Grant Thornton LLP advisers say lean product portfolios could be the secret to increased profitability
TORONTO, ON — In today’s economic climate, Canadian manufacturers are constantly searching for new and innovative ways to cut costs. While a product portfolio is typically the last thing companies want to trim, a new white paper by Grant Thornton LLP suggests that this cost-saving measure can simultaneously improve a company’s bottom line and foster growth.
If 80% of a company’s profits are coming from 20% of its offerings, it’s time to trim down, according to Survival of the fittest: Uncovering the benefits of product rationalization. The report explains how a sound product rationalization strategy will not only enable manufacturers to identify and eliminate unprofitable product lines, but also potentially increase the profitability of remaining lines.
The secret is to focus on a company’s strengths. An effective product rationalization strategy can help ensure that all product lines are in synch with a company’s overall business and marketing goals. Every product should have a purpose whether it’s to enable a company to reach a specific market, or develop a brand in a particular niche. Those products that don’t fit into the overall business plan are likely eating up profits.
A wide assortment of stock-keeping units (SKUs) can result in excessive administration, purchasing and production costs that can get lost in the final sales data. A specific line, for example, may require exclusive machinery or additional marketing resources that aren’t justified by the final sales numbers.
In addition, a complex product portfolio can drastically complicate a plant’s overall efficiency. When customers have the option of buying a wide assortment of products, production schedules may constantly change from week to week. Frequent line and machinery changes lead to costly down time, and stockpiling products becomes difficult due to a lack of available floor space. Sales teams may also have trouble selling a portfolio that is too varied, because it’s just too much to pitch in a typical 20-minute customer meeting.
"Eliminating underperforming SKUs can be difficult, but it can pay in the long run," says Vivek Kalwani, of Grant Thornton Productivity Improvement and one of the authors of the white paper. "Not only does a focused product line make your production, sales and customer service departments more efficient, but it also allows you to free up much-needed room in your warehouse and fine-tune your overall business strategy."
Products that are ideal candidates for elimination typically consume a lot of warehouse space, complicate the production schedule and potentially use a specific type of machinery that isn’t required by any other SKU. Items that don’t foster a lot of demand, or that don’t fit into the company’s overall business strategy, should also be among the first to go.
To find out more about the benefits of product rationalization and how to implement an effective strategy, view the white paper in its entirety at www.grantthornton.ca/insights.