Merchandising Grid: The Mechanism for Product Portfolio Management
Puneet Kulraj, Parag Pai and Dr. Shelja Jose Kuruvilla
Need for Continuous New Product Introductions
A good product variety is considered necessary to enable a firm to satisfy the wants and needs of different segments of its consumers and, thus, to increase the probability of completing a sale. The growth and expansion of a company are, therefore, often heavily built on its new products. So, it is very common to come across vision statements such as “We need X% of revenue coming from new products” or marketing teams complaining about “Our product range is too outdated; we need newer products to fuel our growth”. Consequently, most companies continuously launch new products to:
- Meet dynamic changes in demand: Quickly changing trends and consumer habits leave companies no option except to respect these by offering new products.
- Offset the risk of obsolescence: Evolving technology is making it possible for companies to try and cater to customer demands for ‘smaller-lighter-faster’, thereby leading to a shorter life span of existing products (especially devices) of every firm.
- Earn/protect margins: As a business strategy, companies must run ahead of price competition by differentiating their products and introducing new products that can command better margins.
- Build brand image: Periodically, a company developing new products is likely to have a better reputation and can attract consumers more easily.
- Refresh existing products: New versions of existing products give companies an opportunity to re-introduce and create a buzz around core products and also help to attract new audiences who may be drawn to the new offering though they might have been previously unfamiliar with the original portfolio.
Too much of a good thing?
When companies are riding a wave of growing sales, all new products are met with a lot of excitement. However, the continuous addition of new products to the company’s portfolio can be an enormous challenge for the supply chain due to two major issues:
- Disaggregation of demand
With companies vying with each other to introduce new products and variants in the market across product categories, including garments, shoes, furniture, consumer durables, automobiles, electronics, books, music, and even some industrial products, there is an explosion of variety that is available to the customers. And, each introduction creates a new niche-based segment. For instance, in wall paints, there are a large number of pinks available; and there could be customers who understand the nuanced differences between them and prefer one pink over the others (Mera wala pink!). This phenomenon can be called “Disaggregation of demand”.
Demand disaggregation is leading to the formation of what Chris Anderson in, his book by the same name, calls the “Long Tail” of demand – i.e., in some categories, ~20% of SKUs may cover just about 30%-40% sales, and the rest of the 60% of sales comes from the addition of small volumes of sale, each from many SKUs, thus creating the long tail of demand. This phenomenon poses several challenges for the supply chain.
- Dilemma posed by products in the decline phase
To addition to the above, the duration or the slope of the products life cycle of each of the SKUs in the market is difficult to foresee or predict accurately. However, it is an irrefutable fact that sales of all products eventually hit a slowdown. When this happens, each of these products (at the declining phase of its lifecycle) is often seen as the culprit for high inventories. An increase in inventory is naturally avoidable. It occupies space in warehouses, locks up cash, and companies have to discount or eventually scrap this inventory. All these lead to profit leakages.
This problem has a bigger impact on suppliers who may not only have redundant FG inventory but also would have planned for RM. When products are discontinued, the suppliers are usually left holding huge leftover inventories at their end. This often leads to issues of trust between vendors and companies, and could manifest as supply issues for other items being procured from the same supplier. A huge lose-lose situation for both parties.
The Way Out
Implementing a Fixed Merchandizing Grid and Fast Replenishment can help companies overcome the conflict posed by variety and help companies maintain a regular influx of new introductions without worrying about inventory going out of hand.
How does this work?
Defining the Merchandising Grid
A fixed Merchandising Grid maps the entire product portfolio and limits the range-based parameters that truly matter to the end customer, thus allowing the company to maximise sales without burdening the supply chain.
A common mistake companies make is to replicate products based on what the competition is offering or make product variants based on the different parameters/functions the sales team/other stakeholders consider important. For example, fabric designers might add a particular shade of black fabric with a thin blue line to the product portfolio in search of novelty in design. This may or may not reflect the end customers’ true considerations when they make a purchase, especially since the end consumer is not as knowledgeable as the designer about fabrics, shades or print. He may not be able to distinguish this SKU from another with, say, a thin grey line. So, eventually these cannibalise each other’s sales, reducing volume off-take of both. So, it is very important to have an understanding of the true parameters that are relevant to the end customer.
For example, a shoe manufacturer may decide upon the following five parameters to form the merchandising grid:
- Demographic (e.g., men, women, and kids)
- Occasion of use (e.g., men’s shoes may be formal, semi-formal and casual)
- Style (e.g., men’s formal shoes may be laced-up or brogues)
- Price (e.g., laced up shoes may be offered at <Rs.999; Rs.1000 - Rs.3000; > Rs.3000, etc.)
- Colour (e.g., <999 shoes can be offered in black or tan)
After identifying the relevant number of parameters, the company can also decide on the segments of the grid where the company wants to be present. For example, if price is a parameter, the company may choose to be a premium player and ignore the lower price points. Once the relevant grid is defined, the company has to decide what is the number of products that it wants to include in each square of the grid to be able to offer:
- A relevant choice to the target consumer of each segment
- A variety that does not cannibalise on each other’s sales
For example, in the case of the above shoe manufacturer, the company can decide that it needs to offer two choices of black, <Rs. 999, lace - up, formal, men’s shoes, to maximize sales opportunities.
Once such decisions are made across the various squares of the grid, the existing products of the company have to be mapped against this grid. (Note: If the number of products in the portfolio is too many, rationalize the list based on volume and frequency of sales before taking this step).
While there is nothing like a perfect number of ranges to be offered, there will be significant scope to cut down excess range from certain segments. In that case, a judgement has to be made based on sales and other considerations as to which ones in the range the company wants to keep. Very often, such an exercise leads to the realization that the company can do without ~40% of its SKUs. This range is drop frozen and only used for liquidation, without any additional fresh procurement being done. Also, clear gaps of where new products are needed – and which need to be prioritised – will emerge once the grid is finalised. These can be triggered for new product design and development.
Steve Jobs’ product strategy matrix for Apple
One of the most successful examples of merchandising grid-based product portfolio control is demonstrated by Apple. Steve Jobs defined Apple’s company computer portfolio strategy by using only two parameters - the kind of user and the portability of the computer; and decided to have only a single product offering in each of these.
They have extended this strategy for new category introductions as well. This has ensured that Apple’s supply chain is one of the most agile in the industry, if not the world. An old product starts running out of stock within a week of the introduction of a new model that is expected to replace it. The aspirational inventory turns of a whopping 74 (industry average is 8) enabling Apple to enjoy the industry's highest gross margin and profitability.
Most other companies offer a plethora of choices to every possible customer segment, and consequently, their supply chains have become so complicated that they suffer the twin problems of lost sales due to excess inventory of some variants while suffering high inventory and subsequent margin erosion due to discounts on others.
By committing to freezing the range as per a defined merchandising grid, companies will protect themselves from the problems associated with demand disaggregation, as they will be limiting the range, not only for production but also for channel partners, distribution, and vendors.
Introducing New Products into the Grid
Since the number of possible slots is frozen, whenever marketing teams take a decision to introduce any new product into this grid, they will also need to decide which product they want to discontinue. Not only that, a discontinuation and liquidation plan for the existing inventory of the product has to be chalked out. Taking these decisions in a systematic and timely manner will allow for a smooth liquidation of the products, even as they are selling in small volumes in the market. This will eliminate issues related to leftover inventory in the supply chain and distribution channel.
Reacting to an Emerging Category or Line of Business
Sometimes a new category, not a part of the original merchandising grid, may emerge. For example, an automobile spares company may decide that it wants to be present in the emerging Electric Vehicle (EV) segment. Initially, a new row or column would have to be inserted into the grid. However, over time, some of the older cells that were occupied by increasing obsolescent products (e.g., Internal Combustion engines, in the example of the automobile company) will eventually disappear as the sales of those products reduce and fall below the economic threshold.
In case a company enters a new line of business, this may involve the creation of a new portfolio of products. Therefore, a new grid will be defined on the basis of buying preferences of the customers of this business. Management of the range in this grid may initially be a strategic call taken by top management and, will, therefore, be different from range management for steady-running categories. However, over the long run, as the business line matures, the grid will be managed the same way as described earlier.
Once the merchandising grid rules are implemented in a company, teams working on new product introductions will automatically be more careful in selecting what range they want to push in the market since it involves the decision to discontinue an existing product. This circumspection can improve the probability of the selected products doing well in the market. Moreover, fixing the merchandising grid approach also allows the entire system to focus on the success of the identified range of the company. Experience has shown that when the merchandising grid is used in a pull or replenishment-based supply chain, it can help.
- release plant capacity by up to ~20-25%
- reduce inventory across all nodes by ~25%
- improve availability in the market by up to 90%,
- increase overall sales by 20-30%
Therefore, plan carefully, and your new products will bring in the revenues and profitability that you anticipated. Think outside the box, but stay within the grid!
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