By Ron Ketterling – President
Part 6 of 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. Download our whitepaper, Aging ERP: When Old ERP is Too Old, for more tips on better managing your warehouse and its costs through use of a new ERP system.