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.
Focus
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."
How to Triple Profits!
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
If you want to discuss Portfolio
Planning & Rationalization by phone ot e-mail, fill out this form
below:
For a secure form, go
to: form
at the secure site: https;//design4manufacturability.com
Dr. Anderson is a California-based
consultant specializing in training and consulting on build-to-order, mass
customization, lean/flow production, design for manufacturability, and cost
reduction. He is the author of "Design for
Manufacturability & Concurrent Engineering; How to Design for Low
Cost, Design in High Quality, Design for Lean Manufacture, and Design Quickly
for Fast Production" (2008, 432 pages; CIM Press, 1-805-924-0200;
www.design4manufacturability.com/books.htm) and Build-to-Order
& Mass Customization, The Ultimate Supply Chain Management and Lean
Manufacturing Strategy for Low-Cost On-Demand Production without Forecasts or
Inventory" (2008, 520 pages; CIM Press, 1-805-924-0200,
www.build-to-order-consulting.com/books.htm). He is currently writing the book,
"Half Cost Products: How to Develop, Build, and Deliver Products at Half
the Total Cost."
Dr. Anderson can be reached at (805) 924-0100 ore-mail:
anderson@build-to-order-consulting.com
ENDNOTES/REFERENCES
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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