Leverage Customer Fulfillment Segmentation

to Deliver Differentiated Customer Experiences

Published: 22 November 2019 ID: G00382568

Analyst(s): Beth Coppinger, Jennifer Loveland, Simon Bailey

Supply chain leaders focused on customer fulfillment look to increase

customer-focused resources and manage unified commerce demands while
optimizing costs. Customer fulfillment segmentation addresses these
challenges by creating differentiated service offerings that protect and create
value.

Key Challenges
■ Supply chain leaders focused on customer fulfillment are under pressure from top customers to
not only deliver excellence in daily transactional service, but also bring innovative ideas for
improvements in revenue, value-added services, cost and cash.
■ Many companies find it difficult to effectively serve varying customer requirements in a way that
delivers competitive advantage.
■ Companies often default to a one-size-fits-all approach to fulfillment offerings for customers.
Without prioritizing supply chain resources, the needs of the critical few, strategic customers are
often underserved, and customer fulfillment leaders lack visibility of the true cost to serve for
different customers. This often leads to overservicing of the long tail of customers.

Recommendations
Supply chain leaders who are responsible for customer fulfillment and are looking to develop
customer fulfillment segmentation:

■ Define the right fulfillment segmentation by aligning with your organization’s business goals, the
fulfillment requirements of different customer groupings, the amount of opportunity, and the
appropriateness of collaborating with specific customers.
■ Maximize value creation with top-tier customers, and protect value with lower-tier customers by
creating targeted fulfillment offerings based on customer needs and cost to serve.
■ Align the sales and supply chain organization with the customer fulfillment segmentation
approach by demonstrating how segmentation supports the go-to-market strategy. Couple this
 with scorecards to monitor and enforce customer compliance with the requirements of their
segment.

Table of Contents

Introduction............................................................................................................................................ 2
Analysis.................................................................................................................................................. 4
Define the Right Fulfillment Segmentation and Align It With Business Goals......................................4
Start With Your Business Goals.................................................................................................. 5
Consider Your Customers’ Capabilities and Requirements..........................................................5
Overlay Practicalities and Develop the Vision.............................................................................. 6
Create Targeted Fulfillment Offerings by Segment............................................................................. 7
Align Sales and Supply Chain, and Hold Customers Accountable for the Requirements of Their
Segment...........................................................................................................................................9
Gartner Recommended Reading.......................................................................................................... 11

List of Tables

Table 1. Example of a Gold, Silver and Bronze Customer Fulfillment Segmentation.................................8

List of Figures

Figure 1. Value-Focused Capabilities Confer Significant Competitive Advantage..................................... 3

Introduction
For many years, commercial teams have segmented their approach to servicing customers based
on revenue, strategic importance and a willingness to collaborate. However, the commercial
segmentation did not always match up with the capabilities or service offerings of the supply chain.
In today’s world, business models are changing dramatically, customer expectations are
heightening, lead times are shortening and revolutionary new technology capabilities continue to
emerge. Differentiating the company’s product and fulfillment offering is no longer the sole
responsibility of sales and marketing. Customer demands for improvements in fulfillment, price and
cash flow, combined with the rise of unified commerce, are requiring companies to deliver
innovative supply chain solutions and develop new collaborative relationships.

In a 2018 Gartner survey1 of customer fulfillment leaders, respondents reported an increase in value
and competitive advantage from service capabilities that go beyond the basics of driving functional
scale and efficiency in order management (see Figure 1). Comparing 2015 to 2018, survey

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 respondents reported a 51% increase in high value and significant competitive advantage received
from supply chain segmentation and a 32% increase for differentiated service.

Figure 1. Value-Focused Capabilities Confer Significant Competitive Advantage

Customer fulfillment segmentation, a subset of overall supply chain segmentation, provides clarity
to companies on how best to serve varying customer needs to deliver competitive advantage. It
also provides direction for how to respond to differing fulfillment requests from customers.
Customer fulfillment leaders need to develop a new level of customer centricity and make clear,
strategic choices about what products and services they will offer and to whom. Leaders must
identify what customers value, quantify the cost of trade-offs to align with that value and then
execute a segmentation strategy to deliver the different requirements.

The customer fulfillment segmentation defines clusters of similar requirements across all customers,
products and services, which, in turn, dictate the desired outcome requirements. In this respect,
creating the customer fulfillment segmentation lays the groundwork for creating broader supply
chain segmentation requirements. The insights gained from completing a customer fulfillment

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 segmentation can support redesigning the entire end-to-end supply chain into multiple models
optimized for different customer needs (see “Use End-to-End Supply Chain Segmentation to
Support Growth, Operational Excellence and Increasing Complexity”). This research will assist you
in developing a customer fulfillment segmentation approach.

Analysis
Define the Right Fulfillment Segmentation and Align It With Business Goals
Overall supply chain segmentation is a systemic, repeatable capability to deliver differentiated
outcomes, within and across supply chain functions, based on options selected from a menu of
options (see “Segmentation 101: Apply Supply Chain Segmentation to Serve Diverse Needs and
Reduce Waste”). Differentiated outcomes for supply chain segments are reflected in significantly
different financial and operational performance metric targets.

Segmentation will:

■ Have a defined supply chain business or customer value objective

■ Align supply chain delivery with a portfolio of targeted outcomes
■ Include a defined scope of physical, informational and/or financial processes
■ Define the standard operating procedures for capability variants
■ Require changes in employee and/or customer behavior
■ Require changes in process and/or organizational infrastructure
■ Focus on critical decisions to achieve desired financial and operational performance

The scope of application may be across the end-to-end value chain or targeted to a subset of
processes. Customer fulfillment segmentation is a key subset approach and a critical step in
managing customer relationships and developing capabilities to meet targeted customer needs, as
a means to driving excellence in customer experience.

The first step is to develop a deep understanding of customer wants and needs. Supply chains
need to develop new capabilities that allow for a deeper understanding of customers as well as
responsive and adaptive supply responses in order to move from a product-centric to a customer-
centric focus. There are several capabilities that help organizations develop this deep knowledge of
the customer, including voice of the customer, customer journey mapping and customer analytics
(see “Supply Chain Customer Centricity Part 1: Leadership Alignment and Capability Development”
and “Supply Chain Customer Centricity Part 2: Leverage Personas and Journey Mapping to
Understand and Design the CX”).

But how do you decide on the right customer fulfillment segmentation? The starting point is that the
value proposition will be different for different customers because customer needs differ and
business costs and strategic objectives differ. Examples of areas to consider for differentiating

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 fulfillment include service level, on time, cycle time, speed of delivery, minimum order quantities,
resource allocation and the extent of value chain integration. Ideally, lower-tier customers would
have fewer or lower-level standard fulfillment and must pay for more advanced fulfillments.

The savings created from standardizing the services offered to

lower-tier customers will free up resources that can be
reinvested to be more responsive to higher tier customers. This
supports the development of collaboration opportunities for
mutual value creation and excellence in customer experience.

However, client inquiries indicate that many companies overservice the lower- to midrange-tier
customers, and have trained them to expect higher-level services at no added cost. It’s hard to
move away from these arrangements, and it’s usually not possible to immediately reduce fulfillments
or charge more for them. One successful approach is to create logistics trade terms that motivate
customers toward more efficient ordering and delivery models by offering a lower price (e.g., lower
list price or credit offset to list).

Below are three areas for focus when establishing your customer fulfillment segmentation approach.

Start With Your Business Goals

Decide how customer fulfillment, inclusive of order processing and value-added services, supports
the goals and strategy of your business. Gartner research2 shows that 53% of CEOs identify growth
as a top strategic business priority for 2019 through 2020, while 23% cited financial priorities such
as profitability improvement. Customer fulfillment segmentation links the business goals of the
supply chain with the goals and strategies of top customers. Early alignment and sponsorship by
senior leaders will be critical during the creation and, more importantly, the implementation of the
customer fulfillment segmentation.

Consider Your Customers’ Capabilities and Requirements

■ What do different customer types expect from you in terms of services? How is your
competition servicing these customers? Do you want to reach competitive parity or create a
competitive advantage?
■ How are customers currently set up to transact their order-to-cash processes with you? Do they
utilize electronic data interchange (EDI), web tools or email? How do you want customers to
transact with you?
■ What is the current size of the customer in terms of volume, revenue and margin? What is the
projected growth? What is the future strategic importance? What is the commercial strategy?

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 ■ What is your current relationship with the customer? Is there trust and a desire to move beyond
a transactional partnership? What type of deeper collaboration is the customer interested in
pursuing?

Overlay Practicalities and Develop the Vision

Consider how you interact with your customers today and how you would like to interact with them
in the future. Focus on driving effectiveness and efficiency for all transactional activities, and freeing
up resources to drive value creation activities:

■ How profitable are the current value-added services that are offered to different customers?
Utilize cost to serve to understand the cost-benefit of making investments with groups of
customers (see “Begin Integrating CTS and Supply Chain Segmentation With These Six Steps”).
■ Which customers drive sufficient value to offset the incremental cost to manufacture and supply
specialized products? Assess the balance between your product portfolio and the fulfillment
complexity.
■ What is the capability of the customers themselves? What levels of collaboration and data
exchange is the customer capable of?
■ What are your internal capability and resources, and how will they need to change?

Supply chain needs to define a customer fulfillment segmentation strategy that aligns with the
business goals of both organizations, expected supply chain value/outcomes, and the supply chain
maturity of the organizations involved.

There are several approaches that can be taken to grouping customers. When applying this to
different businesses, create as many segments as necessary to manage your business goals. For
example, some companies will create four groupings: cash cows (profitable, slow-growth
customers), rising stars (high-growth potential), maintain and harvest. Some companies will start
with a segmentation by customer type, for example OEMs, distributors or e-commerce. They will
then further segment the customers within each type. Some will have more groupings initially and
will work to refine as they go.

Typically, two to five segments are most commonly implemented because this number improves
business outcomes without adding too much complexity. Consider the example from consumer
products (CP) companies. Most customer fulfillment segmentation exercises in CP companies result
in a minimum of three groupings, commonly labeled gold (top accounts), silver and bronze.

The gold segment typically comprises two to five top customers in consumer products. They are
usually the largest and most able to engage in collaborative improvement. This is where CP
companies will invest the lion’s share of resources to build out solutions to drive joint value creation.
Silver is usually the next 10 to 15 customers, which are still very important, and will qualify for some,
but not all, of the additional fulfillments and solutions as a gold customer. The remainder of the
customers are placed in the bronze segment. This segment typically qualifies for excellence in
transactional fulfillment only. Transactional collaboration activities are focused on driving seamless

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 interfaces that minimize order touches while meeting agreed metrics (see “Maximizing Zero-Touch
Orders to Drive Efficiencies and Improved Customer Experience”).

Create Targeted Fulfillment Offerings by Segment

Once you have identified the different groupings, or segments, of customers, develop the different
customer propositions to move toward your vision of what fulfillment relationship you want to have
with each group. Some of these propositions may require capability development by the supplier or
the customer that will need to be phased in over time. Continuing with the example of the CP
company, the customer propositions can be divided across four main areas: fulfillment, issue
management, resources and logistics trade terms.

The offerings are designed to be very prescriptive and transaction-focused for bronze customers,
and the rules are strictly enforced. Some CP companies increase the requirements for minimum
order quantity to move small, unprofitable customers to trade directly with distributors or
wholesalers. In other examples, they will outsource the transactional order management processes
for bronze and some silver customers to a third party. They may require bronze customers to submit
orders via a portal, thus eliminating the need for manual order entry by the customer fulfillment
team. The goal is to make the trading relationship as efficient as possible with bronze accounts and
use the resources released to focus on value creation and added services with gold and some silver
accounts. Table 1 is an example of how these four fulfillment offerings could be split across a gold,
silver and bronze segmentation.

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 Table 1. Example of a Gold, Silver and Bronze Customer Fulfillment Segmentation

Gold Silver Bronze

Service

Case Fill 99% 97% to 98% 95% to 97%

On-Time White glove service per Deliver to slot requirements Deliver to slot requirements
customer requirement (hour, day) (hour, day)

Lead Time (Order 24 to 48 hours Three to four days Five or more days
Receipt to Delivery)

Backorders Assuming frequent May be allowed — depends on No backorders; orders are

deliveries then rebook; order frequency canceled and rebooked
otherwise, backorder

Issue Resolution

Allocation (Short- Priority 1 Priority 2 Priority 3

Term)

Shelf-Life Protocol Follow customer Follow same approach as You decide and broadcast
requirements bronze unless customer has a — usually industry standard
different policy

Reverse Logistics By exception; must be By exception; must be Not permitted

(Damages and authorized authorized
Returns)

Resources Dedicated service team Structured by sector or groups; Structured by sector or

plus dedicated customer shared customer logistics groups of customers;
supply chain management resources; focus on limited transactional only
resource; joint-value programs such as joint
creation programs and forecasting/VMI
joint scorecards

Logistics Trade
Terms

Order Acquisition EDI: Be clear on when EDI: Order must be “fit for
orders need to arrive for purpose”; right quantities, SKU
short lead-time deliveries codes and descriptors in line
with agreed pricing and right
pallet quantities or else rejected
EDI or Web: Order must be
“fit for purpose”; right
quantities, SKU codes and
descriptors in line with
agreed pricing and right
pallet quantities or else
rejected

Payment Terms Days/discounts Days/discounts Days/discounts

Source: Gartner

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 In industries other than CP, the categories that are differentiated by segment, the number of
customers per segment and the actual method used for each segment might vary. For instance,
many business-to-business customer fulfillment segments might differentiate with:

■ Negotiating or handling of contracts or tenders

■ Leasing or financing of payment options
■ Determining orders that are consolidated versus shipped individually

In medical devices, there are some customers that get a delivery on certain days of the week,
defined by the supplier, while other customers get on-demand deliveries. As digital technologies
create new opportunities or in an industry like commodity chemicals, certain customers may just
buy 100% availability of a product, and the supply chain will handle when orders are placed and
fulfilled. In high tech, a company may set up a customized employee purchase program for large
customers. There are many ways that fulfillment can be differentiated in each industry and in each
company. The critical idea is to create structures to match what is important to your customers and
your business.

Align Sales and Supply Chain, and Hold Customers Accountable for the
Requirements of Their Segment
Creating the customer fulfillment segmentation is the first step in aligning how supply chain will
partner with the commercial teams to create value for customers and drive growth. Once the
customer fulfillment segmentation design is complete, reengage top management sponsorship and
communicate the value of the new approach to the business. Be sensitive to the issues of the
commercial teams that support bronze accounts who may feel they are “losing” services or
resources for their customers. Utilize change management techniques to ensure alignment on the
need for change and the benefits the change will bring to the organization as a whole (see “Toolkit:
Identifying Outcomes for Communicating Change With Your Stakeholders”). The key here is to avoid
speaking in generalities. Be clear about exactly which accounts get what change — and share
those specifics with specific team members. Aggregate this information for commercial executives
and show revenue and margin impact. In addition, aggregate the information for supply chain
leaders to show volume and location impacts.

In parallel, work across the supply chain to understand the capabilities needed to support the
requirements of a segmented customer approach. It’s important to note that the skills and
competencies required for order fulfillment differ from those required for collaboration. Be sure to
consider retraining or upskilling of resource (see “Customer Fulfillment Organization Design:
Partnering for Value Creation and Improved Customer Experience”). Develop a capabilities roadmap
that addresses any gaps in meeting customer needs (see “Customer Collaboration, Stages 2 and 3:
Build the Foundation for Collaborative Customer Partnerships”). For example, you may need to
make changes to metrics and incentives so they can be tracked by segment, or you may need to
create an ongoing cost-to-serve capability.

Integrate the internal capabilities roadmap into a customer implementation plan. Some customers
may only get changes as part of a contract renewal, or potentially as new products are launched.

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 For other customers, these changes may be completely transparent. Have a “get ready” period and
work with customers to make the changes. Depending on the scale and scope of the required
changes, some elements of the segmentation approach can be implemented in six months, while
other portions may take up to two years. For each grouping of customers, create clear service-level
agreements (SLAs) that outline expectations by both you and your customer. We are often asked
whether to make these SLAs public or not. Certainly, if these are trade terms, such as a minimum
order quantity to obtain a specific price, then they need to be shared. Conversely, there is no need
to share that a customer is in a silver or bronze service segment.

The implementation method will be different depending on the customer segment. For example, for
customers where the ongoing relationship will primarily be transactional, the changes should be
signaled in writing, with clear deadlines for changes as they are implemented. For customers where
the focus is on developing highly collaborative partnerships, the changes should be signaled via a
meeting with the senior commercial and supply chain leaders. These can be at the customer’s
offices and/or be included as part of a discussion of the overall annual business plan. The meetings
should include agreements of willingness for joint work and data sharing. A schedule for ongoing
collaboration meetings should be agreed on. Suppliers should also consider including an initial list
of potential projects to drive joint-value creation. As the relationship progresses, convert this list into
a series of projects to drive improvements in fulfillment, cost and cash (see “Lessons From Leaders:
Medical Device Supply Chain Collaboration With Healthcare Providers Drives Joint Value”).

Implementation and ongoing relationship management should be supported by customer

scorecards that monitor and clearly indicate how each customer is adhering to the requirements of
their specific segment and SLA. The scorecards should be rated in a simple red, amber, green
(RAG) and shared with customers on a monthly basis. Customers that consistently adhere to terms
should be celebrated. Conversely, if a customer is consistently out of compliance, supplier
leadership must convene to discuss next steps and come to a consensus. Suppliers may either take
actions to get the customer back on track, or move the customer to a different tier. In some cases,
customers may even be charged higher pricing.

Typically, the scorecards between suppliers and customers in collaborative partnerships are
developed jointly (top customers may refer to these as vendor scorecards). The joint scorecard sets
out the agreed-on metrics and targets, and tracks progress. It should be a single document for use
by both supplier and customer to identify areas of strength, which can be celebrated and
developed, and areas of opportunity, where joint interventions need to be made and resources
assigned by both parties. The scorecard focuses on fulfillment measures (for example, distribution
center and new product availability, manufacturer case fill rate and on-time delivery, customer lead
time and payment compliance). This may be supplemented by other in-process measures like
forecast accuracy and customer perception of how easy it is to work with the manufacturer. As
partnerships develop, these scorecards expand to include tracking of projects for joint value
creation such as collaborative planning, VMI, collaborative routes to market and other innovations.
In this area, the scorecards should capture ongoing cost and inventory savings, as well as growth
generated.

Gartner’s model for customer fulfillment maturity (see “Use Gartner’s Maturity Model to Improve
Customer Fulfillment”) indicates that customer fulfillment segmentation is a foundational capability
for Stage 3 maturity — integrate. It is a key enabler in supporting growth and delivering

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 organizational efficiency. The segmented approach sets the stage for driving improvements in
transactional order-to-cash processes and frees resources to develop customer intimacy and value
creation with top accounts.

Gartner Recommended Reading

Some documents may not be available as part of your current Gartner subscription.

“Survey Analysis: Majority of Customer Fulfillment Organizations Plan to Shift Focus to Value
Creation by 2020”

“Supply Chain Brief: Manage Customer Expectations to Deliver Great Experiences”

“Supply Chains’ Make-or-Break Business Strategy”

“Supply Chain Brief: Achieve Transformative Benefits From End-to-End Supply Chain
Segmentation”

“Begin Integrating CTS and Supply Chain Segmentation With These Six Steps”

“Focus on Six Capabilities to Master Supply Chain Customer Collaboration for Value Creation”

“Supply Chain Brief: Update on Heineken’s Journey to Customer Fulfillment and Collaboration
Transformation”

Evidence
1Gartner’s 2018 Customer Fulfillment and Collaboration Survey: The purpose of this study was to
understand the current state of customer fulfillment and collaboration strategies, development and
capabilities, and the impact of digital business on these strategies. The research was conducted
using a mixed methodology (online/computer-assisted telephone interviewing [CATI]) from May
2018 through July 2018 among 312 respondents in North America (68%), EMEA (17%) and Asia/
Pacific (15%), across a variety of manufacturing industries. The industry mix included industrial
manufacturing (57 respondents), chemical (59 respondents), high tech (82 respondents), consumer
products (60 respondents) and life sciences (54 respondents).

Participants were required to have decision-making authority for their companies’ customer
fulfillment and collaboration strategy, including order-to-delivery processes, order management,
order management technologies, vendor-managed inventory, customer collaboration, order-to-
delivery metrics and supply chain order-to-delivery strategies.

The survey was developed collaboratively by a team of Gartner analysts that follows the supply
chain, and was reviewed, tested and administered by Gartner’s Research Data and Analytics (RDA)
team.

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 Disclaimer: Results of this study do not represent global findings or the market as a whole, but
reflect the sentiment of the respondents and companies surveyed.

2 Gartner conducted this research from September through December 2018 in order to examine
CEO and senior business executive views on current business issues, as well as some areas of
technology agenda impact. In total, 473 business leaders were qualified and surveyed. The research
was conducted via an online survey (355); an additional 112 surveys were achieved through
telephone interviews; and six were self-administered paper surveys. All respondents were screened
for active employment in organizations with $50 million or more in annual revenue. Sixty percent had
$1 billion or more, and 15% had $10 billion or more in revenue.

The sample mix was as follows:

■ CEOs = 288 responses

■ CFOs = 84 responses
■ COOs = 25 responses
■ Chairperson, president, board of directors or other C-level positions = 76 responses

By region:

■ North America = 184 responses

■ Europe = 109 responses
■ Asia/Pacific (APAC) = 109 responses
■ Latin America = 45 responses
■ South Africa = 16 responses
■ Middle East = 10 responses

By size:

■ $50 million to <$250 million = 78 responses

■ $250 million to <$500 million = 67 responses
■ $500 million to <$1 billion = 47 responses
■ $1 billion to <$10 billion = 211 responses
■ $10 billion or more = 70 responses

The 2019 Gartner CEO and Senior Business Executive Survey was developed collaboratively by a
team of Gartner analysts who examine IT’s role in business, and was reviewed, tested and
administered by the Gartner RDA team. The results of this study are representative of the
respondent base and not necessarily the business as a whole.

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