A Practical Guide to Product Rationalization

Real-life best practices to get excess product off your company's bottom line


  • What SKU will replace the rationalized SKU?
  • What is the cost of manufacturing complexity (cost of changeovers)?
  • What is the lead time and inventory strategy (make-to-stock v/s make-to-order) of the SKU being rationalized v/s the SKU replacing it?
  • What are the historical obsolescence and warehousing costs as a percent of inventory?
  • What is the inventory carrying cost as per the Company financial policy?
  • What is the contribution to the overhead calculation?

Once I created the model, the rolled up number was large enough to turn heads. We presented this to our division General Manager, and he was immediately behind us. He let us know that he would be the sponsor for the project and a high-level team needed to be formed.

Project Sponsorship and Project Team Formation
We formed a cross-functional team, the members of which were suggested by the direct reports of the General Manager. All the above departments I had surveyed earlier were included. The key members of this team were the two marketing/sales reps, as they had the toughest job at hand, first working with their teams to understand what SKUs would replace the SKUs being rationalized, and then getting their teams to sell that change to their customers and receive their input.

Project Stage 2: Analysis and Negotiation

Marketing and Sales Work Sessions
We spent countless hours with our Marketing team members going through the entire SKU list. From this effort emerged the core packages we wanted to carry. The data actually drove us to the answer, but there were some outliers, which the Marketing folks promised to sell to their teams. The list was then presented at the next national Sales meeting, which included a working session to educate the sales team on the list and our findings. They spend a good half day further refining the list and suggesting alternatives where applicable.

Two-phased Implementation plan
When the project team met next, Marketing came back with their list, which was probably 95 percent unadulterated. It was amazing how much they knew about the whole portfolio before their internal meeting and how much they were able to sell our rationalization strategy to their teammates. They suggested a two-phased implementation strategy:

1.) The first phase would start in the short term (within the next three to six weeks) and cover about 70 percent of the items. This was obviously the one that the team thought was easier to begin with and would not require any customer trials.

2.) The second phase would be longer term (within the next six months) and cover about 30 percent of the SKUs. These were the items that the team thought they needed more time to convince the customers and would require trials.

Both phases had a conversion or rationalization date that was within three months of the start of implementation. The timing and two-phased implementation plan was partly to bleed the inventory at the customers and to conduct trials if necessary.

Project Stage 3: Communication & Preparation

We then created an implementation plan that was to be communicated to all internal departments. A comprehensive list of original v/s replacement SKUs was created. We communicated the roll-out plan with customers and internal departments. The list of SKUs included the timing of each, if a product/engineering change process was required, and action items (who does what). We were going to use this list to track progress going forward.

Project Stage 4: Inventory Ramp Up/Ramp Down

Next was the inventory ramp up/ramp down phase where we created and processed product/engineering changes for the affected SKUs, analyzed consolidation and change of demand, and updated replenishment parameters in the company's materials requirements planning system. We also updated and issued a new product/sales catalog to internal and external customers. Updated forecasts were also sent to the affected raw material and packaging suppliers where the impact was significant (+/- 10 percent).

Project Stage 5: Go-live

Finally, in preparation for going live, inventory of old SKUs, if any, was reviewed weekly. We worked with the sales people to sell what was remaining, sometimes at a discount. We continued to flag the SKUs for deletion in the company's enterprise resource planning system. We monitored inventory levels for make-to-stock strategy SKUs that were being eliminated. Finally, we had customer service monitor customer service levels, so we did not let up on the service levels during the change-over process. The concrete deliverables of this phase were no stranded inventory and a list of old SKUs flagged for deletion by our master data group.

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