Best practice rules for product portfolio management, part 3

Part 3: Different rules apply to short-lived goods than to long-lived goods!

In the first two parts, we explained the basic principles and best practice rules one to eight and you now know why it is so important to regularly clean up your product portfolio and how you can do it without annoying your customers. Of course, something new has to “grow back” for something old. And this also has its logistical pitfalls, as you will see below:
Without innovations and further developments of existing products, the company usually does not survive for long or at least loses market share. International competition in particular makes it necessary to be one step ahead of “the others”. However, the world of durable and non-durable goods differs drastically here. Basic Principle 9 applies to companies that earn their money with short-lived goods:
With short-lived goods, you are dealing almost exclusively with new products and usually struggle with over- or under-availability.

The prime example in this area is the fashion industry, which to a large extent only works with items that are only produced for a single season and can only sell these so-called “oneshots” on the market for a limited period of time.

Ideally, or theoretically, the best possible demand forecasts should be prepared as early as possible. However, the statistical and methodological tools available in this area today usually leave much to be desired. We are currently analyzing various approaches to improving forecast quality in this area, but this is still more basic research than concrete solutions. Ultimately, when forecasting new products, especially in markets with short consumption periods, it still depends on the “gut feeling” of product management to estimate the quantities required for a new product.

What we have seen time and again is that advertised products subsequently generate significantly higher sales than those that were not explicitly advertised. This is not surprising; at best the opposite would have surprised us. However, it is astonishing that in many companies the decision on which new products to advertise is only made after the procurement processes and sometimes even the production processes have already begun. At this point, of course, it is too late to adjust the quantities and produce the advertised product in higher quantities.

If forecasting methods do not help you to define the required quantities of certain items in your product portfolio more precisely, you need to make your supply chain and value chain as flexible as possible and align your logistics business model accordingly. What and how this can be done is part of the discussion of best practice criteria of the logistics business model and should not concern us here. However, it is important for product portfolio management that the obsolescence risk, i.e. the risk of being stuck with product stocks and having to scrap or sell them, is included as a residual risk in the product’s profit margin. Thus
Best practice building block 9: When manufacturing and marketing short-lived goods, design the supply chain to be as flexible as possible and factor the residual risk into the profit margin.

In terms of product portfolio maintenance, we also need to take a look at durable goods from a logistics perspective, as Basic Principle 10 applies here:
In the case of durable goods, new products often cause a great deal of planning effort, high inventory costs and a high cost risk in the entire supply chain, which must be borne by the living products in the event of incorrect planning.

New products initially cause headaches in areas other than logistics. We won’t deal with these headaches here, but we will take a look at the logistical problems.

Even with durable goods, there is a risk of overestimating or underestimating the need for new products. In contrast to short-lived goods, however, it is possible to better balance inventories and delivery readiness over time. Above all, there is an opportunity to sell off any excess stock over a longer period of time. This means that storage costs are incurred, but no scrapping costs. Of course, this only applies as long as a poor-selling product continues to be offered on the market and is not removed from the product portfolio too early (see best practice module 7). However, our experience from numerous projects shows that for manufacturers of technical products, more than 30% of new finished products per year are no longer economically viable in terms of logistics and eat up the supposed marketing benefits of a high new product rate.

Strictly speaking, this threshold is not about the proportion of new products in the total number of items in the product portfolio, but about the percentage of inventories to be held for the new products in the entire supply chain in relation to the total inventories in the supply chain. For this reason, parallel to the introduction of new products, it should always be checked which “old” CZ and CZ2 products can be removed from the range. Logistically, however, this is a different front. Sorting out poorly performing items is an important task in itself. However, it does not legitimize the excessive introduction of new products. For this reason, we must take best practice building block 10 into account for durable goods:
In the case of technical products, 30% new products per year that are launched with a “big bang” mark the limit of logistical suicide. Successful companies remain among them.

But what if the market launch can only be achieved using the “big bang” strategy? You will find an answer to this in the next part of our best practice article. So stay tuned!

Picture of Prof. Dr. Andreas Kemmner

Prof. Dr. Andreas Kemmner

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