With another passing day and another earnings call, we hear and read about retail sales slowing, stores closing, and companies filing for bankruptcy. While it is clear that retail is in an upheaval, unable yet to master the on-line off-line model to sales, supply chain, and consumerism “anywhere everywhere now” flexibility, upstream product rationalization or lack thereof, is one key lever to competitive differentiation. Companies are often in a rush to the often heard bottom scraping sales tactics: sales are suffering due (i) decreased store traffic, (ii) increased promotions and discounts, and (iii) unbalanced inventory leading to stock-outs or overstocking. These factors are self-fulfilling prophecies leading to a vicious bottom of the barrel trip: if the products are not what a consumer wants or likes, store (or web) traffic will decrease, resulting in increased promotions, with unsold inventory. The latest example is Bed Bath and Beyond which cited same store sales falling 13% for the 4th quarter even as on-line sales increased by 20%. Apparently, looking as an outsider, a comparative 7% on-line to off-line sales increase was not enough to compensate for the overall drop in sales and revenue.
The horse has left the barn; the efforts to “manage” activities such as inventory management, store inventory re-balancing, promotions, are based on products already designed, ordered, manufactured, shipped, and often unsold. Since products are not selling, the urge is to heavily discount them with the hope they will sell. This leads to more discounts on the unsold, and so on. How is the margin recovered when a significant part of the portfolio is discounted? It is not, and the unsold goods are either consigned to further discount outlets or to landfills. Just think about the total waste in entire value chain from design-make-ship-landfill for absolutely achieving nothing! Product proliferation is the root-cause behind this.
Product rationalization is an effective tool in the waste reduction arsenal. It is a diligent and continuous process of monitoring sales and pruning or eliminating non-performing products. This releases capacity, resources, and capability to focus on products that are selling and in developing new ones.
Product complexity and product/stock-keeping unit (SKU) proliferation also reduces the efficiency and effectiveness of a company’s supply chain. Better management of product complexity and proliferation generally results in cost avoidance and superior control of operations.
What causes Product Proliferation? The major reasons are:
- A product family grows into multiple product sub-families or SKUs for various reasons.
- Acquisitions based SKU increases.
- Sales incentive structures promoting “everything to everyone” approach.
- Sub-par or non-existent product life-cycle management.
The Result? Business Complexity.
- Frequent manufacturing setups and short production runs (while good for agile manufacturing) for unneeded products, reducing manufacturing margins.
- In the absence of sophisticated demand planning and forecasting, difficulties are encountered in forecasting sales volumes, ultimately resulting in increased inventory and transportation costs.
- Shelf space clutter amongst often competing and marginally differentiated products.
- Difficulty in managing a larger supplier pool and higher material costs due to a larger product family.
How to fix it? – product rationalization: This is a comprehensive undertaking. It should start with a review of problem products; a problem because of (i) design complexity or stability, (ii) manufacturability, (ii) quality, (iv) environmental or safety, (v) marketing difficulty, (vi) others. Any of these issues will also manifest as issues with the consumer. One does not desire a faster on-line enabled product return to overwhelm product support. A regular product problem review will yield a list of problem products, either replaceable or to be eliminated. Financial analysis or a total cost of ownership model can be used to further the case for rationalizing the products. And it always best to engage all the stakeholders – Sales and Marketing, Manufacturing, Finance, Support, Distribution, and others in this initial step.
The next step is to negotiate with stakeholders towards implementation of the rationalization. There must be executive level championing of the business case. Specific activities, such as, product replacement or elimination communication plan, supplier engagement plan, an implementation plan and milestones, and project management must be vetted in great detail.
The above steps need to be coordinated with an inventory ramp up/down plan for the impacted products. This includes changes to product catalogs, web updates, and supplier qualification and agreement for delivery. Once the go-live date is reached, a daily monitoring of affected SKUs should be in place with updates to the ERP system/s, on-line catalogs, and ordering. Finally, customer support communication and training is also very critical to ensure that there are minimal disruptions to their business.
Once this process is in place, reacting to changes in market dynamics is easier, inventory imbalance is manageable and minimal, and the need to offer promotions for unsold products is infrequent. Retailers and other product manufacturers would improve their competitiveness by instituting a rigorous and well governed product rationalization process.