The idea behind value chain segmentation is that not all customers or consumers should be served with a one size fits all supply chain. Different service levels, inventory policies, and supply chain networks can make sense depending on the specific goals for a customer or set of products.
Mark Hersh, the Director of Supply Chain Strategy at Clorox, spoke on this topic at the Council of Supply Chain Management Professional’s annual conference on October 2nd. The Clorox journey had previously been written about, but Mr. Hersh went into more details during his speech.
Clorox is a $6.1 billion public company that sells not just bleach, for which the name Clorox is almost synonymous, but over 40 consumer brands including Glad, Brita, and Kingsford. 80 percent of their brands rank number one or number two in their category. Manufacturing is done in 24 countries worldwide through a combination of owned manufacturing plants and contract manufacturing sites.
Clorox looks at their supply chain from an end-to-end perspective – from their supplier’s suppliers through to the consumer. Mr. Hersh says that Clorox seeks to “embrace good complexity and eliminate bad complexity.” They do this by seeking to have the “right supply chain design and capabilities” for their different product and market objectives. “We’ve employed the tailored supply chain approach over the last five to six years and found this approach to be effective in driving improved performance results.”
There is a good deal of internal collaboration involved between cross-functional partners with this approach. “Using this methodology we highlight where General Manager (GM) business objectives and performance targets can be met by a supply chain designed with the right capabilities. We point out the trade-offs based on the capabilities we would put in place.” Depending on the goals, tradeoffs need to be made between efficiency and responsiveness. Efficiency translates into a low-cost supply chain and responsiveness to a high service level, fast response supply chain, with quick response capability to the retailer for products with high demand variability and/or unforecasted demand. This ensures products are in stock at the store shelf for the consumer.
In a disruptive innovation supply chain, often centered on new products introductions and products very different than the core portfolio, speed and service are critical to success, but supply costs will likely be higher. In an efficient and low-cost supply chain, perhaps for a product near the end of its lifecycle or one with scale and more predictable, costs are the priority. Interestingly, individual products with within a business do not always have the same supply chain. Clorox, for example, has different supply chain capabilities for its Brita pitchers, replacement filters and faucet mount units.
Deciding on the right supply chain design is something that occurs during the annual strategy process which occurs in each of the business units. The meetings focus on whether there is a match between the existing supply chain capabilities and the goals of a business unit. The GMs are encouraged to answer the question “What are the real needs to be successful in the market?” It is an iterative, ongoing process. Several meetings can be required to come to agreement between the GM and supply chain team, as well as sales, marketing, finance, IT, and product development teams.
This is also mandatory. GMs are required to participate throughout this process. GMs are required to learn the process and deploy it effectively.
When Clorox decided to implement its value chain segmentation process 5-6 years ago, they developed a preliminary process design, agreed on several pilots for where to start and used an act, learn, improve and scale process for continuous improvement.
Mr. Hersh believes it is important to broadcast your success and wins continuously. Doing this has allowed them to gain traction across the organization for using this approach and build “muscle.” “There used to be a small core group” with the ability to lead this process. “The group is getting bigger” and more people across the organization understand the value this process can deliver.
This value chain segmentation process has delivered $40 million in cumulative value to the organization over the past five years in different areas – cost savings, improved profitability, increased sales and deferred investment. In one project, there was a product line which lacked clarity on what the long-term needs were surrounding those products. The business continued to grow, but there were high costs associated with the product line based on the use of a third-party manufacturer. Bringing manufacturing in-house led to over $13 million in profit improvement. For a different product line, they got $4 million in additional sales by improving the responsiveness of the supply chain. In yet another case, once the team agreed to the goals, they discovered they could defer a $10 million capital expenditure.
The patience to work through a strategy, agree to the real requirements for products and markets over a longer term window of time, have the trade-offs debate, and conduct multiple cross-functional meetings is hard work. But Clorox shows that it is worth the effort.