Increasing Industrial Distribution Profitability by Segmenting Customers, Suppliers and Products-Part 1 Segmentation as a business process

Segmentation is a process of dividing groups into subgroups that can be better managed and deployed. The major groupings to be discussed in this paper are: Customers, Vendors or Suppliers, and Products.

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Successful segmentation first requires an understanding of the metrics that reflect the health and direction of the various aspects of business.  It is a standard business adage that you can only manage something you can measure. It is easy to understand sales or other parameters that are easily retrieved from the application systems. It is more difficult to measure “customer satisfaction” because that is not a number in the financial reporting application.

We need to step back to review the definitions to be used. Data is the raw material of metrics. These are the sales numbers, line item detail, and other data entered into the computer during the daily action of operating the business. All of this data is collected in various data bases that are required to process the transactions of the business.

When these data elements are organized and displayed or printed, they become information. Information is something that staff and management can read and react to. A list of outstanding accounts receivable allows one to follow up on any customers that are late paying their invoices.

As the simple reports are used, procedures are developed and the reports are modified to support those procedures. Following the same example, the accounts receivable A/R aging report may be sorted by due date in groups of 30 / 60 / 90 days or greater. The procedure may be to no longer offer credit to anyone in the 90 day plus report while still trying to collect, restrict the additional credit allowed to anyone in the 60 day list, and just call to inquire on the 30 day list. This process turns information into “intelligence” or actionable metrics.

The highest level is reached when a process becomes institutionalized, then one has achieved “corporate wisdom.” The down side to corporate wisdom is that companies do not quickly recognize when the old wisdom is no longer working.

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