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.
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