CRITERIA FOR PRODUCT

RATIONALIZATION

Copyright © 2010 Business Templates 4u. All Rights Reserved

Copyright © 2010 Business Templates 4u. All Rights Reserved page 2

Product portfolio rationalization is a powerful technique to improve profits, free valuable

resources, and simplify operations and supply chains. It does this by rationalizing existing

product lines to eliminate or outsource products and product variations that demonstrate

various problems in relation to low sales, excessive overhead demands, are not really

appreciated by customers, and limited future potential.

Here are the criteria to consider during a rationalization process:

• Sales volume

• Revenue

• Profitability

• Percentage part commonality

• Impact of elimination on overall product line

• Ability to combine functionality of various products

• Customer need

• Competitive advantage

• Potential shift of allocated overhead to other products

Once a product has been identified as a potential candidate for elimination consider the

following questions:

• Should the price be raised so the customers do not buy it anymore (and hence

discontinue it)?

• Should the price be reduced and hence reduce available inventory?

• Should the right sold to another company or outsource its production?

• Should you sell your product to another country?

Models for Analysis:

• You must carry out focus groups and market research to see how customers

‘feel’ about your product/s

• List all the features and benefits

• Product Line Profitability (sales, growth, etc)

• Examine the Product Platform – could your product be improved and produced

by using a product platform that you already use to manufacture/produce another

product?

• Pareto Analysis (80-20 rule) for all your products - typically with 80% of profits

or sales coming from the best 20% of the products. This happens because almost

all companies keep adding products to the portfolio without every removing any.

Further, sales incentives and emphases on growth and market share encourage

the mantra "take all orders," thus overloading production operations and the

supply chain with too many low-volume products that have unusual parts and

manufacturing procedures. This causes excessive overhead costs, lowers plant

capacity, dilutes manufacturing resources, and complicates supply chain

management. Few companies realize these problems because their cost systems

Copyright © 2010 Business Templates 4u. All Rights Reserved page 3

allocate (average) overhead costs, which implies that all products have the same

overhead costs.

• Boston Matrix – to strategically map your cash cows, etc?

• Product Life Cycle and compare it to Industry Life Cycle – is the market

declining? What happens to your products?

• Value Chain Analysis – does this product add value to your organization?

• Portfolio Effect – The effect of the removal (or addition) of the one, needs to be

considered on the many. While cannibalization effects are typically considered

during the product introduction process, this should be reexamined during the

rationalization process. Will sales go to other products or will they just be lost?

• Lost Sales – While these sales are out on the tail of curve as explained above, the

potential for lost sales of any kind is usually difficult to explain to sales leaders.

Although overall, the rationalization may be a good idea by virtue of reducing

complexity in the supply chain, redundancy in the portfolio, and support costs,

these costs can sometimes be difficult to quantify. Some percent of sales that will

not be transferred to other products should also be estimated. This loss needs

to be made up for and exceeded by new products coming into the portfolio or

growth in existing products, so the company still stays on an overall growth path.

• Production Overhead Costs – When products come out of the portfolio, fixed

costs usually stay the same and now must be spread across the remaining

products thereby increasing unit cost and putting a damper on day of

manufacturing leaders, not to mention on their incentives. It’s important that the

production volume be transferred to new or more profitable products, if demand

for these exists.

• Customer Migration – The prior points have emphasized the need to maintain

sales and volume. To ensure this, migration plans must be made with customers

and the phase out planned through Sales & Operations Planning.

• Strategic Considerations – Is the product sold to customers that also buy other,

more profitable products, and do these customers want one stop shopping? If so, it

may be necessary to retain the laggards at least for a while to retain the business

of the others.

The Value of Product Line Rationalization. Eliminating or outsourcing low-leverage

products will immediately:

Increase profits by avoiding the manufacture of products that have low profit or are

really losing money because of their (unreported) high overhead demands and inefficient

manufacture/procurement

Improve operational flexibility because, typically, low-leverage products are inherently

different with unusual parts, materials, set-ups, and processing. Often, these are older

Copyright © 2010 Business Templates 4u. All Rights Reserved page 4

products that are built infrequently with less common parts on older equipment using

sketchy documentation by a workforce with little experience on those products.

Simplify Supply Chain Management. Eliminating the products with unusual parts and

materials will greatly simplify supply-chain management.

Free up valuable resources to improve operations and quality, implement better product

development practices, and introduce new capabilities like build-to-order & mass

customization.

Improve quality from eliminating older, infrequently-built products, which inherently

have more quality problems than current, high-volume products that have benefited from

continuous improvement and current quality programs and techniques.

Focus on most profitable products in product development, manufacturing, quality

improvement, and sales emphases. Focusing on the most profitable products can increase

their growth and the growth of similarly profitable products.

Protect most profitable products

Stop cross-subsidizes. Remaining products will no longer have to subsidize the "dogs"

and so they can generate more profit or offer a more competitive selling price.