Smallbiz/28″/dt1st/Mike2nd Keeping track of your products is important. This often entails what is known as product rationalization, which is best handled as an ongoing exercise of good housekeeping and product management. You should be regularly checking on the viability and rationale for your products and trim back as necessary. There almost certainly will be some slow-selling, older lines or obvious failures that need to be reconsidered. Many companies do not handle it this way. Rather, product rationalization is limited to an occasional activity, frequently prompted by crisis situations, or when a product line has grown and exceeded a manageable level. Typically, the exercise is handled simply by making a list of sales and profit performance for each product item. Below a certain line, the products are considered nonviable. From a business viewpoint, though, such an approach may be too simple and could cause serious trouble. It could result in an incomplete or unbalanced product range, as you risk deleting some seemingly small but important support or “image” lines, or “sleepers.” Slow-moving products are not very motivating. They often create a disinterest among people, not only among customers but also among your own staff. There are examples of companies that have been able to cut their lines from almost 50 variants to less than 10, without compromising the range of product solutions. The 50 variants were results of meeting customer requests over time, not of carefully planning the specific product line to match market requirements. So there should be a minimum of slow-selling products. However, you need to check important issues in that connection. Which issues should you look after? See if there are any linkages between your products. Cutting away one product or service may influence the selling prospects of others negatively. Think about what the consequences of deleting a particular product will be on your business coverage. You may find that deleting a product can have an adverse outcome on smaller customer segments that, in spite of being diminutive, appeal to certain key customers. Overheads are not always reduced, but merely allocated differently across other products, by cutting certain product costs. You often will find it worthwhile to take your considerations to a broader level. You can do this by asking some more central questions. Many companies find that the market really needs less variety than they are actually offering. Value-chain analysis is a way to unearth where and how costs are really being incurred. If your main goal is to improve profits, there are several questions to consider: ? Where you have “alternative” products, can you switch emphasis to the more fruitful lines and improve the performance of your product mix? ? Can you recuperate average performance by cutting away lower-profit performers that will not significantly affect your marketing position? ? Can you replace less-profitable products with more-profitable ones? ? Can you identify opportunities to take more cost out of less-profitable lines, or to increase prices without being wiped out by volume losses? Actually deleting a product is only one option within a rationalization exercise in which your primary objective is to boost your profit. A clearly defined product rationalization program is part of good product management, and so springs out of a study of the particulars of the product range and its market. It always makes sense to consider where your product is in its life cycle. Most products or services have a life cycle that roughly follows these phases: Introduction, Growth, Maturity, and Decline. It’s a good idea to change product strategies and procedures according to these stages. The product life cycle (PLC) affects three levels of product management, namely a) the individual product, b) the product line, and c) the product category. At the product level, you should cope with various change factors along the way, and manage your product effectively through the end of its life. At the product line level, the important issue is to achieve a balance and optimal range performance. This involves having products at different cycle stages to ensure overall balance in volume, growth, profitability, and cash flow (as also advocated in product portfolio philosophies). At this level, you may be led into rationalization or overall performance improvement exercises. At the product category level, the life cycle stage has a major influence on how much effort and resources you should be prepared to commit. It usually makes little sense to invest great amounts of money and resources into products that are at the end of their life cycle. Be careful, however, in your analysis, because it is sometimes possible to significantly revive products that were considered to be in the maturity or decline phase. For instance, it can been done by repositioning or repackaging the products, finding new uses or markets for them. From your investigations, you may find that a product you were in doubt about should not be excluded after all. Perhaps it requires alteration, or it needs to be complemented by another offering. Or no change may presently be desirable. Most probably, the higher up in the Revenue/Cost/Profit hierarchy you can make improvements, the greater the affect on your net profit. For example, a 1 percent increase on a $1 million-in-sales product can add an extra $10,000 to your gross and net profit. On the other hand, a 5 percent savings on a $50,000 promotional budget only offers $2,500. Another point for consideration is that actual value improvements will typically be more stimulating to profit than just generating extra volume. This is not to say that volume gains cannot be useful, even essential in a fast-growing business, to hold or improve share. However, more-mature businesses all too commonly dilute gross margin (e.g. through higher discounts or special deals), or hit net profits because they need high levels of support costs (e.g. extra sales incentives). Conversely, most value improvements (e.g. better control of discounts or more cost-effective packaging), will not only provide better profits, but will also enhance the rate of profit achieved at gross and net level. The best overall profit improvement program will normally be one that affects small but achievable gains in a number of areas. At any rate, when cutting products or costs, you must endeavor to at least keep a similar level of customer satisfaction. Preferably, you should attempt to increase it. It will not be long before customers notice if product quality or service levels have been compromised. That means that your sales are in danger of falling, and your improvement efforts will have the opposite effect. Therefore, any cost reducing effort should be tested for possible adverse effects on customer contentment. U. Lindahl is a business consultant with Chatsworth-based Vidac Business Consulting. He can be reached by fax at (818) 885-5599 or by e-mail at [email protected].