When you streamline your product portfolio to align with what your customers are actually buying, it unlocks massive value for your organization. Reducing complexity allows you to streamline operations and sales effectiveness, lowering overhead while improving the customer experience.
Here’s an illustrative exercise, based on a computer company’s experience. Imagine that you’re running a company with a product catalog that includes 17,000 SKUs. This large portfolio helps you drive sales and cover a larger portion of your addressable market, but the sheer complexity of managing each one of those SKUs takes time and resources. In this case, the cost of managing each SKU amounts to $2,500. When you multiply the SKUs by the management cost, the total cost of managing your product portfolio comes to $42.5 million.
How do you reduce that cost to maximize value while still meeting customer requirements?
First, you need to determine which products generate the most revenue. By analyzing your transaction data, you discover that roughly 80 percent of your revenue is coming from the sales of 200 products. The other 16,800 SKUs in your product portfolio produce 20 percent of revenue.
In other words, you’re spending $500,000 to maintain the products that drive 80 percent of your revenue … and spending $42 million to maintain the products that drive the remaining 20 percent.
Clearly, there’s an opportunity to improve revenue by streamlining your product portfolio. Armed with this data, you go back to your product management, product development and supply chain organizations and show them that the complexity of your portfolio is self-inflicted — and extremely costly. Now what?
One solution could be to lower the total cost of SKU management by dropping most of the products that drive minimal revenue. But that approach is likely to have a negative impact on your sales effectiveness and, ultimately, your revenue. When your customers need products that are no longer in your portfolio, your sales reps can’t offer a comprehensive solution to the customer’s business problem. You risk undermining your customer experience and either losing their business or becoming a single commodity provider rather than a trusted partner.
Again, the challenge is to lower portfolio management costs while still meeting customer requirements. Here’s a better solution: align your products with customer buying behavior, and use that information to manage your portfolio management. Here’s how to break it down:
1) Develop a core portfolio that addresses 80 percent of your customers’ needs: This allows you to focus operations on delivering the most critical products with an exceptional customer experience and consistency around the globe.
Now, when a customer purchases items in your core portfolio, they have confidence that these products are consistently available in a meaningful timeframe in any of the countries you support. This helps your sales organization focus on the most profitable opportunities and provide a customer experience that’s especially attractive to large global organizations.
2) Use streamlined sales forecasting to improve supply chain management: When you’re delivering a core offer instead of 17,000 SKUs, it allows your supply chain to focus on a comparatively small set of products. This improves the supply chain’s ability to predictably deliver your core products, because it’s easier for them to manage forecasts and aggregate their materials purchasing.
Now, you have a product that’s consistent across hundreds of countries, and your supply chain has the confidence to predict a steady demand. The results: a simpler process, lower overhead, faster turnaround times and stronger service-level agreement (SLA) performance around your core offering.
But what about all of those products that aren’t in your core offering?
3) Develop a second management model for the extended portfolio: Rather than investing enormous energy into finding, sourcing and managing 16,800 SKUs that drive only 20 percent of revenue, use a lower-cost management approach for this tier of products. Your customers are still able to buy products in this extended offering, but they should expect to pay more for these specialty items and a longer turnaround time. Instead of 10 days, these purchases might take 30 days. To further reduce overhead, these extended portfolio items should be analyzed for possible elimination or modification.
Following this data-driven approach to streamlining your portfolio changes your organization’s focus and allows you to reduce overhead, driving profitability. For the real company that this example is based upon, this approach helped to improve execution and increase market share alongside vast improvements in the customer experience, particularly in terms of supporting global customers.
Isn’t it time that you took a closer look at how your product portfolio aligns with what your customers are really buying?