Within the pages of this particularly exciting issue, you will read articles written by the best minds in the industry to discuss multiple important aspects of Product Portfolio Optimization. This is an important topic because in today’s highly competitive market, it is becoming more important than ever to look for ways to cut costs, and increase revenue and profit. Markets are now demand driven, not supply driven.
Globalization has intensified competition. Every day, thousands and thousands of new products enter the market, but their window of opportunity is very narrow because of shorter life cycles. Plus, too much uncertainty is associated with new products. Their success rate is from poor to dismal—25% according to one estimate. Despite that, they are vital for fueling growth. Big box retailers are putting more pressure on suppliers to provide differentiated products. Consumers want more choices and better products. All these factors contribute to the greater than ever number of products and product lines, making management of their demand more complex, increasing working capital to maintain safety stock, raising liability of slow-moving and obsolete inventory, and increasing cost of production because of smaller lots and frequent change overs. Product portfolio optimization deals with these matters.
Product portfolio optimization includes the following: one, how to rationalize products and product lines and, two, how to manage most effectively their demand. Product rationalization includes deciding which products and product lines to keep and which ones to kill, based on the company’s policy. Demand management, on the other hand, is leveraging what Larry Lapide from University of Massachusetts and an MIT Research affiliate calls 4Ps (Product, Promotion, Price, and Place) to maximize sales and pro‑t. The sales of low-performing product lines may be bumped up with a price discount, promotion, line extensions, or by finding new markets.
Although the S&OP process has a component of product portfolio optimization, its team members pay nothing more than lip service to it. Pat Bower from Combe Incorporated discusses in detail the process of product portfolio optimization in the framework of new products. How new products should be filtered from ideation to development and, after launch, how they should be leveraged. Their window of opportunity is very small; most CPG products flame out within the first year of their existence, says Pat.
Mark Covas from Coca-Cola describes in detail 10 rules for product portfolio optimization. He suggests companies should divest low margin brands, no matter how big they are. Many companies such as ConAgra Foods, General Mills, Procter & Gamble, and Estée Lauder are doing it. This makes the allocation of marketing dollars more productive—taking funds away from low performing brands and giving to high performing ones.
Charles Chase from SAS and Michael Moore from DuPont recommend the Pareto principle of 80/20 to determine which products or product lines to concentrate on in their portfolio optimization efforts. Greg Schlegel from SherTrack LLC. Goes even further and proposes that this principle should be extended even to customers. He categorizes customers into four: 1) Champions, 2) Demanders, 3) Acquaintances, and 4) Losers. He then describes a strategy for dealing with each one of them. Greg Gorbos from BASF points out hurdles, political and others, that stand in the way of implementing the optimization policy, and how to deal with them. Clash occurs among different functions because of difference in their objectives. Sales looks to achieve revenue targets, while Marketing looks to hold market share and increase profit. Finance also looks at profit, but seeks to reduce cost and increase capital flow, while Supply Chain looks at cost savings. Communication is another issue Greg points out. The company may decide to deactivate a product, but information about it is not communicated to all the functions. Jeff Marthins from Tastykake talks, among other things, about the exit strategy, which he believes is equally important. He says that we cannot deactivate a product without knowing its inventory position, as well as holding of raw and packaging materials for it.
For survival and growth in today’s atmosphere, it is essential to streamline the product portfolio to reduce costs, and increase revenue, profit, and market share. This issue shows how.
I encourage you to email your feedback on this issue, as well as on ideas and suggested topics for future JBF special issues and articles.
Chaman L. Jain
Chief Editor, Journal of Business Forecasting (JBF)
Professor, St. John’s University
EMAIL: jainc [at] stjohns.edu