Optimizing margins is no easy task, as we see regularly with a lot of our B2B manufacturing customers who struggle to answer increased market volatility and continuous product variety pressure.
That’s why I’ll be taking you on a deep dive into effective product portfolio management and the benefits of cutting real portfolio costs. I’ll go over the challenge of identifying real portfolio complexity, how to counter it, and which benefits you can gain by optimizing your portfolio.
To achieve this, I advise my customers to focus on their people and processes, and develop a common understanding of the ‘cost of complexity’ across their organization. Nevertheless, I often experience a lot of hesitation in Sales to take action on smaller products ‘that still make money’. ‘Why should these products be removed from the portfolio if they still bring in some profit?’ Well, the key is that hidden costs aren’t always properly assigned to the right products (or customers).
The common way of allocating change-over costs or set-up costs, for instance, is done according to the amount of volume produced for an SKU. But in reality, these costs are not dependent on the production volume. They are tied to the frequency of production. As a result, low volume items get an underestimation of the true cost, and high-runners ‘subsidize’ the tail of the portfolio, as you see in the picture below.
As a result, Sales is provided with margin information that doesn’t support good decision making on the overall company portfolio. In this aspect, Finance should take up the role of creating an awareness of economical reality. Refining the margin calculation based upon the cost-of-complexity of each product might be a daunting task, but only by identifying and attributing the right costs to the right SKUs (and customers) can you get a real idea how to optimize your portfolio efficiently. I’ll provide you with a step-by-step approach below.
Product Portfolio Management strategies allow you to constantly revise your product portfolio investments according to changing market conditions and product pressure, as I have discussed in the whitepaper: Building Winning Portfolios. It is also essential that your internal departments are aligned on the product variety funnel or the width of markets and customers you want to address.
To achieve this, we offer our Solventure Perform collaboration platform (see below) to kick-start, improve and support the widespread adoption of your Portfolio Management process. This software tool natively connects to an ERP system in order to generate output based on the latest available portfolio data. To facilitate creating awareness on portfolio complexity for all stakeholders, it is crucial to include not only the product dimension in this tool, but also the customer dimension of the portfolio.
Since 2022, we’ve been working together with a premium biscuits manufacturer on their portfolio complexity with quite remarkable results. At first, there was no common awareness on the cost of complexity, nor had they any structured actions to deal with it. Stuck with project-based portfolio analysis and the need for constant decision-making, they were unable to drive cost gains through plant automation or improve their EBITDA result (earnings before interest, taxes, depreciation, and amortization).
Working together with Solventure , and with the Solventure Perform tool, the company achieved an improved relative profitability of 3.3% in three months, a reduction of active items (-2%) in the last 12 months, a Finished Good inventory reduction with 15 days, and a reduction of inventory write-offs.
Some less quantifiable results were clear profitability targets on the short- and long-term, minimum volume thresholds accepted by the Sales organisation, more qualitative discussions on portfolio actions, improved profitability data for better decision making, and confidence in the accuracy of portfolio data which guarantees better guidance for customer conversations.
The Operations Director, shared his view on the collaboration: “Thanks to our work with Solventure these past two years, we were able to faster analyse our portfolio, improve its transparency, create a higher sense of urgency and better decision-making, while improving the maturity of our business processes.”
Join our webinar: "Increasing Product Profitability: The Role of Data-Driven Decision Making"
📅 February 18, 4:00 PM CET
Learn how to optimize your portfolio, make data-driven decisions, and boost profitability.
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