product protability approach tocalculate its product, channel andcustomer protability. Doing so enabledit to map the cost base to the activitiesperormed. With this increased trans-parency, the company could optimizethe protability o its products andmarkets on a continuous basis.
Eliminate low-proft contributors
As leaders try to gain clarity regardingthe protability o their products,the rst obvious question concernsthe company’s portolio o oerings: Are there products or product eatureswe should think about cutting thatwon’t aect growth?However, reliably answering thisquestion requires the cross-unctionalteams to perorm more detailedanalyses that complement their existingprotability assessment. They need tocollect additional product and marketinormation to veriy each product’sstrategic importance and incrementalsales contribution. For example,companies might be wise to keepan SKU with low sales i it coversa need otherwise not ullled (say,high incremental sales).This analysis shows a product’sincremental value, enabling companiesto determine which products aretruly protable, either as standaloneitems or parts o a cross-sellingstrategy; which have sucientpotential or improved protability;and which are strategically importanteven i they are not as protable asdesired. For all other products, theteam should establish and rigorously implement phase-out plans. A large European ood producer conducted an incremental margin,sales and product rationalizationanalysis using this approach. Theproject enabled it to cut its productportolio by 34 percent, which led tosignicant reductions in the company’sproduct changeover costs—those costsassociated with switching production
Source: Accenture analysis
Marketing and sales
Sales effortsfocused onproducts withlow profitability
High degreeof productcannibalization
Customer-drivensales withstandard pricingroutines
Scale disadvantage due to low-volumeproducts and limited standardization
Low degree of component consistencyacross products
Resources tied upfor designing lowcontributors
Reinventing thewheel for eachnew introduction
Increase time tomarket and reduceservice levelsImpairworkingcapital
Increase directmaterial andlabor costsReduce assetutilization andperformanceIncrease inventoryand capitalequipment costsIncrease suppliermanagement andsales/promotion costs
Shareholder value at risk
Product complexity challenges in a number of areas—including marketing and sales, R&D and purchasing—can have a negative impacton shareholder value. Companies need to have the right analytics in place to truly understand how each factor affects profitability.