pdma: 5 key lessons for successful portfolio optimization

5 Key Lessons for Successful Portfolio OptimizationA Webinar Sponsored by the Product Development and Management AssociationAugust 3rd, 2016 1pm ET

Stephen Wilson, Managing PartnerWilson Perumal & Company

2Wilson Perumal & Company, Inc.

Complexity Assessment

Enterprise Transformation

Growth strategy

Customer Offer

Operating Model

Management System

Culture for Execution

Presenting today• Stephen Wilson• Co-Founder & Managing Partner, Wilson

Perumal & Company• Author of books on complexity, operations &

business strategy• 20 years experience helping senior clients with

critical strategy and operations questions

Wilson Perumal & Company• A strategy consulting firm helping

clients create value in a complex world• Founded in 2009 with operations in

North America and Europe• Clients: Large public & private

companies, private equity firms and select areas of the US/CA government

We help companies compete in a complex world

What products to offer?

How do you structure?

How do you manage?

How do you work?

How, where to grow?

Welcome!


Our Discussion

• Introduction

• 5 key lessons from the field

• Getting started

• Q&A

Wilson Perumal & Company, Inc. 4

Complexity is stretching the capabilities of most companies…

4

New ChannelsNew GeographiesBroader Product Offerings

4

More Systems & Technology

Matrix organizations

More Regulation

More Complex Processes

X

X

X

X X

X

X

http://www.google.co.uk/url?sa=i&rct=j&q=&esrc=s&frm=1&source=images&cd=&cad=rja&docid=KtpTL_dsCg6FlM&tbnid=8g7hO3pmQWUpNM:&ved=0CAUQjRw&url=http://upstreamcommerce.com/blog/2012/04/09/harnessing-big-data-big-ecommerce-part-1&ei=8p8nUbbHM8-GhQeAv4CYCA&bvm=bv.42768644,d.ZG4&psig=AFQjCNEjUVBlP4Nns2zPpxyhPG2viRkl8Q&ust=1361637670758295


… Surpassing the “complexity frontier”

VALUE(diminishing returns)

COST (exponential growth)

Level of complexity you can support

$

#Items #links

1 0

2 1

3 3

4 6

5 10

…

10 45ComplexityFew companies are still here

Many companies are here

An increasing number of companies are here


The result is severe profit concentration …

• Often the most profitable 20% to 30% of products generate more than 300% of the profits in a company, meaning…

• …the remaining 70% to 80% lose 200% of the profits

Products that create profit

Products that “lose” profit

0% 25% 50% 75% 100%

100%

300%

% Total Products

0%

% TotalProfits

Typical “Whale Curve”

Source: Sievanen, Suomala, and Paranko, Activity-Based Costing and Product Profitability (Tampere, Finland: Institute for Industrial Management, Tampere University of Technology)


… And slowing growth rates

Slowing innovation

Fragmented scale

• Revenue grows in linear fashion, cost of complexity grows geometrically• Complexity consumes resources, fragments scale, impedes opp to re-invest

Customer confusion

• Exploding number of products leads to customer confusion• Sales channel loses its ability to effectively support the portfolio

• Larger number of initiatives pursued to keep up growth actually clogs the development process as resources are pulled in too many directions

Lower service levels

• Processes that led to success in the past don’t scale• Complexity impairs customer experience, availability service levels

Growth challenges that arise due to complexity:


The benefits of Portfolio Optimization reduction can be felt across the business

Supply pooling (reduced COV)

Reduced RM safety stock levels

Raw material consolidation

Product consolidation /

elimination

Fewer RM stock outs

Less RM inventory

Reduced product lead times

Supplier consolidation

Greater supplier leverage / scale Lower materials costs

Greater volume per supplier

Better supplier service levels

Reduce changeovers

Direct labor savings

Startup scrap reduction

Redeploy changeovers

Smaller batches for remaining

productsDecreased CTI and lead time

Lower FG inventory levelsDemand pooling (reduced COV)

Reduced FG safety stock levels

Greater product availability

Greater sales force focus

Greater sales volume

More coherent product line

Fewer orders (greater vol/prod)

Increased buyer/planner

focus

Improved PLM focus

Reduced cust. confusion

Higher average sales margin

Reduced cust. service calls

Greater customer service

Reduced customer service costsFewer products/

segments

Portfolio Optimization

Plant

Complexity reduction

Growth impact

Cost impact

Not in current proposed scope

Production plant

Example typical impacts:


Companies pursue portfolio optimization for a variety of goals; aligning upfront can shape the effort

Often, the perceived goals of portfolio optimization vary by function. In upfront diagnostic work, it is important to align on this, and quantify the benefit case

• Eliminate profit eroding products/segments

• Release of assets/fixed costs

• Reduce working capital and inventory levels

• Focus/reduce marketing spend

• Reduce manufacturing capacity

• Create capacity for innovation

• Focus and align sales force

• Build a more competitive offering

• Improve pricing and lifecycle management

• Reduce customer confusion

Frequent Cost Goals Frequent Revenue Goals


Our Discussion

• Introduction


• Getting started

• Q&A

Wilson Perumal & Company, Inc.

Lessons from the field

1. Put the customer at the heart of your portfolio exercise1


What are the gaps/overlaps of the new product line? Is

there customer confusion/over-choice?

What is the true complexity-adjusted cost & profitability of

products /customers?

Where will benefits be realized? Cost?

Growth? Sustainability?

What is the impact of portfolio complexity on

process & organizational performance?

How does the new product line support or impede the

business strategy?

At what level of complexity reduction are there step

changes in cost?

WP&C Six-Facet Framework:

Strategy Coverage

Prof

itabil

ityBenefitsBreakpoints

Proc

. & O

rg.

Integration framework

A structured approach across 6 key facets, but many times the customer/strategic view is neglected


Portfolio rationalization is not just a cost cutting exercise, it is about improving service to the customer

Source: Market Interviews

0%

0%

20%

27%

53%

Price

Availability

Availability is the number one purchase criteria, often ranked above price…

Percent of interviewees who ranked the following criteria as the most important buying factor when selecting a

vendor… “I have plenty of customers who want to buy, I just cannot get enough product.”

- Sales Person 1

“I’d say we lose at least at 5-10% of sales. Where it is worse, though, is that it makes it far more likely we won’t get the sale the next time around.”

- Sales Person 2

Technical Performance

Product Guarantee

Portfolio Breadth

…but product complexity is causing availability issues resulting in current and future lost sales

“There is a huge communication issue between the DCs and the stores. I think I lose 15%-20% of sales because I don’t have the product.”

- Sales Person 3“I’d say I lost 10% of sales because I don’t have the right product at the right time, not to mention the massive increases in shipping costs.”

- Sales Person 4


25.0%

75.0%

About right

Too many

Too few

Q. How would your customers rate the breadth of the product portfolio?A. “Too much. Over time they have several product lines that overlap.” – Major Customer

Taking a customer/strategic view can embolden a more radical reshaping of the portfolio

• Pump Manufacturer• Little customer data• Many SKUs• Some overlapping

families

• Remove SKUs• Exit a family• Make room for new

products

Business:

Family:

SKU:

Business:

Family:

SKU:

XXXXXXX

Highly profitableSomewhat profitableUnprofitableDeletedX

X

Remove SKUs

Exit a family



1. Put the customer at the heart of your portfolio exercise

2. Understand your true profitability, accounting for complexity

1

2


It is very hard to make portfolio decisions before first understanding true profitability

• Most companies don’t have a clear view of where they make money

• An unclear view of product cost and profitability leads to suboptimal decisions (around pricing, promotions, product development, marketing, operations, and overall resource allocation)

• Square-Root Costing is a fast, practical approach to assess complexity costs, built on our understanding of how complexity costs

Variablecosts

Fixedcosts

Variablecosts

Fixed

Complexity costs

Traditional cost paradigm

Today’s cost categories

Mistaking complexity costs for variable costs under-costs small volume products and activities

Mistaking complexity costs for fixed costs over-estimates fixed cost leverage potential


Client Example – Beer Co

Situation

Complication

Key Questions

• Beer Co, a multi-billion dollar beer producer, operates 8 breweries and produces 1700+ SKUs

• SKU variety has continued to grow with new flavors and sizes added each year

• Currently the macro beer market is stagnant and Beer Co is starting to feel pressure from new entrants in the craft segment

• Production has complained about complicated processes for small batch beers and is starting to miss some order delivery dates

• There have been some distributor (customer) complaints about product availability

• Inventory has grown 15% per annum over the last 5yrs, particularly raw materials

• Which products are truly profitable? • What is the “right” portfolio with which to go to market? • How can we grow profitably in a stagnant market?


Square-root costing exampleBeer Co: Adjusting for complexity led to new insightsClient Example:

Low volume and high variation products are often not costed to reflect their true burden on the business

9%

13%14%

26%

14%

5%10%

19%

9%

14%

0%

10%

20%

30%

Budget Below Premium Premium Craft Average

% Operating Margin

Vol. (bbls): 12.5M 16.4M 44.3M 4.8M 78.0M

Comparison between Standard- and Complexity-Adjusted Profit

Typical standard costingComplexity-adjusted costing





3. Leverage substitutability to cut costs while maintaining the top line

1

2

3


At the beginning, 3 things really matter: Incremental Revenue & Cost and Product Lifecycle

Incremental cost0

0

Destroys value

Incremental revenue Adds

value

1

2

Incremental revenue is usually

less than actual revenue

Incremental cost is usually higher than actual costs+ 3 Lifecycle

perspective

**Incremental cost = Cost for item itself + cost added to other items + cost of linked revenue*Incremental revenue = Revenue *(1 ‒ substitutability) + linked revenue

Three factors for portfolio optimisation

1. Incremental revenue: revenue that would be lost if SKU was removed. Incremental revenue consists of:‒ Revenue‒ Substitutability‒ Linkage to other products

2. Incremental cost: cost that would be released if SKU was removed

3. Lifecycle perspective: SKU’s position in it’s lifecycle and future performance


Portfolio optimization looks less like this…

And more like this…

Substitutability is a powerful lever for driving significant benefits while preserving revenues

• Many companies have been cannibalizing their portfolios with similar products for years

• Hence the opportunity: Assess the portfolio for substitutable products

• i.e. If we discontinue Product A, customers still buy Product B

• Approach addresses key roadblock to portfolio to optimization: fear of losing revenue in process

• Portfolio implications: products with high volume, high profit, but low incremental sales may be cut


Mobile Tool Client Example: Focusing on incremental revenue freed up cash while maintaining volume

• A mobile automotive tool business suffered nearly 40% revenue drop.

• In response, the business wildly increased its range to 40,000 SKUs

• Unintended consequences: • poor product availability• late delivery• further sales loss• business facing potential closure

• Response: Evaluated the product portfolio, assessing substitutability, and taking out 22% of SKUs in key categories

• Results: ~25% reduction in inventory, EBIT lift of 2% of sales, fill rates returned to >95%

$0

$50,000

$100,000

$150,000

$200,000

$250,000

0 500 1000 1500 2000

Gross Margin

SKUs Reviewed

Red = SKU selected for discontinue*

The “Tail”


Lesson from the field




4. For maximum impact, leverage concurrent actions

1

2

3

4

© Wilson Perumal & Company, Inc. 24

What frequently occurs

Leveraging “concurrent actions” opens up benefit case

Portfolio Optimization

Supply Chain Redesign

Footprint Consolidation

Current Footprint

Current Supply Chain

Current Portfolio

Footprint

Portfolio

Supply Chain

Integrated Effort

Benefits constrained Dueling initiatives Customer disruption

Transformation Integrated roadmap Customer value

Putting more in play: Concurrent actions

© Wilson Perumal & Company, Inc. 25

Cadbury example

“Now, thinking is more joined-up and there is a more coordinated focus on revenue and margin growth… that joined-up approach has enabled us to rationalize our offer…”

—Todd Stitzer, former CEO

• Cadburys: “More complex than it needs to be.”

• Products, footprint, structure, supply chain

• Fewer, faster, bigger, better

• Impact:‒ Margins up 160 bps to

13.5%‒ 5% top-line growth


Animal Feed Co: Product consolidation enables transformation of the distribution modelUnwinding a product proliferation dynamic to move the needle

Animal Feed Co: “Offered everything to everyone (animal) everywhere”• Over 70,000 SKUs manufactured in

~70 factories around the US.• Leading brand and market share but

barely profitable• Analysis: Interplant transfer cost

higher than manufacturing cost

Consolidate product offering

$25M-$35M prize

Make greater portion of product range at each plant

Reduce 3-touch distribution moves






4. For maximum impact, leverage concurrent actions

5. Start planning for implementation early

1

2

3

4

5


The analysis is key; but thinking through implementation from an early stage is imperative


Distributor pilot design involves four key focus areas

• Main goals of pilot are: – (1) Test substitutability– (2) Identify any lessons learned to be incorporated into full implementation

• Primary need is to pilot with distributors who are eager for reduced portfolio; also important for distributors to be representative of broader distributor population

6

Key parameters for pilot:

Product selection

Distributor selection

Pilot logistics

Pilot performance measurement

• Test product switches whose potential margin benefit is greatest

• Monitor process of switching end-users to replacement products and identify red flags in so doing

• Test products with 4 – 6 distributors who are excited about reducing complexity and come from variety of sales regions

• 2 month pilot with critical task owners both on Pump Co’s and distributors’ ends

High-level execution plan:

Wilson Perumal & Company, Inc.Wilson Perumal & Company, Inc. 12

Implementing portfolio actions will require significant effort across plant operations

Key Implementation Topics• Engineering will need to complete a significant amount of design, testing, and tooling/molding work

and thus prioritization and potentially expanded capacity will be necessary

• Support functions such as IT and Finance do not require many additional actions, but do require advanced notice of changes

• As nearly every function will be affected in some way, project coordination will be a significant effort and require dedicated resources

• Air compressor capacity could affect implementation timelines, reevaluating priorities and/or adding new equipment could help alleviate this issue

Source: Internal & market Interviews; WP&C Analysis

Gantt Chart – Operational Activities

Operationalize

Significant engineering work drives timelines

Pilot Phase - test substitutability and incorporate lessons learned

Operationalize Phase - prepare to produce the necessary SKUs and support volume transitions

Market Prep Phase - communicate with and educate the market to maximize customer conversion

Wilson Perumal & Company, Inc.Wilson Perumal & Company, Inc. 15

Comprehensive market outreach is key to maximizing substitutability

Notify Wilden employees and PSG

Sales of product changes and high-

level timeline

Notify Distributors of product changes

and high-level timeline

Identify new marketing

requirements to achieve

substitutability• Target key industries• Tailor to regional differences

Create/update slick sheets, technical

bulletins and catalogs in major global languages

Train Wilden Inside Sales

Inside sales and PSG Sales will forward market feedback to Implementation Manager for use in operational and market-facing plans

Train Distributors

Wilden-led marketing outreach

Distributor-led marketing outreach

Provide materials to Distributors

Train PSG sales

Announce launch dates and pricing1 changes to

Distributors

1 week prior to distributor notification

Distributor notification

Marketing outreach

Distributor & Customer education

3 months prior to launch

Create educational materials2

Feedback incorporation

Market Prep

Request ordering forecast from Distributors

Notes: These activities are not illustrated to scale or timeline 1) Pricing and lead time changes are captured in ‘operationalize’ section of the implementation plan 2) Educational materials may include objective-handling, application-specific exceptions, industry-specific issues, regional issues, pricing and lead-time expectationsSource: Internal and market interviews; WP&C analysis

12

3

Detect issues early Adapt plan accordingly Celebrate and communicate success to the

organization to increase buy-in


There is always a reason to keep a SKU, but process governance structure and rules can help set the tone

• Overall portfolio health takes precedent to specific product issues

• The burden of proof promotes a bias toward action – concerns need to be specific and backed up with data

• Pending (“imminent”) sales need to be clearly defined in a measurable time frame

• Exceptions to deletion have a documented and communicated plan, timeline, and goals

• Implementation timelines are driven by external constraints – internal constraints are challenged to avoid complexity creep

• Decisions are executed with consistency and discipline (despite inevitable challenges)

Decision Principles For Discussion

1

2

3

4

5

6

29

Client exhibit


Staying focused on the path to benefits

30

Inventory Benefits

Margin Benefits

• Migrating customers to products with lower materials costs• Producing less complicated products with fewer components • Reducing the number of unique components • Reducing demand variability by offering fewer SKUs

Pricing Benefits

• Migrating customers to lower cost diaphragms • Switching customers to improve line profitability

• Increasing price/charging for complexity on select low margin SKUs to meet average margins

• Develop margin targets for select products

Capacity Benefits • Reducing variation should improve assembly efficiency • Portfolio changes create more favorable mix of sizes

Market Benefits • Simplifying the distributors path to market & sales process• Reducing stocking requirements • Elevating the brand with end-users

Type of Benefit How the benefit is accrued

Client example:


Our Discussion

• Introduction


• Getting started

• Q&A


In our experience, the best way to start is through a diagnostic, which includes “sizing the prize”

Answering these questions via an initial diagnostic study is often a prerequisite for launching a full-scale Portfolio Optimization effort

1. Do we have a complexity issue in our portfolio? What impacts?

2. If we had a different/tighter portfolio, what would that mean?

3. What is the “size of the prize” for addressing portfolio?

4. What, ideally, would be additionally in play?

5. What do we want to achieve via our efforts in this area?

6. Is the organization aligned on the need to do something, or what would be required to mobilize action in this area?

1. Do we have a complexity issue in our portfolio? What impacts?

2. If we had a different/tighter portfolio, what would that mean?

3. What is the “size of the prize” for addressing portfolio?

4. What, ideally, would be additionally in play?

5. What do we want to achieve via our efforts in this area?

6. Is the organization aligned on the need to do something, or what would be required to mobilize action in this area?

1

In sum, we recommend that Client proceed with complexity reduction:

1. Our analysis indicates a clear business case and opportunity to improve EBITDA by ~8 - 17%

2. Competitors are embracing complexity reduction as a means to improve cost position, efficiency and strategic advantage

3. Simplifying the portfolio would significantly improve ABC operations, even absent further operational improvements

4. We see a path to tangible financial opportunities, such as decreased spend on 3rd

party manufacturers, lower inventory levels & reduction in OH allocation

5. Moreover, we see evidence to suggest that this will also prevent lost salesthrough improvements in availability

6. General lack of visibility to Spec position is a broader issue for the business, but we see a path to cut through this, and we believe that it is a manageable issue

7. Initial evidence suggests that there is opportunity for substitutability

Findings from sample diagnostic highlighted opportunity:

Stephen [email protected] Mobile: 214-938-4400 www.wilsonperumal.com

Contact information:

• To receive a copy of the slides• To discuss content shared today or if you have additional questions• For more information on our Complexity Diagnostic, on Square-Root

Costing, or other services• Or Link In! https://www.linkedin.com/in/stephen-a-wilson-5782a2

Thank You!

mailto:[email protected]

http://www.wilsonperumal.com/

https://www.linkedin.com/in/stephen-a-wilson-5782a2

https://www.linkedin.com/in/stephen-a-wilson-5782a2


Our Discussion

• Introduction


• Getting started

• Q&A