80 20 Rule
Paul Trudgian Ltd | Supply Chain & Logistics Consultancy No Comments

As a supply chain consultant, I find that almost every company I work with has a product portfolio that conforms to the Pareto principle, i.e. 80% of revenue is generated by 20% of their products. This is rarely a surprise to anyone, but surprising to me are the number of companies that do not have processes to manage their portfolio and ensure resources are focused on the critical products.

It happens like this: successful products often have a product life cycle and sales decline over time; or new products are launched but do not have the sales impact expected; or successful products have an extended family of products that are less successful. All of these factors create what is often referred to as the ‘tail’, i.e. the 80% of a product portfolio that usually only represents 20% of the sales; in other words, the slow movers.

Now, this is not a clear-cut analytical exercise. It is never simply a case of delisting the products that are not generating enough revenue. There are many factors to consider, for example, whether the product is part of an extended family or whether the product is supportive of sales for a higher earning product. Before deciding to delist a product, you could first consider a reseller strategy, increasing margins, introducing minimum order or production quantities. There are a host of different initiatives to manage slow moving products, aside from simply delisting.

I believe that many companies do not have a formalised approach to dealing with slow movers, because it requires a cross-functional consensus. You need: finance to tell you what margin the products achieving; marketing to tell you how critical it is to your wider offering; sales to tell you the future of the product and production and supply chain to advise on how the product impacts on operational efficiency. Of course, many large organisations operate S&OP or IBP, which should theoretically cover portfolio management, but these processes are not as common as you may think, especially within SMEs. So, if you do not operate S&OP, what should you be doing to manage your portfolio?

The answer to this question is a two stage process. Firstly, you should target new product introduction. It is a losing battle to review the portfolio if new products are being added without constraint. Whether it is a manufactured or factored product, there should be a stage gate approval process. You need to ensure that all new products fit with your strategic aims, achieve target margins and are market aligned.

Secondly, you need to set a periodic review in the business calendar. Stakeholders should meet and review the portfolio every quarter, at least, but it needs to be more than just a ‘talking shop’. There should be detailed analysis produced prior to the meeting and responsibility for the analysis needs to be assigned. The periodic review should consider which products are slow moving, what their margins are, their impact on wider efficiency and the market for those products.

As the review meeting will be cross-functional, and consequently there may be many viewpoints, I recommend using a scoring process. A simple scoring test for each factor provides focus for the group and reduces more emotive viewpoints. Factors you should consider scoring are margins, inventory costs and strategic fit, as well as the volume and frequency of sales.

All businesses will have slow moving products, and that will always be the case. However, you must ensure that those slow moving products are not detrimental to the efficiency of supplying fast moving products, and consequently detrimental to your bottom line.

If you would like to further discuss portfolio management or introducing S&OP, then please contact me.

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