-term value of customers. Luxury goods retailers have long been masters of this by deliberately restricting the range of products that are in high demand and initially offering them only to existing customers.

cost effectiveness

As consumers become more accustomed to near-instant gratification and a high degree of flexibility, choice and convenience when shopping online, retail and consumer product companies are aware of the costs associated with these choices. Same-day and next-day deliveries and free returns (which consumers are also used to), fragmenting the product flow to allow for choice, and providing additional convenience factors undermine overall efficiency and profitability. When organizations define their differentiation strategies, they must take a holistic view and understand the full cost of executing the strategy.

sustainability

The extent to which a company acknowledges environmental, social and governance (ESG) issues is an increasingly important dimension of differentiation. Of our 2020 Pulse Consumer Sentiment Survey respondents on sustainability in fashion, 57% have made significant lifestyle changes to reduce their environmental impact and more than 60% say they strive to recycle products more environmentally responsible and buy. friendly packaging.2As consumers increasingly emphasize social and environmental commitment, we are also seeing companies publicly stating their commitment to ESG issues. Businesses may choose sustainable product options (for example, glass containers or multi-use materials) over lower-cost, single-use options (such as non-recyclable plastic). Similarly, retail and consumer goods companies may choose to only work with sustainable or socially responsible suppliers, even if it increases product costs and requires closer supply chain monitoring.

3. Create a differentiated supply chain strategy

The third and final dimension of this segmented approach for consumer goods and retail companies is to create a differentiated supply chain strategy (Figure 3). There are four critical enablers to consider.

Create the right network and ecosystem strategy to support your supply chain strategy and required inventory flows

The location of your manufacturers, suppliers, and distribution nodes is critical to enabling a differentiated multi-velocity supply chain strategy. For example, having the right nodes in the right locations (eg, warehouses, shops, or darkrooms) is critical to achieving the speed and flexibility you want.

Create first-class planning and allocation power

In addition to the correct placement of nodes, the correct inventory must be assigned and placed at those nodes based on the segmented inventory product flow. These two enablers must work together to successfully bring speed, flexibility and convenience options to consumers and businesses at the lowest cost.

Enabling Omnichannel Fulfillment Features

As consumers interact with businesses in more omnichannel ways, such as for online shopping and in-store pickup, it is critical that businesses implement the right omnichannel fulfillment capabilities to deliver the right product to the consumer at through the desired fulfillment method. In addition, the complexity of fulfilling order profiles, from single units for e-commerce customers with millions of delivery locations, to full cases or even full pallets for wholesalers and distributors with only a few delivery locations, requires new capabilities for storage and transportation.

Integrating the right omnichannel operating model

Finally, as with all transformations, it's critical to make sure the organization is rooted in the right omnichannel operating model. Taking clothing as an example, the traditional model that separates wholesale and e-commerce stores is no longer relevant; Retail and consumer goods companies need to have a combined and coordinated vision to ensure proper fluidity and transparency across all channels and across the business.

Consumer expectations have changed dramatically. To succeed in the omnichannel world, the traditional one-size-fits-all approach is no longer enough. Retail and consumer goods companies must first define what their consumers are looking for and align with a clear vision to serve them through a differentiated strategy. Only after a data-driven exercise to define these service models and tradeoffs can they reap the full benefits of building and optimizing a differentiated omnichannel supply chain.