Product Portfolio Management Sets Structure for SKU Optimization

By Janet Suleski | July 20, 2021 | 0 Comments

Supply ChainPower of the Profession

A great many calls I take are on one of two topics: product portfolio management or SKU optimization.

SKU optimization is a more appealing way of saying “SKU rationalization,” or the retirement of products from portfolios, a phrase that often sends commercial team into full defensive mode. It’s easy to see why these two topics are linked to one another, but I find that many companies want to start with SKU optimization as a foundation for adopting more advanced product portfolio management practices. In fact, it’s the art of product portfolio management that is needed to set the structure for SKU optimization.

While supply chain doesn’t typically own strategic portfolio management, supply chain leaders are often tasked with leading SKU health assessment and retirement process definition projects. These projects cannot be truly successful unless they are conducted within a larger strategic framework that sets the guardrails for defining what constitutes a healthy SKU in the context of a product portfolio.

Let’s take a medical devices example. In this composite example, the head of supply chain is tasked with creating a process to remove complexity and lower costs, and is given a mandate to reduce costs by $10 million over the next fiscal year. Her performance evaluation and compensation are tied, in part, to achieving this goal. The target savings and the supply chain leader’s performance metrics are set independently of the company’s stated strategic vision of, “Be the leading supplier of cutting-edge therapies to continually improve patient outcomes and quality of life until a time when a cure exists.”

This sets up the conflict between the stated corporate strategy and the manifestation of the strategy in the eyes of customers. This conflict often manifests between the portfolio strategy and business unit strategies and goals. Figure 1 illustrates one way the bottom-up effort to lower costs could clash with the way the company’s strategic vision has been translated through the next two functional levels. In this example, the critical disconnect happens between the portfolio strategy layer and the product line or business unit’s strategies and financial targets layer. Disconnects such as this can occur because different functions and reporting lines define “success” differently and use different metrics to measure it. Many companies do not have a forum where strategic and operational strategies, goals and metrics can be compared and the disconnects identified and addressed.

To resolve the disconnect, the company’s top-level vision, mission and strategy should be the “North Star” governing the rules for decision making about how the SKU optimization process is set up. Without alignment between corporate strategy and executional activities, the opposing forces meet at the operational decision-making level: Does the company trim the portfolio to satisfy short-term financial goals, but put its stated business strategy at risk? Or does it step back to think about what a consistent strategy framework should look like for the business?

The company needs to make a conscious choice based on connecting the decisions about lifetime management of products to broader corporate goals. Figures 2 and 3 suggest two product strategy frameworks that a company’s leadership could design to align SKU optimization decisions to product portfolio management strategies, which are then aligned with the corporate vision, mission and strategy.

Figure 2 provides a perspective of how the corporate vision and mission could translate down to PLM practices in a company that prioritizes the development of cutting-edge innovations for its products. The supply chain leader may, in this case, design a program that includes ensuring supply chain is involved early in sourcing materials for new therapies still in R&D. This, in turn, would allow the team to vet suppliers and develop programs to source materials at acceptable costs to scale the therapy, if it’s chosen for launch and full production volumes.

Figure 3 suggests a strategy cascade from the perspective of a company whose stated vision, mission and strategy are related to making its products available and affordable to a wide market. In this context, the supply chain leader may opt to design a supply chain and SKU optimization program that focuses on measuring product health. Such a program might retire low-revenue, low-profit products in the portfolio’s long tail in order to lower sourcing, supplier management and distribution costs.

In both solution scenarios, the program the supply chain leader develops to support SKU optimization is designed to be consistent with the overall corporate strategy. There is no one “right” solution, but there is a solution that will enable the supply chain leader to align strategic, tactical and operational  activities and decisions related to PLM to a company’s chosen strategy. In both cases, however, the product portfolio management strategy defines the guardrails for decision making. This applies in both the supply chain leader’s design of the SKU optimization program and in making the most fitting tradeoff decisions regarding SKU health and, if appropriate, product retirement.

Janet Suleski
Director Analyst
Gartner Supply Chain

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