Developing a Product Segmentation Process - a case study at a construction-equipment company

Abstract

Problem description: In production and operations management, companies deal with a sometimes huge variety of products. Differences in for example sales volume, demand uncertainty or strategic criticality result in different needs of handling. As a consequence, companies that offer a wide range of products often struggle with the control of their production and inventory systems. An approach that is generally seen as beneficial involves distinguishing a limited number of classes based on the characteristics of the products. The study was conducted with a global company within the construction-equipment industry. The case company, here referred to as Delta, sells thousands of different products and has recognised a need for product segmentation when making inventory decisions for their stores.

Purpose: The purpose of the study is to develop a product segmentation process in order to determine a standard assortment for the stores of the case company.

Research questions: (1) Why is there a need for a product segmentation process in the current situation at Delta? (2) What criteria in the segmentation should be fulfilled in order to include a product in the standard assortment? (3) How can the segmentation process be designed and what standard assortment is identified through the process?

Methodology: The thesis work aimed at answering the research questions. Relevant elements of theory were found in the literature on product segmentation and process man- agement. By combining the theoretical findings a framework was built. The framework was applied at the case company and supported the development of a product segmenta- tion process. Empirical data were mainly qualitative and were collected through interviews and observations.

Conclusion: On the basis of an identified need for product segmentation, it proved pos- sible to develop a segmentation process that took several criteria into account. It was found that standard products should fulfil the following criteria: not recently introduced, not about to be phased out, top selling in terms of Number of order-lines and low-value in terms of Transfer price. Additionally, qualified products need to pass a qualitative manual evaluation to be selected. A trial run indicated that the new process will allow the case company to segment its product portfolio and determine a standard assortment for its stores.

Popular Abstract

To make inventory decisions for segments of products can be advantageous when a company offers a wide range of products. In this master thesis a process for product segmentation was developed. The identified segment, consisting of low- value and popular items, will be the new standard assortment for the stores of a construction-equipment company.

The purpose of the study was to develop a process that through segmentation could identify an assortment that should be available in every store in any given country; a standard assortment. This case study was conducted together with a company within the construction-equipment industry, and was limited to its stores in northern Europe.

In order to fulfil the purpose of the study, three research questions were
formulated. The first research question aimed at investigating the current need of identifying and prioritising a single segment. The second question concerned what criteria a product should fulfil in order to be included in the standard assortment and the third research question was related to the design of the process and what standard assortment, or output, the process provides. Based on theoretical findings within the two research fields of process management and product segmentation, a theoretical framework was created that supported the further development of the segmentation process.

Regarding the first research question, a need for product segmentation was identified at the case company. In the current inventory planning all products received equal attention and service. For example, this led to that equal time was spent on setting inventory levels for a €3000 demolition tool as for a €3 drill bit. Furthermore, the poor integration between the logistics department and the stores indicated room for improvement.

Concerning the second research question, four criteria were identified that have to be fulfilled by a product in order qualify for the standard assortment. The criteria were: not recently introduced, not about to be phased out, top selling in terms of number of order- lines and low-value in terms of transfer price. Basically this means that qualifying products are relatively cheap and popular. In addition to these criteria, the standard products also need to pass a qualitative review by an appointed manager with sales experience. Some important factors related to the criticality of the products could not be captured automatically in a classification model; such as if a product had to be sold in combination with another item, and therefore this manual review was necessary. It also filled the purpose of letting someone working directly with the stores to be involved in the final decision.

In relation to the third research question, a process was developed together with the case company, which strengthened the link between the logistics department and the stores, for example by defining information sharing standards and declaring responsibilities. The process was executed once and a standard assortment could be identified for the stores in one of the countries studied.

The theoretical framework supported the development of the process. Some improvement opportunities were identified, which in turn hopefully can strengthen the framework. How segmentation can be carried out through a process is a topic seldom discussed in the literature. This study was limited to a single case, but hopefully the framework and the findings can be useful for others who in the future are interested in development of product segmentation processes.

• author: Ramberg, Gustav and Hellered, Erik
• supervisor: Dag Näslund
• organization: Engineering Logistics
• course: MTT820 20161
• year: 2016
• type: H2 - Master's Degree (Two Years)
• subject: Technology and Engineering
• keywords: Product segmentation, Product classification, Process management, Process mapping, Supply chain segmentation, Construction-equipment industry.
• report number: LUTMDN/TMTP—5813—SE
• other publication id: LUTMDN/TMTP—5813—SE
• language: English
• id: 8885207
• date added to LUP: 2016-06-29 11:13:46
• date last changed: 2016-06-29 11:13:46