Why is it necessary? The cost of managing without a portfolio.
No product portfolio spirals out of control overnight. Complexity arises from the accumulation of individual decisions, each seemingly reasonable in its own context: a customer's specific request, a distributor's packaging requirement, an export market's labeling obligation, an outdated model forgotten to be discontinued. After a while, complexity itself becomes a cost item.
What happens when a portfolio is not managed?
The long queue gets bigger. While the majority of products generate only a tiny fraction of the turnover, they continue to create costs across the entire system (inventory, quality, documentation, training, regulations).
Resources are allocated to the loudest demands. R&D and production capacity are distributed not according to strategic priority, but according to the demands of the most persistent sales representative or the largest customer.
Profitability is not known on a product-by-product basis. Because overheads are roughly allocated, it is not possible to see which products are truly profitable and which are unprofitable.
Cannibalization goes unnoticed. The new product takes away customers from your existing product; total revenue doesn't increase, but costs do.
The rate of new product development decreases. Teams become bogged down in maintaining existing products; there is no capacity left for innovation.
An exit decision is never made. Adding a product is a success story, removing a product is a political decision. This asymmetry grows the portfolio in only one direction.
The hidden cost of complexity.
The cost of maintaining a product in the portfolio is not limited to its production cost. Each additional product code represents a separate stock point, a separate forecasting line, a separate quality file, a separate regulatory file, a separate price line, separate training material, a separate spare parts commitment, and a separate system record.
Because these costs don't appear on a single line in accounting , they accumulate as overheads rather than on a product basis . The first task of portfolio management is to make these costs visible.
The right question.
"Should we get rid of this product?" is not the right question. The right question is: "What would we gain if we allocated the capacity dedicated to this product elsewhere?" Portfolio management bases decisions on opportunity cost.
Basic principle
Portfolio management is not a restriction discipline, but a direction discipline. The goal is not to reduce the number of products, but to ensure that limited resources flow to where they generate the highest return.