If you are a leader in a products company where traditional cost-cutting is starting to run its course (or is not effective), you may be considering rationalizing your portfolio. The benefits are obvious – eliminate excessive complexity and waste, cull unprofitable products, increase margins, and enable faster growth. However, not being proactive can lead to unwise cost cuts.
But portfolio changes have their risks as well, which is why so many organizations hesitate to undertake such efforts. Leading CPG companies are leveraging advanced analytics to eliminate these unknowns to maximize the profitability of their portfolios. Done right, portfolio optimization can set your business on a fresh, positive trajectory; done wrong, it can accelerate a company’s demise.
At the heart of any SKU rationalization is an optimization equation with many potential options, constraints and interdependencies:
Do I cut a small volume product? What if that product is critical to a large customer?
- Is that low margin product just priced incorrectly, or should it be eliminated?
- If I eliminate a set of SKUs, what does that mean for the production line where they were produced?
- If I eliminated certain pack sizes or flavor variations, how will that impact the remaining products?
- Once I decide to eliminate certain products, what do I do with my existing inventory
Leading companies deploy advanced analytics to help them sort through the millions of possibilities for their portfolio. We’ve seen the most successful efforts include the following:
- Senior executive sponsorship: SKU and customer rationalization will affect every aspect of your organization. The degree of change management effort will be significant, and while the work will be done at a highly granular level, driving the adjustment to a successful conclusion requires strong executive support.
- Understand the marginal impact: Leading companies understand the marginal impact on the cost structure when the product mix changes (see Greater Growth by Pricing on the Margin)
- Consider all the options: Too often, companies crudely cut off the “long tail” without understanding a product’s growth and profitability, how it fits within the category, or its relationship with other products and customer segments. Bundling, price changes, and changing the timing of production are some of the additional options to consider.
- Model, decide, act: Run multiple scenarios (within the context of a company’s strategy) to determine the potential disposition of the portfolio and the financial impact to the business. Once decided, be relentless in execution. In our experience, slow implementations lead to lost momentum and backtracking.
- Manage for the future: Establish the ongoing capabilities, metrics, analytics, and management routines to be able to productively manage the portfolio on an ongoing basis.
Optimizing the portfolio, in many ways, has all the aspects of a major merger: the entire organization is affected, and it can position your business for substantial growth. But unless managed effectively, it will leave you in a weaker position. CPG companies that leverage advanced analytics to optimize their portfolios will have a distinct advantage over competitors that rely on antiquated methods.