Personalization. Market microsegmentation. New product launch. There are many good reasons to add items to product portfolios, but companies are better at adding than eliminating items. Discontinuing products is a struggle with tension between supply chain and marketing functions.
Why is this an important topic? The lack of product rationalization results in the long tail of the supply chain with increasing complexity. Lumpy demand for product with low volume requires a supply chain redesign. Long tail products do not flow well through the traditional supply chain designed for high volume, predictable demand. In Figure 1, I share a case study from a client engagement. Note that this client had 1723 items representing 23% of the volume. The use of a conventional supply chain tool to forecast this demand resulted in the degradation of the forecast by 14%. The reason? The demand patterns of the tail are different requiring a change in planning analytics.
The company was unable to design and implement a process to reduce item complexity. the organizational dynamics were tough. In parallel, the costs for process redesign were too high. The result? Stuck, the company struggled with customer service levels and high inventory write-offs.
A long tail of the supply chain whips the organization into a reactive mode. Item rationalization is an important initiative to improve agility and drive a balanced scorecard of business results.
Figure 1. Client Item Distribution
I am working on my third book. In the process, I am going through many pages of prior written material. One of the most read case studies written for my first book, Bricks Matter, is a case study on managing item complexity. It is frequently requested, so I wanted to reshare this case study with my readers.
I worked with the World Kitchen team in the period of 2002-2008. It is the best example of a company systemically managing item complexity that I have seen.
Case Study: World Kitchen Assesses Item Complexity to Move Past Bankruptcy
Appliances within the kitchen are a fashion statement. Increasingly it is about form and function. It was in this world that World Kitchen entered public markets with the spin-off from Corning in 1998. Today the Company operates as Corelle Brands, LLC. This case study from 2004 outlines a process to manage complexity and improve agility. The process helped World Kitchen manage inventories through bankruptcy filing in 2002.
World Kitchen’s supply chain– with significant manufacturing and distribution operations throughout North America and Asia– was complex. Selling well-known brands including Bakers Secret, Chicago Cutlery, CorningWare, Corelle, EKco, Pyrex, and Revere, the company sold products to mass retailers and specialty stores in the United States and Canada with extreme demand volatility.
The issue? Product complexity. The problems stemming from product proliferation and the need for product discipline was critical to the company turnaround. In 2002, World Kitchen implemented a disciplined process for managing product complexity.
In the process analysts evaluate all items by volume and profitability. In this process, a cross-functional team composed of senior marketing, finance, sales, and supply chain leaders reviewed all products in a systemic and disciplined process. The focus? The group worked together to gain an understanding of the right fit of products with low volume and profit.
In the management of complexity, there are many good reasons for products with low volume and profit to stay in the product line. Examples include micro-segmentation, a new release of a product for a target market, or the release of a new platform. The key is management ownership and discipline to manage item complexity.
In the World Kitchen Company turnaround, the product stayed in the product line market if the marketing team could justify the need for the product. In contrast, the group killed an item if they could not make the business argument.
The start of the process is the determination of a sales rating/item. To assess a rating, the team plots items by percent of sales on a monthly basis and grouped into three categories. In category three were products with monthly cumulative sales contribution of greater than $200,000/item/month. While items categorized in area two contributed gross sales of $200,000 and $30,000/item/month. Category one products formed the long tail contributing sales of less than $30,000/item/month. More than 50% of the items were long tail items with a small contribution to total sales. Figure 2 shows these patterns.
Figure 2. Determination of Sales Rating by World Kitchen to Assess Item Contribution
World Kitchen Methodology
1. Calculate SEVA. The SEVA analysis is a derivative of Economic Value Add (EVA) methodology. The financial team calculated the EVA by each stock keeping unit (SKU). (A SKU is an item sold at a location.) The SEVA defined SKU profitability after adjustments for associated inventory, manufacturing, distribution and financial assets used to make, deliver and distribute the item. While the team knew that the analysis was directional, they did not let perfection stand in the way of progress.
2. Analyze. Plot the SEVA rating by Gross Sales for each item in the product line at an SKU level.
3. Categorize. Plot SEVA by the number of products and group the product line into three categories. Category one products are high volume products, and the category three products are slow-moving products.
Figure 2. Categorization of Products for Review
In the process, the cross-functional group assigns a SEVA value/item and then classifies products into a nine-box model as shown in Figure 2 A decision to keep an item is easy if it scores six or five. The group discussion in these product categories focuses on driving more sales. When products fall into the “review” categories, the group challenges marketing to develop product action plans. SKUs falling into the “kill categories” were either discontinued or the marketing team was given two months to drive a turnaround in business performance.
The results were dramatic. The team reduced 42% of the poorly performing items in the product line. Here are some lessons learned:
- Clear Roles. There is a need for the team to have clear roles and accountability. Brand owners in this process took ownership of item profitability. In many companies, marketing does not take ownership of item profitability and supply chain impacts
- Governance. The process needs a final arbitrator. In this case study, the Chief Marketing Officer acted as the final tie breaker. The monthly process focused on driving gross sales helped the marketing team to drive programs and initiatives. The focus was on driving sales not killing products.
- Move Forward. This team was successful because they were able to move forward with a directional analysis. They did not strive for perfection. Attempting to drive perfection in an imperfect world is an impediment to item rationalization.
Less than three percent of companies have a process to rationalize product profitability. Many will start, but not sustain the initiative. It is easier to add products than to reduce them. As a result, within many supply chains, the long tail is growing with major implications for supply chain design and deleterious impacts for costs and customer service.
Item rationalization and product portfolio analysis are good projects to tackle in the new year. Welcome to 2019!