Case Study

Battling proliferation at industrial equipment co.

Industrial equipment manufacturer drives better win-rates and improves margins

An industrial equipment manufacturer that was well known for innovation and quality had experienced significant SKU growth over the years. With a high variety of product toproduce each year, the business was feeling theimpact of complexity on costs, working capital, and customer lead-times. Working with WP&C, the company was able toclearly understand the impact of this variety and rethink their product portfolio to better align with growth and profit goals.

Trying to maintain and grow market share, the company had deliberately and consistently introduced new product types and sub-system options on a configure-to-order basis. This meant across four primary product types, over 6,000 unique SKUs could be ordered. Unfortunately, half of the new options introduced by the company in a given year were never produced again nor did they add incremental revenue in the year they were produced. At the same time, the company had seen win-rates across their product lines become increasingly inconsistent over time – they appeared to be winning a greater share of smaller customer orders, while winning fewer larger customer orders.

WP&C was called upon by the parent company’s leadership to conduct an assessment of the current product portfolio to understand if and how the current level of variety was negatively impacting the business. The analysis took into consideration both external and internal factors, ensuring simplification efforts would yield real benefits for the company without negatively impacting customers. WP&C took a top-down and outside-in approach to assessing the offering, which would allow for:

  • An encompassing and holistic view of portfolio performance
  • The setting of targets for overall and product-line specific offerings to meet strategic objectives
  • A new understanding by Marketing and Sales of true customer needs
  • A streamlined evaluation of feature and individual SKU rationalization opportunities

In the end, WP&C identified that many SKUs had the same or similar technical specifications which contributed to the expanding portfolio quickly—without providing incremental revenue. This, in turn, led to scrap and inventory costs outpacing revenue growth by 3x. Additionally, the development of a Whale Curve highlighting a high level of profit concentration in a few SKUs and a wide plateau of SKUs that were product neutral. Many of the SKUs on the plateau were relatively new, while on the steepest part of the curve, where there was the most profitability, were their legacy products. Simultaneously, interviews with distributors and sales managers showed that not only was the company’s product offering larger than competitors, but the broader product range and higher levels of configurability were not significantly valued.

WP&C recommended the company undertake the following actions to support further portfolio optimization efforts:

  • Clarify the benefits to the organization of a portfolio more aligned to strategic and financial targets
  • Determine the level of technical substitutability between products with regard to the primary industries it served
  • Rationalize an option (feature) and all the SKUs that incorporate it as it provided no technical or operational differentiation
  • Establish a set of KPIs to monitor performance and success of new configurations
  • Implement a more formal approach to product lifecycle management including new product approval business case thresholds

Additionally, as the sales team had free reign with discounts to ensure they had the flexibility to win new business,margin was being destroyed in the process. WP&C developed tailored recommendations for the company that focused on developing a new pricing process to provide the sales force with tools and guidance which would preserve flexibility, drive better win-rates, and improve margins.

A more strategic approach to portfolio optimization and management would yield benefits to profitability and working capital while freeing up the production capacity needed for growth. And, as half of the product development team was dedicated to support sustainment of the existing portfolio, a reduction in complexity would enable the re-deployment of resources to NPD. Results for the company included:

  • A ~5% expected increase in capacity benefits
  • Identification of working capital reductions of 16%
  • Opportunity for over 10% improvement in EBITDA
  • Decrease in scrap and inventory costs
  • Standardized business rules for the sales force to ensure margins were preserved
  • A consistent process to leverage for the ongoing evaluation of product performance

Trying to maintain and grow market share, the company had deliberately and consistently introduced new product types and sub-system options on a configure-to-order basis. This meant across four primary product types, over 6,000 unique SKUs could be ordered. Unfortunately, half of the new options introduced by the company in a given year were never produced again nor did they add incremental revenue in the year they were produced. At the same time, the company had seen win-rates across their product lines become increasingly inconsistent over time – they appeared to be winning a greater share of smaller customer orders, while winning fewer larger customer orders.

WP&C was called upon by the parent company’s leadership to conduct an assessment of the current product portfolio to understand if and how the current level of variety was negatively impacting the business. The analysis took into consideration both external and internal factors, ensuring simplification efforts would yield real benefits for the company without negatively impacting customers. WP&C took a top-down and outside-in approach to assessing the offering, which would allow for:

  • An encompassing and holistic view of portfolio performance
  • The setting of targets for overall and product-line specific offerings to meet strategic objectives
  • A new understanding by Marketing and Sales of true customer needs
  • A streamlined evaluation of feature and individual SKU rationalization opportunities

In the end, WP&C identified that many SKUs had the same or similar technical specifications which contributed to the expanding portfolio quickly—without providing incremental revenue. This, in turn, led to scrap and inventory costs outpacing revenue growth by 3x. Additionally, the development of a Whale Curve highlighting a high level of profit concentration in a few SKUs and a wide plateau of SKUs that were product neutral. Many of the SKUs on the plateau were relatively new, while on the steepest part of the curve, where there was the most profitability, were their legacy products. Simultaneously, interviews with distributors and sales managers showed that not only was the company’s product offering larger than competitors, but the broader product range and higher levels of configurability were not significantly valued.

WP&C recommended the company undertake the following actions to support further portfolio optimization efforts:

  • Clarify the benefits to the organization of a portfolio more aligned to strategic and financial targets
  • Determine the level of technical substitutability between products with regard to the primary industries it served
  • Rationalize an option (feature) and all the SKUs that incorporate it as it provided no technical or operational differentiation
  • Establish a set of KPIs to monitor performance and success of new configurations
  • Implement a more formal approach to product lifecycle management including new product approval business case thresholds

Additionally, as the sales team had free reign with discounts to ensure they had the flexibility to win new business,margin was being destroyed in the process. WP&C developed tailored recommendations for the company that focused on developing a new pricing process to provide the sales force with tools and guidance which would preserve flexibility, drive better win-rates, and improve margins.

A more strategic approach to portfolio optimization and management would yield benefits to profitability and working capital while freeing up the production capacity needed for growth. And, as half of the product development team was dedicated to support sustainment of the existing portfolio, a reduction in complexity would enable the re-deployment of resources to NPD. Results for the company included:

  • A ~5% expected increase in capacity benefits
  • Identification of working capital reductions of 16%
  • Opportunity for over 10% improvement in EBITDA
  • Decrease in scrap and inventory costs
  • Standardized business rules for the sales force to ensure margins were preserved
  • A consistent process to leverage for the ongoing evaluation of product performance

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