The right way to approach product line rationalisation

The right way to approach product line rationalisation

Mark Blackwell, Arkaro

Product Managers’ responsibilities cover the whole range of the product life cycle, including end of life deletion, often through SKU rationalisation efforts. Opportunities are all too often missed in this important activity.  

Leaders may call for a tidy up of the product portfolio because instincts, or past experience, suggests that simplification will drive business benefits. And yes, this is possible, but it can all too easily fail to achieve the desired results. Correctly done it is much more than a one time event, but active ongoing process to drive business productivity and profitability in line with product line strategy.   

With rules of thumb like 80% of the profits come from 20% of the product often the advice is all you have to do is take a pareto and cut the tail – but can be less clear on what to measure performance revenue? volume? profit, and what measure of profit? and that is not all ……  

Product Line Rationalisation - Arkaro Change Management Business Consultants

A critical insight is that complexity can be good or bad

  • A broad product line that generates value by covering the needs of differing market segments without overlap is good complexity.  
  • A broad product line that confuses customers and frustrates with long lead times along with high inventory costs is bad complexity.   

On the flip side, we can therefore have both bad and good product line simplification or rationalization. The core issue is will simplification drive productivity? i.e. get more out of a finite resource? ….. and more precisely will an active product portfolio process drive more financial returns? 

Rather than just blindly cutting the tail, a better starting point is to think about what resource should secure better returns, or improved productivity, and what is the desired outcome. In other words, where is the bottleneck to superior financial performance? Some possible areas for busting bottlenecks; 

  1. Fixed Asset productivity – for many B2B organisations fixed assets represents a considerable investment and driving return on this investment is essential for success. A cost-accounting approach to product profitability, full of allocations, may obscure rational decision-making to develop the product line with the best returns on fixed asset investment. Throughput accounting, or profit velocity, techniques offer greater insight. (More on this topic in future articles) 

  2. Working capital productivity – Inventory is generally essential, but the funds invested should generate an adequate return over other business choices. Product line choices impact inventory productivity not just at finished level, but also for raw materials and intermediates. Likewise product portfolio choices can impact accounts receivables and payables. 

  3. Supply chain performance productivity – Full assets and a complicated product line may create uncompetitive lead times and poor delivery reliability driving customers to competitors.  

  4. Sourcing productivity – are some raw materials in limited supply? Does the product portfolio work to maximise returns on this constraint? Does it allow for strategic sourcing – or are there single sourcing risks possibly with distant suppliers? 

  5. Customer productivity. Company insiders may understand the intricate naming strategy of a broad product portfolio. It may take the outside view of a consultant to demonstrate the customer lens and the frustrations of selecting the right product to get the job done. Unless you are a seasoned DIYer, trying going to a super-store and choosing some paint for the garden shed – or ask a visiting European to order a sandwich in a New York Deli.  Less can be more to grow sales! 

  6. Sales & Marketing productivity. Faced with a bewildering choice of growth products time and funds may be diluted across the customer base leading to poor value proposition communication and thus poor sales. Again less can be more for profitable growth! 

And move towards developing a product line strategy …

The “What to measure” to guide decision making now becomes clearer with the productivity bottleneck identified. It should also now be obvious that the product manager must lead a cross-functional team to align on the bottleneck and work together to envisage superior scenarios to current baseline. 

 The cross-functional team should look for solutions beyond deletion alone.  Raising price on low profit products may show that customers valued the items more than was realised. Greater visibility on relative product profitability may drive better price-volume trade-offs. Cross-functional discussion may reveal that operations can make a small capital investment for significant profit improvement on a nearly forgotten product. … 

 A greater shared understanding of the customer needs, profit drivers, and competitive stressors can soon take what might have been one one-off “cut the tail” event to a much richer product line strategy development process. 

 Arkaro provides the right tools and capability building and can facilitate the right discussions to bring this value to your business.   

Mark Blackwell - independent consultant Arkaro

Mark Blackwell

With over 25 years of experience Mark has global line management and consultancy experience across innovation, product management, marketing, sales and supply chain built on strong analytical capabilities and business acumen.   
A 6 Sigma Black Belt, Mark was internal business consultant and productivity business leader in DuPont covering a range of industries including advanced materials, agriculture & speciality chemicals and nutrition & health. 

Mark is based in the Geneva, Switzerland area.