Too much of a good thing?
When Kenny Rogers penned these lyrics for the Gambler, "You gotta know when to hold them, know when to fold them, know when to walk away," I don't think he was thinking about product proliferation. However, for many packaged goods firms, service companies and wholesalers, with large product portfolios, they would be mindful to heed the words.
The 3 Cs
Managing large product portfolios are inherently complex, cumbersome and costly. For example, creating new SKUs often require the use of manual processes and operations that increases the likelihood of errors, confusion and supply chain & purchasing inefficiencies. Product proliferation takes many forms including: existing products (active, dead and discontinued), new products launches, promotional packs and special orders. Fortunately, management is waking up to the issue. According to a 2005 Bain survey of 900 global executives, approximately 70% of them admit that excessive complexity is raising their costs and hindering future growth. However, it is not always clear within the Company that there is a problem. For example, the sales group could easily retort: "if we are satisfying customer needs and generating revenue, what is the problem?" Well, lots.
Appearance versus reality
The total cost of product proliferation resembles an iceberg. Above the water are inefficiencies that generate direct and measurable costs: longer changeovers, increased inventories, and higher marketing, training and service expenses. However, below the water line is where the larger, more insidious problems occur. These include: brand confusion, a lack of strategic focus, reduced supply chain productivity, misallocated resources and lower service levels. Moreover, the greater the complexity, the more likely that bill of material (BOM) optimization and purchasing discounts are not being fully exploited.
Many factors, both internal and external to the firm, have contributed to the rapid rise in SKUs. Marketers, in the quest to satisfy customer needs or to respond to competitors, liberally launch products with low ROI or with little regards for total system cost. Not surprisingly, there is often institutionalized incentives for a marketer to undertake SKU-creating initiatives that will get him/her rewarded. Rarely, does glory come to those managers that pay attention to or even cull underperforming SKUs. In other cases, the phenomena of incrementalism leads to product expansion since the marginal cost of adding one SKU is usually low especially in cases where important customers request 'specials.' Finally, there is often a dearth of relevant data which makes ROI-based culling decisions a challenge to complete.
Current approaches are not always effective
The usual antidotes for reducing complexity – lean manufacturing, Six Sigma tools – focus on what happens on the factory floor rather than at the source, the product line. A Company can have the most efficient production lines but if its product management group consistently adds low volume and low margin SKUs (however attractive in isolation), the total system cost will increase.
Moreover, effective product management requires focus throughout the entire product life cycle. In many firms, the culling side of the life cycle is often neglected in favor of the far sexier activity of launching products or through lack of management time.
"Stop the insanity"
Reducing product proliferation is about effectively managing product life cycles, making changes to the existing product portfolio and ensuring the complexity does not return.
For two global packaged goods company, we deployed the following methodology for attacking the problem and preventing its return:
Going forward, system-wide issues need to be addressed. Companies ought to consider how product life cycles are managed with particular attention paid to process, cultural and compensation dynamics. For example, IT departments need to deliver the right data at the right time to facilitate planning and decision making. Product culling and rationalization need to be a core activity and capability within product management as well as sales, operations and manufacturing. Secondly, product and sales management needs "permission to fail" so that the right decisions are made for the organization. Finally, there needs to be appropriate feedback loops in place to make sure that new products are delivering hurdle ROI rates. If they are not, the process needs to include checks and balances to take corrective action.
- Assemble a cross-functional team; The team should be familiar with all aspects of product delivery, supply chain and costing
- Accumulate the data: Map each SKU according to brand, product, competition, revenue, contribution and end user need.
- Create and align around filtering criteria: Decide on which rules will determine the status of each product and SKU.
- Formulate a list of "quick wins" that can be eliminated painlessly and quickly and those longer term reductions which involve significant BOM changes
- Develop and agree on the business case for the recommended culls. Be realistic in terms of hard and soft costs and expected payouts. Communicate decisions internally and externally well in advance so business risks are minimized
- Implement recommendations: ensure "quick wins" reduction are made as quickly as possible in order to maintain momentum and generate immediate savings.
Copyright 2007 Quanta Consulting Inc.
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