IJLM

16,1 Product value-density: managing

diversity through supply chain
segmentation
142
Antony Lovell
Clearpepper Ltd, London, UK, and
Richard Saw and Jennifer Stimson
Cranfield University, Bedford, UK

Abstract
Purpose – Aims to identify the importance of segmentation both as part of the network design
process and as an operational tool for correctly allocating products to appropriate supply chains.
Design/methodology/approach – The allocation is based upon a wide range of possible factors
relating to the characteristics of the product, to the market, to the source and to the geographic/commercial
context. The application of this framework is presented in a case study of a global electronics company,
where large costs savings were achieved through the segmentation of supply chains.
Findings – A logical basis for segmentation is derived and an operational framework developed,
which highlights the importance of product value density (PVD), throughput volume and product
availability.
Originality/value – Demonstrates the paramount importance of throughput, demand
variability/service factor and PVD as the key drivers in the segmentation process.
Keywords Supply chain management, Electronics industry
Paper type Research paper

Supply chain management is now recognised as a major contributor to competitive

advantage and to cost efficiency in major businesses. In the current environment these
targets are becoming more difficult to achieve as the level of competition increases and
product variety proliferates. Increasingly, an important factor in the quest for supply
chain excellence is the quality of the supply chain design and selection; no longer can
products be allowed to flow along the wrong channel.
In this paper, the importance of segmentation is identified; both as part of the
network design process and as an operational tool for correctly allocating products to
one of the available supply chains. By considering a wide range of possible factors, a
logical basis for segmentation is derived. From the segmentation scheme, a framework
for an operational process is developed, which highlights the importance of product
value density (PVD), throughput volume and product availability.
Finally, the concepts of segmentation and the framework developed in the paper are
used in a case study based on Sony Broadcast and Professional Europe (Sony BPE)
distribution activities in Europe, Africa and the Middle East.
The International Journal of Logistics
Management The need to segment supply chains
Vol. 16 No. 1, 2005
pp. 142-158 Supply chains have to service a very wide range of products and markets. This diversity
q Emerald Group Publishing Limited has long been recognised, and an oft-repeated caution by lecturers, consultants and
0957-4093
DOI 10.1108/09574090510617394 practitioners is the concept that “one size does not fit all”. First suggested within
the supply chain arena by Fuller et al. (1993), the theme has more recently been developed Product
by Fisher (1997) to identify two main categories of products: functional or innovative.
These two types of product should be treated differently in segmented supply chains.
value-density
The supply chain, which matches each category, is “an efficient supply chain for
functional products and a responsive supply chain for innovative products”.
Christopher and Towill (2002) develop the Fisher theme with particular reference to
the garment industry with several examples of failure when the concept has been 143
ignored and success when it has been adopted. They state that “pipelines must be
carefully matched to market requirements. It is equally clear in the current business
environment that quite different pipelines may function alongside each other, each
needing appropriate operating and management skills”.
What Fisher, and Christopher and Towill, have done is to use a few factors to
identify major clusters occurring in supply chains and to suggest that one supply chain
solution is more appropriate for that cluster than any other. However, there are many
more factors that influence the selection of the most appropriate supply chain design,
than those identified in these studies alone. At one extreme, this would provide a
unique supply chain for each product in each market; this would be extremely
expensive, unmanageable, and inefficient. The other extreme would force all products
to all markets down the same or similar supply chains. The optimal solution lies
somewhere between two extremes: this paper reviews those factors that influence
supply chain design before these are then refined to highlight a set of key factors that
drive supply chain costs and so influence the appropriate supply chain selection.

Factors that influence supply chain segmentation

Many factors have been described within the literature as influencing supply chain
selection and product or customer segmentation. Table I lists these factors, which are

Group Factor

Product Life cycle

Variety within product group
Product type: functional or innovative
Handling characteristics
Shelf life
Physical size and weight
Value
PVD
Market Demand location/dispersion
Demand level (throughput)
Demand variability
Service expectations
Source Limitations on raw material
Economies of scale
Production flexibility
Lead-time
Geographic and commercial environment Existing infra-structure Table I.
Transport mode availability Factors influencing
Customs/duties/trade areas supply chain
Legislation segmentation
IJLM grouped as product, market, source or geographic/commercial environment
16,1 specific. Each of these factors is then discussed in the associated commentary that
follows.

Product factors
Product factors include such issues as life cycle, variety, and product type (either
144 commodity or innovative). These factors are heavily correlated and have been
considered in detail by previous authors. Christopher and Peck (1999) highlight the
increased importance of a supply chain that delivers reliability where products exhibit
short life cycles. Also commodity products are matched to lean supply chains, and
innovative products are matched to responsive/agile supply chains (Harrison et al.,
1999; Fisher, 1997).
A number of product factors relate to the physical characteristics of products. The
shelf life and the handling characteristics of a product influence the appropriate supply
chain selection. For example, products with a short shelf life would lend themselves to
networks that hold low levels of inventory and utilise faster transport modes.
Differences in the handling characteristics of products can also impact on supply chain
costs and, therefore, the most appropriate supply chain selection. For example,
differences in the weight of the product, or the level of security or safety requirements
of the vehicle can affect the type of mode or vehicle choice for a product, and can also
lead to network constraints in the type of operation that can be used (Rushton et al.,
2000).
The factors of product value, physical size/weight and their ratio, generally known
as value density is widely recognised as an important factor but has not received much
attention in the academic literature. Value density is highlighted in particular as a key
determinant of the level of centralisation, with high value density products (such as
microchips; Cooper et al., 1990) being manufactured at a few large-scale plants.
Voordijk (1998) provides an example of research that maps the supply chains for
building materials with different product value-densities, and identifies more
centralised inventory holding associated with higher product value densities.
Farmer and van Amstel (1991) also discuss the relationship between value density
and additional distribution costs associated with products. They suggest that as the
value density of a product decreases the percentage of additional distribution costs
increases.

Market factors
The market factors of demand variability and service expectations and their influence
on supply chain design (which includes inventory levels and locations) are widely
discussed in the supply chain literature (Fisher, 1997; Shapiro, 2000; Waters, 2003;
Christopher, 1998; Harrison et al., 1999). Harrison and van Hoek (2001) discuss the
impact of demand volatility and service expectations on inventory holding policies in
relation to the level of inventory centralisation within a supply chain, and this is shown
in Figure 1.
As previously discussed, Fisher (1997) also highlighted the strong correlation
between demand variability and the commodity/innovative factor. Innovative products
have higher demand variability and can be matched with more responsive or agile
supply chain designs.
 Product
value-density

145

Figure 1.
Inventory centralisation
against logistics costs and
service dimensions

Demand level (throughput) and demand dispersion are also important factors in the
design of the physical network, and influence factors such as modes of transport and
warehouse size and location where the economies of scale of production or distribution
influence supply chain costs (Vos, 1993). The concept of classifying products and
product groupings by demand levels is also embodied in Pareto Analysis. This is
commonly used to optimise inventory policy in relation to throughput level
(Waters, 2003). Christopher and Towill (2002) suggest that there should be a judicious
selection and integration of appropriate aspects of the lean and agile paradigms.

Source factors
Source factors can often act as constraints to supply chain design. Limitations on raw
material availability can mean that all supply chains for a particular product must
start at very few locations.
Production characteristics can also be considered under the heading of source
factors. Christopher and Towill include distinction between production technologies
that dictate whether a product is supplied with a given lead-time or made to order
(Christopher and Towill, 2002) in their taxonomy for pipeline selection. Another
significant factor concerning source issues is the manufacturing economies of scale
(Vos, 1993; Cooper, 1993; Dicken, 2003). Many supply chains have moved towards
focused factories on the basis of manufacturing economies of scale (Harrison and van
Hoek, 2001). When fixed costs are high volume is critical and large plants can produce
product at significantly lower prices.

Geographic and commercial environment

The geographic and commercial environment is obviously an important issue when
designing a supply chain. It is difficult to generalise about the geographic environment,
however, this is likely to act as a constraint on solutions given the differing levels of
infrastructure development. Legislation can also act as a constraint in the geographic
environment in which supply chains operate. For example, modal choice and/or
network design has been influenced by the Swiss decision to allow cross-country
freight movements by rail only (SULOGTRA, 2002).
IJLM In the area of the commercial environment Vos (1993) highlights a number of
16,1 important factors that influence supply chain location decisions: corporate income tax
rates; barriers to trade (tariff and non-tariff barriers) and currency exchange rates. This
is supported by Dicken (2003) who highlights how administrative tariff and non-tariff
barriers stimulate enterprises to erect plants in different national markets. Changes to
the barriers to trade, and the currency exchange rate through the integration of
146 European countries in the formation of the European Union can be seen as an example
of when changes in the commercial environment influence supply chain design. With
the advent of the Single European Market in 1992, supply chains have become more
centralised, as barriers to trade have fallen. Earlier indications of this trend were noted
by Vos (1993).

The fundamental trade-offs relationships in supply chain design

From the foregoing it would appear that a wide range of factors will influence the most
appropriate supply chain solution. However, the key parameters for grouping products
together with appropriately matched supply chains can only be identified after a more
detailed consideration of the fundamental supply chain cost trade-offs that relate to
these factors. In order to do this, it is necessary to return to the fundamentals of supply
chain design. This section therefore considers the key trade-offs associated with
different supply chain design decisions, and the related driving factors.
Supply chain costs are wide ranging, however the design of the network
concentrates on a number of key related costs which contribute most towards total
supply chain costs. Looking at a typical generalised supply chain, the major costs are:
.
manufacturing costs;
.
primary transport costs (trunking);
.
secondary transport cost (local delivery);
.
facility costs (warehouses and depots); and
. inventory costs.

Of these costs, manufacturing, primary transport and secondary transport are

associated with specific parts of the supply chain. Facility costs arise at specific points
along the full length of the chain, whereas inventory can be considered as a fluid cost
that exists from end-to-end. The understanding and control of the trade-offs that exist
between these different costs is a key element of supply chain management and design.
To identify the key factors four fundamental trade-off relationships are discussed
here in more detail. These are: facility, transport and inventory costs; through-put and
number of inventory holding locations; transport mode and inventory costs; and
demand variability, service level (in terms of product availability) and lead-time.

Facility, transport and inventory costs

Figure 2 shows the way the trade-off between facility, transport and inventory costs is
expressed in most supply chain design methodologies (Christopher, 1998). With an
increasing level of decentralisation (increased number of warehouses) the facility costs
increase (realistically in step-wise fashion) and the primary transport costs increase.
In contrast, with increasing decentralisation, the secondary transport (or local delivery)
costs decrease. The total cost is assessed and this will usually lead to preferred level of
centralisation. In some cases, such as Figure 2, there can be a certain amount of Product
uncertainty as to where the optimum lies.
value-density
Throughput and the number of inventory holding locations
There exists a trade-off between the level of inventory centralisation and throughput
for a product in determining the optimal supply chain design. Maister (1976) showed
how inventory centralisation leads to the minimum inventory holding policy. 147
According to the relationship presented in Maister’s square root law:
pffiffiffi
Percentage reduction ¼ ðDI 2 CIÞ=DI ¼ 1 2 ð1= nÞ;
where DI is the decentralised inventory level, CI the centralised inventory level, and n
is the number of inventory locations.
However, Vos (1993) suggests that economies of scale justify a more decentralised
inventory holding policy. Figure 3 shows how an increased number of inventory

Figure 2.
The total cost of a
distribution network

Figure 3.
Justification of extra
inventory holding
locations with increasing
throughput
IJLM holding points can be justified with an increased throughput. This relationship is
derived on the basis that inventory-carrying cost must remain a fixed proportion of
16,1 product total cost, and that demand is evenly spread across the region, as throughput
increases.

Transport lead-time and inventory costs

148 Another major trade-off occurring in many supply chains is that concerning transport
lead-time and inventory. Transport lead-times can differ according to the mode that is
used, and also the different service options adopted. Typically, the lower the transport
lead-time, the higher the associated transport cost. If higher speed (and more expensive)
modes are used, e.g. airfreight rather than surface freight, then there is a reduction in
inventory holding. This relationship is used to justify the increasing use of airfreight for
global logistics solutions. Figure 4 shows the shape of the theoretical relationship.
Historically many organisations have tried to minimise total transport costs.
However, for the lowest cost supply chain selection, an appreciation of both the
transport and inventory costs is required.

Demand variability, service level (product availability) and lead-time

In traditional probabilistic models of single point inventory control, the level of safety
stock is determined, as a function of the service level required, the level of demand
variability, and the lead-time. There are many different ways of defining and
interpreting what is meant by service level. Within this context, it can be considered
the product availability requirements. This relationship is formally presented by
Waters (2003) as:
pffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffi
Safety stock ¼ Z * s * ðT þ LTÞ;
where Z is the number of standard deviations from the mean corresponding to the
selected service level (product availability), s the standard deviation of demand of T, T
the review period, LT the replenishment lead-time, and T þ LT is the total lead-time.
The relationship above shows that an increase in the required product availability
or an increase in demand variability will both lead to either additional inventory
holding at the decoupling point in the network or lower lead-times to compensate. This
three-way trade-off is an important relationship in selecting the most appropriate
supply chain for a given situation. Service (product availability) requirements

Figure 4.
The transport lead time
and inventory
and demand variability will be factors determined by the market; the lead-times will be Product
that of the selected mode of transport and system response time. value-density
Diversity between products or customers in terms of the service level requirement
or demand variability can, therefore, influence the most appropriate supply chain
selection.

Identification of key supply chain cost drivers 149

As we have suggested the major costs in the supply chain are identified as
manufacturing, primary transport, facilities, secondary transport, and inventory. From
our understanding of the trade-offs that exist along the supply chain we can derive the
factors which drive these major costs. These are shown in Table II.
In the above table, we can see that for all costs apart from manufacturing there is a
small set of drivers: throughput level and variability; product size and weight; value
and the demand variability/service factor. For a given manufacturing strategy, these
four factors are the drivers for supply chain selection and segmentation. These four
factors can be further reduced to three by combining value with size and weight to
form PVD.
Figure 5 shows the segmentation that might be adopted using these three cost
drivers. Each of the individual cubes might represent a grouping of products, which
share common characteristics, and, therefore, supply chain requirements. The greater
the diversity in the key cost drivers, the greater is the need for differentiation between
the associated supply chain strategies.
The next section presents a framework that allows these three key drivers to be
used to indicate the most appropriate supply chain selection.

A framework for supply chain selection

Having identified three key supply chain segmentation factors, this section describes
the impact of these on different network design alternatives. With three factors

Fundamental supply chain costs Cost drivers

Manufacturing cost Throughput level

Raw material cost
Labour cost
Technology (economies of scale)
Primary transport cost Throughput level
Product size and weight
Location of manufacture
Facility cost Throughput level
Product source and weight
Service (product availability)
Secondary transport cost Throughput level
Product size and weight
Service (product availability)
Inventory cost Throughput level
Value Table II.
Demand variability/service (product availability) Principal cost drivers in
factor the supply chain
IJLM
16,1

150

Figure 5.
Categorising products by
PVD, throughput, and the
demand-service factor

the correct segmentation of supply chains can be represented as a three dimensional

diagram (Figure 5). However, for ease of comprehension, a number of two-dimensional
slices through the three-dimensional space are considered. These are considered in
turn: the demand variability-service (availability) factor and throughput; PVD and
throughput; and PVD and the demand variability-service (availability) factor. Each of
these combined methods of segmentation are considered in terms of their impact on the
level of stockholding centralisation within the supply chain, and also in terms of the
choice of transport, and so transport lead times.
Figures 6 and 7 show the impact on network design alternatives of supply chain
selection based on segmentation by the demand variability-service (availability) factor
and throughput. In Figure 6 as the demand variability-service (availability) factor
increases, safety stock requirements at the decoupling point in the supply chain
increase. This tends to be offset by the selection of more centralised stockholding
options, where risk pooling of safety stocks can produce total lower supply chain
inventory holding. Whilst the centralisation that is encouraged by increases in the
demand variability-service (availability) factor tends to increase transport distances
from the inventory holding points, this can be offset by the use of faster transport
options (Figure 7). This will often mean a modal choice. This mitigates the impact that

Figure 6.
Inventory centralisation
according to demand
variability-service factor
and throughput
increased lead times might have had on inventory holding. The level of throughput Product
affects the level of centralisation of inventory holding. As throughput increases, a more value-density
decentralised inventory holding structure can be justified, as economies of scale can be
achieved in a more decentralised design. In contrast to the previous argument, as
inventory becomes more decentralised, slower transport options can be considered.
Figures 8 and 9 show again the supply chain choices relating to the level of
centralisation of inventory holding, and the speed of transport option adopted. It has 151
already been discussed that the demand variability-service (availability) factor
encourages more centralised inventory holding and faster transport options as it
increases. However, these figures also present the impact of segmentation by PVD. As
the PVD increases the cost of holding inventory also increases, and this dictates
measures that will reduce the overall inventory holding measures within the supply
chain. As such centralised inventory holding measures (the benefit from stock
reductions because of risk pooling), and also faster transport modes (which reduces the
level of replenishment stock at the decoupling point, and reduces the levels of stock in
transit) are dictated by high product value densities. In Figures 8 and 9 the interaction
between the two drivers is shown. The top left hand side of the figures are crossed-off
because the decision to offer products that exhibit a high demand
variability-availability factor, but a low value density should be questioned.

Figure 7.
Transport options
according to demand
variability-service factor
and throughput

Figure 8.
Inventory centralisation
according to PVD and the
demand variability-service
factor
IJLM Figures 10 and 11 show the interaction of PVD and throughput. High PVD, and low
16,1 throughput leads to inventory holding that is centralised, because high product value
densities, and so holding cost drives the need to minimise inventory levels. In
conjunction, this high inventory holding cost also drives the decision for faster
transport options. As the PVD decreases and increasing throughput levels provide

152

Figure 9.
Transport options
according to PVD and the
demand variability-service
factor

Figure 10.
Inventory centralisation
according to PVD and
throughput

Figure 11.
Transport options
according to PVD and
throughput
opportunities from economies of scale, a more decentralised approach to inventory Product
holding is possible. The area identified as low PVD and low throughput is crossed out,
as the decision to offer products that fall within this segment should be questioned.
value-density
This section has highlighted the impact of the three identified drivers on the
selection of the most appropriate supply chain designs, in terms of two of the key
supply chain decisions. This provides a framework for supply chain selection.
Identifying how these relationships and trade-offs translate into more specific supply 153
chain decisions depends upon more detailed examination of the business case, with
identification of the supply chain options possible, and the break-even points between
the choices of these different options. The next section considers how categorisation by
PVD and throughput lead to more effective supply chain selection for products at Sony
BPE.

Managing diversity via supply chain segmentation at Sony broadcast and

professional Europe
In order to illustrate the use of supply chain segmentation to manage product diversity
a case study is presented. The case study is based on Sony BPE, the professional
electronics arm of the Sony Corporation, with responsibility for the markets of Europe,
Africa, and the Middle East. Sony BPE was, until July 2002, the professional product
arm of the Sony Corporation in Europe. Sony BPE has now been merged with several
other European divisions of Sony Serving similar customers to form Sony Business
Europe. For the purposes of this paper, we refer to Sony BPE alone. The range of
products includes broadcast equipment and digital video systems through to security
systems, medical equipment, professional display, and video conferencing systems.
The company has a sales and distribution focus as manufacturing plants are owned by
separate manufacturing companies of the Sony Corporation. The main market focus of
the company is to provide solutions to customers in the media, retail, corporate,
education, government, and medical industries.

The Sony BPE supply chain

The Sony BPE supply chain in 1997 is shown in Figure 12, with approximate lead
times between network nodes depicted in days.
In 1997, the majority (85 per cent) of Sony BPE products were manufactured in Asia.
Most of these were then shipped to Europe by sea freight, with only the very highest
value products being transported via airfreight. The remaining products were
generally sourced from European factories and shipped by surface transport.
Depending on the transport mode selected, distribution time from Asia to European
customers ranged from seven days for airfreight to 46 days for sea-freighted products.

Figure 12.
Sony BPE supply chain
pipeline (1997)
IJLM The utilisation of product value density
16,1 This paper has already highlighted the importance of value density on supply chain
selection, and Sony BPE also considered this in their review of European supply chain
strategy. In doing so, Sony recognised that many service providers price their service
based on a weight to volume ratio of shipments known as the chargeable weight.
As supply chain resources are constrained by both volume and weight, providers
154 need to charge for their services as a function of both volume and weight. Chargeable
weight is the greater of the actual weight of a shipment, or the shipment’s cubic volume
converted into volumetric weight using a cubic metre to weight conversion factor. The
typical factor varies by service provider dependent on the typical weight to volume
capacities that typically constrain their resources. Airlines generally use the
conversion factor that one cubic metre shipped has a volumetric weight of 166.66 kg.
Thus, a shipment of one cubic metre weighing just 1 kg would attract a charge of
167 kg. At Sony a standard weight volume ratio of 1 m3 ¼ 250 kg was assumed.
For Sony, the chargeable weight was critical in determining the cost drivers as the
products were volumetric in nature. Therefore, PVD was calculated at Sony as:
Product value ðEuroÞ
Product value density ðPVDÞ ¼ :
Chargeable weight ðkgÞ

Supply chain segmentation strategy at Sony BPE

Figure 13 shows the PVD and chargeable weight throughput profiles of products
within the Sony BPE range.
When examining the distribution of value density and throughput values of
products at BPE, management noticed the huge diversity of product values, the high
mean value density and low throughput of products. Particular factors were:
(1) Huge diversity: Sony BPE was faced with a highly diverse product range with
value densities varying by a factor of 10,000. This demonstrated the need for
appropriate supply chain segmentation.

Figure 13.
PVD versus chargeable
weight throughput at
Sony BPE (2003)
 (2) High value products: The second factor was the high mean product value and Product
low mean chargeable weight throughput. These factors pointed to the increased value-density
use of rapid transit transport and the consolidation of stockholding points.
(3) Service level requirements: In general, customers require “off-the-shelf”
availability for standard products, and seven-day lead times for specialist
products. The service requirement for standard products constrained the choice
of supply chain, and eliminated those with lowest inventory. 155
Considering the three main drivers of PVD, throughput, and service requirements, it
was possible to segment the Sony BPE supply chain into the four quadrants, shown in
Figure 14. Products with a service level requirement of “off the shelf” were not able to
adopt the bottom-right hand corner segment and would be artificially pushed into the
top-right hand corner.
The top-left hand segment of Figure 14 best represents the single supply chain
strategy in use by Sony BPE in 1997, based on the use of multiple stockholding points
in Europe and sea-freight as the predominant way of importing products from Asia.
The two boxes on the right hand side represent the approach taken for the high PVD
products. The bottom left hand corner is an unusual one – where one finds low PVD
and low throughput. This would appear to be a commercially unattractive segment,
but these products are often consumables and accessories that have a strategic role in
the support of main model sales.

Implementation of supply chain segmentation strategies at Sony

Increased use of rapid transit. The high value nature of the Sony BPE product range
inherently lent itself to rapid transit as inventory cost saving can generally pay for
increased transport costs. In 1997, the majority of Sony BPE products were produced in
single global factories in Asia for manufacturing economies of scale. To assess the
suitability of the then predominantly sea-freight policy, management only considered
the capital cost of the inventory at sea for 35 days versus the marginal costs of
airfreight.

Figure 14.
Sony BPE supply chain
segmentation strategy
2002
IJLM Figure 15 graphically highlights the break-even points between airfreight and
16,1 sea-freight using product value versus chargeable weight. In this instance chargeable
weight was used as the volumetric nature of the business meant that the chargeable
weight was an accurate indicator of marginal costs. Break-even lines were plotted on
the graph to represent annual costs of capital/inventory of 5, 8, and 20 per cent. It was
the feeling that inventory costs due to high obsolescence rates could be higher but in a
156 time of change a conservative approach was adopted.
The chart also indicates products that were moving by airfreight at that time as
squares and products designated as shipment by sea freight as triangles. The analysis
clearly identifies that certain product were moving by air and should have been
moving by sea and vice versa. This highlights a danger of making supply chain
decisions based on marketing groups as opposed to supply chain characteristics and
also highlights why it is dangerous to adopt a minimum transport cost policy.
Savings achieved when the project was completed and full inventory costs put into
calculation were a 10 per cent reduction in total supply chain costs even after transport
costs increased.
Consolidation of stockholding points. European stockholding consolidation. The first
step was to consolidate European inventory from 14 national and two hub warehouses
to one central stockholding point in The Netherlands. As a first project all inventory
was brought into the two European hubs: after this was complete the two hubs were
merged. The benefits of this were:
.
Removal of all replenishment inventories moving between European
Distribution Centres and National warehouses.
.
Safety stock reduction due to the pooling of 14 national warehouse inventories
into one European Distribution Centre in Tilburg, The Netherlands.

The reduction in warehouse and trunking costs actually offset the increase in local
delivery costs giving a net saving even before inventory reductions were taken into
consideration. These projects resulted in an overall supply chain overall cost reduction
of 25 per cent from 1997 cost situation.

Figure 15.
Airfreight analysis (1997)
Global stockholding consolidation. The principles of the European stockholding Product
consolidation were then applied on a global level so that the very highest PVD value-density
products with the lowest chargeable weight throughput were consolidated to a single
global stockholding location. Owing to the increased transit times from Asia, this was
not possible for all products but the strategy was suited to many, as it was found that
these high value products:
.
were only held in Europe on a “just in case” basis; 157
.
had highly volatile demand patterns; and
.
had customer lead time expectations greater than one week.

The main benefits of this project were the safety stock reduction due to the pooling of
inventories from three regions into one stockholding point for the most volatile
products. Warehouse costs also reduced slightly while transport costs increased.
However, this project reduced total supply chain costs by an additional 13 per cent
from 1997 base index.
Evaluating the impact of supply chain redesign at Sony. When all projects were
implemented, costs were reduced by 48 per cent (Figure 16), sales increased by 100 per
cent, and service levels had also improved. As such, the supply chain cost to sales ratio
had declined 90 per cent, while service levels improved. This is an endorsement of an
effective supply chain segmentation strategy.

Conclusions
The concept of supply chain segmentation has been widely accepted for some years.
Similarly many of the costs trade-offs that are discussed in this paper have been
understood and regularly utilised in supply chain design studies. This paper has
demonstrated the paramount importance of throughput, demand variability/service
factor and PVD as the key drivers in the segmentation process. Of these three factors,
throughput and the variability/service factor already have wide acceptance: PVD has
yet to be given the recognition that it deserves.

Figure 16.
Cost savings from the
supply chain redesign at
Sony
IJLM References
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(Anthony Lovell was previously a logistics manager at Sony Europe and currently in Innovation
Director at Clearpepper Ltd. He can be contacted at anthonylovell@clearpepper.com
Richard Saw is Senior Lecturer at the Centre for Logistics and Supply Chain Management,
Cranfield University, England. He can be contacted at r.j.saw@cranfield.ac.uk
Jennifer Stimson graduated with an MSc and PhD from the Centre for Logistics and Supply
Chain Management, Cranfield University, England and is now a freelance researcher. She can be
contacted at jennifer@stimson.co.uk)