Portfolio Management: New Product Introductions through End of Life
Portfolio management defines the products and services offered to customers and to manage those offerings throughout their lifecycle (see Figure 4.1). As shown in the following figure, a portfolio review (see Figure 4.2) is the first step in a consistent sales inventory and operations planning (SIOP) cycle of events.
Figure 4.1 Portfolio management
Figure 4.2 SIOP: a consistent cycle of events
The inputs include:
•Product development pipeline
•Up to 3 years of demand history.
Whereas the outputs are:
•A volume- and dollar-based plan for portfolio changes
•A stock-keeping unit (SKU) rationalization plan
•A customer service strategy for each SKU in the portfolio.
What Does a Product Really Cost?
This is the essential question. Every additional product line increases complexity, from the design process to customer delivery. This means that product portfolios can have an impact on performance and that managing the portfolio of products (including the beginning of life, product rationalization, and end of life) has a profound impact on working capital and operating cost. Factors to be considered in evaluating which products to make available are cost, sales, and margin.
Listed as follows are some of the costs related to delivering a product to the marketplace, including manufacturing costs, logistics costs, procurement costs, and sales and marketing and customer costs:
Manufacturing costs
•Changeovers
•Schedule changes
•Component part management
•Tooling
•Maintenance
•Work-in-progress inventory management
•Overhead for complexity.
•Warehousing and facility costs
•Inventory management
•Freight
•Overhead for complexity.
Procurement
•Supply management
•Materials management
•Design engineering
•Developing and maintaining specs
•Testing.
Sales and marketing costs
•Training
•Communications
•Closeouts.
Customer
•Warehouse/storage changes
•Display changes.
Portfolio and Product Review
Product portfolio management aims to understand any changes to product offerings. The inputs are the product development pipeline, SKU rationalization, and positioning, with a constant examination of the marketing channel strategy and the end of life for any product. Outputs are a volume- and dollar-based plan for any and all portfolio changes.
To effectively manage a business’s portfolio, focus on the following two areas, with planning different for each phase:
1.The beginning of life
2.The end of life
The following graphics illustrate product lifecycle management and the various phases (see Figures 4.3).
Figure 4.3 Product life cycle management
In addition, a business should understand its sales profiles and how to support them. Different product strategies require different sales profiles (see Figure 4.4).
Figure 4.4 Anticipated change in rate of scale
As seen, different product strategies are required for different sales profiles.
The Beginning-of-Life Process
New Product Introduction
New product introduction (NPI) has to have a complete end-to-end business view rather than one limited to engineering, sales, or marketing. Assumptions need to be incorporated into the SIOP process, with any changes tracked. If a new product is replacing an existing one, the big question is whether it will sell like the product that it is replacing.
If a product is not being replaced, consideration should focus on these assumptions.
•Market size
•Rate of market penetration
•Final saturation
•Replacement lifecycle.
Then determine how to monitor and test the preceding points as the product rolls out.
At this point, implement a stage gate review process,* with the key company functions participating being sales, marketing, engineering, finance, the supply chain (including manufacturing), and sourcing. The following figure shows this process (Figure 4.5).
Figure 4.5 New product introduction
NPI is a vital part of the SIOP process, as seen in the graphic below. Demand planners need a view of all upcoming product introductions, including timing, volumes, probability of projects happening, understanding and documenting assumptions, as well as identified opportunities and risks. Any changes should be recorded for incorporation into the demand review (schedule, volumes, risks, etc.). It is key to understand any significant changes as they occur.
NPI (with its phase-in/phase-out of activities) and product rationalization* are also vital parts of the portfolio review process.
Creation of demand profiles to support product launches, as well as a keen understanding of the launch and growth strategies, are again critical to managing working capital and operating expenses. For instance, is the business cannibalizing existing products or is this a new offering to the market? Will these products be make-to-stock or make-to-order, and what are the lead times and service levels anticipated by marketing and/or sales?
Product Rationalization
One way for a business to manage to the right level of complexity is by using production rationalization as part of the portfolio review. This allows the business to:
•Optimize the portfolio for both top-line growth and bottom-line profit
•Identify lines of business that are trending toward nonprofitability
•Identify lines that compete with each other (which can create channel conflicts)
•Create exit strategies targeted at controlling costs and potential customer disruption.
Simple SKU Rationalization Process
The figure identifies the SKU candidates for rationalization (Figure 4.6).
Figure 4.6 Identification of SKU candidates for rationalization
Inventory reductions are typically not driven by the idea of optimizing a company’s inventory. Rather, they are a reaction to a cash shortfall. Understanding inventory-carrying costs does not necessarily lead to inventory reductions. However, understanding the cost drivers of storing and handling materials is essential to mapping out areas of greatest cash and cycle time reduction.
Typical costs of carrying inventory are between 15 and 45 percent, with some of the components including cost of money, warehousing and handling, inventory losses, freight, administration, and insurance.
Inactive, Obsolete, and Surplus Inventories
The handling of inactive, obsolete, and surplus (IOS) inventories has a direct impact on working capital and requires aggressive actions to both reduce and prevent unnecessary inventory. Standard definitions for managing these types of inventories are as follows:
•Inactive—no usage in the previous 12 months and no demand in next 12 months
•Obsolete—items that are no longer in the product catalogue or any bill of materials (BOM)
•Surplus—inventory in excess of previous 24 months of sales.
Activities designed to reduce or prevent IOS can include developing action plans and timelines to sell or dispose of material, as well as developing methods to predict slow-moving inventory and what will be excess in the next 3, 6, and 12 months.
The End-of-Life Process
Working inside a Toyota plant for a model change to a Corolla or Tacoma was one of the most remarkable experiences of my career. The choreography was truly amazing to watch:
•A test line was fully laid out to build the new model, complete with machinery, parts, and labor. We moved from a mindset of anticipating what would happen when we started to actually knowing and understanding where issues would be found.
•Concurrently, aggressive actions were being taken on the existing product lines and stores to manage down to the last part and determine how the last vehicle would be completed.
A great celebration was held throughout the plant as the last vehicle rolled off. It was amazing to see that we were left with only a handful of materials when the process was over, all of which were converted to service parts.
Most companies are able to create and maintain their product lines, but very few know how to kill an SKU or manage its end of life. Very few ask this question: How should we phase-in the new product and phase-out old ones? Not performing this task properly leads to SKU proliferation, as well as inactive, surplus, and obsolete inventories. This is a waste of working capital.
Aside from a model change, the ways to identify products for end of life are:
•A combination of low sales/margins
•Determining if there are any strategic reasons for a product to stay.
The ways to get rid of this material include discounting, scrapping, donations, and auctions.
Managed properly, end of life helps a business clean up its inventories. Conversely, failing to manage can result in higher operating costs for holding the inventory, as well as increasing working capital requirements.
Final Thoughts on Portfolio Management
For a small- to medium-sized business, this needn’t be a difficult, complex process. Simply sitting down monthly to review what’s selling and what’s not is all it takes. A business performing its portfolio management properly can hold the reins on its cash, working capital, and operating expenses in order to grow. Conversely, if this process is performed poorly, a company can hemorrhage, draining valuable resources from other parts of the business.
A Disciplined Approach
There are four critical elements for a successful portfolio management process:
1.A review of the NPI status and plans
2.A review of last-time buys and obsolescence items
3.SKU and family rationalization
4.IOS inventory review.
Supply chain complexity directly correlates to portfolio complexity. Product portfolio management begins with the life of a product or service and ends with the elimination of the SKU with engineering, marketing, sales, demand management, and sourcing owning the process.
NPI is part of portfolio management and is thus a de facto part of the demand plan and SIOP. Demand profiles are generated to support phase-in and phase-out of products and services. Launch strategies and assumptions must be understood by everyone, including the leadership team, and may include the following items:
•Order profile—make-to-stock versus make-to-order
•Customer service requirements
•Cannibalization/replacement assumptions
•Timelines, volumes, and manpower
•Risk identified with issuance of an issues log that is included in the demand review.
Finally, remember that the two main goals of a portfolio review are to define the products and services a business offers its customers and to manage those offerings throughout their lifecycle.