Targeted segmentation focused on the needs of a market is a marketing strategy with the potential of generating profitable growth.

 

Despite being seemingly desirable, rapid growth can lead a company to focus on what it can do, while losing sight of what it must do. With growth, customary operational conditions change and, if we fail to prepare for these changes, we can put the company’s success within its industry niche in jeopardy.

 

The task of finding the optimal approach to a market can be achieved by determining Value Propositions for different client segments. That is, a company must understand the needs of its segments, designing strategic intentions and service schemes for each of them. This is the first step to be taken by organizations that wish to optimize growth in terms of profitability. On this line, we align the organization along new guidelines aimed at increasing client satisfaction and controlling overhead for the purpose of enhancing the company’s profits.

 

The next success case study, in which Sintec’s multidisciplinary team worked with a manufacturing company, used the approach described previously. The company successfully modified its market strategy in order to differentiate services in terms of client needs. This way, the company was able to achieve common goals and improve overall profitability.

 

BACKGROUND AND KEY ISSUES IN THE COMPANY

The company is devoted to the manufacturing and sales of building materials, and has been on the market for more than fifty years. Through growth of the core business and acquisitions it has achieved its current size and reach, consisting of more than 2,000 employees distributed in three plants and 70 plus sales outlets. Moreover, it had a portfolio of 13,600 plus SKU and an active client base that tops 600.

 

The company’s diagnose opened the door to conceptualizing areas of opportunity existing within its operational structure. These can be summed up as followed:

• The company served a wide range of clients whose needs are vastly different, but without operational areas enjoying the insight into the actual drivers of client behavior and what their respective beliefs were regarding the value of service attributes.
• Supply Chain Executives were focused on enhancing internal productivity rather than on responding to specific client needs.
• The company worked in silos; with each link of the supply/operational chain focused on its specific performance benchmarks, while ignoring overall company performance.

 

These issues, consisting of non-differentiated value propositions, fill rates falling short comparing to demand, inadequate SKU classification (tying up capital in unneeded inventory), to mention a few, posed serious impediments to the CEO’s main objective, i.e., to focus organizational resources on providing optimal, profitable service.

 

 

Action Plan

(Gráfico)

 

1. To tackle these issues we began by understanding current client needs for the purpose of designing a client segmentation scheme capable of taking into account the fundamental needs of each segment: purchase objective, sales volume and profitability, type of product purchased, attention requirements, service levels, operational complexity and other key business variables.
2. Having achieved a clear picture of this segmentation and in view of the value perceptions of each client segment, we posed Value Propositions (VP) for each segment, defining ad hoc schemes for client attention, shipping, portfolio and business terms and conditions. This approach is informed by the strategic intention of the company to grow each client segment, as well as by the company’s plant production scheduling and its newly optimized and standardized shipping plan. This way, we were able to ensure that the VPs were realistic and could actually enhance the client’s perception of reliability of the company’s service.
3. In terms of internal organization, we determined the SKUs to be produced under an MTO scheme, and we carried out an evaluation of profitability of the current ABC catalogue, in terms of volumes, variability and sales frequencies in order to establish a new ABCD classification. We designed inventory levels and routines for classifying in the event of stock outs, according to the VP for each client segment and their respective target service levels.
4. To ensure alignment of the sales and operational areas, we implemented a cross-organizational process touching on all points in the chain called the Order to Billing. Through the actions of an Order Management team and a system designed to fit the needs of the new processes, the company can track each and every action along the entire supply chain. This allows the organization to guarantee fulfillment of the VP consistently and on time, thereby ensuring high client service levels and satisfaction.
5. Finally, we adapted roles and duties in order to align them with the modified processes and ensure implementation success. This adaptation was carried out according to the requirements of the Order Management area. In addition to this task, we prepared the company for these important changes by means of a change management program in order to convince employees about the benefits of the new processes. This is a key factor in turning the project’s planned benefits into real gains for the organization.

 

Benefits achieved upon implementation

Qualitative

• We transformed the vision and mentality of the organization, gearing its strategy towards profitable growth. We were able to shift the paradigm from “all clients are equal” to one that takes into consideration the specific features of each client segment, underpinned by an awareness of the diverse contributions each client makes to the company and, thereby, encouraging a more focused approach to profitability.
• We achieved proactive communication with clients and an enhanced management of their respective expectations.
• We optimized human resources assets, applying these where required as a function of client value perceptions.
• We understood and adopted global responsibility for meeting service level benchmarks.
• We aligned the process throughout the operations chain by establishing a common goal and an unified understanding of the meaning of service underpinned by segment-specific value propositions.
• We created a sole channel between all areas by means of the Order Management team.
• We developed Order Management experts to guide the operations of sales, shipping, inventory and operations.

 

Quantitative

• Improved fill rates,  bringing significant returns on two separate fronts:
  • We generated 1.6% additional earnings before interest and taxes (EBIT) of 1.6% by reducing sales losses.
  • By improving fulfillment, client perceptions of reliability increased, thereby boosting business by 3.2% over EBIT.
• We designed client-by-client strategies, making the overall sales strategy more profitable by 1.5% over earnings before interest (EBIT) and taxes.
• We reduced working capital by 9.0%, by trimming approximately 5,250 tons of inventory. This was achieved by:
  • Reclassification of the SKU catalogue using an ABCD model and optimization of inventory levels.
  • Streamlining of SKU products in the catalogue by eliminating unprofitable products and those products contributing the last 5.0% of the profit margin to the business.
  • Shifting diverse SKU to MTO production schedule.

 

Conclusions

Because fast growth can undermine the soundness of a company, strategies must be adapted quickly in order to address market priorities. Such agility can spell the difference between success and failure.

 

There are many actions that can be taken in the areas of sales, operations and the administration of the organization; however, all such actions must focus organizational assets towards providing full services to clients that are, moreover, profitable for the business.

 

We can assert that a change in the mentality and vision of the company that underpins the segmented client strategy based on differentiated strategic intentions and Value Propositions is a key factor in turning fast growth into profitable growth. 

 

 

Alexander Ugaz

alexander.ugaz@sicweb.wpengine.com

Alfredo Ortega

alfredo.ortega@sicweb.wpengine.com

Carolina Palacio

carolina.palacio@sicweb.wpengine.com