Part 3: Best practice rules for product portfolio management

By Prof. Dr. Götz-Andreas Kemmner

The last five building blocks mark the stages on the home stretch to a perfectly maintained product portfolio. You have now learned in the first two parts why you should not bow to the constraints of the product range and instead decide which items should leave your range based on customer needs. You now also know why your value chain is particularly often disrupted by CZ articles – and why you therefore need to sort out or refurbish “rusty” links.

Whichever way you choose to streamline your product portfolio, you must observe Basic Principle 7 to ensure that a product streamlining process is as cost-effective as possible from a logistical point of view:
A supply chain needs time to run empty in order to keep the costs of remaining stock low.

Remaining stocks are a regular nuisance in logistics. They always arise when production volumes can no longer be sold on the market and there are many different reasons for this:
Excessively high demand forecasts for new or live products lead to quantities that you will either never be able to sell, that are past their best-before date or that can no longer be used as spare parts due to technical changes, or only in customer service.

Another, but often neglected, cause of residual stock and disposal costs results from product streamlining. For companies that produce for an anonymous market, product discontinuation should always take place in two stages: In stage 1, the product is discontinued “internally”. Logistically, this means that the sourcing of the product itself or the product-specific raw materials, materials and semi-finished products is stopped. Let the value creation pipeline run as empty as possible before you discontinue the product “externally” in stage 2. Once the product has been withdrawn from the market and can no longer be found in the catalog or on the website, you can only use the remaining stock at the various stages of the value chain for spare parts and warranty purposes.

Figure 4: A two-stage discontinuation of a product ensures that the remaining stock can flow through the supply chain

Best practice building block 7 is therefore:
For companies that manufacture for an anonymous market, product discontinuation always takes place in two stages: internal discontinuation and external discontinuation.

In anonymous markets, you may know your customers statistically, but not personally. By contrast, in familiar markets, especially in the capital goods sector, the customer must be seen as an individual contractual partner. Companies that do not take this into account will quickly learn Basic Principle 8:
Customers react negatively to product adjustments if they are not informed and have no time to react.

Nobody wants to voluntarily give up products they have become accustomed to. Many customers who ask you and thus practically request approval for a product adjustment will initially be reluctant.
For this reason, it should be clear in advance of the customer information which products and variants you want to eliminate from your product portfolio. The sales department can then inform customers about alternative products, preferably from their own company, of course. If there is no longer an alternative product in your own company, but you know of a suitable alternative from a competitor, you should point this out to the customer. If he needs the product, he will find your competitor anyway. If you point him in the right direction right away, you improve your cards a little; especially if the customer continues to stay with you with other products. Giving customers a deadline for final orders should be a matter of course.

Particularly customer-oriented companies sometimes go one step further and support good customers with special services as part of product streamlining. This allows you to offer customers special conditions for products they continue to purchase or support customers in making the necessary process adjustments to an alternative product or a new raw material. The assumption of development or quality testing costs for alternative products may also be an option.

This strategy can be summarized in best practice module 8:
The articles affected by an assortment adjustment in the b2b area are to be determined independently of the customers. The subsequent implementation must take place in interaction with the customer.

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 “oneshots”, i.e. items that are only produced for a single season, and which can only sell these items on the market for a short time.

Ideally, you should draw up the best possible demand forecasts as early as possible. However, the statistical and methodological tools available in this area today 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.

Time and again, we have found that products that are advertised subsequently generate significantly higher sales than those that are not explicitly advertised. This is not surprising. However, we are amazed when we realize that in many companies the decision as to which new products should be advertised 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 determine 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. We cannot discuss how this works here.
However, it is important for product portfolio management that the obsolescence risk, i.e. the risk of being left with product stocks and having to scrap or sell them, is included in the product’s profit margin as a residual risk. Best practice module 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 throughout the entire supply chain, which must be borne by the living products in the event of incorrect planning.

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 can no longer be handled economically in terms of logistics and that any supposed marketing benefits are eaten up by 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% of new products per year, which are introduced in a “big bang”, mark the limit of logistical suicide. Successful companies remain below this level.

Figure 5: Big bangs don't always have to be at market launch
Figure 5: Big bangs don’t always have to be at market launch

In many industries, it is common practice to launch new products on all markets at the same time, and for many products this may not be possible in any other way. Fashion, for example, only has a limited lifespan and must be presented quickly on all markets where it is to be sold. What applies to fashion generally applies to the majority of short-cycle stock products.
Getting a new product into stores everywhere at the same time requires a great deal of effort throughout the entire supply chain :
New product launches with a “big bang”, i.e. in all markets at the same time, require high inventories and high flexibility costs in the supply chain for stock manufacturers, combined with long lead times.

With new products, there is typically the problem of predicting future market demand. If you want to be able to deliver despite uncertainties, you need to stock up on the new products. In the worst case, you need safety stocks in all markets. The required stocks need to be built up before they can be sold, and the necessary components need to be procured, manufactured and assembled. Such a new product piglet must therefore be pressed through the entire supply chain and slowly digested.
Worse still, entire collections of parts often have to be brought onto the market. The queue of suppliers and own production must therefore digest an entire herd of piglets at the same time. Just as the snake has to stretch, so too must the supply chain, which means additional costs for the necessary flexibility.

However, the reality is even meaner than previously described. Not only your company, but also most of your market competitors think and work in the same rhythm, sometimes burdening the same supply chain, the same suppliers with their herds of piglets at the same time, which drives up the costs of the suppliers and therefore your costs even further.

This strategy would not be absolutely necessary in all sectors and for all companies that introduce products using a “big bang” strategy if they had the courage to break away from this lemming behavior.

In many industries, it has long been common practice to test the demand for new products in “test markets”. In the food industry, for example, this is a typical approach taken by many suppliers. In the case of more durable goods, such as technical products or luxury goods, this strategy offers the opportunity to sell the lower material stocks on other markets if a product is not successful on its launch market.

If the introduction is successful, you can ramp up the supply chain. You can use the increasing capacity utilization of the supply chain for products such as consumer goods, where high delivery capability and therefore good market supply are important, to satisfy the increasing demand on the launch market. Only then should you expand your supply to new markets.

In the case of products for which a certain exclusivity is one of the characteristics, you would possibly first add further sales markets or better supply the initial markets and thus further increase the exclusivity character in the subsequent markets.

However, by discussing how we distribute the growing output of the supply chain to the markets, we are poaching in the area of marketing and sales strategy and we should leave this to the relevant experts. The main thing is for the experts to think about whether a “long chime” strategy is conceivable instead of a “big bang” market launch, in which the markets are served and filled successively and the supply chain can run empty better if the products do not reach the market.

Let’s imagine how beautiful the supply chain world could be if not all products were brought to all markets at the same time, collection by collection. The result would be much lower flexibility costs throughout the supply chain, lower scrapping costs and better delivery capability. For many companies, such a world would be unthinkable. However, there are always companies that do the unthinkable, thereby significantly improving their margins, while also setting themselves apart from the market and thus demonstrating best practice building block 11: Best Practice Building Block 11:
Big bang or long chime: successful companies check whether and how abruptly new products really need to be introduced.

As we all know, not everything about a new product has to be new. New products are often only product variants. Product variants can now be developed in such a way that the variant spread must take place early or late in the supply chain. From a logistical point of view, a late variant spread is better than an early one. However, the best variant spread for the logistics provider is the one that does not take place at all…

Regardless of whether the new products are variants of existing products or not. You can always think about using identical parts. The common parts strategy starts with a few standard screws in different products and extends to identical assemblies in different products. It is worth thinking about, because as Basic Principle 12 states:
The fewer different products can rely on common parts, assemblies and manufacturing processes, the more cost-effective and controllable the value chain and supply chain become.

A diversity of variants, where variants are created late in the value stream, counteracts a CZ explosion at finished goods level, which can break the neck of any company. It would be ideal if variants at the finished goods level were no longer stored at all, but were assembled to order. This is a strategy that is possible and common in many industries and for countless companies.

This is how the automotive industry works on the European market and how the majority of the machine tool industry works.

A standardized range of variants, in which as many identical parts as possible are used, also prevents the explosion of CZ at component and assembly level.

Starting from an existing broad product portfolio, the path to a standardized range of variants is long and the effort involved is considerable. It would therefore be better if you took the concept into account right at the start of a new product development.

As a best-practice strategy 12 we can therefore state:
Successful companies standardize their range of variants. And you start right at the beginning of the life cycle of a new product by thinking ahead to possible variants.

With this last consideration, we have finally arrived at the border area between portfolio management, product management and product development – and have thus reached a first target line for optimal logistical product portfolio management.

Image rights: iStock

Picture of Prof. Dr. Andreas Kemmner

Prof. Dr. Andreas Kemmner

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