Why you must crop your products: if you want to cultivate your bottom line, try trimming your product line.

• Author: Boltin, Gerald
• Position: Cover Story

In the most recent annual report of a large consumer products manufacturer, the company explains it added more than 200 products during the fiscal year. It also stresses its focus on new-product development. But it says nothing about retiring any of its existing products. Assuming, therefore, that few - if any - of the firm's products are headed for retirement, it's very likely that unmanageable complexity and increasingly bogged down operations will mar the company's future results.

The company also will probably find it harder and harder to schedule, make, manage and deliver a full product lineup. A steadily increasing variety will clog the process and even result in cannibalizing demand for other products, thereby reducing returns on all products. Written between the lines of the annual report is evidence that this is already happening: The company says its average revenue per stock-keeping unit, or SKU, is less than 20 percent of the average revenue per SKU of several competitors (and it's not enjoying premium pricing for its products). Sound familiar? If it does, you're not alone. When Financial Executives Institute and Computer Sciences Corporation asked financial officers how they grapple with today's toughest information-technology issues, the two areas where CFOs feel most limited by a lack of enabling technology are measuring product and customer profitability and reducing enterprise operating costs. (The results of the study appear in the "1998 First Annual Survey of Technology Issues for Financial Executives," a joint FEI/CSC publication.) And one issue that relates directly to both concerns is the process of "rationalizing" products, services and customers.

Resources to the Rescue

In recent years, many companies have launched initiatives to bolster their operations. By enhancing business processes that focus on developing, producing and marketing new products and services, many have enjoyed market growth. Too often, though, the market growth hasn't been followed by improved financial performance. In effect, companies fail to grow profitably.

While many potential reasons exist for no-profit or low-profit growth, a key factor is neglecting to regularly analyze product and service profitability - and subsequently failing to retire products, services and customers from which the enterprise can't generate acceptable returns. This analysis and cropping cycle is often called "rationalization," a systematic process that helps companies evaluate products, services and customers; identify those that aren't producing targeted returns; implement programs to improve performance; eliminate those products, services or customers from which you can't raise returns to an acceptable level; and redirect resources to more profitable endeavors.

In many ways, the rationalization process is similar to pruning a tree. The best growth occurs when old, dying and low branches are cut away to reduce the drain on finite resources. This allows more nutrients to go to the highest and greenest branches the ones that gather the most light and, thus, are best positioned to...