Uncover the benefits of product rationalisation
Paul Kane, partner, Privately Held Business, at Grant Thornton New Zealand, looks at ways retailers can analyse their product lines to ensure they ride out any economic slow down.
It’s a tough market with not a lot of positive news on the horizon. Consumers are being cautious, happy to buy tomorrow what yesterday they may have bought today.
The market has definitely changed, but have you changed with it?
Have you thought about evaluating and rationalising your product line in order to cut costs and improve productivity thereby better positioning the company for a resumption of growth?
This may all seem counterintuitive as products are still selling, contributing to the top line but what you may not know is the effect this is having on the bottom line. The scale of the offering maybe resulting in increased administration, purchasing and production costs.
Product rationalisation eliminates efficiency problems by examining the bigger picture and determining which products are costing more than they are bringing in. If 80% of your company’s profits are coming from 20% of your product portfolio, chances are it’s time to take a closer look at those weaker offerings.
By reducing SKUs (stock-keeping units) employee time can be freed up thus making them more productive, but it may also highlight opportunities to reduce labour costs. By focusing on selling the products consumers want, you may be able to free up much needed warehouse space, eliminating the need to move to a larger facility and the marketing team can put the effort into core products, taking the time to ensure they are reaching the right markets, at the right prices. A leaner company will prevail.
The first step in rationalising the product line is to re-evaluate the business strategy, understanding the type of business, customers and market the company is going to target, therefore being able to determine the products that will propel the company forward.
Once the products have been selected, the total cost of ownership - the full cradle to grave costs of specific products - needs to be determined. This will include ordering, marketing, warranty and other hidden costs such as high energy costs, to name a few.
The final evaluation will be to look at the price structure to ensure you are not cutting SKUs that, with a slight tweak in price, may make the product profitable and therefore save it from elimination. The problem that can be encountered is that with a price increase sales volumes may reduce putting the product back into a loss situation which may mean it has to be dropped anyway.
And finally, one of the most important parts of a product rationalisation strategy is to communicate to every party involved.