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Faced with rising geopolitical risks and supply chain disruptions, many consumer products executives are keen to make their supply chains more efficient, resilient or sustainable, but are not certain where to begin.
How EY-Parthenon can help
EY-Parthenon teams can help your business identify and implement consumer strategies relevant now as well as in the future. Find out more.
Read moreIn fact, greater collaboration between the organization’s commercial and supply chain functions on product decisions can lead to substantial efficiency gains in both areas. When product and supply chain strategies work together, companies can achieve multiple positive impacts, such as simplified sourcing, greater manufacturing efficiency and improved customer service. This can be done on its own or as part of an overall cost enhancing strategy and can lead to improved competitiveness and profitability. Based on our experience working with clients, companies that adopt a coordinated approach can simplify portfolios by reducing SKUs by 20% or more
Unfortunately, it is common for marketing and finance departments to make product decisions without considering supply chain implications — informing the supply chain team only toward the end of the process or even after changes in the product portfolio are made. Similarly, when the supply chain is designed to deliver on production requirements, products are often lumped together in a “one-size-fits-all” solution without considering the commercial implications.
This kind of siloed approach can result in poor use of manufacturing capacity that may lead to stockouts and missed revenue opportunities. It can also cause higher inventories that increase working capital costs and reduce overall SKU productivity.
A better way is to prioritize products and product families according to sales volume and manufacturing complexity (Figure 1). Products that are high volume and “made-to-stock”— which may be fewer in number but deliver a larger proportion of revenue due to the higher sales volume and economies of scale in manufacturing — have very different production requirements than the company’s “long tail” of lower-volume products, which may require customization or frequent production line changeovers.
Note: Make-to-Stock (MTS); Make-to-Order (MTO); Pack to Plan; Pack-to-Order (PTO); Rationalize (RAT)
Product supply chain segmentation enables tailored marketing strategies and improved competitiveness. The quadrants show different levels of product complexity and provide a starting point for efficient alignment of the product strategy with supply chain management.
Such diverse product profiles, which are common among consumer products companies, contribute to supply chain complexity. Companies can create new efficiencies by considering product simplification together with supply chain restructuring. Both sides of the equation are important to making the approach work.
By aligning supply chains with the different product profiles, organizations can segment the supply chain by product type, making it easier to develop tailored marketing strategies that serve the business more efficiently. Without appropriate segmentation, the high-volume, high-consistency products can be interrupted or delayed by changes required to produce the lower-volume, one-off or specialized products. Capacity that is designed for one product segmentation may not be available or flexible enough to accommodate the other.
EY-Parthenon teams have worked with clients to evaluate the SKU portfolio using predefined metrics that help prioritize products based on both market performance and manufacturing complexity. This starts by incorporating evaluation parameters that include supply chain and operational considerations alongside marketing and financial objectives.
While company leaders may be generally aware that their organization’s product mix could be simplified, a 2x2 portfolio segmentation matrix can help determine how complex the product portfolio is and can indicate how much the company might benefit from consolidating SKUs in a way that helps both commercial go-to-market and supply chain processes work better together.
With a more robust portfolio design in place, the “optimized” portfolio can be aligned across the supply chain in logical operational segments to create differentiated, parallel supply chains to meet the different needs of all products.
For the supply chain, realignment introduces a strategy for low-volume SKUs that share common components with high-volume products to create production synergies. The result is shifting a one-size-fits-all model to a tailored approach where manufacturing lines and stocking strategies are appropriately based on specific SKU and customer dynamics.
The portfolio changes can have a direct impact on supply chain efficiency by eliminating unnecessary product runs and changeovers. Planning around product families enables plants to change packaging for SKUs without bringing down the “main” production line. Production runs are longer and better utilized, helping unlock capacity to meet new demand and creating new revenue opportunities. The simpler product and manufacturing profile also helps improve supply chain resilience by reducing complexity and duplication.
The benefits for the commercial side, and the business overall, are equally clear. Product consolidation can help leaders define brand and product roles while also eliminating unproductive or duplicative SKUs. The result is a streamlined business and improved go-to-market and asset utilization, which in turn promotes sustainability and greater profitability due to cost savings. Sales are stronger, customers are better served, and the business can be more competitive overall (Figure 2).
Note: Make-to-Stock (MTS); Make-to-Order (MTO); Pack to Plan (PTP); Pack-to-Order (PTO); Overall Equipment Effectiveness (OEE)
Coordinated attention to improvement levers in both product portfolio and supply chain management lead to new efficiencies and gains in several key areas.
Client story
▉ The challenge
A global food manufacturer was struggling with insufficient production capacity and wished to streamline its product portfolio to eliminate unnecessary complexity. Leaders wanted a nimbler supply chain that could meet the evolving needs of the business while unlocking capacity to help meet new demand.
▉ The solution
An EY-Parthenon team led an initiative to help simplify the product portfolio and align product segments across the supply chain. The result was a more efficient, tailored supply chain with significantly greater capacity and alignment and a redesigned product portfolio that enabled differentiated marketing strategies. New inventory modeling and processes at the SKU and distribution center levels helped maintain healthy inventories, freeing working capital and helping improve customer service.
▉ The outcome
The company simplified its product portfolio by reducing the number of products by 20% and achieved a 5% increase in capacity across its manufacturing network, which helped increase sales. The changes significantly reduced inventory, and the unlocked capacity contributed to significant profitability gains.
This kind of coordinated approach can lead to a meaningful gain in competitiveness by improving production operational effectiveness while also delivering a more effective product portfolio.
Companies that take a coordinated approach to product portfolio planning can benefit from a streamlined portfolio that alleviates complexity in supply chain processes and enables a more efficient and competitive marketing operation. Improved supply chain efficiency and capacity helps improve competitiveness through lower costs, a greater ability to meet market demand and improved customer service.
Gustavo Rossetto contributed to this article.
