Segment Proportions

In order to calculate the change in variety, it is essential to know both the current and projected proportion of projects versus tenders. Tenders are long-term contracts with low margins and high volumes, usually commissioned by utilities. Utilities are public organizations that maintain the infrastructure for a public service. In this case, utilities are active in the electric power industry and engage in the electrical generation and distribution of electricity. From now on, tenders will be called contracts. Company X will put the emphasis on projects (non-contracts) for the Product Y family, although the contract business could be beneficial as well. This will be elaborated later in Section 3.3.5. Projects tend to have high margins and low volumes, and are commissioned by all sorts of companies in varying segments. This explains the enormous increase in the Product Z sales volume, because Product Z is designed to cover a broad spectrum of solutions. Logically, this highly customizable system is aimed at the project business (private segment). Within Company X Product Z is classified as an engineer-to-order (ETO) product, which means that it requires engineering work before it can enter production. Product Y is both an assemble-to-order (ATO) and an ETO-product. The Product Ys manufactured for projects are in general ETO-products. The Product Ys for contracts are mostly ATO, because its design has already been made and only needs to be copied every time an order is placed by – most of the time – the utility company. Most utility companies have a contract with Company X; however, not all utility orders are contract orders and vice versa. Therefore, we compare both types in this section.

Another type of product is a make-to-stock (MTS) product. These are standard components or products that are literally made to stock, which means that they follow a push strategy. Examples of such businesses are the food industry and consumer goods. When contract orders enter the system the first time, they are classified as ETO, but once they are standardized they become ATO. Because

contracts are closed deals for three to five years, demand is already roughly known. Company X could decide to produce the orders in advance to cover fluctuations in production capacity and decrease delivery times for the contract partner. Therefore, it may be wise to eventually classify the contract orders as MTS instead of ATO (Manager Marketing Product Management, 2016). This would, however, result in an increase in inventory costs, since products are kept in inventory for a long time. Further research needs to be conducted on this subject to determine the impact of classifying the contact orders as MTS instead of ATO.

First, we compare public sector sales to private sector sales. In order to say something about the future proportion of public and private segment sales for the Product Y product family, it is essential to know the current distributions. These are displayed in Figure 3.3 (Company X (7), 2016). The public sector is dominated by utilities, but there are some so-called substation builders and system integrators as well, private parties that act as an intermediary for utilities. These are added to the proportion of public segment sales. The proportion of public sector sales for Product Y is slightly greater than the proportion of private sector sales. For Product Z the proportion of public versus private sector sales differs a lot each year. We will take the averages of respectively 51% and 19% to perform the analysis on.

Figure 3.3: Public vs. Private Sector Comparison.

Another comparison can be made between contract and non-contract orders. Contracts can be seen as ATO-orders, non-contracts as ETO-orders. Most utilities have a contract with Company X to deliver a certain number of systems for successive years. In Figure 3.4, we compare the proportion of contract sales volume to the proportion of non-contract sales volume for both products (Company X (7), 2016). Again, we will take both averages to perform the analysis on.

Figure 3.4: Contract vs. Non-Contract Comparison.

The data used for the analysis pictured in Figure 3.3 and 3.4 is, however, not a hundred percent accurate. Company X is a volumous organization with multiple plants and offices, so for some applications an overarching ERP-system is necessary to combine the data of all these different

locations. The data in the ERP-system used for marketing analyses (OBIEE) is not always a hundred percent correct, but it will do for this analysis (Commercial Marketing Analyst, 2016).

In Figure 3.5, the current and future proportion of contract versus non-contract sales value is compared for both products (Company X (7), 2016). The current proportion non-contract orders for Product Z is assumed to be 100% in contrast to the 95% in Figure 3.4. The reason for this assumption is that Product Z is assumed to consist fully of ETO-orders (Manager Marketing Product Management, 2016). Further explanation will follow in the next section.

Figure 3.4: Sales Proportion Contract vs. Non-Contract Comparison.

In Section 3.3.5, we will elaborate on the changes in segment proportions in relation to the influence of using LPD-partners to decrease the impact of variations, as described in Section 3.3.4.