Are you familiar with the term “assortment constraint”? Assortment pressure is the situation of having to offer a customer not only well-performing and lucrative articles but also poorly performing articles, usually with a low margin, because – according to the underlying axiom – the customer wants all parts of a certain product range from a single source; if he doesn’t get the bums from you at an attractive price, he won’t buy the top sellers from you either. The product range constraint often means that a (hopefully small) part of the product portfolio has to be offered in red and cross-subsidized by the bestsellers.
For the sales department, however, the product range constraint is a powerful spell, because it legitimizes every variety and every exotic in the product portfolio, with which you can perhaps still get hold of a scattered customer. Assortment pressure is therefore the first word a salesperson says when you wake them up at night.
Superficially, the assortment constraint is often present in the customer-supplier relationship: customers’ purchasing departments like to argue that they will only purchase the supplier’s lucrative items if they also supply the less attractive items; after all, they are anxious to obtain their less attractive purchased items as cheaply as possible. From a purchasing perspective, however, the combined procurement of a product range from a single source also makes sense in order to minimize the complexity of the procurement process. And from the supplier’s perspective, the product range constraint is a good thing if it generates a certain level of customer loyalty.
If a supplier is not careful, the winds of assortment pressure will continue to blow up the number of variants. Six years ago, I already pointed out in detail the problems for a supplier’s earnings situation that result from a product portfolio that is too broad. In the meantime, however, we are increasingly finding in product portfolio analyses that the hoped-for customer loyalty is not all that far off. If the competition makes a cheaper offer on the racers, more and more customers seem to switch quickly and leave the supplier’s sales department sitting on its red bums.
There is a system behind this: as the level of automation and rationalization of procurement processes increases, it is becoming less and less necessary to keep the number of suppliers for a particular product range low due to process costs.
That wouldn’t be a problem, because the compensation principle of “I’ll buy the racers from you and you’ll supply me with the bums” would still apply. Unfortunately, many suppliers do not monitor these compensation criteria and either do not even realize that the racers are no longer being ordered and are being ordered less and less, or they hope to win the customer back with goodwill.
Compulsory product ranges are dangerous and should not simply be postulated by the sales department. Compensation transactions between racers and bums must be clearly defined in the customer-supplier relationship and documented in the ERP system. This enables a supplier to react immediately if the customer no longer complies with the conditions.
One thing remains to be said: The stronger the tendency of customers to be very price-sensitive and willing to change their racing cars, the less justification there is for selling bums at a lower price or even keeping them in the portfolio at all for reasons of a postulated product range constraint.
