Protecting profits through inventory management is a popular topic on quarterly earnings calls whether the company is Xerox Corporation or Joann Fabrics. The article Ecolab: Fewer Products Greater Profits, is fairly representative of the manufacturing sector’s intention to reduce product arrays. Ecolab plans to cut its product offering by 50% within three years. The WSJ article Retailers Cut Back on Variety, Once the Spice of Marketing is about the retail sector making a u-turn from its historical approach to product assortment. It is no longer about adding clutter to store shelves with continued addition of product line variations. According to the article, major retailers are expected to reduce product assortment by 15% within the year. If manufacturers and retailers rationalize their product offering correctly, they would gain better controls on excess inventory, improve inventory turns hence cash flow, and be able to exert greater bargaining power in negotiating price and terms with their vendors.
Despite obvious gains, the traditional method of slicing product offering by simply purging items with the lowest dollar sales needs to be revisited. A senior manager at a major retailer discussed their current approach with me as follows:
- Develop lists of SKUs by category in descending order of sales and also margin
- Identify SKUs, including top sellers, which compete with each other with the intent of keeping the smallest number of items that will deliver at least the same sales and profits. For example, if two-three (or more) products from competing suppliers represent 100% of sales mix but fewer items can generate all of it, the rest are candidates for removal. The procurement teams negotiate price and extract further concessions from vendors in exchange of more shelf space.
- Check items with low sales carefully for several factors before chucking out any product. For example, consider keeping new items showing rapid sales growth and items that are part of a natural basket of goods so that a missing small piece does not hurt healthy incremental sales.
- Replace branded staples with private label products where viable
The process of product rationalization has its share of pitfalls hence the need for caution. Unless the execution is overseen by an influential senior manager in a well-laid out process, such projects tend to go haywire, for instance, because of turf battles between product managers within a company. For example, product teams at an industrial company would phase-out products to “make the numbers” but later add them to a list of custom manufactured products to even greater detriment of their company. Some questions to consider if your company is considering product rationalization:
- How do I make sure that my product rationalization process is not flawed?
- What if sourcing from a sole vendor fails to deliver on quality or time?
- What about customer choice if only major brands supported by deep pockets survive?
- Would customers move to competition to buy what they need?
The one-stop-shop concept gets unprofitable if a grocer stocks, say, ten competing products with cheddar flavored microwave popcorn or a manufacturer offers good-better-best variations of a product without differentiating them by value or price. Yet, manufacturers and retailers who understand customer value in the context of a complete shopping experience and set commensurate prices will survive the days of deep cuts.