Red Zebra Business Centre -Management Memos
February, 2010. Making Measurably More For Your Business Since 1985!

MaxProfile

Earlier Focus on Traders is not at the expense of Manufacturers!

Max Williams, Principal Consultant

Last month's edition of Management Memos' addressed a very significant problem for retailers - what they should stock. Inevitably, retail stock tends to run high, and it can prove very difficult to manage.

This month, we address the same issue, but for manufacturers. For manufacturing, the problem of 'product ranging' is at once easier, and very much harder.

Retailers in particular, and traders in general, have an investment in stock, and if they have been a loyal distributor, they will have a very substantial emotional investment and retail brand association with the lines they sell. Despite this, lines can be changed quite quickly, when the time comes.

Manufacturers, though, have a huge investment in design and testing, tooling, staff training and marketing channel development - all of which is at risk if a product line changes or is discontinued.

While the risks for a manufacturer may be greater, the challenge to make changes when they re needed remains just as strong as for the trader, The stakes are higher, so the discipline to make the right decision is more stringent.

Over the years we have seen many manufacturers make really daft decisions on product range extension, or on making specials, and sometimes both at once.

This month we set out a process, which, if followed closely, will help manufacturers avoid the worst pitfalls of just plain not recognising what might be at stake in their product ranging decisions

Windows 7 Arrives in Town!
During February we had a massive disruption to our work flow.  The cause? The introduction of the new computer operating system, Windows 7!

After the debacle Microsoft managed to create with the introduction of Windows Vista in 2007, its replacement Windows 7 faces an uphill battle to gain ready acceptance.

We had to change early to be sure that all our client material will perform as it should in the new environment. Right after we made the move, we found two clients with new computers already - loaded with, yep, you guessed it - Windows 7!

Our issue was not with any question of quality or ease of operation or reliability of the new operating system. I has all worked with fewer hitches or questions than you would expect. It seems to be a very, very stable, easy to use system. For most people, it is likely that they will notice not much change, although change there is. Ultimately, it will change the way use your computer.

Our problem is that the system has changed to focus on file types, like 'documents', 'images', and 'videos'. We use a dozen or so different file types for each client, and we need to keep them altogether and arranged by client name. Windows has allowed us to do that since Windows 95 in1995, and we are managing a work around to keep doing it now.

For Microsoft Corporation, '7' might be their lucky number. For the rest of us, though, it's just another change.



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to make or not


L

ast edition,we considered the factors that might lead a retailer to make the right decisions about what products to stock. Retailers often forget they need a product plan to make sure their retail efforts really succeed.  Make no mistake about it. Manufacturers need a sound product plan too.





Consider this! A good marketer will always try to have something for everybody. Different people need different solutions, and so they'd all like different product. But manufacturers need consistency and volume, and the best way to do that is to have one size fits all. Neither approach works these days, and the key to success is how to drive the right compromise.

Look at just one example of how things came back from the brink - dramatically! This manufacturing company boasted a "bigger range than any one else in the business", and proudly offered over a thousand models and variations.

Unfortunately, this line - famous in it's own sector, was on the brink of collapse. It just wasn't earning its keep! When the range was reduced to just a hundred varieties, sales increased by ten percent within three months, and without any change to the marketing mix. It goes without saying that profitability did not just increase - it ballooned!

What happened?  Why did sales increase when instinct suggests sales should go down?  What does it mean for others?

In this case, all the sales force got a new understanding of the product range - what was important and what wasn't. The downstream channel partners could get their mind around the streamlined and simplified product line. So everyone sold better, and sales went up. The amazing thing here is that the increase in selling effectiveness was automatic. Imagine what might have happened if the changes had been fiercely promoted!

Productivity improved - not only because of the arithmetic of economies of scale, but largely because the production staff could see some point in engineering new economies into the consolidated product line.

Most small manufacturers have more demands for specials and alternatives than they can handle, and very often each new variation offers a worthwhile volume if everything works out.  But 'everything' never works out. So the manufacturer doesn't get the returns from the "special" they expected

.It is a brave decision to stick to a predetermined product strategy and refuse a prospective customer's request for a "special", but sometimes it can be fatal not to take the hard line.
The problem for most of us lies in first having a sound "New Product Strategy," and then striking the proper balance on tailor made "specials" for particular customers. Here are some suggestions to formulate a product strategy that will improve both your sales,  and your Return on Investment.

Begin with a "zero base", and build up from there.
  1. You know what your business does and for which markets. Start with only core products to provide the framework for servicing your key markets.
  2. Only the core products.  Only the key markets.
  3. These are the core of your profit and cash flow - especially cash flow! (Pareto's 80/20 rule!)
  4. Add extra products to this core group, only if they satisfy your company's targets for sales value, gross profit and stock turn.
Leaving out these low volume lines will free up unexpected resources to be used much more effectively.

Good sellers, poor sellers! Some of your products sell particularly well, and others just don't.

Don't fall for the old saw "We need it to keep a full range on offer".  That's not usually true, but it's still a great point with the sales team.

Examine every product you make.  Does it produce at least your average gross margin, and your average stock turn? (Don't forget component stock holding.)  If not, what possible reason is there for continuing with it?  Why put it in your new, streamlined product range?

Use activity based costing principles to see if the gross profit dollars generated by these low volume lines cover the full cost of making and holding them.  Include warehouse costs and stocktaking costs, quality certification costs, engineering change updates, and all those incidental costs that usually get overlooked.

When you do a full cost analysis like this, you will see which products make the cut, and which don't If you make wise (and often hard product range decisions You will be well on the way to performing at the top of your category.


And isn't that where we all want to be?





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