Portfolio Rationalization and Complexity Management
Rationalization is the process of reviewing a portfolio at regular intervals and removing items that do not generate value. The goal is not to reduce the number of products, but to ensure that the complexity of the portfolio is proportionate to the value it generates .
Method
Inventory management: Listing all active products and SKUs along with volume, revenue, margin, inventory turnover rate, and customer count data for the past 24 months.
Segmentation: Classifying items according to their performance. The classic approach is to group them into four categories: high contribution, medium contribution, marginal, and loss-making.
Identifying strategic exceptions: Items that must be protected for strategic reasons despite incurring losses (legal requirement, complementary product stipulated by a key customer, entry point for a new product, brand positioning).
Impact analysis: Measuring the impact of discontinuing a product on revenue, customers, channels, production load, and supplier agreements.
Alternative matching: Determining the alternative to which the customer will be directed for each product to be discontinued.
Phased implementation: Planned rollout on a channel and customer basis.
Preventing re-accumulation: Adding portfolio entry criteria and product launch approval to the new product launch process. Otherwise, the portfolio will revert to its previous state within two years.
Critical warning
The most common mistake in rationalization is making decisions based solely on product revenue. A low-revenue product might be an indispensable part of a large customer's shopping cart. The decision should not be made without analyzing the customer basket and cross-selling effects .
In the real business world
Rationalization efforts are often undertaken during a crisis, with consultant support, as a project lasting a few months, and the final report is delivered in a presentation. Two years later, the portfolio is bloated again.
The lasting solution is to transform rationalization from a project into a process . The system continuously identifies low-performing items; the portfolio board reviews this list every quarter; and the product launch process monitors new entries. This establishes continuous hygiene instead of a cleaning operation.
Benefit to the customer
Inventory investment and warehouse space requirements decrease.
The number of production line setups decreases, and productivity increases.
Demand forecasting accuracy increases; fewer items mean better forecasting.
The sales team focuses its attention on high-value products.
The burden of quality, regulations, and documentation is reduced.