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Analyst Insight: Many organizations struggle with how to effectively deliver upon executive-level mandates for retail margin growth. There are several reasons for this, one of which is the lack of a formalized approach supported by tools that are used to drive a fact-based analysis that identifies the source of cost savings and provides insight to the high-impact improvement efforts required to realize the benefit. Overlay the fact that most organizations pursue cost reductions through functional approaches, as well as the lack of recognition that sustainable and incremental margin improvements require ongoing use of the approach and tools, and the result can be sub-optimized and often competing efforts to deliver upon the mandate.
-Michael Rellihan, associate principal at REL, a division of The Hackett Group
For consumer product companies, especially those manufacturing highly engineered products across multiple product categories, decisions made regarding product line positioning and featuring can have a significant impact on bottom line performance. Products that are poorly positioned in the marketplace, or contain costly features that consumers don't value, can result in both loss of market share and reduced margin.
Product line structure and feature-value analysis are two components of a broader, comprehensive framework supported by quantitative and qualitative tools that are designed to deliver specific cost-saving actions. Product line structure and feature-value, in particular, are approaches that result in the identification of opportunities to optimize the product range, maximize volume and margin, rationalize unprofitable SKUs, reduce products' net landed cost by de-featuring, and drive up price points through up-featuring. Each of the approaches utilizes a defined set of tools that are applied after some high-level analysis has been performed to identify and prioritize those business platforms that then serve as the focus and "scope" for the more detailed analysis.
The product line structure approach deploys tools such as SKU profitability and complexity analysis and channel and sales allowance analysis to identify products/brands that have overall profitability issues, whether those issues are driven by product-specific attributes versus channel-specific attributes, as well as identify opportunities for SKU-level and brand-level consolidation. The result of the analysis is a target set of products to do a deeper profitability dive to determine their core issues, and the basis from which to develop specific cost saving improvement actions. Typical savings generated from improvement actions linked to product line structure analysis are in the range of a 1-percent to 2-percent increase in gross margin.
The feature-value approach deploys tools such as competitive feature assessments and cost benchmarking, bill of material analysis, and other market/survey and internal costing tools to identify opportunities to better target customer market segments with features deemed to have high value relative to cost, as well as to identify areas of potential savings by product, part and sub-system. Typical savings generated from improvement actions linked to feature-value analysis are in the range of 2 percent to 5 percent of material costs and an increase in gross margin of 1 percent to 2 percent.
Many organizations don't have the cross-functional structure and the framework and tools in place to drive the ongoing focus on cost that's required to support margin growth. Transitioning from a functionally-driven approach to cost reduction to an approach driven by cross-functional commitment supported by robust tools and approaches that are embedded into the organization requires executive-level leadership and commitment, as well as a pilot business platform from which to launch the tool set on a limited basis.
The outcome will not only serve as a basis for identifying where opportunities exist to reduce cost and what the potential value of those opportunities are, but it will also establish a scalable and re-usable framework for future analysis and broader improvement efforts.
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