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Accenture Outlook | When Product Complexity Hurts True Profitability

Accenture Outlook | When Product Complexity Hurts True Profitability

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Published by Accenture
To meet the challenges inherent in today’s volatile global marketplace, companies need the right analytical lens to clarify the incremental profit generated by offering more innovative and differentiated products.
To meet the challenges inherent in today’s volatile global marketplace, companies need the right analytical lens to clarify the incremental profit generated by offering more innovative and differentiated products.

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Categories:Business/Law
Published by: Accenture on May 06, 2013
Copyright:Attribution Non-commercial

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05/06/2013

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The journal of high-performance businessThis article originally appearedin the 2013, No. 1, issue of 
Supply Chain Management
When product complexityhurts true profitability
 By Johan Sjöström Bayer, Mikael Hilding, Antal Kamps,Gustaf Sahlén and Robin Sparrefors
To meet the challenges inherent in today’s volatileglobal marketplace, companies need the right analyticallens to clarify the incremental profit generated by offeringmore innovative and differentiated products.
accenture.com/outlook
 
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Outlook 2013
Number 1
These days, the typical US supermarket’sshelves strain to hold between 30,000and 50,000 unique products, up romabout 15,000 in 1991. Yet roughly aquarter o those products sell less thanone unit per month.Similar product prolieration trendsare evident everywhere, rom car manuacturing to the ood industry.However, as more products arecreated, per-unit revenues (andassociated protability) can drop:One sports drink maker increasedits number o favors three-old but sawsales per favor decline nearly 60 percentdue to massive cannibalization. A dierentiated product strategy canpay big dividends i companies havethe right analytics in place to truly understand protability. But many rms struggle to achieve this levelo transparency. In the mad globaldash to be everywhere, all the time,companies oten lack the analyticalhorsepower to determine whichproducts actually make money, andthat can be a huge downdrat onshareholder value (see chart, page 3).
Seductive
Make no mistake: Complexity is here tostay—no one is going back to the FordModel T era o a universal product—andor good reason. At its core, complex-ity osters growth, and that’s part o itsseductive power. Making more productsattuned to the needs o more customer segments generates growth. Problemscan occur, however, when companieslose control o product complexity,which in today’s ast-moving, global,competitive environment has become anall-too-common occurrence.One proven way leaders can cutthrough complexity’s knottier issues is to use a six-step productcomplexity management ramework,which systematically establishes aproduct’s “true protability.” Theramework’s power comes rom itsintense ocus on identiying whichproducts to keep and then improvingthe protability o those products.Deeper analyses at the productand component levels enable theorganization to identiy, evaluateand measure product complexity and the potential or improvement.The ramework also examines acompany’s sales eorts and ultimately helps companies develop and sustaintruly protable products.
Understand true productproftability
How can you tell whether your current assortment o products isideal? You could examine productcomplexity in technical terms,tracking the number o categories, variants and custom products, or example, or analyze sales margins.But these approaches do not typically reveal a product’s actual direct andindirect costs—they don’t capture allo the costs related to its develop-ment, procurement and sale. As aresult, companies are discoveringtoo late that they are unwittingly destroying shareholder value.The product complexity managementramework provides a path teamscan use to understand all o thedirect and indirect costs generatedwhen a product is developed, producedand sold. These include direct labor and materials costs, administrativeand sales expenses, rebates, discounts,supplier overpayments, an allocatedportion o the company’s cost o capital, and whatever other chargesand expenditures the company makesrelated to the product. This assessmentcreates a picture o the product’s trueprotability and can then help leadersdetermine a roadmap or reconguringboth their portolio as well as individualproducts (see chart, page 5).One consumer goods company wantedto develop an activity-based costingsystem, which assigns indirect coststo products more accurately thantraditional methods, and used the
 
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product protability approach tocalculate its product, channel andcustomer protability. Doing so enabledit to map the cost base to the activitiesperormed. With this increased trans-parency, the company could optimizethe protability o its products andmarkets on a continuous basis.
Eliminate low-proft contributors
 As leaders try to gain clarity regardingthe protability o their products,the rst obvious question concernsthe company’s portolio o oerings: Are there products or product eatureswe should think about cutting thatwon’t aect growth?However, reliably answering thisquestion requires the cross-unctionalteams to perorm more detailedanalyses that complement their existingprotability assessment. They need tocollect additional product and marketinormation to veriy 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 ullled (say,high incremental sales).This analysis shows a product’sincremental value, enabling companiesto determine which products aretruly protable, either as standaloneitems or parts o a cross-sellingstrategy; which have sucientpotential or improved protability;and which are strategically importanteven i they are not as protable 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 productportolio by 34 percent, which led tosignicant 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
Purchasing
Scale disadvantage due to low-volumeproducts and limited standardization
Low degree of component consistencyacross products
Research anddevelopment
Resources tied upfor designing lowcontributors
Reinventing thewheel for eachnew introduction
Over-specifiedproducts
Increase time tomarket and reduceservice levelsImpairworkingcapital
DecreaseprofitabilityImpaircapitalproductivity
ReduceshareholdervalueDecreaseRoA
DecreaserevenueIncreaseCOGSIncreaseSG&A
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.

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