Many companies believe that they can only remain competitive if they can offer customers the most differentiated solutions to their problems through a wide range of variants and products – even if they know that this is costly.
But does it really have to be like this? No! The best example is Apple. Although the electronics giant releases new versions of its smartphones at regular intervals, the range of variants on offer is very limited: Three storage sizes, two color variants and that’s about it in terms of choice.
The situation is similar for discounters in the retail sector: compared to full-range retailers, they are not exactly bursting with variety. But they offer the essentials you need.
So there is obviously something to be learned from the minimalism of Apple and the discounters. After all, the success of these companies shows that it is possible to hold your own on the market even without a wide range of variants and products. What’s more, limiting the portfolio can even improve your own market position. After all, diversity costs the provider a lot of money: development costs, production costs, logistics costs, distribution costs.
If the finished goods or components of a typical production or trading company are structured once according to their contribution to sales or their stock throughput (ABC criteria) and once according to their regularity of demand (XYZ criteria) and the two classifications are superimposed in an ABC/XYZ portfolio, astonishing effects become apparent:
The AB/XY segment generates 60% to 80% of sales with 20% to 30% of articles. In the CZ segment, 40% to 50% of articles account for 1.5% to 3% of sales. and while the inventory ranges in the AB/XY segment are usually quite low, they are usually quite high in the CZ segment. A lot of money could therefore be saved by foregoing this portfolio segment.
You may now object that the corporate strategy and contribution margins speak against this: A retailer that positions itself on the market as a full-range retailer must also offer the full range. And if you want to survive as a production company against low-cost suppliers from the Far East, you have to score points with customers by offering solutions with more variants. These considerations can be strategically wise. However, they assume that you also earn money with your product range; with each individual product and not just in total!
This is precisely where the problem lies in many cases. If you ask your controllers, they will show you that most products generate positive contribution margins. However, these contribution margins do not necessarily reflect the real situation: you may earn more money with these “exotic” products than they cause variable costs and therefore contribute to covering fixed costs. Without this wide range of exotic items, however, you could possibly get by with significantly lower fixed costs. In addition, when calculating contribution margins, not all variable costs are allocated to the exact costs, but in some cases allocated according to “carrying capacity”, which means that the contribution margins of exotic companies usually look better than they actually are on closer inspection.
Why is this so important? New competitors will typically attack you in your AX portfolio. However, AX articles often have to subsidize CZ articles or contribute to covering the fixed costs they incur. As a result, sales prices are often higher than those of a competitor who concentrates solely on parts of your AX range and can therefore often establish a much more cost-effective value chain. The deeper new lean competitors penetrate into the AX range of your broad portfolio, the more you will come under economic pressure and worsen your competitive situation. Attempts are then often made to differentiate themselves even more in the breadth of the portfolio. But you have to (be able to) pay for a broad product portfolio. Or you try to produce it as cost-effectively as possible by following a building block strategy and massively standardizing and creating variants as late as possible in the production process. Postponed manufacturing and mass customization are the buzzwords here.
Of course, it would be even better than a cost-effective range of variants and products if you could design your bread and butter AX products in such a way that they delight customers so much that they don’t develop a craving for countless exotic variants. This does not necessarily have to be purely wishful thinking. Apple has already done it.
