As the mid-year economic reports on 2010 roll in, it is becoming more likely that we’ll continue to see slow market growth for several months or even years. The competition for tentative consumers during this time will place even more pressure on food and beverage (F&B) manufacturers to manage costs and improve operational efficiency—while still driving innovation. Those best positioned for both short-term and long-term success will be the F&B companies that can actively corral the complexity around these demands.
For the F&B industry, complexity is not merely a matter of raw materials or SKUs. It is an inherent part of the business structure resulting from product proliferation, merged operations, supply chains, and reorganizations. Failure to manage this complexity can paralyze an organization’s ability to drive innovation and growth. The key then is to maintain complexity where it matters and drive it out where it’s unnecessary.
Central to this effort is deploying a strategic complexity management initiative with:
- Product, raw material and supplier rationalization
- Platform-based product development (including design for cost and design for manufacturability)
- Pipeline and portfolio management
In this column, we will explore product, raw material, and supplier rationalization, as well as look at steps F&B companies can take to implement this process within their organization.
A major source of complexity for F&B is product proliferation. There are often strategic reasons for marketing similar products to reach different consumer segments. The problem comes when these products are aimed at the same market segment, price band, or distribution channel, which can lead to confusion, weakened brand value and unnecessary price pressures.
Typical causes of product proliferation:
- A lack of portfolio management throughout entire lifecycle leads to an environment where old products are rarely discontinued even as new products are launched.
- An increase in the number of active products results in reduced sales per item and added complexity across the value chain.
- "Allocated” costs create poor visibility into true product profitability and distort the profit impact.
- An acquisition and merger occurs.
- Sales and marketing incentives are tied to revenue growth not profitability.
- Products are developed with minimal innovation, creating overlaps in market segmentation, price band, product lines and/or distribution channels.
- A lack of clear accountability and difficulty in gaining organizational alignment leads to a failure to take action.
Product proliferation significantly affects the entire organization. Marketing sees a dilution of brand power and an increase in shelf space clutter. The operations group faces higher manufacturing costs due to frequent set-ups and short production runs. The supply chain has difficulty forecasting sales, ultimately resulting in increased inventory and transportation costs. Finally, purchasing faces supplier fragmentation, which leads to a loss of buying leverage and ultimately higher material costs.
Knowing where to cut is critical. Managing the bottom line with across-the-board cuts is not the solution, as this approach fails to address product proliferation, yields limited savings, and in the worst cases can even hurt a manufacturer’s revenue-earning potential.
Consider this: a typical company generates 120 percent of its profits from just 20 percent of its most productive products. As a result of product proliferation, the bottom 20 to 40 percent are profit-dilutive, eroding up to 80 percent of the product potential among existing products, consuming scarce resources, and driving organizational complexity.
Rationalization: Where to Start
Real gains come as a result of implementing a strategic rationalization initiative. I’ve seen companies drive their profit growth by five points or more by reducing or eliminating unprofitable products, suppliers, customers or even divisions, and then redirecting investments and resources into those with high profitability potential.
Taking a strategic approach to rationalization consists of the following phases:
- Balance resources to work on new product development and product rationalization initiatives. Allocating a percentage of project portfolio initiatives towards complexity management ensures that resources can be realistically allocated to manage complexity without bogging down the innovation engine.
- Collect and analyze product sales and profitability data to identify:
- Low and medium productivity SKUs that are in-scope for product rationalization.
- “Obvious” cuts for immediate action.
- Profit growth potential.
- Identify strategic actions for all low and medium productivity products via a cross-functional team rationalization workshop. For example: exit, harvest, fix, improve margin, or improve sales.
- Develop an action plan for each SKU identified as in-scope in Phase 1. This includes plans for:
- Consumer and retailer product substitution.
- Supply chain implementation.
- Finished goods and raw material inventory reduction
- Complete the implementation plan for all products in-scope, tracking rationalization actual vs. goals. Examples of aspects to track include:
- Number of SKUs rationalized.
- Sales impact.
- Profit impact.
- Measure the results of the rationalization plan, and implement ongoing portfolio management to prevent future product proliferation and ensure sustained results.
Product, raw material and supplier rationalization improves cash flow, working capital utilization, and resource utilization and effectiveness, while shifting the focus to more innovative and strategic “big idea” products. Successful F&B companies are those who can eliminate non-strategic and low-value products, and then reinvest the savings in profitable product offerings to drive innovation and sales growth.
Last month: PLM Primer: Choosing the Right Solution for F&B
Next month: How platform-based product development and pipeline and portfolio management can help manage complexity
George Young is a founding partner of management consulting firm Kalypso (www.kalypso.com), which specializes in innovation, and he leads Kalypso’s Consumer Packaged Goods practice. He has more than 20 years of industry experience in executive management consulting roles. He holds four US patents and was named the 1994 Northeast Ohio Inventor of the Year.