Category: Uncategorized

Taming a Chaotic World of Complex Product Portfolios

Over the years, your product portfolio can become as cluttered and bloated as a hoarder’s garage. The “collection” slowly grows into an unmanageable mess of products as they work their way into your portfolio through acquisitions, new market trends, and SKUs that should have been tagged for end of life years ago. Along with these products are years of similar and unused components and vendor agreements that must routinely be updated.

The scope of the problem

Managing this mess is troublesome enough. But what makes it worse is knowing that potentially 80% of that clutter is driving only 20% of your profits. Too many products and too many vendors add complexity and challenges that impact profits. But efficient use of Billing of Materials (BOMs) can help reduce redundancies and avoid duplicate costs and wasted resources by standardizing components in your product line.

Every new part or variant added to your product portfolio increases the cost of complexity, which must eventually be offset by price increases or cost reductions. It gets to a point where the incremental cost of adding a new product variant is way higher than the incremental margin that can be attained.

Product rationalization

Using analytics to understand your product portfolio involves a process called “product rationalization.” In the product rationalization process, you can use the Pareto Principle — aka the 80/20 rule — to determine which customers and products account for the majority of margin dollars and growth. Employing this approach allows you to create a P&L for each product, which helps justify a reduction in the number of components and/or vendors.

The product rationalization process uses the detailed BOM and looks for similarities across the product portfolio. It can also look at vendor relationships and inventory management as it relates to the 80/20 rule. The BOM analysis, together with engineering input, focuses on reducing the total number of distinct components required to manufacture the entire product portfolio.

From there, you can use a SKU rationalization algorithm to export transaction-level data. Having this data will help you define your options, such as where to increase prices or what products to eliminate. You can determine where to make price adjustments to deliver additional value while determining which products or SKUs to discontinue or replace across the product portfolio.

Of course, effective product rationalization also means reaching an agreement between marketing and operations as to which products offer the most benefit and the greatest profits over time.

Take stock of your product portfolio

Your effort to simplify your product portfolio starts by taking stock of your existing products or SKUs. Once you have everything in front of you, focus on two actions: streamlining the portfolio (cutting the long tail) and simplifying the product line. The long tail consists of any products that limit profits — anything not making you the money you need.

To simplify your product line, start with pragmatic goals, such as increasing reuse/standardization of components and consolidating the number of suppliers for certain product groups in the portfolio. Use data analytics with the 80/20 rule to prioritize products, components, and vendors.

Put your BOMs to work

Link BOMs and SKU data to determine component overlaps and standardization opportunities. Identify similarities across your product portfolio. Also look at vendor relationships and inventory management as they relate to the 80/20 rule.

Don’t just eliminate low-volume part numbers. Instead, reduce the number of discrete products within a product line consistent with your business strategy. Create a filter to determine what product to offer a certain customer set, then align manufacturing processes to support that product. Give “tailored” products a hard look to determine if they’re still worth the work.

All of these efforts will lead to greater margins. A BOM analysis, combined with engineering input, can help reduce the total number of distinct components required to manufacture the entire product portfolio.

When product portfolios grow beyond what’s needed, companies find themselves spending too much money and too many resources in areas that might not be as profitable as others. The key to simplifying your product offering is to use the 80/20 rule to intelligently manage BOMs for the most efficient and most profitable outcomes.

If you want to hear about how other companies are improving their use of BOMs to simplify their product portfolios, reach out to me below or or follow the author link.

Author: Patrick Mosimann

Posted on May 29, 2019 by Danielle Mosimann

Working as a Team to Improve Profits

To improve profits, you must build and coach a team across multiple facets of your company. You need players from all parts of the company: engineering, operations, sales, marketing, and finance. Only together can you commit and engage to improve the customer experience, products, and processes that go into making more money for your company. Read on to learn how to make the most of these areas with a three-phase approach to improving profits.

Profit improvement is a team sport

Almost every function in a company has a role. Unlike in most competitive sports, there is no starting five or first-string or second-string players when it comes to improving profits.

The secret to building profit is engagement across internal cross-functional teams and customers. Senior leadership has to bring the disciplines together, set targets, and establish real, measurable goals for each.

Applying the empirical and age-proven Pareto Principle, aka the 80/20 rule, can help you achieve profit improvement in three phases: customer rationalization, product rationalization, and process improvement. When applied to profits, the 80/20 rule states that 80% of a company’s profits come from 20% of its customers.

Working together as a cross-functional team, you can improve margins in both customer segments by changing how you do business with each side. Think of it as scouting a team to customize your game plan. By segmenting both the 20% and the 80% into distinct strategies, you can improve profits.

Phase 1: Customer rationalization

In the first phase, the focus is on getting low-margin/low-volume customers to move to standard products — or to raise prices. This touches mostly finance, product management, pricing, marketing, and sales.

If 80% of your customers are contributing only 20% of your profits, chances are you’re focusing on the wrong products. These are products that offer low margins and high costs associated with support and maintenance.

Phase 1 comes down to two questions: Can you eliminate these low-margin, high-cost products and move customers to something else? Or do you get rid of the customers altogether?

Ford is a great example of a company that took this approach. When faced with the prospect of retaining customers with low-margin economy cars and lower sales volumes, the company decided to eliminate its line of budget sedans and place more focus on its large crossovers, SUVs, and trucks — where profit and demand were the greatest.

Phase 2: Product rationalization

In the second phase, the engineering, procurement, and product management departments are heavily involved in standardizing components and reducing the number of suppliers. Companies that have been around for longer periods — 10 or 20 years or more — usually develop a bloated product portfolio that eats into their profits.

It’s human nature to want to provide a variety of products and features. And salespeople are all too happy to offer these varied products as a means of attracting and keeping customers. In the process, duplicate components, vendor contracts, and support for those products can cost more money than they’re worth.

Sometimes it’s good to do a little spring cleaning and discard the products and services that weigh down your employees and profits. Bring in engineering, procurement, and product management for an 80/20 audit — known as managing the long tail — on vendors, clients, processes, and products to cut some of your losses.

Phase 3: Process improvement

The third phase relies on the operations and sales teams to make sure low-margin products and customization requests by customers don’t creep back in. This includes looking at customers, products, and processes across the company’s entire product portfolio.

Take an 80/20 review of every business unit to determine gross margins and true profitability for every product and customer in the portfolio. Review your procurement processes to understand similarities among products and components, and then devise a strategy to reuse and standardize parts and materials.

Once you’ve tackled all three phases as a team, you can expect new profits and sustainable business to carry your company through a winning season.

If you’ve been struggling to improve profits, AlignAlytics can help you draw out a game plan that engages your employees and customers for a whole new winning strategy. Reach out to me below or or follow the author link.

Author: Patrick Mosimann

Posted on May 22, 2019 by Danielle Mosimann

Are Your Products as Profitable as You Think?

Most companies think they know how much profit certain products bring to the table. But their real costs might be deceiving.

The complexity of activity-based costing

True product profitability is elusive. Individual products that we think are highly profitable sometimes aren’t. If you spread indirect costs evenly across the entire product portfolio, the true margins are distorted.

Typical indirect cost allocation methods look at an organization’s activities and assign a formula-derived cost to all products and services under its umbrella. As more products are added to the company’s portfolio, a clear association between products and costs becomes blurred.

Many companies are ditching this top-down approach and are instead using direct costing analysis for a clearer picture of product costs — focusing only on labor and materials. To get an accurate idea of your profitability, compare products on a direct-cost basis first. Then factor in complexity and volume. It will soon become apparent which products make the most money.

Use direct costing with 80/20

Direct costing looks at variable or incremental costs, such as the actual costs involved in manufacturing a specific product or the costs to increase production. Direct costing is best suited for temporary activities and for short-term analysis and decisions.

Breaking down incremental, variable costs for individual products and services can give you a clearer picture of their profitability — but this approach is labor-intensive. Direct costs on a particular product are easier to report and more difficult to hide.

As you consider adding new products to your portfolio, you need to understand the added costs and complexity it will create for your overall portfolio. You must also determine how much it costs to retain older products — potentially justifying their end of life. In the process, you can determine which customers generate the most revenue.

As the Pareto Principle — also known as the 80/20 rule — suggests, in most companies the top 20% of customers generate close to 80% of profits. Using analytics and insights from direct costing, you can find ways to improve the performance of the other 80% of customers. By using the Pareto Principle in tandem with the true cost of complexity, you can tailor specific actions to your portfolio and successfully raise your margins.

Use cases for direct costing

Indirect cost allocation methods lump all your customers and products into the same expense bucket. This makes it difficult to know how to best allocate your resources on the underperforming 80% of your customer population to make them more profitable. Some customers require more support than others but still buy in quantities or selections that produce profits. With a direct costing approach, you can evaluate the support costs to determine how much those customers are worth.

Direct costing insights can also help you:

  • Determine if it makes sense to manufacture a product in-house or through an outsourced manufacturer, based on costs associated with staff and equipment
  • Evaluate the profit impact from changes in sales volumes — an analysis can demonstrate how volume levels produce additional costs and profit
  • Justify investments in automation to accurately gauge the impact of reduced direct labor and depreciation of older equipment
  • Uncover true product profitability

    Direct costing provides a clearer picture of the price to bring products to market and support them. In addition, it equips management with options to control margin dollars and keep overhead down.

    The direct costing approach to evaluating costs lets you see through the complexity of standard accounting methods. Using direct costing in combination with data analytics helps uncover true product profitability.

    Do you really know the true cost of your products? AlignAlytics can help you use analytics and insights from direct costing to improve your profitability. Reach out to me below or or follow the author link.

    Author: Patrick Mosimann

    Posted on May 15, 2019 by Danielle Mosimann

    Tangled Up in Your Long Tail? Straighten It Out!

    Every company has customers who are inconsistent in their buying habits. Either they buy too infrequently or they buy products that do little to move the profit needle. This wreaks havoc with inventory and revenue streams. Often, companies choose to tolerate or ignore these customers.

    But what if these customers purchased higher-margin products? Would you keep them? The secret isn’t weeding out your customers. It’s about simplifying your business model and removing products that create complexity and reduce your profit.

    Understanding complexity

    With each new product or feature that’s introduced to keep up with trends or competitors, another level of complexity is added to the product portfolio. Sometimes this comes in the form of offering older products (soon to be classified for end of life) to customers at greater discounts, with lower profit margins. In this case, excessive overhead soon enters the equation, along with those associated costs — and the added work of managing customers and vendors.

    Subtle design variations can create confusion over warranties and support, in addition to the issue of keeping track of excessive parts and components. Out-of-control variety impacts all business functions and customers. Too much product complexity ultimately compromises cost, quality, and delivery.

    Analyze the data

    Analytics can help you understand and address the complexity that’s generated at the intersection of customers and products — especially during sales transactions. Most companies have a wealth of data resources available to them. Using analytics allows companies to understand true product profitability and streamline their product offerings and sales processes to cut the long tail.

    However, many companies fail to take advantage of this information because they lack a useable framework to analyze data for actionable insights.

    The Pareto Principle — aka the 80/20 rule — suggests a strategy for handling large amounts of product and customer data. Using the Pareto distribution approach to classify products and customers based on profit and cost data lets you determine which customers and products account for the majority of your profit margin and growth. In the process, you essentially create the equivalent of an individual P&L for each product.

    From there, you can use data science to extract transaction-level data. Having this data will allow you to define your options, such as where to increase prices or what products to eliminate. As you consider which products or SKUs to eliminate or replace, you can also determine where to make price adjustments to deliver additional value. The end goal is to guide the customer to an alternative product solution that will increase your profit.

    An example in practice

    Some car manufacturers are skilled at resolving product complexity. For example, Ford eliminated several sedan and economy models to focus on larger cars with greater demand and higher profit margins. Ford reduced its complexity by streamlining its fleet, effectively focusing on cars that are in greater demand and have higher profit margins.

    Analytics can drive greater margins

    Companies can use analytics to reduce product complexity. The key is in eliminating low-margin products or improving the way you manage them.

    If long-tail buyers and complex product offerings are keeping you up at night, AlignAlytics can help you employ a smarter approach to managing your product offerings and pricing structures. Reach out to me below or or follow the author link.

    Author: Patrick Mosimann

    Posted on May 9, 2019 by Danielle Mosimann

    Simplify Manufacturing by Saying Goodbye to Dead Weight

    As companies become more successful, they tend to grow their business by adding parts and vendors. However, every new part or new vendor adds more complexity to the manufacturing process — which in turn adds more costs.

    Complexity can come in many forms:

    • Duplicate or conflicting parts
    • Excessive contracts
    • Expanding overhead

    Reduce complexity

    To help reduce internal manufacturing complexity, companies need to streamline their portfolios and simplify their product lines. This starts with consolidating vendors and producing the right parts that can be used across multiple product groups.

    Every new part or variant added to a company’s portfolio increases the cost of complexity, which must eventually be offset by price increases or cost reductions. Eventually, the company must decide if the incremental cost of adding new products, parts, or vendors is worth the potential impact on its margins.

    Start with the data

    Manufacturers can use data analytics in conjunction with the 80/20 rule to determine component overlaps and standardization opportunities. Data analytics can help companies understand true product profitability in relation to overall operations. Companies can then develop successful strategies to keep complexity and costs under control.

    Most of the company data to evaluate for product profitability is easily accessible, such as sales and purchase transactions. However, many companies fail to use this data because they lack the framework to properly analyze it and derive actionable insight from that analysis. Furthermore, handling the complexities of large data is nearly impossible without having a good grasp of analytics tools and data science.

    The best way to analyze these large amounts of product and customer data is to use the Pareto Principle, aka the 80/20 rule, by comparing products and customers based on profit and cost data.

    Streamline your portfolio and simplify the product line

    To reduce internal complexity, focus on streamlining your portfolio and simplifying the product line. This starts with increasing reuse/standardization of components and consolidating the number of suppliers for certain product groups.

    You can use data analytics and the 80/20 rule to identify component overlaps and standardization opportunities. This information can help you re-engineer products to reduce costs.

    Companies can also introduce profitability early in the product design and development stage. The number of suppliers can be reduced through greater collaboration with existing suppliers, as well as more outsourcing of less strategic products and components.

    Processes can be put into place to understand similarities among products and components and to increase, reuse, and standardize parts and vendors. The fastest way to reduce manufacturing costs is to cut your overall number of parts. Fewer parts means:

    • Fewer purchases
    • Fewer contacts
    • Less inventory
    • Less handling
    • Shorter process and development times
    • Shorter engineering and testing cycles

    Reducing the number of vendors and components simplifies all activities related to a product — from its design to its final day of use.

    About 70% of all manufacturing costs originate at the design stage. By simplifying manufacturing early in the process, with fewer vendors and parts, companies can focus on quality and time to market. In addition, reducing the number of vendors and parts can lead to more customers and greater revenue.

    If you’d like to know more about how to simplify your manufacturing processes, starting with ridding yourself of extra vendors and parts, reach out to me below or or follow the author link.

    Author: Patrick Mosimann

    Posted on March 27, 2019 by Danielle Mosimann

    Upgrades at What Price? Leveraging Direct Costing to Uncover the Hidden Costs of New Product Features

    Companies constantly update their products to stay ahead of the competition and maintain customer loyalty. Sales and marketing look for those new features and product modifications that can offer an edge.

    But beyond the obvious costs that go into modifying your products — such as design changes, manufacturing setup and marketing campaigns — do you know the true impact of bringing new products into your operations? This continuous drive for something ‘new’ does have a significant counter effect – it brings additional complexity to the business. Without an eye on managing this complexity the business will quickly be less profitable as the number of product variants grow.

    What is true profitability?

    True profitability takes direct costing a few steps further. Specifically, it looks at the cost of complexity or the hidden transformation costs that occur with product proliferation. These can be found in the indirect costs and overheads. For example, new suppliers mean more work for procurement, logistics, inventory management etc. These fixed costs are rarely effectively allocated to products and therefore by definition a full picture of product profitability is difficult.

    Standard financial accounting allocates these indirect costs (absorption costing) so that a full costed value of the company’s product inventory can be stated on the balance sheet. This approach will tend to overstate the profitability of the tail at the expense of key products and customers. True profitability looks for a better proxy to allocate these fixed costs, namely complexity drivers. By restating these fixed costs, based on complexity factors, the business gets a “truer” picture of which products and customers contribute profitably to the business. This then allows a more accurate view of where the tail can be cut, and the business simplified to focus on where true profits are earned.

    Adding product options increases complexity

    As you introduce new products or add new features to existing products, your fixed costs go up. New materials, components, vendors, and support functions increase your overhead. Every new part or variant that you add to your product portfolio drives up the cost of complexity. And you must eventually offset these increases by increasing prices or reducing costs. The alternative is to see reduced profit margins, reduced competitiveness and ability to react to changing market conditions. Managing complexity downwards is a constant battle and needs better tools to track and deliver on.

    Complexity can result from:

    • New parts
    • Tailored parts that interfere with standard parts
    • Low-volume products that hinder production of high-volume products
    • Inconsistent and variable designs that impact inventory management

    Too much variety can affect your business functions and customers while compromising your costs, quality, and delivery. Unfortunately, many companies approve new products and features without understanding how these new variables will affect their bottom line.

    As you can see in this example, period cost (fixed costs) changes are rarely linked to new product proliferation. Looking at your contribution margin is not enough as greater complexity gets introduced into the business.

    Contribution margin will be explored in a future article; SG&A expense refers to selling, general, and administrative expense.

    Benefits of using true profitability

    Managing the business along a dual track of a conventional P&L and a true profitability view allows for a quick understanding of where the business focus needs to occur. The tail gets reviewed with more rigour to either eliminate, find substitutes and re-price so that it doesn’t create a drag on the business. Equally more effort is placed on direct material optimization (DMO) and standardization, where possible. The business should continually looks to reassess where to trim the dead wood and re-affirm the focus to those products and customers where true profitability is earned.

    Having trouble determining the true cost of your products? AlignAlytics can help you employ a direct costing approach to improve your profitability. Reach out to me below or follow the author link.

    Author: Patrick Mosimann

    Posted on March 26, 2019 by Danielle Mosimann

    The 80/20 Conundrum: How to Improve Your Margins

    In most companies, the top 20% of customers generate close to 80% of profits. But there are ways to improve the performance of the other 80% of customers. By using the Pareto Principle — also known as the 80/20 rule — in tandem with the true cost of complexity, you can effectively tailor specific actions to your portfolio and successfully raise your margins. Unfortunately, standard financial absorption costing does not provide accurate guidance on how to best allocate your resources on the remaining 80% of your customer population. By segmenting both the 20% and the 80% into distinct strategies, performance improvements can be achieved.

    Don’t be held ransom

    Many businesses using the 80/20 rule are hesitant to raise their prices for those customers in the 80% bracket, for fear that they will lose sales. In fact, businesses tend to focus on their lower-performing customers because they see them as potential growth opportunities. Dig a little deeper, and you’ll discover that 40% of U.S. business revenue comes from repeat customers — but these customers account for only 8% of all customers.

    What does this mean for the growth-oriented business? Break out of the cycle of working for a dime, not a dollar — don’t be held ransom by fear.

    Making 80/20 work for your business

    All this means making some big decisions. But don’t be discouraged; there are a number of ways to strategically apply the 80/20 rule within a business portfolio to generate profitability and reduce complexity across the board.

    1. Pricing — Resist the urge to apply a one-size-fits-all approach to pricing. Refine your cost structure by layering true profitability segmentation with the 80/20 rule to optimize pricing results and reduce pricing leaks. Why? Margin-driven profiles of clients and products allow for a clearer understanding of which need specific pricing actions. As a result, businesses will be able to observe which clients and/or products are most profitable within their portfolio, including those in the 80% bracket. Isolating profitable products not only drives revenue but also reduces complexity by removing focus on redundant processes.
    2. Assess complexity — Assess the scope of complexity within your organization by identifying the reasons behind particular clients and/or products not generating the intended margin. By evaluating complexity from a true profitability perspective, you restate the contribution margins of the 20% of your customers who make 80% of your profit and define different portfolio priorities. This process makes it easier to determine specific problem areas.
    3. Divide and conquer — Illuminate redundancy while enhancing productivity and effectiveness by defining specific 80/20 tasks that deal with not only product complexity but also the underlying drivers and processes. Don’t allow the groups to exist in a vacuum; look to align them with key priorities and ensure that effective lines of communication exist. Strong communication will allow those dealing with process complexity to provide valuable insights into platform redesign, Direct Material Optimization (DMO), product modularization, or commercial processes that avoid excessive complexity and inefficiency.
    4. Spring cleaning — Most businesses are burdened by more processes, clients, products, suppliers, etc., than are needed for positively impacting their true bottom line. Despite this adding to operational complexity, organizations tend to expand their operations over time, meaning that obligations become increasingly expensive and cumbersome without ever evaluating their true worth. Is it easy to throw away your favorite pair of sneakers? No, but in the end a good spring cleaning is more important than sentimentality — and the same idea can be applied to businesses. Conduct an 80/20 audit (known as managing the long tail) on vendors, clients, processes, products, etc., and get ready to cut some of those losses.

    The AlignAlytics approach

    At AlignAlytics, we’ve found that most product simplification approaches only focus on the symptoms; few companies have a formal process to manage portfolio optimization, product line simplification, or complexity governance. This is why we developed 80/20 Align, a system that provides data-driven complexity management by illuminating the true cost of complexity, its related causes, and the actual margin impact.

    Complexity doesn’t need to get the best of your business, nor does its ebb and flow need to be dictated by the standard patterns of the 80/20 rule. With some honest evaluation of every aspect of your business and widespread data analysis, you can find ways to tighten margins and improve profitability while reducing complexity.

    Want to maximize the 80/20 rule to help your business to grow? Reach out below or follow the author link.

    Author: Patrick Mosimann

    Posted on March 13, 2019 by Danielle Mosimann

    How much is product complexity costing your business?

    Author: Pedro Ferro with True Profitability

    Every established company has a certain amount of complexity in its product portfolio. Adding new products, variants and features is very seductive because it helps grow the business. That growth usually comes with a cost – creating complexity. Product proliferation inevitably leads to internal complexity in the form of excessive overhead, too many vendors and a myriad of components, resulting in:

    • Tailored parts increase every day and interfere with standard products.
    • Numerous subtle variations in similar designs, with minimum component standardization and reuse, creating slow and obsolete inventories.
    • Out-of-control variety impacts all business functions and customers, compromising cost, quality and delivery.

    Very few companies understand true product profitability before they decide to add a new feature or new design to satisfy a customer.

    Adding New Products 

    Every new part or variant added to the portfolio increases the cost of complexity and must eventually be offset by price increases or cost reductions. It gets to a point where the incremental cost of adding a new product variant is way higher than the incremental margin gain that can be attained.

    To make the problem worse, most companies do not measure cost of complexity and so do not know the real impact that proliferation has on the bottom line.

    In our experience, the main reasons companies do not have proper metrics or processes to manage complexity are:

      1. They do not have a reliable and practical way to measure the cost of complexity and understand true product profitability
      2. They do not segregate their portfolios into groups of products and customers according to economic value, in ways that they can apply different strategies to recover the cost of complexity.

    The key management challenge is to balance scalability and variety (customization), given that scale is rapidly compromised when complexity is mismanaged.

    The use of data analytics to understand true product profitability, coupled with a complexity management process, which can differentiate between the vital few and the trivial many, can lead to a successful strategy to keep complexity costs under control.

    How to understand and optimize your offering to improve true product profitability?

    1. Use data to understand true product profitability and to streamline your offering (cut the “long tail”)

    Use data to understand true product profitability 

    Most companies are sitting on a wealth of data that they can use to understand complexity, especially data at the intersection of customers and products, such as sales and purchase transactions. The reason why most companies do not use data to track complexity is that they don’t have a workable framework to analyze and from which to derive actionable insight.

    The best way to handle large amounts of product and customer data is to resort to the empirical and age-proven Pareto Principle, aka the 80/20 Rule.

    80/20 Rule Pareto Principle 

    Using the Pareto Distribution to classify and overlay products and customers based on profit and cost data is a simpler way to segregate the portfolio. And it’s no surprise when, time after time, the analytics keeps pointing to the fact that only a few customers and products account for the majority of margin dollars and growth.

    By using Pareto to distribute overhead and support costs amongst all products, in proportion to individual economic contribution and complexity level (measured in terms of revenue, number of transactions or parts-count), we can arrive at true product profitability. This is the equivalent of having an individual P&L for each product.

    80/20 True Proftability 

    When we look at cumulative profits in a Pareto Chart (using gross or contribution margins), we don’t observe the loss of profitability that comes from complexity.

    Only when we overlay the true profitability curve on the same chart do we see the impact on the bottom line caused by the “long tail of complexity”.

    Managers need to use true profitability as a guide to eliminate low-profit contributors and rationalize the portfolio. They also need to apply different marketing strategies for different groups of customers and products, based on their strategic and economic value, since not all “freeloading products” can be phased-out or replaced in the short-term, especially those that serve strategic customers.

    2. Repair true profitability of remaining products in the portfolio

    Repair true profitability of remaining products in the portfolio

    Every portfolio will contain a number of products that fall below a true profitability threshold. As companies prune the “long tail” they also need to be able to heal true profitability of remaining products, by either recovering the cost of complexity by better pricing or by reducing the cost of the product. There are several options to repair true profitability, depending on where the product is in the economic value matrix created by the Pareto analytics:

    • Reduce cost of goods sold (COGS) by reducing material cost. Companies should pursue a 10 to 15% reduction in material cost for products sold below the true profitability threshold via direct material optimization.
    • Rationalize the offering of non-strategic products. Replacing products sold to non-strategic customers with those sold to core customers is another option.
    • Build marketing strategies around true profit contributors. By understanding the entire product P&L, sales organizations can focus sales efforts on true profit contributors.
    • Develop pricing mechanisms for different product and customer groupings. Non-strategic products sold to non-core customers should reflect the full cost of complexity.
    • Stop creating more low-profit contributors. The best way to sustain true profitability is to keep freeloaders from entering the portfolio.

    3. Diminish internal complexity by rationalizing components and vendors

    Diminish Complexity

    To reduce internal complexity companies, you need to focus on two sets of actions: streamlining the portfolio (cutting the long tail) and simplifying the product line.

    However, reengineering a product line is not a trivial or an overnight exercise. Product line simplification needs to start with pragmatic goals, for example increasing reuse/standardization of components and consolidating the number of suppliers for certain product groups in the portfolio.

    The use of data analytics in conjunction with the 80/20 rule can be instrumental in determining simplification priorities. Linking bill of materials (BOM) and finished SKUs data for example, can determine component overlaps and standardization opportunities.

    Typical techniques used to reduce internal complexity are:

    • Reengineering the product to reduce cost. Based on value engineering and similarity index teams develop ideas to reduce cost without compromising quality.
    • Standardization and modularization. Teams set goals for complexity levels desired within a segment of the portfolio.
    • Design and develop for true product profitability. When companies account for true product profitability early on, they have a better chance of creating sustainable value – products designed not only with sales specifications in mind, but also with the ability to be manufactured in existing high-volume production lines.
    • Supplier consolidation, category management and outsourcing. Reducing the number of suppliers through greater collaboration with suppliers and more outsourcing of less strategic products and components are great ways to reduce complexity.

    4. Manage future complexity to sustain true product profitability

    Manage future complexity to sustain true product profitability 

    Finally, to sustain true profitability, companies need a stronger complexity governance process composed of four elements:

    • Clear roles and responsibilities. Assign a complexity manager to coordinate the entire process. This individual is the connection point between the external and the internal complexity arenas.
    • Decision-making forums. The organization needs effective cross-functional decision-making forums to expedite decisions at the right levels of the organization:

      R&D, sales, sourcing, operations and finance.

    80/20 True Proftability 

    • Analytical tools and KPIs. Visual representations of product portfolios using data analytics with simulation tools allow for timely, accurate decisions. Monitoring true product profitability performance is the most effective way to measure progress.
    • The right behavior. New ways of working must be integrated into the complexity management process. They need to be present in the work routines of sales, sourcing and R&D to induce the desired behavior.

    Living with complexity demands a clear understanding of true product profitability. It also requires that mechanisms are in place to control future complexity and sustain profitability.

    Author: Pedro Ferro

    80/20 Align provides a data driven complexity management process that better manages the causes of complexity and diminished margins. It can support you in all the above steps to ensure you don’t reach chaotic mode.

    Posted on June 20, 2018 by Danielle Mosimann