Walk into your warehouse and imagine more than 40 percent of the SKUs within it contributing less than 5 percent to your organization’s overall revenue – and even less to your margin. Unfortunately, this is true for a majority of companies and probably applies to your own organization. Combine this with the number of SKUs in the average distribution company’s product portfolio tripling over the past 10 years and the problem has a far bigger impact than the average executive realizes.
Some impacts are obvious: warehouse and inventory space, handling costs and their usage of the most valuable real estate in the entire supply chain, shelf space. However, it is the less obvious impacts of excess SKUs that do the most damage: they diffuse focus across a larger number of products, eat up limited promotion dollars, distract sales organizations as they push distribution, use up the creative effort of marketing, sign shops and merchandisers and prevent the effective launch of new products.
The solution is a better approach to portfolio management, the process that defines a goal or purpose for each brand, product or package and ends with either improved performance or SKU rationalization. This process is founded upon a strong understanding of each product’s contribution. Volume contribution is often the starting point because most consumer packaged goods organizations focus first on growing market share, but as an organization’s portfolio management process matures, the analysis of how a product is impacting performance shifts from volume and revenue to margin so the financial impact is clearly understood and takes center stage in the decision-making process. The process should continue to mature, showing portfolio performance using any metric or combination of metrics that best reflects management’s thought-process. Improving your approach to portfolio management may seem challenging, but starting simple and improving as the portfolio becomes more productive provides a logical path to improve your approach and continue to drop more profit to the bottom line. Here’s what this maturation process looks like:
- •Periodic SKU Rationalization: Most organizations rationalize their portfolio only once a year, some even less, allowing suppliers and retailers to define what they will carry. Even a periodic rationalization of products is an improvement over this failure to control your own destiny. This is a fairly simple process. Identify underperforming SKUs by contribution, pull out the products that have both the lowest number of customers purchasing and also re-purchasing them, and you have a short list of candidates that can be potentially rationalized.
- •Continuous Portfolio Segmentation and Analysis: When management first agrees to carry a product (or a new brand), they do so because they believe it will allow them to compete more effectively in the market — they have a long-term goal in mind for each product. Getting the organization to act upon these goals requires the ability to create custom grouping of products that exceed the common brand, product and package relationship found in portfolio data. These groupings will reflect management’s intent and create five non-typical groups: core products; strategic products; future growth products; products which block competitive products and cannot be rationalized; and all other types of products. By removing those products that cannot be rationalized from the overall group, the process becomes more efficient by clearly identifying those that have no role in the organization’s strategy and are not only unproductive, but also the most distracting. Management can focus on the goals of each product in each subgroup, driving greater performance. While this continuous and strategic approach to portfolio management yields significantly higher returns than a periodic approach, it can be further enhanced to include the consumer’s perspective.
- •Occasion-based Segmentation and Rationalization: Consumer behavior — which brands and packages customers prefer on which occasions — should influence the ideal mix of products contained in a portfolio. Creating non-typical product groups based upon this consumer perspective follows a basic rule of portfolio management: not all products within a portfolio actual compete with each other. Products only compete if consumers consider them for the same occasion—consumption on the drive home versus once at home. Companies that do not take this market-driven approach are prone to not only competing with themselves on specific occasions, but also miss the opportunity to compete on some occasions. Occasion-based segmentation combined with continuous segmentation allows management to marry portfolio management with strategic efforts, more effectively penetrating the market by targeting all opportunities with productive products.
To truly be effective, portfolio management must be tightly integrated into operations. Segmentation and analysis provide the proper starting point for action that will lead to a positive financial impact. Financial benefit is realized when rationalization is coordinated with the actions of managers and operations staff in the field where real value is added.