Control costs and boost value through product-driven transformation (PDT)
Is a complex product portfolio hurting your bottom line?
To satisfy customer and regional demand for customization, many US manufacturers have expanded their product portfolios and increased product complexity. For some, deepening complexity has produced drags on profitability caused by inefficiencies across the business — from supply-chain management to sales and marketing to after-sales parts and service. Those manufacturers undergoing rapid growth, in particular, have seen product complexity obscure their ability to calculate how a given product truly impacts the bottom line. However, product-driven transformation can help reduce complexity and extend value across all functions in an enterprise.
What is product-driven transformation (PDT)?
Successful companies triumph by building a system of capabilities that differentiate them from their peers, which often means achieving customer delight, superior products, efficient operations, reliable supply chains, and effective go-to-market strategies. Companies that cannot deliver on these promises run the risk of disruption and potential business failure. But everything has a price. To achieve this success, businesses have to serve many customer segments, cover multiple geographies, and operate with a wide array of external partners and suppliers.
As a result, this long-term growth strategy has caused the proliferation of product portfolios and designs that can lead to significant, yet unrecognized, enterprise costs. For a Fortune 100 IT infrastructure company, we found that 25% of their product portfolio is unprofitable after all costs are accounted for over a product’s life cycle. Similarly, another study indicated that a large power grid solutions company offering customization to a large set of customers is now competing with many low-cost suppliers with standardized solutions. This has forced the company to cut prices while continuing to carry a high-cost base.
However, such companies, burdened by the weight of product and service complexity can benefit from product-driven transformation (PDT) which involves re-examining complex product portfolios and designs to unlock cross-enterprise value across numerous area including product engineering, sales, marketing, manufacturing, sourcing, customer service, and back-office functions (e.g., information technology, finance, human resources).
Pandemic highlights challenges surrounding product complexity.
Issues surrounding product complexity—as well as product cost accounting—are not new. However, the pervasive disruptions of the COVID-19 pandemic have only exacerbated matters by creating labor shortages, supply-chain snarls, and rising prices of raw materials. COVID-induced disruptions have also made supply chains more inelastic, making it difficult for businesses to quickly ramp up production to meet higher demand.
Why does product-driven transformation matter?
While market opportunities and revenues attached to products and services are easily measured, every new product or variant introduces additional cross-functional costs that may be difficult to calculate. We observed that a large company, with more than 10,000 product variants in its portfolio, lost considerable productive time due to changeovers, rework, and reading of work instructions. The plant’s production operations were repeatedly interrupted by the need to follow a separate production process for each variant. This “stop-and-start” of production processes led to reduced productivity, resulting in poor quality performance and yields as well as increased scrap and rework. Similarly, a $20-billion leading home appliance manufacturer experienced reduced throughput for a production plant by 50%—in addition to frequent stockouts and material handling issues—due to its many low volume, customized products. Additionally, such hidden costs were seldom accurately factored into commercial discussions while bidding for customer orders.
Enterprise challenges driven by portfolio and product complexity
Source: PwC analysis
Customer-facing functions can also suffer from similar challenges that arise due to product and design proliferation. We estimated that a large IT infrastructure company was saddled with approximately 30% more costs tied to highly customized products (i.e., providing warranty, service, and post-sale support) than they experienced with simple, “out-of-the-box” products. When extrapolated to the company’s large product portfolio, the cost to serve each customer was significant and substantially impacted the company’s bottom line. Furthermore, when a Fortune 500 consumer software company moved from individual products to platforms (leveraging common technologies), it increased sales velocity, improved customer experience, and reduced trial costs for freemium services by 30%.
What hinders companies from carrying out PDT?
While the market opportunities, and hence revenues, attached to products and services are easy to envision, the associated costs are frequently hidden. Companies must attack the source of the problem to remain competitive, which often means reducing complexity stemming from the proliferation of product portfolios, product variants and new, often complicated, designs.
Reducing portfolio complexity can open untapped opportunities for enterprise efficiency. However, many companies fail to drive such a transformation. There are three principal reasons for this:
- Growth, growth, and more growth. An insatiable appetite for revenue is one of the major drivers for a rise in hidden costs and complexities in the system. Companies add products, variants, SKUs, and customizations to serve a large set of customers without accurately assessing whether more complexity introduces a proportional amount of business value.
- Misalignment of incentives among leadership. Some companies lack basic tools such as a balanced scorecard to ensure tight alignment among individual goals. This results in an inability to pause and consider the big picture. Instead, they are often focused on “running the shop” instead of “cleaning the house.”
- Local over global. When functional leaders are focused on fixing their areas first, they often fail to synchronize their efforts to better leverage and drive value across the organization.
How can companies drive PDT?
A strategic, enterprise-wide program that looks at product portfolios holistically to drive transformation is required to overcome these challenges. We identified three levers that companies can pull to reduce (or control future) proliferation of products and designs:
Lever 1: Product portfolio and SKU rationalization
- Prioritize products and eliminate the long tail
- Reduce or rationalize the number of models / SKUs
- Reduce number of options for each customizable feature
Lever 2: Platforming and modularization
- Architect platforms that are a logical and unique aggregation of core product attributes that creates a basis for producing multiple products
- Balance customer needs for product distinctiveness versus product commonality
- Improve reuse of components across multiple products and product lines
Lever 3: DFX/DFM/DFA
- Implement design for manufacturability, assembly, and other design for X principles to reduce production risk, increased quality, improved yields, better customer satisfaction, and other operational efficiencies
Companies that pull these product portfolio and design levers can reap enterprise-wide benefits across product engineering, sales, marketing, manufacturing, supply chain, product operation, customer care, and back-office functions.
Typical benefits triggered by product driven transformation
Source: PwC analysis
However, realizing these benefits can often be challenging. Based on the outcomes of pulling these product and design focused levers, companies will also need to ensure that subsequent changes are made in downstream functions. For example, a company’s sales team may need additional training on how to sell or where to focus after discontinuing low-performing products. Additionally, a company may have to perform a detailed analysis to determine how to consolidate suppliers after increasing the use of platforms and common components.
Though the effort and investments can be significant in the short-term, PDT can be a highly effective way to drive long-lasting business value. Many companies can initiate impressive functional transformation programs; however, they then may be unable to extract the full value of their investment without considering necessary product-level, company-wide changes. If today’s business landscape is all about products, then why should business transformation efforts be any different?
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