Product portfolio strategy and SKU rationalization aren’t just concerned with what to offer — managers also need to know when to offer their products, what audience to target / market to and where to introduce them. Only multi-dimensional analysis that considers all variables can offer true portfolio optimization.
There are no specific strategies the apply universally to all situations managers may find themselves in. Businesses offering products with long development cycles require fewer launches than businesses with products that are quick to market. Consumer adoption of new technologies will affect businesses differently, and products often have to conform to the widespread and highly varied technological requirements of consumers. This can lead to difficulty in deactivating products, even when they become unprofitable.
For these reasons, what-if analysis will significantly strengthen the process of developing and maintaining a product portfolio. Before diving into the details on what these what-ifs can offer your business, let’s go over one of the most common pitfalls that gets in the way of product portfolio optimization.
Departmental Goals Will Lead To Opposing Product Mix Suggestions
The most significant hurdle to a comprehensive strategy is the fact that separate departments within a business will look to achieve different goals and suggest opposing product mixes in the process.
A sales department will look to exceed revenue targets, and therefore be inclined to favor products with a high velocity regardless of the costs associated with getting that product to market. A marketing division will look for products that expand a business's overall market share, while divisions associated with supply chain management will look to decrease input costs.
A successful S&OP manager must therefore undertake the difficult job of identifying the correct balance between these individual goals.
You may be inclined to side with your finance division and their interest in profit, cost reduction and cash flow, but the obvious short-term choice is not always the best option when long-term goals and company constraints are factored into the equation. This is why a comprehensive analysis of all potential inputs and outputs on a forward-looking basis is necessary to ensure that your product portfolio strategy is truly optimized.
What-If Analysis and Product Mix
What-if analysis allows users to evaluate alternative strategies, policies, and tactics to maximize their revenue, profit and working capital performance while delivering on service level commitments and properly considering risk and supply chain constraints. By accounting for every possible variable and the trade-offs associated with different decisions, you’re able to maximize success within the constraints of the business. Especially when unlimited scenarios can be accounted for, what-if analysis provides significant value to a company’s product portfolio strategy.
What-if analysis does more than just optimize current strategies; it helps to plan for unexpected scenarios and adjust rapidly to instances of unplanned change. Even well-structured portfolios can benefit from this, as external circumstances can negatively affect otherwise well-planned product mixes. A forward-looking strategy helps minimize adverse outcomes that these situations may otherwise have on profitability and total expenses.
Likewise, external circumstances may change in a way that creates an opportunity that was not previously available. What-if analysis can keep businesses prepared to take advantage of demand increases that are not accounted for in traditional planning measures. This especially comes into play when dealing with sudden events, e.g., natural disasters or market crashes. What-ifs therefore represent an opportunity to outpace forecasts and increase overall profits while also limiting risks.
What-ifs can also help to expose business data that even the best S&OP managers are unable to visualize. Introducing a certain product may appear to be a profitable decision based on costs and expected revenues associated with the product, but what-if analysis may expose the potential for the product to negatively impact the performance of other product offerings. Similarly, it may expose the potential for it to negatively impact an entire business sector, e.g., sales and service level agreements.
There are also instances where products that individually perform poorly are greatly beneficial to the overall portfolio. This ‘loss-leader’ strategy is one that what-ifs can easily uncover. What-ifs can even be used for variance analysis, determining things like the ideal quantities that products should be offered in. This will lead to decreased costs by limiting excess inventory.
Closing Remarks
For these reasons, the most successful S&OP managers can build upon their current successes by incorporating what-if analysis into the generation of their product portfolio. It offers more realistic projections of profitability and helps to uncover hidden risks that may otherwise go unnoticed.
By embedding what-ifs into the S&OP process, managers will avoid unnecessary difficulties when presented with opposing suggestions that arrive from various departmental goals. Decision making becomes much more apparent when a multi-dimensional investigation of actions and outcomes is performed, leading to true optimization and greater alignment with business goals and objectives.
Many S&OP managers constantly lose sleep thinking about how to balance the many departmental demands. What-if analysis is one of the best ways to lessen the burden of playing the mediator — it allows business data, constraints, variables and objectives to make those difficult decisions much more clear.
