Tips and insights: Customer segmentation and needs analysis

The basis of an effective supply chain (SC) is knowing exactly which service criteria are important to customers. It is critically important, therefore, to determine customer segments and the basic needs of each segment.

5 tips for customer segmentation and needs analysis

  • First, identify your customer segments

The first important step is to identify, update or refine the various customer segments that are currently being served. These are identified according to the type of SC best suited to their demand predictability (continuous replenishment, lean, agile, reactive) and their degree of loyalty (partner, long term, short term, ad hoc). Each customer segment has differing SC requirements.

  • Isolate your customers’ top three service needs

Customers must be asked to select the top three service criteria that affect their buying decision. If a list of ten service needs (such as quality, rapid response, price, customisation, etc) is presented to customers, they will likely choose all ten as critically important. Isolating the top three instead enables the SC delivering to that segment to focus on meeting the critical service criteria.

  • Be aware of changing needs

Setting customer service levels by customer segment must be based on the current customer needs of each segment. This may seem obvious, but with rapidly changing markets and competition, it is easy for an organisation to assume that customers’ needs remain the same over time.

  • Survey your internal operations staff

Once the external view of customer needs per segment has been determined, an internal survey of the views of the organisation’s key operations staff (in sales, marketing and SC operations) will highlight any areas of under- or over-servicing. Usu ally, significant gaps and differences emerge. These are the people that are making day-to-day prioritisation and delivery decisions, which result in the customer experience. They must be informed of the gaps and trained to meet needs in each segment.

  • Separate demand forecasts

The effectiveness of the SC planning process, in terms of sales and operations planning, demand forecasting and inventory management, depends on correct definition of customer segments and their needs. Each customer segment must have a separate demand forecast which suits the buying characteristics (independent or dependent demand) and should be combined at the inventory management stage, for each stocking location.

Indicators of potential for improvement

Here are some typical symptoms of inaccurate or outdated customer segmentation and needs analysis:

  • Frequent and conflicting priorities in day-to-day customer stock allocation and deliveries
  • Competitors eroding existing market share in certain (usually lucrative) customer segments
  • Management time and effort spent dealing with the issues of less important customers
  • Excess operating costs in the SC due to last-minute and urgent procurement and order expediting
  • An imbalance in stocking levels (too few “A” and “B” stock keeping units (SKUs), excess of “C”, “D” SKUs, etc.)
  • The need for urgent supplier orders and expensive inbound freight options
  • The need for urgent customer orders and expensive outbound freight options