PRODUCT   LINE   RATIONALIZATION

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 Here is what Rationalization can do right now in this day and age:

Copyright © 2022 by Dr. David M. Anderson

Rationalize away products that waste resources, which will immediately: 

1) Prioritize scarce resources, on products and customizations that will sell immediately, never building anything for inventory, which,  in turn, will:

(a) not brig in any money now, and,

(b) actually be charged an "inventory carrying cost" equal to 1/4 of its value per year!

2)  Prioritize assignments of skilled labor by focusing then on the highest "net" return that brings back  good money in the fastest time.  If skilled labor expertise is spread too thin, there may not be enough available for production, especially  if any of them miss work for any reason.  So don't waste skilled labor on  "loser" products and customizations that won't  sell now and just go into inventory.

Do everything possible to minimize skill demands, as taught in the article: How to Cut Labor Cost in Half or Build with Half Absent.

3) Avoid machine bottle-necks.  As with scarce labor (point 1( and skilled people (point 2), prioritize sales acceptance by doing the followingc

a) Avoid orders and customizations consume too much run time -- and setup time -- on machines.  thus creating a bottle-neck 

b) Avoid exceeding the bandwidth on a bottle-neck machine building products that will not bring in money now and only go into inventory.

c) Avoid (a) or (b) to "fill the factory" which may be an arbitrary goal of utilization  metrics, or "take all orders" to keep machines running or keep people busy.  Eli Goldratt (an expert on bottlenecks) wrote in industrial novel, where a company was building inventory to meet its utilization goals, but about to go out of business! See, The Goal, North River Press.

When the author was making this point at an Executive Education session, a very brave Manufacturing Engineer pointed out that their "we-need-to-take-all -orders-to keep the-lights-on" defense forced him to delay a cash-cow shipment, at their bottleneck machine.

4) Prioritize on sales that will focus on new sales that will bring in money right away, not just to customers that want to fill their shelves or to customers fulfillment centersor wherehouses or even long boat rides.

Next, work all of this into Product Portfolio Planning and New Product Development  roadmaps as taught in the 54 articles on the home pagee of this site and the new 590 page DFM book, just published in June, 2020.

The Rationalization Procedure

    The actual procedure divides the product line in to four zones: The least profitable products would be dropped. Products that need to be in the catalog would be outsourced, thus simplifying the supply chain and manufacturing operations.

    The cash-cows would remain and the balance would be improved with a better focus in product development, operations, and marketing. Because these products no longer need to subsidize the "losers," they can now sell for less.

    The combination of better focus and lower overhead changes will soon restore the "lost" revenue from the dropped products.

The Value of Product Line Rationalization. Eliminating or outsourcing low-leverage products will immediately:

C Increase profits by avoiding the manufacture of products that have low profit or are really losing money because of their (unreported) high overhead demands and inefficient manufacture/procurement

C Improve operational flexibility because, typically, low-leverage products are inherently different with unusual parts, materials, set-ups, and processing. Often, these are older products that are built infrequently with less common parts on older equipment using sketchy documentation by a workforce with little experience on those products.

C Simplify Supply Chain Management. Eliminating the products with unusual parts and materials will greatly simplify supply-chain management.

C Free up valuable resources to improve operations and quality, implement better product development practices, and introduce new capabilities like build-to-order & mass customization.

"Product line rationalization freed up a lot of people!"

- Jon Milliken, VP Engineering, Fisher Controls div., Emerson Electric

C Improve quality from eliminating older, infrequently-built products, which inherently have more quality problems than current, high-volume products that have benefited from continuous improvement and current quality programs and techniques.

C Focus on most profitable products in product development, manufacturing, quality improvement, and sales emphases. Focusing on the most profitable products can increase their growth and the growth of similarly profitable products. According to Richard Koch, writing in The 80/20 Principle,²

"If you focus on the most profitable segments, you can grow them surprisingly fast -- nearly always at 20 percent a year and sometimes even faster. Remember that the initial position and customer franchise are strong, so it’s a lot easier than growing the business overall."

C Protect most profitable products from "cherry picking" (launching a competitive attack on the most profitable products), which is becoming more common as "virtual," cyberspace enterprises skim off the most profitable products.³

C Stop cross-subsidizes. Remaining products will no longer have to subsidize the "dogs" and so they can generate more profit or offer a more competitive selling price.

 

The biggest resistance to Rationalization

Some companies are reluctant to prune back on any products for fear of decreasing revenue, which many  people are pressured and rewarded for.  

Why a downturn or goind back to work is the easiest time to Rationalize

However, if the company is going to take a temporary “hit” on revenue anyway, a downturn may be a good time to go rationalization  since revenue drops are already expected by investors and have probably been explained away to other causes. 

Further, during downturns, companies have people available to perform the rationalization.

To show how powerful Rationalization is, here is a simpmle scenario:

Triple your profits immediately!

Just stop selling your highest-overhead "loser" products.

You will earn back that 20% sales when the rest of your products can sell for less and
when the resources that were wasted on fire-drill products can focus on designing low-cost products.

    Product line rationalization is a powerful technique to improve profits, free valuable resources, and simplify operations and supply chains. It does this by rationalizing existing product lines to eliminate or outsource products and product variations that are problem prone, don’t "fit" into a flexible environment, have low sales, have excessive overhead demands, are not really appreciated by customers, have limited future potential, may really be losing money.¹

^{FIRST: SEGREGATE PRODUCTS INTO FAMILIES}

^{The first step would be to segregate all product variations into families, according to the four criteria presented in the Product Family Article and then build the most promising families in flexible build-to-order operations with parts delivered by spontaneous supply chains . It may be necessary to design product families to be built in flexible BTO operations from standard parts and materials that are always available, as described in the Family Design article.}

^{Products that do not fit into these families will need to be rationalized, as discussed in the product line rationalization procedure (next):}

    Pareto’s Law for Product Lines

    All companies experience some Pareto effect, typically with 80% of profits or sales coming from the best 20% of the products.

    This happens because almost all companies keep adding products to the portfolio without every removing any. Further, sales incentives and emphases on growth and market share encourage the mantra "take all orders," thus overloading production operations and the supply chain with too many low-volume products that have unusual parts and manufacturing procedures. This causes excessive overhead costs, lowers plant capacity, dilutes manufacturing resources, and complicates supply chain management.

    Few companies realize these problems because their cost systems allocate (average) overhead costs, which implies that all products have the same overhead costs.

    Product line rationalization encourages companies to focus on their best products by eliminating or outsourcing the marginal products. The resources that were being wasted on the low-leverage products can then be focused on growing the "cash cows."

    The following scenario shows the power of this methodology using the simple example illustrated on the cover. If a company kept the 20% of the product line that was making 80% of the profits, and dropped the other 80% of the product line, it would result in only a 20% drop in revenue.

    However, dropping 80% of the worst products would eliminate 80% or more of overhead and distribution costs because those products are built infrequently with less common parts on older equipment using sketchy documentation by a workforce with little experience on those products. Further, those products may be less well designed for manufacturability and have much higher quality costs.

    If overhead and distribution costs are half of total cost (as is quite common), eliminating 80% of those costs will cut total costs in half. If profits were originally 10%, dropping revenue by 20% and cutting costs in half would result in over three times the profit!

Case Study: An industrial products company had 30% price price disadvantage from "taking all orders."   Neither the engineers or managers could not figure out why a competitor's product sold for thirty percent less until they realized that the competitor built only its newest, best product whereas this company was still “taking all orders” and selling all its legacy products.

by Dr. David M. Anderson, P.E., CMC
www.design4manufacturability.com
Copyright © 2020 by David M. Anderson

 

This page presents a compelling case for  significant investment providing nothing counter-productive gets in the way.  If so, find out how to identify and overcome whatever is  Conter-Productive page.

 

The very first step may be to start with a few hours of the DFM thought-leader to help formulate strategies and implementation planning.  See his consulting page:  http://design4manufacturability.com/Consulting.htm

 

All of these principles on DFM can be included in
your customized class and workshop on DFM or
the Most Effective Prouct Development class 

 

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1. David M. Anderson, Build-to-Order & Mass Customization; The Ultimate Supply Chain Management and Lean Production Strategy for Low-Cost On-Demand Production without Forecasts or Inventory; (2004, 520 pages; CIM Press, 1-800-924-0200; www.build-to-order-consulting.com/books.htm). Chapter 3, " Product Line Rationalization"

2. Richard Koch, The 80/20 Principle; The Secret of Achieving More With Less, (New York, Currency/Doubleday, 1998), p. 90.

3. Larry Downes and Chunka Mui, Unleashing the Killer App, Digital Strategies for Market Dominance, (Boston, Harvard Business School Press, 1998), p. 140.

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