The Fallacy: “If we stop making the low volume products our efficiency will increase, our obsolete stock will reduce and our profit will improve”
The Reality: Each small volume product is not produced very often and individually has very little impact on productivity or raw material obsolescence. Some low volume products may be highly profitable or necessary to secure a customer. Withdrawing products often requires significant effort from the sales team and causes significant customer dissatisfaction.
A Better Solution: Remove attributes not products.Product attributes typically depend on size, shape, raw materials and production processes. By removing an entire category of an attribute you can have a much bigger impact on efficiency and stock turns. For example if your products are made in 10 colours in 5 sizes, removing one colour will reduce one raw material, reduce multiple end products and is simpler to explain to customers. Removing one size reduces multiple machine set ups making your production more efficient. If necessary some of the efficiency gain can be used to placate customers.
The Fallacy “If we switch our largest raw material to a cheaper supplier of the same raw material, our profitability will improve”
The Reality: Fully qualifying alternative raw material usually requires enormous time and effort as every product using the raw material needs testing. Switching without full re-qualification can go badly wrong, risking product recalls and lost businesses. The alternative, informing customers so they can test the replacement, can result in price erosion or lost business and any profit saving is quickly lost.
A Better Solution: Re-engineering a product to deliver the same key performance attributes at a lower cost means many lower cost raw materials can be introduced at once. By increasing the price of the original product customers are encouraged to switch to the new version whilst protecting the profit on that business that is unable to move.
An Alternative Solution: Phased introduction of raw materials allows the company to benefits from small savings early on without disrupting the market. By switching groups of products in phases means that the company has a roll-back postion in the event of any problems.