How Product Portfolio Management Is Key to Increasing Profitability
By J Schneider, VP, Strategy
The average manufacturing company has thousands of items in their product portfolio. The 80/20 rule dictates that of these, around 20% of products likely account for roughly 80% of a firm’s revenue. The remaining 80% of products form a long tail that together adds up to roughly 20% of sales. With so many products in play, it can be quite challenging to individually manage and care for each of the thousands of items in a portfolio. Product portfolio management is the key to doing so.
Most companies use product rationalization — which focuses on product elimination — as the primary means of doing so. They aren’t wrong to think about portfolio management in terms of what should be eliminated. After all, many industrial companies really do carry too many products. This glut of inventory can lead to a lack of focus and an inability to drive down the costs of carrying and warehousing slower-moving products. The reality, though, is that product rationalization doesn’t offer a truly holistic view of product management. But something called product portfolio management does.
In this article, we’ll walk you through the basics of product portfolio management and share a framework to best approach it.
Product Rationalization vs. Product Portfolio Management
Most manufacturing companies already have some sort of product rationalization protocol in place. Typically, this process involves periodically reviewing the products within a company’s portfolio to determine what should stay and what should go. These companies may consider more than just sales figures in making their decisions. But in terms of outcomes, at least, there’s not much nuance to the process. It’s a straightforward yes or no question that results in a product’s preservation or discontinuation within the portfolio.
Product Portfolio Management Framework
Product portfolio management, on the other hand, is more holistic and nuanced than product rationalization. It takes into consideration more than just sales thresholds and looks at:
- The needs of your firm today
- The needs of your firm in the future
- The needs of your end customers
With product portfolio management, your goal is to go beyond merely giving products the thumbs-up or -down by asking where each product fits in based on those larger needs. With this additional context, you can then decide how each product should be treated moving forward. For example, let’s say you have a low-volume product that doesn’t perform from a sales perspective but does play an important role in completing your portfolio for one reason or another. With product portfolio management, you have options beyond just keeping or cutting the product. You might decide to designate the product as special-order only, limit the product’s distribution to just those regions where it still sells, or limit its availability to certain, strategic times of year. Taking this middle path allows you to keep the product on your roster while reducing the amount of overhead.
Make no mistake: Product portfolio management necessarily involves some degree of product rationalization. Each product in your inventory will someday need to be obsolesced. And some are likely overdue to make the transition. Even now, you almost certainly have products in your portfolio that are little more than dead weight and should be cut loose.
But product portfolio management allows for a higher degree of flexibility, creativity, and granularity in the decisions you make about individual products beyond just keeping or scrapping them. Taking this holistic approach allows you to capture higher returns since there’s often a middle ground before removing a product wherein it can continue to add value. Approaching your portfolio this way also prepares you to respond in a more agile manner to your customer’s needs.
Incorporating the Needs of End Customers in Product Portfolio Management
Speaking of customer needs, your approach toward product portfolio management should begin with an up-to-date understanding of your end customers and what they want from your company. Their needs should shape your larger portfolio management strategy and decisions about individual products.
For example, let’s say you have a product that doesn’t meet your bare minimum sales threshold. From a pure product rationalization standpoint, the product should be cut. But in talking with your customers, you might discover that the sales numbers don’t tell the full story. In some cases, you might learn that although your customers only rarely purchase that particular item, it plays an important role in what they do. In this case, your customers would really notice if the product was cut. This lost offering would have an outsized impact on your customers’ perception of your ability to meet their needs and could ultimately impact related sales.
In other cases, your customers may tell you loud and clear that the slowest-moving items in your portfolio aren’t selling because they simply don’t want or need them. Products like these should, of course, be rationalized.
The bottom line is this: If you don’t understand your customers and their needs, it will be next to impossible to make the right decisions about products as you manage your portfolio. Get out of the conference room and into the field to observe and better understand your customers. Whatever you do, don’t decide to eliminate products based purely on numbers. Instead, make informed decisions about products based on how your customers use them and why they value them. If low sales numbers reflect a lack of value, then it’s time to say goodbye.
Create an Organizational System to Support Product Portfolio Management
With so many products to consider, you’ll need to create a strong organizational system to support effective product portfolio management.
To begin, establish a framework to “bucketize” your products based on a product valuation system.
All products have a certain amount of value to your firm and a certain amount of value to your customers. The value each item has for your firm will depend on a number of factors, including:
- Margin of revenue
- Cost of production
- Simplicity of manufacturing
- Cost of warehousing
- Speed of sales
The value to the customer reflects a different set of factors, which may include:
- Quality of construction
- Availability across the market
Your own valuation and that of your customers may or may not line up. Start by assigning two sets of values to each product, one for your firm and one for your customers. This value matrix provides the organizational structure necessary to streamline product portfolio management and make informed decisions about each product.
It works like this: If you and your customers both rate a product as highly valuable, it’s likely already one of the 20% of the items accounting for the majority of your firm’s revenue. And if the reverse is true — if neither you nor your customers value a product highly — rationalization is the obvious choice. If it’s high value to you but low value to your customers, you must consider how to shift your approach (whether by improving the product, adjusting prices, or something else) so that the product does a better job of meeting your customers’ needs. Finally, if a product is low value to you but high value to your customers, it’s time to think creatively about how best to treat that product to minimize the downside to your firm while continuing to make the product available to your customers.
Product portfolio management offers a holistic approach to optimizing your product portfolio. Adopting this method allows you to grow your business by making the right decisions for your firm while meeting the needs of your customers.