By Ron Ketterling – President

In our Effective Ways to Reduce Manufacturing Costs series introduced product line rationalization and its effect on total cost. Product rationalization focuses on the most profitable products, while eliminating or outsourcing low-profit products that have high overhead demands and are not compatible with manufacturing cost reduction strategies.

Product line rationalization is broken up into the following four steps:

•   The least-profitable products are dropped or eliminated from the catalog

•   The products that need to remain in the catalog are outsourced.

•   The high-profit products remain in the catalog.

•   The balance (remaining products) is improved with a greater focus on product development, manufacturing processes and marketing strategies. Because these products no longer need to support the low-profit products, companies can now sell them for less or enjoy greater margins.

The combination of an improved focus on product development and lower overhead changes will more than make up for the revenue lost from eliminated products. Generally, 80% of sales come from the best 20% of a company’s products. Many companies keep adding products without removing any low performers from their catalog. This results in high overhead costs, lower plant capacity, lack of manufacturing resources and supply chain management complications. Take this simple test.  Run a report from your ERP system on the products with the highest sales (both dollars, quantity and pick lines).  You may be surprised.  Many of our clients have been startled to see how large a percentage of their sales comes from a small percentage of their product line.

Product line rationalization solves the problem by eliminating low-profit products and freeing up resources to improve the remaining high-profit products. While product rationalization is not the cure all, it helps to increase profit and improve the quality of products.

A current ERP system can help manufacturing companies reduce costs and help take back control of their warehouses.

As noted earlier, a huge benefit of rationalization is the increase in profit. That fact alone is enough for companies to consider rationalization in their cost reducing strategies; however, the additional benefits make product line rationalization a better operational strategy all around.

•   Improved Operational Flexibility:  Low-profit products typically require unusual parts, materials, set-ups and processes. Many older, low-profit products are built so infrequently that the workforce does not have the experience necessary to quickly produce a high quality product. High-profit products that use more common parts can be manufactured quickly, without the obstacles that generally come with the low-profit products.

•   Simplifies Supply Chain Management: The elimination of products with unusual parts, materials and procedures greatly simplifies supply chain management.

•   Availability of Resources: Rationalization frees up valuable resources to improve operations and the quality of products, introduce new methodologies (such as build-to-order and mass customization), and implement better product development processes and procedures.

•   Improves Quality of Products: Older products are typically built infrequently by inexperienced staff, resulting in quality issues. In contrast, higher profit products are evaluated more frequently to improve their quality.

Product line rationalization goes further to improve your overall product line. By concentrating on higher profit products, manufacturing companies will increase their profit significantly over time. Keeping current and re-evaluating processes and products is crucial to any manufacturing company’s success. An ERP system can help you achieve this. Download our whitepaper, To ERP or Not to ERP: It Isn’t Even a Question, to learn how the right ERP system can help you reduce your inventory levels by 22% and improve your complete and on-time shipments by 10%.