Sales and operations planning, S&OP, buildings

As we outlined in the “S&OP: A 7-Step Business Process” article, periodically reviewing each of the products in your portfolio is a key component of product portfolio management. It is essential to ensure you are generating an optimized revenue stream for your company.

The process of managing a company’s product portfolio typically includes the following steps:

  1. Product introduction
  2. Product supersession
  3. ABC & XYZ analysis
  4. Product portfolio decommissioning
  5. SKU rationalization

Let’s dive into each one of these actions to successfully manage your company’s product portfolio.

1. Product Introduction

Much like a small business, each new product should be self-sustaining. Introducing a new product involves several critical steps to ensure its success.

The first thing you should do when starting the process of introducing a new product to your current portfolio is asking yourself:

  • Is it an extension of an existing product line? 
  • Is it a brand-new launch within your company?

And, equally importantly: To manage the portfolio strategically, you have to ensure this product introduction aligns with your company’s overall strategic goals.

Next, you’ll need to conduct thorough market research to understand customer needs, market size and the competitive landscape. This information is vital for developing a product that meets market demands and is designed for manufacturability and cost-effectiveness.

Once you have a viable product concept, demand planning becomes essential. You need to forecast product demand to ensure you have adequate production capacity and raw material availability. Securing sufficient funding is also crucial at this stage to cover production, marketing and distribution costs.

Finally, a comprehensive marketing plan is another key component of a successful product launch. This should include product positioning, pricing strategy, promotional tactics and distribution channels.

2. Product Supersession

Consumers are changing their preferences constantly. This requires manufacturers to stay ahead of the consumers’ wants. This requires manufacturers to introduce more products more often. This process involves replacing a product with a new one. The first step is assessing the performance of existing products to identify the replaceable candidates.

An essential thing to take into account is whether the new product cannibalizes demand from other products in your portfolio or if, on the contrary, it brings added value and generates new revenue acquiring new customers. The new product should complement other products in the line and fit the overall brand strategy, not compete with your existing portfolio. You should take it as a mantra that each product is part of a greater whole.

Communicating these changes to all stakeholders – both internal and external (suppliers and customers) – is necessary to ensure a smooth transition. A well-planned phase-out of the old product and the introduction of the new one will minimize disruption and maintain, if not increase, customer satisfaction.

Last but not least, don’t forget to keep an eye on inherited products either via an acquisition or a merger. The previous owners might have set up these products under different strategic and performance criteria that may not support your current company’s objectives.

3. ABC & XYZ Analysis

ABC & XYZ analysis helps categorize products based on sales volume and demand variability, allowing to assess a product’s risk.

Whereas in ABC analysis, products are classified into three categories based on volume and value, in XYZ analysis these are based on demand predictability. The different kinds of categories within each type of analysis are:

  • ABC analysis categories
    • A products: high volume and high value
    • B products: moderate volume and value
    • C products: low volume and low value.
  • XYZ analysis categories 
    • X products: predictable demand
    • Y products: moderate demand variability
    • Z products: highly unpredictable demand.

Combining ABC and XYZ analysis enables you to prioritize what actions need to be revisited, as well as to manage resource allocation effectively. For example, high volume and low risk products (A and X) are typically the most desirable, while products with low volume and high risk (C and Z) may require strategic decisions about whether to maintain or discontinue them.

4. Decommissioning your Product Portfolio

Phasing out underperforming or obsolete products is something that companies need to do constantly to keep their profitability in today’s complex and uncertain business landscape. This process is known as ‘decommissioning’, and it should start by establishing a thoughtful and holistic process with objective criteria to assess the viability of each individual product.

For example, looking just at the sales volume might give a false picture of a product’s profitability. A high sales volume for a product that cannot command the right price to yield a profit might be an opportunity for eliminating the product from your portfolio.

This is why it is important that the company is aligned on the criteria to use in this assessment, such as profitability, sales trends and strategic alignment. Regularly reviewing product performance against these criteria helps identify which products to phase out.

Evaluating the impact of decommissioning on customers, revenue, and operations is also essential so it might be a good idea to develop a communication plan to inform stakeholders, including customers and sales teams, about product discontinuation. Properly managing the phase-out of inventory will not only help avoid excess stock or stockouts, but also ensure continued support for customers with existing products and manage warranties and after-sales service.

5. Stock Keeping Unit Rationalization

For your organization to be nimble in responding to changes in the marketplace, Stock Keeping Unit (SKU) rationalization should occur on a fairly regular basis. It is the process of evaluating thoroughly the performance of your product line in order to optimize your product assortment and improve efficiency and profitability.

It starts by gathering data on sales, profitability, and operational costs for each SKU. Evaluating SKUs based on sales volume, margin contribution, and their strategic impact will help you make informed decisions about which units to keep, consolidate, or discontinue.

For example, when the pandemic hit, companies that switched production to PPE – in replacement of other products they had been producing – were able to take advantage of an exponential growth in demand. The ability to know which products were performing poorly made it possible for management to quickly stop production of weak performers, and pivot to producing profitable PPE with growing demand and strong profits. 

Effective product portfolio management is vital for optimizing revenue streams and maintaining strategic alignment within a company. By carefully reviewing these five steps, you will ensure you are tackling all the aspects to manage your company’s product portfolio effectively and strategically.

QAD’s Sales and Operations Planning solution is the perfect tool to support your S&OP process, and ensure your product portfolio remains agile, competitive, and aligned, driving sustained growth and profitability.

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