Why CPG Product Optimization Isn’t a One-Size-Fits-All Solution

Why CPG Product Optimization Isn’t a One-Size-Fits-All Solution

  • Product simplification in a hyper-competitive world can’t be the optimal long-term strategy
  • A better approach is to use a decision framework matrix and measure the impact of your choices on profitability and demand
  • Companies with agile supply chains and reliable data capabilities have a better chance at fulfilling changing customer needs
June 09, 2022 | Supply Chain Strategy Blogs

The pandemic has forced consumer packaged goods (CPG) companies to transform their supply chains amid changing demand and sales volumes from different channels.

In this scenario, a standard method used by CPG brands to streamline the flow of goods has been the rationalization of products. Product rationalization is the process by which a business decides to keep or discard certain products aligned to its priorities, primarily driven by profitability. On the other hand, product proliferation refers to adding more products to the portfolio.

Product Rationalization Usually Brings Four Benefits to CPG Companies:

  • Reduced cost through multiple areas such as production, inventory holding, and distribution
  • Streamlined supply chain and warehouse management due to a reduced number of products
  • Lower product cannibalization since the portfolio size is optimized
  • Enhanced clarity in market positioning by focusing on the business’ core offerings

However, in a volatile and hyper-competitive world, product simplification can’t be the most optimal strategy in the long term. Simply cutting out a variety of products will likely result in barriers to attracting new consumers and growing the brand.

Finding The Best Strategy for Product Optimization

A better approach for the long-term success of CPG product portfolio optimization is to use a decision framework matrix and measure the impact of your choices on the two parameters —profitability and the demand for the product.

Product Portfolio Optimization Decision Framework Matrix

Product Portfolio Optimization Decision Framework Matrix

Source: GEP

1. Product Bundling (High Profitability, Low Demand):

Product bundling is a strategy by which multiple products are grouped and sold as a single unit. Similar or complimenting products, such as “distinct flavors of potato chips” or “nachos and salsa sauce,” when bundled together, induce the customer to buy more than one product at a reasonable cost and hence increases the total revenue for an organization. Companies also use this strategy to bundle a low-demand product with a market leader to introduce it to a broader audience and increase engagement.

For example, in 2021, PepsiCo’s home brand Frito Lay introduced its variety pack by clubbing 30 different products to cater to new consumer needs and increase the demand for its products. Lastly, this strategy piles on the inventory complexity with customization, hence having SKU handling capability throughout the supply chain is critical for an organization that opts for product bundling.

2. Product Proliferation (High Profitability, High Demand):

Product proliferation is a strategy wherein a firm extends the number of products it offers in a market. It is wiser for a business to increase the number of products in its portfolio when they are in high demand and profitable. Product proliferation, with the availability of required levels of capital, helps in scaling the business by offering more products and services to the customer and increasing the overall revenue for the company. This strategy is not best suited for a brand that aims to position itself as “high-value” by creating scarcity or perception of luxury.

Also Read: Companies Build Brand Awareness with Digital Sampling

3. Product Rationalization (Low Profitability, Low Demand):

Unlike proliferation, product rationalization is a strategy wherein a firm reduces or discards its product offerings in a market. It is efficient to rationalize products that are neither profitable nor in demand. Such products only consume resources and increase inventory holding costs. After rationalization, the company can deploy the resources towards the value-driving core and ensure strong customer focus.

4. Increase Product Depth (Low Profitability, High Demand):

Product depth is the number of versions of a product that a firm offers. Certain products or product lines do not add much value to the bottom line but are critical to business given their high demand. Increasing the product depth is an effective strategy to reduce costs and achieve more weight. CPG brands offer popular products in different pack sizes to increase revenue and reduce costs through economies of scale.

When demand for CPG products fell due to lockdowns and changing consumer behaviour during the COVID-19 pandemic, Frito-Lay turned to product rationalization (cutting 21% of its product portfolio) and product bundling (offering assortment packs). By shifting attention and efforts to high-demand products, Frito-Lay could make its supply chain efficient.

However, as mentioned earlier, the strategy is short-term until the product count returns to pre-pandemic levels.

Product optimization strategies also help a brand focus on its value-driving core. For example, at the start of the pandemic in 2020, Campbell Soup Company leveraged product rationalization to avoid factory downtime, ensure capacity utilization, and shift resources to make products in higher demand by the consumer.

Embracing Supply Chain Complexity

CPG companies today also must contend with growing supply chain complexity. The reasons include changing customer needs, faster lead times, personalized delivery expectations, expanding products and services, changing markets, and others.

Also Read: CPG Companies Can Survive the Inflation Shock

Referring to the decision framework matrix, CPG companies can manage supply chain complexity, as explained in the table below:

Product optimization strategy

Potential challenges adding to supply chain complexity

Potential solutions

Product bundling

  • Difficult to forecast demand
  • Difficult to identify profit allocation among supply chain practitioners
  • Minimize demand uncertainty and make accurate calculations by investing in cutting-edge analytical tools

Product proliferation

  • Complex supply chain
  • Increases strain on existing resources
  • Impacts on-time, in-full metric and increases in costs
  • Fragments the supplier base
  • Invest in enhancing supply chain capacity
  • Collaborate with strategic suppliers to transform legacy processes

Product Rationalization

  • High per unit cost of transport
  • Sub-optimal utilization of capacity
  • Reduces value networks
  • Increase the focus on value-driving core products and reach optimal levels of capacity utilization
  • Enhance volumes of profitable products to leverage current capacity

Increase Product Depth

  • Adds products leading to increased load on the supply chain
  • Cannibalizes existing products
  • Difficult to forecast demand
  • Identify the right mix of products
  • Plan and determine the proper marketing, sales, and distribution channels for the products

Conclusion

The right CPG product optimization strategy considers the organization’s short and long-term goals, competitive position in the industry, and appetite for disruption. At the forefront, CPG companies with agile and well-controlled supply chains, supported by reliable and detailed data dissemination capabilities, have a better chance at fulfilling the changing customer needs and gaining a competitive advantage.

Authors: Abhinav Acharya & Kushagra Kasliwal
 

References:

“Frito-Lay bucks the trend of supply chain simplification”, Supply Chain Dive, 20 July 2021 | https://www.supplychaindive.com/news/frito-lay-supply-chain-simplification-SKUs-demand-planning/603241

“The strength of our supply chain”, Campbells Soup Company, 3 April 2020|https://www.campbellsoupcompany.com/newsroom/news/the-strength-of-our-supply-chain

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