The value of Supply Chain segmentation in Pharma

Last month I have been asked to make a presentation at the Global BME Supply Chain conference in Frankfurt about supply chain segmentation in the Pharma industry. I do truly believe that this topic is the next opportunity area for meaningful improvement in overall Pharma supply chain practices.

The concept of segmentation, well known in other industries, is now starting to take hold in parts of Pharma, notably within generics manufacturing companies and consumer health ones. But within “branded pharma” the concept is still taking its first steps….

So, what do we mean by segmentation? The “Gartner” definition is one that I like the most. Being appropriate and to-the-point;  “Segmentation is all about designing and operating distinctly different E2E value chains (from customers to suppliers) optimised by a combination of a unique customer value, demand specific patterns and manufacturing/supply capabilities”. This is easy to say……but it is definitively not so straight forward to implement, as it requires a strong change management effort focusing on a few – but very important – elements that I call the “ABC of segmentation”.

ABC of segmentation

The starting point, the “A”, is always the CUSTOMER. This is the most important step but also the one that is often overlooked, undermining the overall segmentation effort. So, keep it simple and just ask yourselves three basic questions: 1) Who are my customers? 2) What are their unmet needs? 3) Are we delighting them? For how basic it could seem, never skip asking or answering these critical questions!

The “B”, or step 2, of segmentation is about mapping the DEMAND patterns. It is not uncommon to identify 4 groups of SKU’s that have a clear demand behaviour. In my company we do classify these as follows: – Horses (High Value/Low volatility) – Mules (Low Value/Low volatility) – Mad Bulls (High Value/High Volatility) – Jackrabbits (Low value/High Volatility). Obviously the way to forecast these four different demand patterns requires a smartly differentiated approach. The Horses, that normally account for >50% of the value, can easily follow statistical forecasting (8 times out of 10 proven better than the in-market forecast) whereas the jackrabbits, which normally account for >50% of the SKU’s, require an ad-hoc forecasting that combines a mixed of advanced analytics techniques with in-depth knowledge of market dynamics.

This brings us to the third step of Segmentation, the “C”, which is all about designing the supply chain and operate it “from the customer backwards”. By having applied the previous two steps, we should consequently identify the right de-coupling point in the supply chain (design requirement) and the right supply strategy (operating requirement). For example, the Horses work best with a robust make to stock policy, while for the volatile jackrabbits require a highly reactive make to order strategy with as much late stage differentiation as possible within your operations.

These are the few simple hints about how to apply segmentation in practice. Now, let’s just do it!!!!

Alessandro De Luca
Senior Vice President, Head of Global Supply Network Operations at Merck Group