Reshape and Refresh Your Product Portfolio for a Streamlined Supply Chain
Organizations embrace periods of strategic portfolio expansion as a lever to improve top- and bottom-line growth. But in the wake of product proliferation, portfolio complexity emerges with unanticipated supply chain consequences that can significantly impact customer service, quality, and cost.
The accumulation of products spanning multiple life-cycle stages may redirect the organization away from its charted course while adding internal and external inefficiencies.
Firms across all industries recognize and attempt to remedy these challenges, but most fail to unlock value using traditional complexity management (CM) programs. Traditional programs are often a subtractive exercise—focused solely on “tail-cutting”—leaving the firm exposed to top-line risk without driving value internally or for the customer. A more comprehensive approach is needed to overcome these challenges.
A comprehensive approach goes beyond tail-cutting to reshape and refresh the product portfolio. It is not a subtractive exercise, but one focused on adding value to the organization and the customer with a streamlined and well-positioned product offering. It brings to bear resources from commercial, R&D, and supply chain organizations to lead a transformational change across the portfolio. The result is a less complex portfolio that frees up resources for growth while improving the bottom line.
Testing the Health of Your Portfolio
In an effort to move beyond the tail-cutting trap, firms must test the health of the portfolio beyond simple metrics, such as gross profit and sales revenue, and use a broad stakeholder lens.
The firm should evaluate the portfolio across multiple dimensions, including:
- Strategic value
- True end-to-end profitability (fully burdened net margin, not relying solely on gross profit) and cash flow impact
- Quality and service
Strategic value. Measuring portfolio health starts with assessing the strategic value of the products in the portfolio. Understanding the value of a brand or product beyond simple financial or service metrics is critical to decision making—it should be the starting point. The portfolio should mirror the strategic objectives of the commercial organization to drive the most value for the customer and the firm.
True end-to-end profitability. Financial health is a key consideration for driving portfolio decisions; however, most firms do not measure true product profitability. Financial performance is often measured using readily available information, such as gross profit (GP). While this presents a starting point, GP does not provide a complete measure of product profitability because it often underrepresents the costs to manufacture low-volume codes and it excludes firm operating expenses (for example, selling expense and distribution).
Net margin provides a more accurate representation of true financial health. It includes all the costs typically included in cost of goods sold plus below-the-line operating expenses. Depending on the industry, operating expenses such as selling, marketing, distribution, and R&D may represent a majority of the total cost structure.
Quality and service. A third—and often ignored—measure of product health is the quality and service reliability of the offering. Quality and customer service issues are not random; they tend to consistently be concentrated in portions of the portfolio. A product or product category should be deemphasized in the portfolio if it cannot be delivered with consistent quality or supply reliability. Such products detract from the external image of the firm and cause significant internal costs. Including this in the assessment of portfolio health provides a more comprehensive picture of how to reshape the portfolio.
Driving Meaningful Change through Complexity Management
A successful approach for implementing a CM program moves beyond tail-cutting. Tail-cutting often leads to sub-optimal decision making and can put significant top-line revenue at risk. A more holistic approach should include a proper assessment of the health of the portfolio across multiple dimensions and stakeholder groups. When using this approach, a successful CM program can reduce portfolio complexity, drive significant financial benefits for the organization, and facilitate a winning portfolio strategy with customers.