Oktoberfest is a celebration of all things beer, when specialty beers are refined and revealed to the world. I’ve always been a draft beer guy myself, not dabbling in grapefruit lagers or coffee-enhanced stouts. But I am clearly in the minority.
In 2018, more than 10,000 companies crafted beer — up from a mere 49 breweries 30 years ago. While this is to the delight of my friends who love hard cider in fall and Hefeweizen in spring, it compounds supply chain complexity not to mention the cost-to-serve. Large brewers are being forced to personalize and expand offerings to keep up with customer preferences and fend off new, more agile microbreweries.
The beer industry is not alone. In every industry, the digital economy has leveled the playing field for niche players. Many long-standing manufacturers must not only increase their product selection, but they must also learn how to cater to the unique needs of these new and different customers. This personalization redefines what products and services customers now value and what they are willing to pay for them. Simply put, traditional channels are a thing of the past.
A single supply chain strategy to serve these divergent channels is also no longer enough. To identify cost-to-serve and enhance profitability, our clients find value in segmenting their customers into channels that encompass their unique customer and product demands.
Here are a few things we advise our clients as they adjust their direct and multi-channel service models:
Properly define your channels. Segmentation sounds easy, but it requires not only an understanding of both product and customer characteristics, but also of your own supply chain capabilities. A hotel chain stocking draft beer kegs does not have the same service expectation as a specialty cafe who purchases 4-pack bottles. If these service level limits are not well defined, your profitability will suffer. Segmenting these clients will help you identify which service demands should be met or not — like foregoing the halt of your bulk draft manufacturing to meet on-time delivery for a mom & pop retailer’s small, seasonal rush order. As personalization intensifies, companies should identify the requirements of both traditional bulk and lower volume, broader portfolio channels. To create these channel classifications, consider each customer’s demand volatility, service requirements, and cost-to-serve (see Figure 1).
Segmentation is instrumental in helping set profitable service targets in each channel, but as with the 6% Reinheitsgebot Oktoberfest beer, a little goes a long way. We recently surveyed a group of supply chain executives who identified a reasonable segmentation to be between 3 and 5 channels.
We recently surveyed a group of supply chain executives who identified a reasonable segmentation to be between 3 and 5 channels.
Establish each channel’s playbook. Once you have created homogenous groups within your supply chain, you must determine which products you will offer and how you will get them to each customer. This requires you to identify the unique service expectations of each channel. For example, some customers might expect flexibility in terms of responsiveness, while others just want a reliable and cost-effective service. In the beer industry, a large retailer may easily meet minimum order quantities but experience margin pressure, and yet a specialty store may need a broader portfolio of premium SKUs but have limited shelf space thus requiring more frequent and on-time replenishment. To optimize cost-to-serve, each channel should evaluate individualized manufacturing strategies, stocking policies, service level targets, and product portfolios.
In the example playbook shown below, this manufacturer segmented its customers into four channels. Gold service customers have products developed specifically for them. Flexible growth encompasses newly introduced products, like an Oktoberfest Marzen. A steady flow client may consume private label products with high volume and low margins, while a managed complexity customer may best be served through a distributor.
Accept some degree of service failure. As consumable supply chains move from bulk to customized products, service demands will accelerate. Companies must be careful to transition traditional bulk channel’s service metrics to these specialized ones. In the case of beer, demand at restaurants continues to decline, while more margin sensitive retail sales are increasing. Accepting some degree of supply chain failure — and properly setting those limits — will allow you to compete with more agile, niche companies and increase your overall supply chain profitability.
To segment your supply chain and regularly refine and update your playbook requires the right amount of data and analytics. With digitization, you probably already have the data, but how to harness it for supply chain segmentation will continue to be your challenge. Internal company bias might also limit your success. This is where we can help. Our extensive industry knowledge and fact-based, analytical decision process will allow you to achieve your supply chain goals any time of year. Not only during beer season.
Erik Diks, Chainalytics’ Managing Director of Europe, has been a supply chain management adviser for over 20 years. Throughout his career, he has supported multinationals such as Coca-Cola, Heineken, and Bayer with large-scale transformational projects which better align their supply chain and business strategies. Currently, Erik manages the sales and delivery of Chainalytics’ end-to-end supply chain consulting services in the European region.
