Canadian Vending

Features Business Staffing
Dispensing Strategies – November/December 2010

Culling The Herd


December 7, 2010
By Michelle Brisebois

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Product rationalization often isn’t the easiest or most straightforward task to perform effectively. The decision to continue selling or to discontinue a SKU (stock-keeping unit) often comes down to a variety of issues. If it were simply a matter of dropping the poorly performing products in favour of something more popular, life would be easy. Your product line is an ecosystem and, much like nature, removing one species from the mix can be a game changer for better or for worse.

Product rationalization often isn’t the easiest or most straightforward task to perform effectively. The decision to continue selling or to discontinue a SKU (stock-keeping unit) often comes down to a variety of issues. If it were simply a matter of dropping the poorly performing products in favour of something more popular, life would be easy. Your product line is an ecosystem and, much like nature, removing one species from the mix can be a game changer for better or for worse.

Start with the 80/20 rule
One version of this rule states that, generally speaking, 80 per cent of your sales will come from only 20 per cent of your products. Many experts believe that it’s usually more extreme than 80/20. This is a good rational place to start; however, several other factors enter into the decision-making process. Your sales reports will show the top selling SKUs and their associated revenue.

That’s only part of the equation. You’ll need to determine each product’s profitability as well because a product may not be a top seller but may be extremely profitable. If it’s neither profitable nor a revenue generator, does it encourage sales of other products?

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For example, salty peanuts may lead to beverage sales, so the peanuts play a pivotal role in the ecosystem. Bottom line: the product makes money by selling a lot, having a generous margin or encouraging the purchase of another product, resulting in an increased average sale. If it’s not doing any of these things – consider removing it from the lineup.

Portfolio management
Does the product you’re evaluating fit appropriately with the rest of your offering? Maybe your machine thrives because it offers something for everyone so diversity is the key to success? That’s great if you’re in an industrial or college setting. However, if the machine is placed next to a Weight Watchers meeting – you may want to drop the chocolate bars.

If you’re planning to remove a product from a machine, is there another product that can fill the same need, but profitably? While cannibalization effects are typically a consideration when you’re introducing a new product, they should be re-examined when you’re about to discontinue a product. Will sales go to other products or will they just be lost? Rather than manage the run-out over many machines slowly, could you take remaining inventories of a product you’re not going to sell anymore and focus on blowing the SKU out through a few machines where it will go quickly?

Do lost sales offset efficiency gains?
Every product has to be managed; it’s only a question of how easy it is to manage. If the product in question comes from a unique supplier requiring a separate system of payment, it will be less efficient to manage than one sourced through a supplier you buy other things from.

When products come out of the portfolio, fixed costs to operate the machine stay the same and now must be spread across the remaining products. It’s important to make sure you’re finding that balance between portfolio diversification and operational focus. If a product needs special storage or handling to retain its quality, perhaps it’s not worth the bother?

Think carefully about the soft costs associated with having the product in question stay in the lineup. Although overall, the rationalization may be a good idea by virtue of reducing complexity in the supply chain, redundancy in the portfolio and support costs, these costs can sometimes be hard to pin down. Some percentage of sales that will not be transferred to other products should also be estimated. This loss needs to be made up for and exceeded by new products coming into the portfolio or growth in existing products, so the company still stays on an overall growth path.

Customer migration
Discontinuing a product doesn’t have to mean lost sales if you can direct them to an acceptable alternative. One classic retailing technique involves shelf signage that says, “If you like XXX try YYY.” When a customer discovers their product of choice is no longer available, offering an immediate solution will help to smooth that transition.

Inventory control
As a point of reference, many large multinational companies target 0.5 per cent to 1 per cent of their annual volumes in excess inventories, and they have structured processes for dealing with the surpluses. These ratios are considered an indicator of a healthy company. Troubled companies, on the other hand, often have 20 per cent to 40 per cent in excess inventories and are under more stress. The best way to deal with excess inventory is to view it as a means of generating cash without focusing on loss of profit. If you build in some lead time before discontinuing a product, you’ll have a chance to work through your inventories without too much left over to liquidate.

Even the big car companies have had to bite the bullet and discontinue products and, in some cases, entire product lines. The goal was simple: improved efficiency and profitability.

You may get resistance from a sales force convinced they’ll lose accounts because of product changes but stick to your guns and help them navigate the change management issues. Remember that existence is something most species must earn – it’s not a foregone conclusion. As Carl Sagan once pointed out “Extinction is the rule. Survival is the exception.”


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