PDMA: 5 Key Lessons for Successful Portfolio Optimization

5 Key Lessons for Successful
Portfolio Optimization
A Webinar Sponsored by the Product
Development and Management Association
August 3rd, 2016 1pm ET
Stephen Wilson, Managing Partner
Wilson Perumal & Company

Wilson Perumal & Company, Inc. 2
Complexity Assessment
Enterprise Transformation
Growth
strategy
Customer
Offer
Operating
Model
Management
System
Culture for
Execution
Presenting today
• Stephen Wilson
• Co-Founder & Managing Partner, Wilson
Perumal & Company
• Author of books on complexity, operations &
business strategy
• 20 years experience helping senior clients with
critical strategy and operations questions
Wilson Perumal & Company
• A strategy consulting firm helping
clients create value in a complex world
• Founded in 2009 with operations in
North America and Europe
• Clients: Large public & private
companies, private equity firms and
select areas of the US/CA government
We help companies compete in a complex world
What products
to offer?
How do you
structure?
How do you
manage?
How do
you work?
How, where
to grow?
Welcome!

Our Discussion
• Introduction
• 5 key lessons from the field
• Getting started
• Q&A

Complexity is stretching the capabilities of most
companies…
4
New ChannelsNew Geographies
Broader Product Offerings
4
More Systems
& Technology
Matrix organizations
More
Regulation
More Complex Processes
X
X
X
X
X
X
X

… Surpassing the “complexity frontier”
VALUE
(diminishing
returns)
COST
(exponential growth)
Level of complexity
you can support
$
#Items #links
1 0
2 1
3 3
4 6
5 10
…
10 45
ComplexityFew companies are still here
Many companies
are here
An increasing number
of companies are here

The result is severe profit concentration …
• Often the most profitable 20% to 30% of products generate more than
300% of the profits in a company, meaning…
• …the remaining 70% to 80% lose 200% of the profits
Products that
create profit
Products that
“lose” profit
0% 25% 50% 75% 100%
100%
300%
% TotalProducts
0%
% Total
Profits
Typical “Whale Curve”
Source: Sievanen, Suomala, and Paranko, Activity-Based Costing and Product Profitability (Tampere, Finland:
Institute for Industrial Management, Tampere University of Technology)

… And slowing growth rates
Slowing
innovation
Fragmented
scale
• Revenue grows in linear fashion, cost of complexity grows geometrically
• Complexity consumes resources, fragments scale, impedes opp to re-invest
Customer
confusion
• Exploding number of products leads to customer confusion
• Sales channel loses its ability to effectively support the portfolio
• Larger number of initiatives pursued to keep up growth actually clogs the
development process as resources are pulled in too many directions
Lower service
levels
• Processes that led to success in the past don’t scale
• Complexity impairs customer experience, availability service levels
Growth challenges that arise due to complexity:

The benefits of Portfolio Optimization reduction can
be felt across the business
Supply pooling
(reduced COV)
Reduced RM
safety stock levels
Raw material
consolidation
Product
consolidation /
elimination
Fewer RM stock
outs
Less RM inventory
Reduced product lead times
Supplier
consolidation
Greater supplier
leverage / scale Lower materials costs
Greater volume
per supplier
Better supplier service levels
Reduce
changeovers
Direct labor savings
Startup scrap reduction
Redeploy
changeovers
Smaller batches
for remaining
products
Decreased CTI and lead time
Lower FG inventory levels
Demand pooling
(reduced COV)
Reduced FG safety
stock levels
Greater product availability
Greater sales
force focus
Greater sales volume
More coherent
product line
Fewer orders
(greater vol/prod)
Increased
buyer/planner
focus
Improved PLM
focus
Reduced cust.
confusion
Higher average sales margin
Reduced cust.
service calls
Greater customer service
Reduced customer service
costsFewer products/
segments
Portfolio
Optimization
Plant
Complexity reduction
Growth impact
Cost impact
Not in current proposed scope
Production plant
Example
typical
impacts:

Companies pursue portfolio optimization for a variety
of goals; aligning upfront can shape the effort
Often, the perceived goals of portfolio optimization vary by function. In upfront
diagnostic work, it is important to align on this, and quantify the benefit case
• Eliminate profit eroding
products/segments
• Release of assets/fixed costs
• Reduce working capital and
inventory levels
• Focus/reduce marketing spend
• Reduce manufacturing capacity
• Create capacity for innovation
• Focus and align sales force
• Build a more competitive offering
• Improve pricing and lifecycle
management
• Reduce customer confusion
Frequent Cost Goals Frequent Revenue Goals

Our Discussion
• Introduction
• Getting started
• Q&A

Wilson Perumal & Company, Inc.
Lessons from the field
1. Put the customer at the heart of your portfolio exercise1

What are the gaps/overlaps
of the new product line? Is
there customer
confusion/over-choice?
What is the true
complexity-adjusted
cost & profitability of
products /customers?
Where will benefits be
realized? Cost?
Growth? Sustainability?
What is the impact of
portfolio complexity on
process & organizational
performance?
How does the new product
line support or impede the
business strategy?
At what level of complexity
reduction are there step
changes in cost?
WP&C Six-Facet
Framework:
Strategy
Breakpoints
Integration
framework
A structured approach across 6 key facets, but many
times the customer/strategic view is neglected

Portfolio rationalization is not just a cost cutting
exercise, it is about improving service to the customer
Source: Market Interviews
0%
0%
20%
27%
53%
Price
Availability
Availability is the number one purchase criteria,
often ranked above price…
Percent of interviewees who ranked the following criteria as
the most important buying factor when selecting a
vendor…
“I have plenty of customers who want to buy, I
just cannot get enough product.”
- Sales Person 1
“I’d say we lose at least at 5-10% of sales. Where
it is worse, though, is that it makes it far more
likely we won’t get the sale the next time
around.”
- Sales Person 2
Technical
Performance
Product
Guarantee
Portfolio
Breadth
…but product complexity is causing availability
issues resulting in current and future lost sales
“There is a huge communication issue between
the DCs and the stores. I think I lose 15%-20% of
sales because I don’t have the product.”
- Sales Person 3
“I’d say I lost 10% of sales because I don’t have
the right product at the right time, not to
mention the massive increases in shipping costs.”
- Sales Person 4

25.0%
75.0%
About right
Too many
Too few
Q. How would your customers rate the
breadth of the product portfolio?
A. “Too much. Over time they have several
product lines that overlap.” – Major Customer
Taking a customer/strategic view can embolden a
more radical reshaping of the portfolio
• Pump Manufacturer
• Little customer data
• Many SKUs
• Some overlapping
families
• Remove SKUs
• Exit a family
• Make room for new
products
Business:
Family:
SKU:
Business:
Family:
SKU:
XXXXXXX
Highly profitable
Somewhat profitable
Unprofitable
DeletedX
X
Remove SKUs
Exit a family

1. Put the customer at the heart of your portfolio exercise
2. Understand your true profitability, accounting for complexity
1
2

It is very hard to make portfolio decisions before first
understanding true profitability
• Most companies don’t have a clear view of where they make money
• An unclear view of product cost and profitability leads to suboptimal
decisions (around pricing, promotions, product development, marketing,
operations, and overall resource allocation)
• Square-Root Costing is a fast, practical approach to assess complexity
costs, built on our understanding of how complexity costs
Variable
costs
Fixed
costs
Variable
costs
Fixed
Complexity
costs
Traditional cost
paradigm
Today’s cost
categories
Mistaking complexity costs for
variable costs under-costs small
volume products and activities
Mistaking complexity costs for
fixed costs over-estimates fixed
cost leverage potential

Client Example – Beer Co
Situation
Complication
Key
Questions
• Beer Co, a multi-billion dollar beer producer,
operates 8 breweries and produces 1700+ SKUs
• SKU variety has continued to grow with new
flavors and sizes added each year
• Currently the macro beer market is stagnant and Beer Co is starting to
feel pressure from new entrants in the craft segment
• Production has complained about complicated processes for small
batch beers and is starting to miss some order delivery dates
• There have been some distributor (customer) complaints about
product availability
• Inventory has grown 15% per annum over the last 5yrs, particularly
raw materials
• Which products are truly profitable?
• What is the “right” portfolio with which to go to market?
• How can we grow profitably in a stagnant market?

Square-root costing example
Beer Co: Adjusting for complexity led to new insights
Client Example:
Low volume and high variation products are often not costed to
reflect their true burden on the business
9%
13%
14%
26%
14%
5%
10%
19%
9%
14%
0%
10%
20%
30%
Budget Below Premium Premium Craft Average
% Operating Margin
Vol. (bbls): 12.5M 16.4M 44.3M 4.8M 78.0M
Comparisonbetween Standard- and Complexity-AdjustedProfit
Typical standard costing
Complexity-adjusted costing

3. Leverage substitutability to cut costs while maintaining the top line
1
2
3

At the beginning, 3 things really matter: Incremental
Revenue & Cost and Product Lifecycle
Incremental cost
0
0
Destroys
value
Incremental
revenue Adds
value
1
2
Incremental
revenue is usually
less than actual
revenue
Incremental cost is usually
higher than actual costs
+ 3 Lifecycle
perspective
**Incremental cost = Cost for item itself + cost added to other items + cost of linked revenue
*Incremental revenue = Revenue *(1 ‒ substitutability) + linked revenue
Three factors for portfolio
optimisation
1. Incremental revenue: revenue that
would be lost if SKU was removed.
Incremental revenue consists of:
‒ Revenue
‒ Substitutability
‒ Linkage to other products
2. Incremental cost: cost that would
be released if SKU was removed
3. Lifecycle perspective: SKU’s
position in it’s lifecycle and future
performance

Portfolio optimization looks less like this…
And more like this…
Substitutability is a powerful lever for driving
significant benefits while preserving revenues
• Many companies have been
cannibalizing their portfolios with
similar products for years
• Hence the opportunity: Assess the
portfolio for substitutable products
• i.e. If we discontinue Product A,
customers still buy Product B
• Approach addresses key roadblock to
portfolio to optimization: fear of
losing revenue in process
• Portfolio implications: products with
high volume, high profit, but low
incremental sales may be cut

Mobile Tool Client Example: Focusing on incremental
revenue freed up cash while maintaining volume
• A mobile automotive tool business
suffered nearly 40% revenue drop.
• In response, the business wildly
increased its range to 40,000 SKUs
• Unintended consequences:
• poor product availability
• late delivery
• further sales loss
• business facing potential closure
• Response: Evaluated the product
portfolio, assessing substitutability,
and taking out 22% of SKUs in key
categories
• Results: ~25% reduction in
inventory, EBIT lift of 2% of sales,
fill rates returned to >95%
$0
$50,000
$100,000
$150,000
$200,000
$250,000
0 500 1000 1500 2000
Gross Margin
SKUs Reviewed
Red = SKU selected for discontinue*
The “Tail”

Lesson from the field
4. For maximum impact, leverage concurrent actions
1
2
3
4

© Wilson Perumal & Company, Inc. 24
What frequently occurs
Leveraging “concurrent actions” opens up benefit case
Portfolio Optimization
Supply Chain Redesign
Footprint Consolidation
Current
Footprint
Current
Supply Chain
Current
Portfolio
Footprint
Portfolio
Supply
Chain
Integrated
Effort
 Benefits constrained
 Dueling initiatives
 Customer disruption
 Transformation
 Integrated roadmap
 Customer value
Putting more in play: Concurrent actions

© Wilson Perumal & Company, Inc. 25
Cadbury example
“Now, thinking is more
joined-up and there is a
more coordinated focus on
revenue and margin growth…
that joined-up approach has
enabled us to rationalize our
offer…”
—Todd Stitzer, former CEO
• Cadburys: “More complex
than it needs to be.”
• Products, footprint,
structure, supply chain
• Fewer, faster, bigger,
better
• Impact:
‒ Margins up 160 bps to
13.5%
‒ 5% top-line growth

Animal Feed Co: Product consolidation enables
transformation of the distribution model
Unwinding a product proliferation dynamic to move the needle
Animal Feed Co: “Offered everything to
everyone (animal) everywhere”
• Over 70,000 SKUs manufactured in
~70 factories around the US.
• Leading brand and market share but
barely profitable
• Analysis: Interplant transfer cost
higher than manufacturing cost
Consolidate product
offering
$25M-$35M prize
Make greater portion of product
range at each plant
Reduce 3-touch distribution
moves

4. For maximum impact, leverage concurrent actions
5. Start planning for implementation early
1
2
3
4
5

The analysis is key; but thinking through
implementation from an early stage is imperative
Distributor pilot design involves four key focus areas
• Main goals of pilot are:
– (1) Test substitutability
– (2) Identify any lessons learned to be incorporated into full implementation
• Primary need is to pilot with distributors who are eager for reduced portfolio; also
important for distributors to be representative of broader distributor population
6
Key parameters for pilot:
Product selection
Distributor selection
Pilot logistics
Pilot performance
measurement
• Test product switches whose potential margin benefit is
greatest
• Monitor process of switching end-users to replacement
products and identify red flags in so doing
• Test products with 4 – 6 distributors who are excited about
reducing complexity and come from variety of sales regions
• 2 month pilot with critical task owners both on Pump Co’s and
distributors’ ends
High-level execution plan:
Wilson Perumal & Company, Inc.Wilson Perumal & Company, Inc. 12
Implementing portfolio actions will require
significant effort across plant operations
Key Implementation Topics
• Engineering will need to complete a significant amount of design, testing, and tooling/molding work
and thus prioritization and potentially expanded capacity will be necessary
• Support functions such as IT and Finance do not require many additional actions, but do require
advanced notice of changes
• As nearly every function will be affected in some way, project coordination will be a significant effort
and require dedicated resources
• Air compressor capacity could affect implementation timelines, reevaluating priorities and/or adding
new equipment could help alleviate this issue
Source: Internal & market Interviews; WP&C Analysis
Gantt Chart – Operational Activities
Operationalize
Significant
engineering work
drives timelines
Pilot Phase - test substitutability
and incorporate lessons learned
Operationalize Phase - prepare to
produce the necessary SKUs and
support volume transitions
Market Prep Phase - communicate
with and educate the market to
maximize customer conversion
Wilson Perumal & Company, Inc.Wilson Perumal & Company, Inc. 15
Comprehensive market outreach is key to
maximizing substitutability
Notify Wilden
employees and PSG
Sales of product
changes and high-
level timeline
Notify Distributors
of product changes
and high-level
timeline
Identify new
marketing
requirements to
achieve
substitutability
• Target key industries
• Tailor to regional differences
Create/update slick
sheets, technical
bulletins and
catalogs in major
global languages
Train Wilden
Inside Sales
Inside sales and PSG Sales will forward market feedback to Implementation Manager
for use in operational and market-facing plans
Train
Distributors
Wilden-led
marketing
outreach
Distributor-led
marketing
outreach
Provide
materials to
Distributors
Train PSG sales
Announce launch dates and
pricing1 changes to
Distributors
1 week prior to
distributor notification
Distributor
notification
Marketing
outreach
Distributor &
Customer
education
3 months prior to launch
Create educational
materials2
Feedback
incorporation
Market Prep
Request ordering forecast
from Distributors
Notes: These activities are not illustrated to scale or timeline 1) Pricing and lead time changes are captured in
‘operationalize’section of the implementationplan 2) Educational materialsmay include objective-handling,
application-specificexceptions, industry-specificissues, regional issues, pricing and lead-time expectations
Source: Internal and market interviews; WP&C analysis
1
2
3
 Detect issues early
 Adapt plan accordingly
 Celebrate and communicate success to the
organization to increase buy-in

There is always a reason to keep a SKU, but process
governance structure and rules can help set the tone
• Overall portfolio health takes precedent to specific product issues
• The burden of proof promotes a bias toward action – concerns need
to be specific and backed up with data
• Pending (“imminent”) sales need to be clearly defined in a
measurable time frame
• Exceptions to deletion have a documented and communicated plan,
timeline, and goals
• Implementation timelines are driven by external constraints –
internal constraints are challenged to avoid complexity creep
• Decisions are executed with consistency and discipline (despite
inevitable challenges)
Decision Principles For Discussion
1
2
3
4
5
6
29
Client
exhibit

Staying focused on the path to benefits
30
InventoryBenefits
MarginBenefits
• Migrating customers to products with lower materials costs
• Producing less complicated products with fewer components
• Reducing the number of unique components
• Reducing demand variability by offering fewer SKUs
Pricing Benefits
• Migrating customers to lower cost diaphragms
• Switching customers to improve line profitability
• Increasing price/charging for complexity on select low margin
SKUs to meet average margins
• Develop margin targets for select products
CapacityBenefits
• Reducing variation should improve assembly efficiency
• Portfolio changes create more favorable mix of sizes
Market Benefits
• Simplifying the distributors path to market & sales process
• Reducing stocking requirements
• Elevating the brand with end-users
Type of Benefit How the benefit is accrued
Client example:

Our Discussion
• Introduction
• Getting started
• Q&A

In our experience, the best way to start is through a
diagnostic, which includes “sizing the prize”
Answering these questions via an initial diagnostic study is often a
prerequisite for launching a full-scale Portfolio Optimization effort
1. Do we have a complexity issue in our portfolio? What impacts?
2. If we had a different/tighter portfolio, what would that mean?
3. What is the “size of the prize” for addressing portfolio?
4. What, ideally, would be additionally in play?
5. What do we want to achieve via our efforts in this area?
6. Is the organization aligned on the need to do something, or
what would be required to mobilize action in this area?
1. Do we have a complexity issue in our portfolio? What impacts?
2. If we had a different/tighter portfolio, what would that mean?
3. What is the “size of the prize” for addressing portfolio?
4. What, ideally, would be additionally in play?
5. What do we want to achieve via our efforts in this area?
6. Is the organization aligned on the need to do something, or what
would be required to mobilize action in this area?
1
In sum, we recommend that Client proceed with
complexity reduction:
1. Our analysis indicates a clear business case and opportunity to improve EBITDA
by ~8 - 17%
2. Competitors are embracing complexity reduction as a means to improve cost
position, efficiency and strategic advantage
3. Simplifying the portfolio would significantly improve ABC operations, even absent
further operational improvements
4. We see a path to tangible financial opportunities, such as decreased spend on 3rd
party manufacturers, lower inventory levels & reduction in OH allocation
5. Moreover, we see evidence to suggest that this will also prevent lost sales
through improvements in availability
6. General lack of visibility to Spec position is a broader issue for the business, but
we see a path to cut through this, and we believe that it is a manageable issue
7. Initial evidence suggests that there is opportunity for substitutability
Findings from sample diagnostic highlighted opportunity:

Stephen Wilson
swilson@wilsonperumal.com
Mobile: 214-938-4400
www.wilsonperumal.com
Contact information:
• To receive a copy of the slides
• To discuss content shared today or if you have additional questions
• For more information on our Complexity Diagnostic, on Square-Root
Costing, or other services
• Or Link In! https://www.linkedin.com/in/stephen-a-wilson-5782a2
Thank You!

Our Discussion
• Introduction
• Getting started
• Q&A

PDMA: 5 Key Lessons for Successful Portfolio Optimization

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