During the recent webinar, Inventory Fitness – Governance, Targets, and Segmentation, we took audience questions and answered them.
Here are some issues that people in industry face and are interested in finding a solution to!
Question 4 of 14
Question:
Many of our clients talk about market segmentation. How does market segmentation fit in with inventory policy?
Answer:
It seems like the framework only considered volume or revenue with variability.
That can be approached in two ways. I’ll grab the first one. Maybe, Kai, you can take the empirical approach. So, if you take a mathematical approach, what you’re kind of implying is that the market segmentation is based on numbers, based on profitability, and that’s the primary, but not the only component. There are always multiple components.
But if we’re going to base that market segmentation on profitability, then we’re going to use a safety stock calculation, a mathematical calculation to account for the margin generated by the product, and there’s a technique called the newsvendor model approach to set the service level. Look that one up. There’s it’s a lot more than we can discuss here. A sample of variability is taken. Your calculator price versus cost fractile.
Adopt that for discounts and returns. You determine how that cumulative distribution works, and that pulls the safety stock level. So, again, look that one up. That’s the newsvendor model. But that’s when you’re looking at profits, I’m saying profits only; we never look at profits only, then that’s a good way to take a look at it.
Yeah. And what’s interesting is that sometimes people or organizations won’t accept a numerical solution. And then you may want to do something that’s a little more empirical, meaning that you talk to your customers.
You talk to your sales team, and you ask, What level of service do you need?” Or you talk to your marketing group, and you ask, Who are our most important customers, and what kind of service do they expect?
And how does that give us a competitive advantage? In essence, what you do is you build a model of your business.
You lay in the rules that you’re going to use to service your customer base or that particular market. And then you make sure that that level of investment and support is fundable by your organization, either from a working capital perspective, or from an expedited perspective, or from an open capacity perspective.
Again, the idea is that rather than using a mathematical approach, you’re going to use a customer-driven consensus-based approach that’s driven by a very solid framework so that you actually get consistent results.
Whichever one you choose, you’ll meet with success. The key is that you both think through the approach and work through the approach to make sure that you’re not surprised when you get a certain set of results.
Yeah. Nobody ever wants surprises.
It’s best to look at both of those methods in tandem because we’re concerned about profits, and about service, and about our image in the marketplace. So, we’re giving you an either-or. It’s not an either-or. This is a take an educated approach but take a consistent educated approach.
Remember, we’d be happy to chat with you about any of this in more detail.
And if you’re interested, check out our schedule for upcoming business process improvement courses that we offer throughout the year to help you achieve business excellence.