Case Study

Complexity assessment at a powersports vehicle co 

Partnering with a vehicle company to remove complexity and recapture $8M in lost profitability

A leading recreational vehicle company with a history of innovation and product diversity was facing a 5th straight year of stagnant profitability. Concerned that the same innovation which was once the driver behind growth may now be the culprit behind the decline, company leadership turned to WP&C. Together with WP&C, the company was able to understand the impact of complexity on profitability and develop a plan to simplify and improve profitability while their spirit of innovation.

With a history of innovation and impeccable design, the company had become a market leader in each of its product lines. As the company grewnow serving more than 100 countriesso too did the number of products, most of which were refreshed annually. The company’s swelling SKU count and the cost of what it saw as 'necessary' variety was limiting profitable growth with EBITDA stagnant the past several years. It was the classic 'Expanding Portfolio' siren that had led the business to deliver everything the customer asked for at the expense of profitability.

The company’s leadership recognized that in order to reverse the recent trend of declining profitability and to remain competitive it needed to clearly understand where profit was being created as well as where it was being destroyed.  Plagued by product proliferation, the company was cannibalizing its own sales and quickly becoming overwhelmed by its own complexity.  WP&C was called upon to not only shed light on the underlying drivers of complexity within the portfolio but to build an actionable approach to SKU rationalization.

  1. Assess costs and cost drivers
    WP&C conducted an assessment of NVA costs as well as the drivers of these costs taking into consideration product sales, revenues, and the impact of product changes. By applying WP&C’s square root costing methodology it was now possible to accurately drill down into finished goods costs.
  2. Identifying opportunities
    Based on the analysis and the current position of the business, WP&C identified significant areas of profit concentration (as shown by the whale curve), likely cannibalization, and opportunities to address profit-eroding products and practices.
  3. A plan to execute against
    In order to capture value, we delivered actionable recommendations to improve the company’s product profitability including portfolio optimization, pricing tactics, and product refresh strategies.

Reassess the size of the portfolio: Cross-referencing competitor portfolio variety against that of their own and ensuring portfolio alignment with the overall company’s strategy allows for greater scale and recapturing value with reduced cannibalization while still meeting customer needs.

Add variety only where it matters most: As mid-tier products were profit destructive, having the greatest variety in this line-up was not valued by the customer. Limiting variety in mid-tier allows for greater variety to be redeployed where it would be valued.

Focus where complexity adds more value than it destroys: Systems upgrades add much less complexity than product refreshes while providing greater perceived value to customers and freeing up innovation resources for potentially greater opportunities.

Manage parts complexity: Parts introduce significant complexity and cumulatively can add more than whole new products. Reducing the number of unique part SKUs where commonality already exists saves on both inventory and R&D.

  • WP&C identified the key drivers of complexity for the company including:
    • A variety of product combinations from high to low end
    • Annual refreshes on most products
    • Meeting unique product demands for regional markets
  • Portfolio optimization opportunities were identified to address the significant profit concentration where 15% of products were delivering 100% of operating profit.
  • A new pricing strategy was recommended to help capture $8M in lost profitability by tackling the most profit negative product group
  • Armed with this new view of profitability, the company’s efforts to rationalize the portfolio are allowing it to recapture more than $50M in previously destroyed profit margins

With a history of innovation and impeccable design, the company had become a market leader in each of its product lines. As the company grewnow serving more than 100 countriesso too did the number of products, most of which were refreshed annually. The company’s swelling SKU count and the cost of what it saw as 'necessary' variety was limiting profitable growth with EBITDA stagnant the past several years. It was the classic 'Expanding Portfolio' siren that had led the business to deliver everything the customer asked for at the expense of profitability.

The company’s leadership recognized that in order to reverse the recent trend of declining profitability and to remain competitive it needed to clearly understand where profit was being created as well as where it was being destroyed.  Plagued by product proliferation, the company was cannibalizing its own sales and quickly becoming overwhelmed by its own complexity.  WP&C was called upon to not only shed light on the underlying drivers of complexity within the portfolio but to build an actionable approach to SKU rationalization.

  1. Assess costs and cost drivers
    WP&C conducted an assessment of NVA costs as well as the drivers of these costs taking into consideration product sales, revenues, and the impact of product changes. By applying WP&C’s square root costing methodology it was now possible to accurately drill down into finished goods costs.
  2. Identifying opportunities
    Based on the analysis and the current position of the business, WP&C identified significant areas of profit concentration (as shown by the whale curve), likely cannibalization, and opportunities to address profit-eroding products and practices.
  3. A plan to execute against
    In order to capture value, we delivered actionable recommendations to improve the company’s product profitability including portfolio optimization, pricing tactics, and product refresh strategies.

Reassess the size of the portfolio: Cross-referencing competitor portfolio variety against that of their own and ensuring portfolio alignment with the overall company’s strategy allows for greater scale and recapturing value with reduced cannibalization while still meeting customer needs.

Add variety only where it matters most: As mid-tier products were profit destructive, having the greatest variety in this line-up was not valued by the customer. Limiting variety in mid-tier allows for greater variety to be redeployed where it would be valued.

Focus where complexity adds more value than it destroys: Systems upgrades add much less complexity than product refreshes while providing greater perceived value to customers and freeing up innovation resources for potentially greater opportunities.

Manage parts complexity: Parts introduce significant complexity and cumulatively can add more than whole new products. Reducing the number of unique part SKUs where commonality already exists saves on both inventory and R&D.

  • WP&C identified the key drivers of complexity for the company including:
    • A variety of product combinations from high to low end
    • Annual refreshes on most products
    • Meeting unique product demands for regional markets
  • Portfolio optimization opportunities were identified to address the significant profit concentration where 15% of products were delivering 100% of operating profit.
  • A new pricing strategy was recommended to help capture $8M in lost profitability by tackling the most profit negative product group
  • Armed with this new view of profitability, the company’s efforts to rationalize the portfolio are allowing it to recapture more than $50M in previously destroyed profit margins

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