FUNDAÇÃO DOM CABRAL

PORTFOLIO MANAGEMENT AND

COMPLEXITY REDUCTION

A Case Study for Whirlpool Latin America

Marco Eduardo Marques

Belo Horizonte

2012

Marco Eduardo Marques

PORTFOLIO MANAGEMENT AND

COMPLEXITY REDUCTION

A Case Study for Whirlpool Latin America

Projeto do EMBA da Fundação Dom Cabral

Orientador: Alexandre Teixeira Dias

Sponsor: Andre Raj Maitan

Belo Horizonte 2012

ABSTRACT

This work analyzes the current situation for portfolio and complexity management at Whirlpool Latin America and proposes tools and processes to eliminate complexity and keep it under control. A permanent portfolio management methodology is also being proposed in order to guarantee that the organization is continuously monitoring and assessing its portfolio´s financial health and objectivity.

SUMMARY

1 – THE COMPLEXITY ISSUE………………………………………………………… 1

2 – THE COST OF COMPLEXITY…………………………………………………….. 2

3 – PORTFOLIO OPTIMIZATION…………………..……………………………….... 7

3.1 PORTFOLIO OPTMIZATION METHODOLOGIES………………………... 7

3.2 PORTFOLIO OPTMIZATION TOOLS………………………………………. 12

4 – STANDARDIZATION AND MODULARITY……………………………………… 13

5 – COMBINING PORTFOLIO MANAGEMENT AND STANDARDIZATION AND

MODULARITY………………………………………………………………………….. 19

6- BENEFITS OF COMPLEXITY REDUCTION …………………………………… 20

7- IMPORTANT FACTORS TO ACHIEVE SUCCESS IN PORTFOLIO AND

COMPLEXITY MANAGEMENT……………………………………………………… 22

8- BRINGING THE CUSTOMER INTO THE PICTURE……………………………. 24

9- BENCHMARKING: A COSMETICS COMPANY………………………………… 26

9.1 AN INTEGRATED PORTFOLIO MANAGEMENT PROCESS…………..... 26

9.2 PORTFOLIO MANAGEMENT TOOLS AND CRITERIA …………………. 28

9.3 DEFINING NUMBER OF SKUS …………………………………………… 30

10 –PORTFOLIO DEFINITION AT WHIRLPOOL………………………………….. 30

11 –MODULARITY AND STANDARDIZATION AT WHIRLPOOL ……………… 36

12 –THE EXPORT PORTFOLIO ………………………………………………………. 40

13- PROPOSED SOLUTIONS FOR WHIRLPOOL LATIN AMERICA…………….. 41

13.1 PORTFOLIO MANAGEMENT……………..………………...…………..... 42

13.2 COMPLEXITY REDUCTION………………………………………………. 48

13.3 CONTROLLING COMPLEXITY AT PROJECT START…………………… 50

13.4 RISKS AND CONCERNS………………………………..…………………… 52

14- CONCLUSIONS……………………………………………………………………..... 54

INTRODUCTION

In order to compete for an ever more demanding consumer and stronger global

competition, companies try to grow by launching new products, new channels, new services,

etc. creating increasing complexity in their portfolio and organization to manage all that.

Companies are really good in creating all those products, but not so effective in controlling

and measuring the impacts of complexity or understanding its costs, to a point where the

bottom line financial results may be penalized. An analysis of Whirlpool Latin America's

portfolio indicates significant number of SKUs, not all really profitable and apparently more

models than needed in some families. Complexity is even higher when we look at the export

portfolio, which has significant lower volumes, but much more SKUs (Stock Keeping Units)

with much lower profitability.

The objective of this work is to evaluate the current complexity and portfolio

management processes at Whirlpool Latin America and propose new approaches that

combine current and new efforts and methodologies in order to maximize value for the

company. Some activities are already on going on standardization and modularity front, but

not fully aligned and conducted by separate groups, which reduces the number of joint

opportunities and combined efforts. The area of portfolio management can also be improved

to keep complexity down and its profitability up.

By proposing new methodologies and processes for portfolio management and

complexity control we intend to create the basis for policies to be introduced to guide the

company on a more sustainable and profitable path for growth. These policies are to be agreed

and followed by multiple areas which will require their full support and buy in, which we

expect to gain by doing a cross functional assessment of the existing situation, of the portfolio

optimization process and of the proposed new policies.

The new methodologies consist of new tools that can be used to:

−−−− assess the contribution of each SKU and family lines to the complexity and

profits generated to the company,

−−−− understand where are the opportunities to reduce complexity on existing

models, without sacrificing profitability,

−−−− organize the efforts on standardization and modularity actions,

−−−− allow better comparison with competitors strategy and complexity,

−−−− increase the visibility of product portfolio definitions

−−−− periodic review of each SKU and product family profitability,

−−−− call for action when this profitability is at stake,

−−−− define policies and guidelines that guide the company on decision making

regarding portfolio definitions.

Ultimately the goal is also to define processes that put complexity control as a top

requirement for product development and portfolio management in a way that it becomes part

of the day to day and is kept regardless of the people involved.

- 1 -

1 – THE COMPLEXITY ISSUE

We are living in the 21st century and as exciting and interesting times these may be, it

is clear that the world has become a more challenging place. We live in hectic times, with lots

of demands, new possible paths, technology evolution at its peak, social media

revolutionizing communication, globalization, information instantly available and other

influences changing continuously how things “used to be” .

While as consumers we appreciate the increased number of product and services

choices we are offered it is clear that to some extend we are also overwhelmed by the sheer

number of offers we are given. Hundreds of products and dozens of brands may be competing

for consumer´s preference on a single product line. The number of choices we have today has

never been seen before in history. This can also be overwhelming to consumers in some

cases.

On the companies side, this new environment is also charging its toll. More and

stronger, globalized and regional competitors, niche competitors, customers wanting things

personalized their way, global supply base, new disruptive technologies threatening the

business, new consumer needs arising, more legal and environmental requirements and the

need to grow in this tough an “chaotic” environment.

Sources for complexity affecting the company may be summarized as in figure 1, by

MARTIN (2007).

Fig. 1 – internal and external sources for complexity

- 2 -

On their search for growth and increased revenues, companies launch more products,

they expand to different markets, they search for new consumer niches, they look for low cost

suppliers across the globe, they expand market channels. To their surprise, however, things

not always go as expected and their profits go down, instead of going up. One of the main

reasons for that is complexity.

Complexity in the companies bring different effects. The clearly noticeable effect is

the increase in revenue. It is there and it is visible. The more products the company sells the

higher will be the revenues. The problem is that there are a lot of expenses related to this

complexity of too many products, brands, channels, overhead, etc. that are not clearly visible

as they are not captured by traditional accounting systems.

In the words of MARIOTTI (2008) “They create more new products; sell them in

more places; offer them in more varieties; source them from more, different, distant low-cost

sources; and offer more services. There is just one problem with this scenario. The increase in

sales happens, but profits don't go up, they go down. More products, more customers, more

distribution channels, more suppliers – more, more, more of everything results in costs that

grow at a far greater rate than the revenue”

2 – THE COST OF COMPLEXITY

Looking at a company´s financial statement, what happens with increasing

complexity is that:

• sales and revenue go up, which is quite straightforward. The more products you

have to offer in different markets, the more likely consumers will buy them and

sales will go up

• Cost of Goods Sold – COGS, however, go up too. Increasing complexity result

in more components, lower batch volumes, higher components costs, less

efficient manufacturing, more shipping costs, more overhead to deal with it

• Gross profit margin goes down as a result of the increase of COGS. Another

point to consider, according to MARIOTTI (2008) is that the introduction of

new products lead to cannibalization as consumers will tend to prefer the new,

lower cost, lower margin products, which will impact the mix and therefore

also the margin.

- 3 -

• SG&A will go up as sales expenses will for sure increase with more products,

channels, promotions, etc. Fixed General and Administrative expenses go up

due to more products to sell and advertise, more expenses related to the

maintenance of a bigger portfolio, etc.

• EBITDA was then penalized

• Net income was therefore significantly penalized due to increased, but diluted

and not so visible costs increase that were higher than the revenue increase

from additional sales.

The product proliferation dilemma is also shown by VINEET (2011) in figure 2.

Fig.2 – Product proliferation cycle

It also mentions the negative impacts coming from reduced average volumes, the

demand uncertainty due to more difficult predictions now that there are more offerings on the

market, loss of efficiency and responsiveness ultimately leading to profitability loss and

consumer satisfaction decrease (due to longer lead times, misplaced orders, quality issues, etc.

that also increase in probability due to increased complexity).

SCHUH, shows it a bit differently but with the same outcomes, as seen on figure 3.

- 4 -

Fig. 3 – Vicious cycle of complexity

An interesting way to see the impacts of product variety is shown in figure 4, as

proposed by Rathnow, as presented by MARTI(2007)

Fig. 4 – Cost and benefit of variety

- 5 -

It shows that in the beginning of the product portfolio growth the benefits of variety

increases faster than the costs associated to it, but its incremental speed reduces as more

products are introduced. In the meantime complexity costs increase exponentially eventually

surpassing the benefits curve. In principle, therefore, a maximum net benefit coming from the

definition of an optimum variety in the product portfolio exists and should be pursued.

Sources for cost increase inside the organization can be seen in figure 5 by MARTI

(2007)

Fig 5. - Cost generating activities inside the organization

The reason it is so hard to realize some products are actually loosing money for the

company is that traditional accounting systems cannot capture each SKU actual cost. Some of

the expenses are just spread across the whole product portfolio equally or based solely on

production volumes, which is not accurate enough. As a result, higher volume, more

profitable products end up subsiding lower volumes, less profitable products. As shown by

Schuh and Shweenk, cited my MARTI (2007), in figure 6.

- 6 -

Fig. 6 – how low volume products are subsided by higher volume standard products

As production volumes go down and variety increases, more and more the subsiding

cross products happens, with two consequences: higher volume standard products have their

cost artificially increased, loosing competitive advantage and low volume, exotic products

with artificially low cost actually loose money for the company, although they apparently

make money at a first (and official) sight.

BROWN et al (2010) correctly state that “even complexity that is translated into

additional revenues, such as product or service enhancement that customers value and are

willing to pay more for, and that differentiate a company from the competition – or that result

in greater customer satisfaction and loyalty – can hurt the bottom line if the value it delivers

in increased revenues isn´t greater than its real costs. Driving out needles complexity from

product and customer portfolios, manufacturing operations, and supply chains can be an

effective way to increase margins, boost efficiency, strengthen the cores business, and

improve asset and resource utilization throughout the enterprise. Unfortunately , few

companies apply the analytical rigor needed to fully understand the trade offs.”

- 7 -

3 – PORTFOLIO OPTIMIZATION

BRENNAN et al (2011) mention that “Portfolio complexity has become a concern

not only for consumer goods manufacturers but for the retail partners as well. Leading

retailers..., in efforts to improve margins and squeeze costs out of the supply chain, are now

exerting pressure on suppliers to optimize and simplify their offerings”

This section discusses methodologies and tools found on the literature to deliver

portfolio optimization and SKU elimination.

3.1 – PORTFOLIO OPTIMIZATION METHODOLOGIES

In order to achieve excellence in portfolio management the companies, according to

BRENNAN, have to perform:

1 – Assortment optimization: understand each SKU's role according to three filters,

in addition to financial performance: momentum, importance to key channels and/or

consumers, and strategic role and

2- Standardization: Taking advantage of opportunities across the value chain.

Eliminating variants, consolidating SKUs, standardization of components, etc. can be a

significant source for cost reductions, but also increase sales due to better speed to market or

brand blocking.

A simple way to reduce expenses related to the portfolio is to eliminate the SKUs

that have low volume and deliver poor financial results. A simple Pareto analysis will show

the contribution of each SKU on the sales volume and the lowest volume ones show as the

“tail” of the picture.

According to BYRNE (2006), “this effort is at once necessary and commendable.

But it is not enough”. Byrne defends that also some unnecessary high volume SKUs should be

eliminated as well, as the results of eliminating just the low volumes/slow moving ones, may

not be significant. “Products disappear, but nothing – shelf space, inventory, gross margin, or

market share changes. Factories remain open, production lines continue to sputter along,

changeovers keep on disrupting, and physical distribution is still a maze”. The idea would be

to do some “smart” SKU reductions. This is shown in figure 7.

- 8 -

Fig 7 – traditional vs “smart”SKU rationalization

His proposed approach for portfolio optimization is shown in figure 8. The idea is to

start with defining what would be the perfect portfolio from a consumer point of view, with

the essential SKUs, that should be a significant lower number what the company has today. It

is possible that some SKUs need to be added back to the list on the second step due to the

trade and specific retail channels requirements, but the number should still be significantly

lower than what it is today. “The result will be fewer, but bigger, mid range “power” SKUs.

And there will be more room for growth because there is less shelf clutter, fewer out of stocks

and more time to focus on innovation.”

- 9 -

Fig. 8- Approach for portfolio optimization

Instead of the typical SKU reduction process where supply chain or finance leads and

the outcomes are small and uncertain, Byrne proposes a new process that could be considered

the failed product elimination process where as much energy from marketing and sales

organization would be used as in the launching of new products. The proposal is also to have

a proactive approach on marketing and sales so that all efforts are done to avoid that part of

the consumers of the eliminated SKUs would migrate to the competition and keep loyal to the

brand, as shown in figure 9.

Fig 9 – SKU reduction process

- 10 -

MAHLER and BAHULKAR (2009) propose a 4 step process as shown in figure 10,

consisting of:

1. forming one team, with one goal – to guarantee that the initiative is unified and

integrated and that marketing and operations are sitting on the table to review the same data,

speak the same language and making decisions together

2. perform “less is more” analysis – go beyond the variety-drives-growth

approach to “what do we really need?”

3. increase cost transparency: a detailed analysis of complexity cost drivers will

replace intuition by actual data to separate good complexity from bad complexity

4. be a constant garderner: complexity control needs to be an ongoing process,

influencing how different functions operate today to a new approach where new products is

not the solution for everything.

Fig. 10 – Approach for portfolio standardization

- 11 -

Another approach is presented by BROWN (2010) in figure 11.

Fig. 11 – Cost and value weight

In this approach the company plots its products on a cost/value matrix with two

dimensions: the degree of value or competitive advantage that each product offers and the

operating margin after subtracting direct cost and SG&A expenses. The decision on each

SKU is then defined by the quadrant where it is located.

• Advance for high margin and high advantage products, meaning the company

should build on their differentiating value and streamlining operations in order

to increase margins even further. All efforts should be done to maximize its

sales and efficiency

• Streamline for low margin and high advantage products, which means that

prices are too low or costs too high – or both.

• Maintain for high margin, low advantage products. If it is not possible to add

differentiating customer value or the strategic relevance is minimal, just

maintain the products, limiting investment, reducing cost and operating

complexity

• Phase out for low margin, low advantage products that consume resources and

end up as cash traps

- 12 -

3.2 – PORTFOLIO OPTIMIZATION TOOLS

MAHLER (2009) proposes an interesting tool in order to compare the company's

portfolio performance against competitors for each market, including a comparison index to

be used to understand portfolio effectiveness.

Fig. 12- comparison with competitors

SCHEITER et al (2007) shows a method that clearly identifies what in the portfolio

is adding value and what is driving complexity, that they called “complexity fingerprint” as

can be seen on figure 13.

In this approach each driver number is plotted on a graph which also indicates how

many of those are contributing to 80% of the EBIT. In this way it is possible to clearly see

that the numbers generating 80% of the EBIT are actually relatively small, while a significant

number of drivers is mostly generating complexity and destroying value.

- 13 -

Fig. 13 complexity “fingerprint”

Portfolio management should be a process present as part of companies day to day

and culture, not an occasional exercise or it will not deliver the expected outcomes and deliver

its full potential. Tools adopted for portfolio management must be applied periodically as the

reality change over time.

4 – STANDARDIZATION AND MODULARITY

Standardization means using the same components across multiple products as a way

to leverage volumes and reduce cost. Significant cost reductions can be obtained by using this

approach, not only on increasing buying power, but also on cost reduction related to logistics,

development, quality (since you are reusing a known component instead of designing a brand

new one), etc. Every time a new and unique design or component is used, cost tend to be

higher due to the low volume compared to industry standard components. Dell, for example,

was a huge success using standard components to built its computers, while Compaq, on the

other hand, suffered greatly from some proprietary designs.

- 14 -

Figure 14 shows the trend of cost of products going down as production volume

increase due to gains in scale and productivity.

Fig. 14 – cost reduction as production volume increases

As we standardize multiple components used in the product line, therefore, the trend

is that volume leverage reduces the average costs of these components. A known approach to

understand cost of a family of components is known as LPP or Linear Performance Pricing. It

assumes that the cost trend of the family is a linear function of a main parameter that

characterizes the components, X. If the design is able to standardize multiple components, as

seen on figure 15, what happens is that the number of components reduce, as seen by the

number of circles, the size of the circles which represent their production volume increase and

the average cost, represented by the straight line goes down. This effect can be seen

consistently on standardization processes.

- 15 -

Fig.15 – effect of standardization of a family of components

The problem with standardization is that it goes against variety that consumers want

and in some cases need. The solution for that is to standardize as much as possible in areas

where consumer cannot see and/or do not care. If an automotive maker can standardize a fuel

pump across all its cars, why not to do it? Consumers do not pay for a unique fuel pump, but

they will pay for aesthetics, comfort, and other attributes they can see, feel or touch.

A simple example of a standardization action on the refrigeration industry can be

seen on figure 16. A product family had multiple badges to identify different models and

functions. The cost of the lowest volume ones, however, had a cost of more than double the

one with the higher volumes. By doing a simple standardization exercise a good cost

reduction was obtained

- 16 -

Figure 16 – example of standardization benefit

Modularity consists on a methodology applied to the design of new products in a

way to deliver variety at a low cost. The system is separated in different modules that perform

certain functions and that can be exchanged easily since the design uses standard interfaces

common to all the interchangeable modules.

By doing that, different aesthetics or functions can be changed on the design at a low

cost, since there is no need to develop a brand new product to deliver that variety, thus

reducing investment, resources etc. and at a much faster speed than a brand new design.

Differences to a traditional design approach are shown in figure 17 by EAGER et al

(2010).

Fig. 17 – differences between modular and conventional design approache

- 17 -

An example of a modular design for a refrigerator can be seen on figure 18

Low end model High end model

Fig. 18 – Example of modularity to deliver multiple configurations of products

replacing modules that use the same interfaces

- 18 -

A modular design has multiple benefits according to OISTEN (2003):

• greater product variety can be delivered since the cost and investment to do so

is reduced

• mass customization: since it is easy to change aesthetics and functions through

modules and standard interfaces, customization can be delivered at the last

moment and with lower cost

• product families: multiple product options can be offered based on few product

platforms with minor modification on aesthetics, functions, packaging, etc.

• reduced cost of development since most of the product is common and

investment was done only once. If multiple products need to be delivered with

the standard approach, bulk investment is required for each and every one of

the models

• economy of scale: since most of the common components and modules will be

maintained the same, their volumes are high, reducing their cost

• faster technology upgrading: new modules can be developed fast and replace

old modules giving to consumers the impression of a brand new product

• faster speed to market: once interfaces are well defined, modules can be

developed in parallel knowing they will fit perfectly with the design later

• handle uncertainty: when future consumer preferences are uncertain, the

flexibility to accommodate more variants to try to meet consumer needs and

desires

Benefits of modularity/commonality according to George and Wilson (2004) are:

• Improved efficiency through elimination of non value add cost

• Reduced lead time (improved time to market and order to delivery)

• Fewer chances for errors or mistakes (defect reduction)

• Improved flexibility throughout operations

• Better use of resources

... All resulting in higher ROIC and shareholder value

- 19 -

5 – COMBINING PORTFOLIO MANAGEMENT AND STANDARDIZATION AND

MODULARITY

Benefits of portfolio management and standardization and modularity are not

excludent. In fact they complement each other and there is no reason not to implement them

simultaneously. Both are related to complexity management and both add financial benefits if

properly executed.

While optimizing the portfolio offering increases the benefits of variety through

focusing on the products that really matter to consumer, optimizing the structure of the

products through standardization and modularity reduces its cost. MARTI (2007) in figure 18

shows how performing both optimizations simultaneously maximize value for the company.

Fig. 18 – Impact on cost and benefit of product variety from product offering (portfolio) and

structure (how products are designed) optimization

- 20 -

In fact it is clear that any structure optimization, trying to maximize reuse,

standardization and modularity on a company's portfolio will be only partially successful if

the portfolio keeps adding non added value SKUs that destroy value for the company and

increase complexity back. On the other hand, if the company has a very good portfolio of

badly designed and complex products, profitability will also be lost. For the best results both

optimizations need to be performed simultaneously.

6- BENEFITS OF COMPLEXITY REDUCTION

Kluge (1997), in a survey of electronic companies, showed a significant difference in

profit level between the most and the least successful companies, by a 19% point gap. 13%

points were accounted for by the lowers Cost of Good Solds, COGS as can be seen on figure

19.

Fig.19 – Cost structure difference between most and least successful companies

- 21 -

Cost of Goods Sold is significantly reduced with complexity reduction. Figure 20

shows that more successful companies in Computer and Communications field, for example

have much less complexity embedded into their products, with less parts, subassemblies and

finished goods. With a simpler design volumes are leveraged for parts and subassemblies and

their costs go down, not to mention the benefits on logistics, inventory and overhead due to a

more efficient operation.

Fig. 20 – Number of parts, subassemblies and finished goods difference between most and

least successful companies

SCHEITER et al (2007) reported 3-5% EBIT gains in companies that cut 20-40% of

their portfolios in order to reduce complexity, as can be seen in figure 20.

- 22 -

Fig. 20 – EBIT gains and levers to reduce complexity

Many companies have successfully managed complexity and used its reduction as

competitive advantage. Motorola, in its “war on complexity”, Black and Decker that

completely redesigned their product line following a modular approach, Unilever with their

“Leap Forward” program, VW with their platforms for multiple cars and many others.

7- IMPORTANT FACTORS TO ACHIEVE SUCCESS IN PORTFOLIO AND

COMPLEXITY MANAGEMENT

Different authors have different recommendations on how to peform or introduce

portfolio optimization and management and control complexity.

BRENNAN et al (2011) recommend to:

• undertake assortment optimization and standardization reviews at regular

intervals.

• assign clear responsibilities and

• develop a set of principles and rules to govern new product launches.

WILSON and PERUMAL (2010) suggest a 6 step rationalization process consisting

of:

• Approach: determine the principles and methodology to be used to address

portfolio complexity.

- 23 -

• Analysis: data collection and analysis to define which are the most attractive

SKUs and the least attractive to be eliminated. Definition of metrics is key for

this stage.

• Selection: based on the analysis done and discussions among the stakeholders

and the team, a list of SKUs is approved for elimination

• Deletion/Transition: execution of the elimination plan

• Benefit Capture: actions are taken to capture the benefits

• Sustainment: it is important that processes, behavior and discipline are created

to keep bad complexity out once it is removed.

Failing on some of the stages mentioned above would make a portfolio optimization

to be reduced to a SKU rationalization only, which is temporary and does not deliver the full

expected benefits of the former.

After analyzing multiple references, it is clear that in order to succeed, a portfolio

optimization and complexity management process must:

• be sponsored at high levels: it should not be an isolated initiative but indeed an

organizational principle shared by the organization. Common performance

goals across different areas also facilitates the success of the initiative

• be the result of a cross functional team: the only way to guarantee the right

balance of forces and goals and the right level of buy in is to have a multi

functional team in charge of delivering the optimization plan

• portfolio management must be a continuous process, not only cleaning up what

is already there, but also preventing new complexity from being introduced

• a periodic assessment of the portfolio is recommended in order to update

volumes and profitability data and take new decisions about successful and

unsuccessful products

• principles and rules are needed in order to guide new product introduction and

portfolio analysis

• if possible, complexity indexes should be used to keep track of complexity and

its evolution

- 24 -

According to a survey by A.T. Kearney (2004) complexity is here to stay and the

focus must be on complexity management, not on complexity reduction. “Most companies

focus on tactical complexity reduction (for example, eliminating slow moving SKUs). Few

think about strategic complexity management: how to achieve and maintain profitable growth

by only adding complexity where it counts (for example, providing consumers with the right

product variety), while constantly driving unnecessary complexity out of the business”.

8- BRINGING THE CUSTOMER INTO THE PICTURE

Living in an era of too much choice, according to SCHWARTZ (2011), can be

frustrating to consumers as they get confused by all options available. Consumers are

shopping more, spending more time at it, but enjoying it less. A large array of options may

discourage consumers by forcing them to make a decision so they decide not to decide and

don´t buy the product.

It is clear that no company will succeed without offering products that appeal to

consumers, though, and any complexity reduction or portfolio optimization should not

decide which products to eliminate based on complexity or revenue alone. While

continuously adding complexity in the hope to meet consumer´s preference is not the

answer, neither is the complete opposite of it.

One clear example at Whirlpool Latin America on why not to simply cut products

with low production volume is the retro product shown in figure 21. Even though the sales

numbers are not so high, the product can be seen on 9 out of 10 décor magazines, generating

free press advertisement worth millions. Besides it appeals to architects, artists and other

cool influencer people, amplifying the innovative image of the brand.

- 25 -

Fig. 21 – Retro fridge used as a brand image product

One tool that can be used to understand what consumers value among all product and

feature offers is the conjoint analysis, a set of techniques for measuring buyer´s trade-offs

among multiple attributed products. Applying such tool to a product portfolio can define the

relative importance of product attributes that influence the buying decision so that the

portfolio decisions do take into consideration consumers preferences.

The principle behind this analysis is to break a product down into its constituent parts

to look at what consumers prefer. By designing the study appropriately and using the right

statistical analysis to identify the value of each part in driving customer decisions.Conjoint

analysis are commonly used on automotive industry to define which accessories bundles

consumers prefer and sell those instead of odd configurations very few people would be

interested in.

It is clear that any methodology used to define candidate products for elimination on

a portfolio optimization process that is based on financial and complexity analysis should

actually be the first step of the process. They should raise questions and indicate possible

alternatives that will have to be further analyzed with the customer and strategic focus in

mind.

- 26 -

9- BENCHMARKING: A COSMETICS COMPANY

For benchmarking an important company in the cosmetics industry was selected. They

are known for their profitability, respect to environment and human principles and in the

portfolio management area as a reference company in Brazil.

Their business model is focused on sales consultants that sell directly to consumers.

Their products cannot be found on stores or on the internet and are displayed on catalogs sent

to the sales consultants that are renewed every 21 days, which means their portfolio may

change every 21 days with the inclusion of new models and the elimination of old ones. They

currently carry 740 products and in each year up to 210 products may be launched or

discontinued. The entire portfolio is renewed or re-launched each 3 years approximately. The

timeline between definition of a new project and start of production is around 200 days,

although more disruptive products may take up to 4 years under development.

Such different environment compared to the home appliances business where products

stay in the portfolio for a very long time, 3 to 7 years for example, is interesting as it brings

new perspectives and approaches that can help to establish new practices and learning.

9.1 – AN INTEGRATED PORTFOLIO MANAGEMENT PROCESS

In order to cope with such dynamic environment they have developed an integrated

portfolio management process, shown in figure 22.

- 27 -

Innovation

Funnel

Portfolio

OptimizationMarket

Strategy

New Products

Pipeline management

Portfolio evaluation

and optimization

Market reading vs

strategy. Opportunities

Identification, etc.

PORTFOLIO

MANAGEMENT

EXECUTION

Fig. 22- Portfolio management process

The process guarantees that the portfolio optimization is linked to the innovation and

new product introduction and to the strategy defined by the company on an integrated

manner. Decisions about portfolio must take into account what is coming out of the pipeline

of new products and the strategic directions of the company. The analysis of the portfolio can

actually drive new projects that are more suitable for the company needs.

It also brings innovation and new product introduction to have a clear view of

strategies and performance of the existing portfolio, guiding the new developments. Where

should the new projects focus on, for which markets, categories and brands? Which existing

products are not anymore meeting the requirements of profitability, environment, etc.? This

way there is no disconnect between what R&D is working and the company´s real needs, a

common problem in many organizations.

The full process is done once a year, but the portfolio is evaluated every week and new

introductions and/or discontinuities are defined every 21 days when the new catalog is

launched.

- 28 -

9.2 –PORTFOLIO MANAGEMENT TOOLS AND CRITERIA

The company takes into consideration a triple bottom line: financial results,

environmental and social and intangible. Environmental means if the product reaches certain

criteria and indexes on sustainability. Social is to verify if the product generates income and

development to the society, like communities that supply raw material, for example.

Intangible means if that product line adds to or drains the main brand. Some product lines are

so strong that they add to the brand, being as recognized and valued as the main brand. Some

others may actually be a burden to the main brand, for being outdated, not well perceived, etc.

In order to rank and prioritize the new and existing SKUs a grade is given to each one

following a Pugh matrix approach where each criteria has a weight and each SKU receives a

grade on each criteria. The portfolio definition is therefore a qualitative process.

Before starting the development, a new product needs to meet certain minimum

financial criteria and marketing requirements. There is a filter per each category and the new

product needs to be more profitable than the average of the category, not counting the SKUs

that deliver only 5% of the total profitability. As a rule, 80% of the SKUs are in charge of

95% of the profitability, so only the best 80% of the SKUs are used on this filter. The 20% of

SKUs that are responsible for only 5% of profits should be discontinued or have an action

plan to recover profitability. This criteria aim at keeping a healthy and positive trend for

profitability. The consistency of these criteria is followed along the whole development

process.

Each product category is analyzed separately and taking into consideration their

particularities and the results are based on the category, not on products or target consumers.

The process also does not take into consideration internal limitations of the supply chain in

order not to discard what can be good opportunities due to current limitations that can be

overcome with the proper focus.

The main strategic drivers for the portfolio definition are:

• Competitive position: leader, follower, etc.

• Direction for share: maintain, moderate grow, etc.

• Price positioning

A tool used to verify the relative positioning of the company to the market is shown in

figure 23.

- 29 -

Price Segment 1 Price Segment 2 Price Segment 3

CompetitorA# of SKUS% share

CompetitorA# of SKUS% share

CompetitorA# of SKUS% share

CompetitorB# of SKUS% share

CompetitorB# of SKUS% share

CompetitorB# of SKUS% share

CompetitorC# of SKUS% share

CompetitorC# of SKUS% share

CompetitorC# of SKUS% share

Figure 23 – Overall view of competitive situation for a certain product category

A more refined tool used that allows the visualization of the strategy for each segment

and gives more resolution to the product category by including purchase drivers is shown in

figure 24.

Price Segment 1 Price Segment 2 Price Segment 3

Competitor A # of SKUS

% shareCompetitor B # of SKUS

% share

Competitor C # of SKUS% Share

Competitor A # of SKUS

% shareCompetitor B # of SKUS

% share

Competitor C # of SKUS% Share

Competitor A # of SKUS

% shareCompetitor B # of SKUS

% share

Competitor C # of SKUS% Share

Competitor A # of SKUS

% shareCompetitor B # of SKUS

% share

Competitor C # of SKUS% Share

Competitor A # of SKUS

% shareCompetitor B # of SKUS

% share

Competitor C # of SKUS% Share

Competitor A # of SKUS

% shareCompetitor B # of SKUS

% share

Competitor C # of SKUS% Share

Competitor A # of SKUS% share

Competitor B # of SKUS

% share

Competitor C # of SKUS% Share

Competitor A # of SKUS% share

Competitor B # of SKUS

% share

Competitor C # of SKUS% Share

Competitor A # of SKUS% share

Competitor B # of SKUS

% share

Competitor C # of SKUS% Share

Romantic

Sexy

Beauty

Purchase

Driver

Figure 24 – Refined view of competitive situation for a certain product category

- 30 -

In this case the color code indicates the strategy for that particular cluster. It may mean

for example, if the company is present or not in that segment, if it is a strategic focus or not to

be present in that segment, etc. It allows a quick visualization of the competitive scenario and

may identify opportunities where the company is not yet present or areas where products

should be discontinued. Market drivers are identified by market intelligence and are based on

consumer’s perception, not on internal views.

9.3 –DEFINING NUMBER OF SKUs

In the past it was attempted to have a fixed maximum number of SKUs for the

company that had to be met regardless of the launching of new product lines. Each new

launching should result in the discontinuation of an old, less profitable or suitable SKU. This

approach was found to be limiting for achieving the strategic goals after some time. Today the

maximum number of SKUs is still monitored carefully, but it is not strictly enforced.

Some rules are followed to define the number of SKUs by product category:

• If the company is the market leader: maximum number of SKUs is the current,

minimum number of SKUs is the current minus the ones decided to be phased

out

• If the company is not the market leader: minimum number of SKUs is the

current and maximum number is the number of SKUs the leader company has

• If the company is not present in that category: maximum number is the number

of the leader company and the minimum number is the number estimated to

deliver 90% of the revenue of the leader company. This estimation is based on

the internal reality data, extrapolated to the external market.

While not based on any sophisticated analysis, the rules for maximum number of

SKUs along with the portfolio criteria allow the company to monitor and keep consistency in

the proliferation of SKUs while focusing on the profitability of the entire portfolio and

following the market strategy defined by the company.

As of today the company has no methodology do manage life cycle of the products.

10 –PORTFOLIO DEFINITION AT WHIRLPOOL

Whirlpool brands aim at having the most complete portfolio in the market, therefore

offering a wide range of products. Introduction of new models are decided looking at

- 31 -

opportunities in the market, comparing with competitors, trying to explore niches, etc. but

there is no methodology to look at the portfolio as a whole, entering requirement filters or

concern with maximum number of SKUs, which means complexity tends to grow.

New product introduction process is very rigorous and continuously followed up by a

multidisciplinary team. Marketing, engineering, finance, logistics, service and manufacturing

follow up the development process that needs to follow a methodology, called C2C, which

foresees intermediate tollgates for verification and decision to proceed or not. Technical

readiness, manufacturing readiness, investment levels, BOM (bill of materials) evolution,

launching process etc. are tracked during this process. In each tollgate a series of deliverables

need to be met and after an evaluation done by the GGPR (team that evaluates project

progress from a business perspective) the status of ready or not ready to proceed is given. In

case of a not ready, the project team needs to overcome the pending items in order to have a

re-loop of the tollgate until the ready status is granted. C2C process is shown in figure 25.

Fig. 25 – C2C development process tollgates

A typical opportunity identification tool is shown in figure 26, where current models

from Whirlpool and the competition are shown in terms of internal capacity, a quite important

requirement for refrigerators, for example, and price range. This tool allow the visualization

of the current market scenario for the product category, where competitors are, if there is any

gap in capacity or prices offered and how products of similar categories compete against each

other.

- 32 -

Capacity

421

to

445L

446

to

550L

551

to

600L

Up to R$2.500 From R$2.501-R$3.000 From R3.001-R$3.500

BRM50

R$2.499430 L

BRM50X

R$3.149430 L

INOX

BRK50

R$3.399432 L

BRK50X

R$3.899432 L

INOX

R$2.699425 L

BRE50

R$3.199425 L

BRE50X

INOX

R$2.999430 L

BRW50

R$3.499432 L

BRW50X

INOX

DF50

R$2.399430 L

DFW50

R$2.899430 L

DF50X

R$3.099430 L

DFW50X

R$3.399430 L

GC-L21

R$3.299498 L

GC-L21

R$3.799498 L

GC-L21

R$3.999498 L

GC-L21

R$4.499498 L

RS21

R$4.399524 L

RS21

R$3.499524 L

BRS62

R$3.999560 L

BRS62

R$4.499560 L

From R3.501-R$5.000

DF80X

R$3.599542 L

DF80

R$3.099542 L

DI80

R$3.799542 L

DI80X

R$4.399542 L

BRE80 BRE80X

INOX

BRK80 BRK80X

INOX

Fig 26 – Capacity and price range comparison

Other analyses are done to check consistency of the new launchings versus the main

competitors. Figure 27 shows a gap analysis to compare a new product to the existing

competitor and verify if feature content and specifications are good enough to add value for

consumers.

- 33 -

� 17

Products

Total Capacity

Stock Management

Ice Maker

Smart Ice

Smart Door

LED lights

Interface

Humidity control drawer

Smart Bar

Water dispenser

553L

No

Yes

No

No

No

LED

Yes

Yes

Yes

575L

No

No

Yes

No

Yes

LED

No

Yes

No

575L

Yes

Yes

N/A

Yes

Yes

LCD

No

Yes

No

542L

No

Yes

N/A

No

No

LCD

Yes

Yes

Yes

553L

No

No

No

No

No

LED

No

Yes

No

DF80 DFI80 DTX80

Figure 27 – Gap analysis comparing feature content and specs with competitors

Market analyses to verify the potential growth of the category are also done to

guarantee the company is investing on a growing segment that can maximize profits for the

company in the future. Figure 28 show some estimates of market size for a certain type of

product.

454746 850

10191142

126726

49

60100

113

2008 2009 2010 2011 2012 2013

70 cm 80 cm

88%

23%

23%

44%67%

13%

64%

14%20%

12%11%

XL

Fig.28 – Market growth estimate for a certain category of products

- 34 -

Prioritization among projects is done comparing capital expenditure, capex, and

EVA, Economic Value Added. A graph as the one shown if Figure 29 can show which are the

best projects as they deliver more EVA per capex unit.

Capex

EVA

Project AProject B

Project C

Project D

Fig. 29 – EVA vs Capex tool for project selection

The complete product plan can be seen and tracked as in figure 30. Each team is in

charge of certain projects, with certain duration and the cadence of new launchings can be

seen per brand or market. The tool also shows the capacity of the product development area as

size of projects are distributed by launching teams, occupying the full capacity of the existing

resources. The GGPR team can then track the projects according to the schedule.

- 35 -

2010 2011 2012 2013

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 H1 H2 H1 H2

Brastemp Consul Lar International

NEO

PUNISHER

CHANGEMAN

RETROZÃO

A. POWER

GURU

GII

XXL – FASE 1

ASIMOV

GANDHI

CONCERTO

Wine

FROSTY

Team 1

Team 2

Team 3

Team 4

Team 5

Team 6

Team 7

Team 8

Team 9

Fig. 30 – Product plan overall view

Innovation projects are tracked by a multidisciplinary team, including Marketing,

Industrial Design, Technology and Engineering. The IPT (Innovation Project Tracking)

ensures that the innovation projects are properly supported, staffed and funded, even being

still outside the product development process. It also guarantees that the projects being

worked on are delivering the expected benefits and linked to the future needs of the product

plan, avoiding that the company works on projects that are not considered priority and may

waste valuable resources. Innovation projects must be delivered and made available before the

product project starts as a way to avoid the development of new technologies inside the

product development phase which adds a great amount of risk.

As of today there is no methodology to evaluate life cycle of the products. The

company has a very good process for creating new products, but the elimination of old ones is

usually very slow and done only when the results of the product is already very poor and its

existence is really non justifiable anymore. Once the product is launched, its consistency over

the years and changing market reality are not systematically evaluated and in light of the

research done in this work, here there is a great opportunity to introduce portfolio

management tools that ensure:

- 36 -

- Consistency of the product portfolio with the strategy of the company

- Focus on the profitability of the portfolio

- Focus on complexity reduction for parts and modules aiming at increasing

productivity, reducing cost and improving quality

- Periodic and continuous assessment of the portfolio to identify opportunities and

maintain complexity under control

11 –MODULARITY AND STANDARDIZATION AT WHIRLPOOL

Whirlpool has grown worldwide by acquiring other companies. Each time a new

company was purchased, different products, cultures, manufacturing processes, brands,

development methodologies, etc. came into the picture. Different than the main competitors,

mainly Korean brands that grow by expanding their business and building their own factories

with standard products in the new markets, Whirlpool has a huge inherent complexity in

terms of products and part numbers.

Only recently engineering systems became more similar and a big effort was done to

reuse existing parts, defined preferred ones, to apply modularity principles in order to allow

flexibility to deliver variety at a lower cost, etc. Still, each development center competes to

have the right to develop their own models, develop technologies and solutions, change parts

due to regional needs, etc. This requires a huge effort to align directions and solutions across

the globe. Some new platforms had a more centralized development with the participation of

the regional teams which increased the leverage of volumes for parts and modules and

allowed more common products across the globe.

Whirlpool has also multiple brands, which require visual identity, specific aesthetics,

different colors, specific features and so on. The main competitors have only one brand which

significantly reduces complexity.

At a global level Technology group (Cooling, Controls, Mechanical Structures and

Materials) are in charge of defining roadmaps for modules and track the evolution in reducing

complexity, trying to capture cost and quality improvements in the process. Alignment with

Procurement is a key in order to take advantage of the volume leverage. Some global forums

are in charge of this alignment. This is a critical action as volume leverage is a quite important

competitive advantage for the competitors that have far less complexity than Whirlpool, since

they have standardized products with one brand across the globe and Whirlpool doesn´t.

- 37 -

Volume leverage produces economy of scale and allow global suppliers from low cost

countries to be effective in supplying big volumes. This also puts pressure on local suppliers

that need to compete on a global basis and are taken out of their comfort zone.

There have been some good examples of success as shown in figure 31, that focus on

the module count reduction of Cooling technology at a global level from 2009 on, including

forecast until 2015. A significant reduction in module count was achieved, allowing

significant volume leverage and cost reduction.

120 111 91 71 46 38 35 35 35

53 5551

4732 29 23 22 21

160 157151

124106

86 68 68 68

47 4847

33

2624

24 24 23

220 222186

167

136130

124 123 121

38 41

41

49

5243

38 38 37

638 634

567

491

398350

312 310 305

0

100

200

300

400

500

600

700

2008 2009 2010 2011 2012 2013 2014 2015 Future

Mo

du

le C

ou

nt

Cooling Module Counts - 2009 to Future

GLOBAL

EMEA

WMX

NAR

WOI

LAR

Total geral

- 68 Modules

- 46 Modules114Modules

Fig. 31 – Module count evolution for Cooling technology

Another good example at a regional level is shown on figure 32, a blueprint of the 2

factories located in Brazil and the 8 production lines. An effort was done to move from 13

condensers (one of the main components of the refrigerators and freezers) with multiple

condensers per line to 4 condensers, being one single condenser per production line. The

savings on BOM, cost of the component was quite significant, not to mention the logistics at

the factory that also improved a lot, eliminating the risks of wrong component assembly,

facilitating material movement, etc.

- 38 -

13 condensersMultiple condensers per line

4 condensersOne condensersper line

Fig. 32 – Blueprint of the Brazilian factories and production lines showing before and after

standardization of condensers

In order to achieve this migration, it is necessary to define how it will happen over

time through a roadmap, as shown in figure 33. The migration and standardization of modules

and parts to preferred ones is not sometimes so straightforward. In some cases it is needed to

understand which is the best module or part available. Will it deliver the best cost, quality and

performance? Do we have the resources to do it? Does it require investment? In some cases

changes can be done as cost reduction opportunities, in others a new project needs to happen

to allow for the high investment.

Fig.33 – Example of module roadmap

- 39 -

New projects have been a key to provide such evolution. As new investment is being

done, a strong effort has been done to reuse modules that are proven to deliver best cost and

best quality from existing models. This reuse also allows the new products to deliver faster as

less resources and time are used during the development as well as the risk is significantly

reduced. New designs also allow modularity and standardization to be thought and planned

from the beginning allowing the best possible results.

Figure 34 shows the results in reduction of part number count (PNC) and number of

modules for a global project between Mexico (WMX) and India (WOI).

WMEX WOIL

Common Parts

DUO/GNFCERVANTES/TRIO

58 34

WMEX WOIL

92 27

11 6

PNC

PNC Total

Module Count

14 17

No common parts.

L60TCurrent scenario

Modularity

Fig. 34 – Outcomes in PNC and Module Count of a global project replacing existing

regional products

In spite of the good examples, achieving standardization and modularity at a regional

and global level have been a slow process that could use improvements. Main issues have

been:

- Lack of visibility and priority of the projects in the region

- Low support from Procurement

- Low visibility between Procurement and Technology strategies, although there is

already a forum to discuss that periodically

- 40 -

- Lack of sponsorship from higher management

- Each technology working on their own piece of the puzzle with little or no

involvement or visibility by other areas

Also here there are good opportunities to speed the process up, with a better

integration with procurement, increased cross function visibility of the projects in order to

identify further opportunities and leverage.

12 –THE EXPORT PORTFOLIO

One more complication for Whirlpool Latin America is the export market. There is a

big number of brands, each with their own requirements, like colors, visual languages,

aesthetic solutions, etc., regional regulations and special characteristics (like voltage and

frequency), for example, bring the complexity sky high.

With the current Brazilian currency, the Real, over valuated the cost in most markets

is high and sales volumes are at an all times low. The export group struggles to make more

volume, but in doing so end up selling unique low volume SKUs or creating brand new ones

again increasing complexity.

To make things worse, the export group has an independent organization, not subject

to the same KPIs as the Engineering that is in charge of maintaining the product line. The

autonomy of the group is such that they can create new SKUs using Engineering resources,

but the visibility and control of the Engineering leadership are nonexistent. This is quite

dangerous for the Engineering goals as at the end of the year they may realize that all the

efforts towards standardization and modularity may have been trashed due to the creation of

new export SKUs.

The potential proliferation due to different brands, languages and colors is shown if

figure 35. Plastic parts may have different colors and the serigraphy in the part too, with

words in different languages or pictograms.

- 41 -

Part

Consul

Portuguese

Color 1

Brastemp

Portuguese

Color 2

Whirlpool

Spanish

Color 3

Eslabon

Spanish

Color 1

Maytag

Spanish

Color 4

1 2 3 4 5

Whirlpool

Picto

Color 5

6

Fig. 35 – Proliferation of part numbers due to export and domestic brand requirements

This proliferation happens because in spite of the low volume for the export

products, the brands have the right to create the additional complexity of the new parts. It also

happens because complexity control is a KPI only for Engineering and Technology groups,

but not for the Export, Marketing or Industrial Design areas which are free to be creative and

increase complexity.

13 – PROPOSED SOLUTIONS FOR WHIRLPOOL LATIN AMERICA

As seen in previous chapters, complexity in product portfolio and product

configuration can bring significant additional costs to the company, reducing its profitability.

Although today there is a robust and detailed process for new product introduction in the

company, the analysis of the current portfolio and the life cycle of the products could use a

more structures approach.

Although the company is also working on complexity reduction through modularity

approach, it is clear that this approach could also be more focused on delivering the desired

outcomes through better alliances between Procurement and Engineering&Technology.

Last but not least, complexity creation needs to be stopped or controlled at birth,

avoiding that additional resources are spent reducing what should not have been created in

first place and ensuring the right profitability levels at first launch.

The proposed solutions, therefore, consist of:

- Improved portfolio management

- Better focus on the complexity reduction through modularity efforts

- Controlling complexity at the start of new projects

- 42 -

13.1 – PORTFOLIO MANAGMENT

Profitability should be an important factor on the portfolio management analysis and

a continuous monitoring of the portfolio health needs to be done looking at products life cycle

and their contribution to the operating profits.

Strategic definitions are also important. Where are the most profitable markets?

Where do we want to grow? What is our relative position to the competitors? Without clear

definitions of the strategy, a winning portfolio will not happen.

Some tools are here recommended to improve the portfolio management capability.

Figure 24 in chapter 9.2 showed one tool used by the cosmetics company used in our

benchmarking and allows a quick view of the current situation versus the company´s strategic

definitions. It could be easily adapted to the home appliances market, bring value to the

portfolio analysis and adopting complexity reduction as a premise.

One simple analysis of the portfolio profitability can be seen on figure 36, where

total contribution margin (contribution margin per unit times production volume for that

particular SKU) is plotted for each SKU and the accumulative total contribution margin is

shown as a % of the total contribution margin for the company.

Fig. 36 – Total contribution margin per SKU

- 43 -

The tool allows some questions to be raised and also some points for attention.

Clearly not all SKUs in the portfolio make good profit for the company, but they do add costs,

which are not always visible. Should the company have so many SKUs? Should they still be

in the portfolio? What is the reason for their existence? This tool alone cannot answer all

those questions, but it is a good start. If we compare the same graph with the SKUs for the

external market, for example, we will see far more SKUs, but significantly reduced margins.

Should all those SKUs also be there?

The particular case in figure 36 shows that a significant number of SKUs can be

eliminated and the total contribution margin “loss” would be only of 5%. In real life it is very

likely that this loss will not be there at all. Expenses will be eliminated, existing SKUs will

take over the sales of eliminated ones, efficiency of sales, manufacturing, logistics, etc. will

go up. All those benefits would compensate for the apparent loss.

In addition to that, an analysis per product family or platform can be done as shown

in figure 37.

Fig. 37 – Units sold and margin for a certain platform

This analysis also raises some questions that can be useful for the portfolio

management. In this particular case, for example, we can see 4 products, very similar to each

- 44 -

other, being used for brand image. Even though they do have good margin per units, their

sales volume are quite small, raising the question if all four are really needed. It is a way to

see the relative position and situation in terms of sales and profit of all SKUs and define

actions based on that.

Another possible analysis is to look for a different graph with the same information:

total contribution margin and sales volume, which looks like the graph shown in figure 38.

Fig. 38 Total contribution margin vs Units sold

If we consider profitability and complexity reduction as priorities, we can refine this

graph in order to include:

- A desirable minimum production volume

- A desirable minimum contribution margin per unit

- A desirable minimum total contribution per SKU

And the picture will look like figure 39.

- 45 -

Fig. 39 - Total contribution margin vs Units sold

A more strategic view of this picture would be as shown in figure 40.

Fig. 40 - Total contribution margin vs Units sold. Strategic View

- 46 -

Based on the different areas defined by the graph, the following ideal categories of

products were defined:

- Innovative: low volumes and big margins mean that consumers pay for this

product a premium price because they see the value for it. Innovative products

provide that benefit and collect the premium.

- Brand image: there are products that the company already knows that will sell

small volumes and may not reach the expected total contribution margin, but they

do generate a lot of midia attention or they are used to display the company´s

technology or capability in certain area. Most of the products usually found in

this cluster, however, are not there because they were meant to be there, but

because they were forgotten there over time or they did not deliver the expected

results and were not discontinued after some time.

- Healthy: products that have a good production volume and a good total margin.

Generate revenue with low (in principle), justified complexity.

- Problematic: high volumes below the desired margin per unit can be considered

problematic and need action. Cost reduction, feature content review or price

adjustment.

- Fighter: sometimes a high production volume needs to have lower margin to fight

competitors, leverage volumes and dilute fixed costs. Ideally this should be

temporary, though, and if the markets permits, should be brought back to higher

margins.

With the tools described above, it is possible to raise questions. The next step is to

discuss those SKUs, preferably on a multidisciplinary team, to understand why those products

are there and what complexity do they bring to the company, thus addressing the benefit, but

also the “cost” of each SKU. The proper trimming of the portfolio can then be performed.

Important to remind, however, that SKU trimming is not enough to keep a healthy

portfolio and should not be an occasional activity later to be forgotten. Portfolio management

needs to be a continuous priority process for the company.

In this sense, portfolio management needs the right sponsorship, visibility and follow

up from top management. In order to do that a proper process needs to be put in place. The

- 47 -

proposed process is to make use of existing forums inside the company to give the proper

level of visibility and discussion to the portfolio management process.

Fig. 41 – Proposed process for portfolio management

The portfolio analysis run by Marketing Strategy with the proposed tools is reviewed

by a multidisciplinary business team, called PBT, Product Business Team, on a meeting that

is held every quarter. The decisions of this team can be:

- Replace this product by a different one in the portfolio

- Redesign the product in order to increase attractiveness, reduce cost or increase

margins

- Reduce cost through specific actions or reduce feature content

- Increase prices to recover profitability

- Eliminate, in case there is no interest or feasibility of possible actions.

In order to implement the above mentioned tools and processes it is recommended

that a joint work between Marketing Strategy and Engineering is done for the first pass and

understanding of the methodology. There may be additional tools or adjustments that can be

done if we use both areas expertise.

Proposed KPIs (Key Performance Indicators):

- 48 -

- Average margin of the portfolio

- Number of SKUs in the portfolio

Support from top management will also be required. Introducing a new topic at a

PBT level, for example, can only be done with the support of a Vice President. Also in order

to make the joint work cross areas the support of the Directors will be key.

13.2 – COMPLEXITY REDUCTION

Although the work being done on complexity reduction through modularity is

already generating interesting results there are opportunities for improvement. Today each

technology/area works on their own roadmaps and definitions looking for opportunities that

are mostly focused on cost reduction. Alignment with Procurement is done on a needed basis,

not so much at a strategic level. There are multiple parallel initiatives that do not necessarily

communicate and align with others. There are areas inside the company to perform

bencharking, to define supply base strategy, to work on innovation, etc. but there is a lack of a

forum where all those things can be discussed together with the same goals and focus in mind.

Fig. 42- Complexity reduction process

- 49 -

In the proposed process, shown in figure 42, all the already existing tools and forums

that exist get a consolidation in a Modularity Committee. This multidisciplinary committee

will have consolidated information from multiple sources guaranteeing strategy alignment

cross areas and cross technologies. Revision, prioritization and alignment of the projects will

be done by this committee, consisting of Engineering and Technology plus Procurement.

The modularity committee will analyze roadmaps, benchmarking, innovation,

strategic definitions from global MVT (team that defines strategy for supply base and

modules evolution globally), plus DFX tools (design for assembly, design for environment,

etc.). From this alignment, working groups within each technology will make the strategy

work and bring results and progress to be analyzed again by the Modularity committee. When

some significant change that requires investment, impacts significantly manufacturing or

currently existing product concepts or any other major impacting change, it is important to

give visibility in advance to a broader team, called Modularity Council. This Council includes

other areas, such as Manufacturing, Marketing and Export groups and its role is to discuss,

approve and support those new projects.

Goals of the proposed process are:

- Guarantee alignment across technologies

- Provide common understanding to multiple areas of where our technology is

heading for

- Speed up projects related to complexity reduction that bring cost and quality

benefits

- Align modularity plans with innovation needs

- Aligns global supply base and regional project actions

- Align Procurement and Technology in order to achieve better and faster results.

Proposed KPIs:

- Number of projects implemented

- Cost and quality results coming from Modularity actions started, leveraged by the

committee.

Most of the effort to make this approach work is from the Engineering and

Technology teams which has a good support in this direction. Alignment with Procurement

- 50 -

will require some preliminary discussions, but no major difficulties are foreseen once the goal

is to make an existing link stronger and speed up projects that will benefit both areas.

This should be an ongoing process, not something with a beginning and and end

date.

13.3 – CONTROLLING COMPLEXITY AT THE PROJECTS START

Working on complexity reduction after the fact is not efficient. Cleaning the portfolio

and reducing complexity on the existing products will be wasted if new product introductions

do not follow the same principles.

While Technology is working on new product introductions to be as much modular

and standardized as possible, it is key that this is discussed at a cross area forum as product

specs coming from Marketing, Manufacturing or other areas can bring complexity back.

The proposal is to add complexity metrics to the early stages of product development

so all stakeholders involved are aware of the impact of their decisions, how the product is

being conceived and how this can impact complexity and profitability.

Fig.43 – Process to control complexity at the project start

- 51 -

In the proposed process, shown in figure 43, the POS, document that starts officially

the projects contains already the project outline as it is today. In the WDT, Winning

Definition Tollgate, the novelty is an increased emphasis on the complexity analysis, which

has to include at a preliminary level complexity related indicators, such as: impact on PNC,

part number count, number of modules being added, impact on number of SKUs in the

portfolio, etc. This analysis is refined on the next project tollgate, CLT, Concept Lockdown

Tollgate, where the basic concept of the project needs to be defined. This way it is possible to

understand what is the complexity situation before and after the introduction of the new

project and act on its definitions to prevent undesirable impacts after its launch.

The decision is made by the GGPR, group that follow up the project evolution

thorough all the tollgates. It may decide to review project requirements in light of the

complexity impacts information made available.

Alignment with different areas will be required and some restrictions to product

development may show up, although the possibility to offer new features is not at stake.

Another important source of complexity is the export area. Today this area has a sort

of independent existence. They do manage a separate portfolio that modifies the existing

products in order to meet requirements for foreign markets. The complexity introduced is

inherently higher. More markets, more voltages, electrical frequencies, energy requirements,

standards, brands, colors, etc. On top of that production volumes are significantly lower,

which reduces the benefit of the complexity added.

Complexity generated by the export group is not visible to the Engineering team in

charge of maintaining the product portfolio, which adds to the problem. A proposed process

to handle it is shown in Fig.44.

- 52 -

Fig. 44 – Proposed process for controlling export models complexity

Again complexity analysis is brought as a requirement and an important area for

analysis that will drive decisions about the creation of new modules. The process forces a

leadership review that does not exist today where complexity impacts will be reviewed and

proliferation brought back under control.

The creation of complexity requirements is also important. Today a new market can

create new colors, languages, features, etc. regardless of the sales volume they will bring. The

explanation is that there are marketing requirements for each brand that must be met

regardless of the volumes.

In order to ensure profitability, however, the requirements could define, for example

that:

- If sales is below a certain minimum number, no specific changes can be

introduced to the product unless the bare minimum ones like language and power

plug

- If sales are above the minimum number, but below a certain mass scale number,

some modification could be introduced, like colors for the serigraphy, for

example

- If sales are above the mass scale number then and only then more significant

changes like colors of plastic parts and features could be introduced.

This approach would guarantee that complexity would only be created when justified

by sales volume. Costs associated with complexity would be significantly reduced, generating

profits to the company, making the cost of the export models lower and increasing their

competitiveness.

- 53 -

The proposed process will have to align two areas: Export and Engineering. Some

conflict is expected as Export team main focus is to increase revenue by increasing sales.

Main strategy so far has been to offer more products to more markets regardless of the

required effort to achieve that. Even though they did some exercise in the past on reducing

complexity which gave significant benefits in terms of cost, it was a spot event and since then

complexity did increase again.

Preliminary discussions happened at a Director level with the Export team already, but

additional efforts will be required.

Proposed KPIs:

- Number of export SKUs with less than 1000 units per year

- Number of parts used for export models

13.4 – CONCERNS AND RISKS

Some points of concern and risks can be mentioned in this project:

- Lack of dedicated resources to keep the drive and stamina of the teams involved.

Currently people involved in the initiative are part time only.

- Starting in 2012 there was a relaxation on formal targets related to complexity

and modularity and even if people agree on the benefits this project can deliver

their focus can be dedicated to other KPIs that are being demanded formally on

their evaluations.

- There are some paradigms that need to change in order for the project to succeed.

Killing SKUs are often considered a risk of loosing market share or increasing

fixed cost. Also there is a view that, as our brands are famous and respected, the

company should have the most complete portfolio in the market, which goes

against the optimized portfolio view that is proposed here

- Sponsorship will be required for some of the implementations. If the vision is not

shared by all areas the risk of failure is high. Sponsorship at a Vice President

level is not yet negotiated or available.

- Addressing multiple initiatives in different fronts in order to reduce complexity

may result in lower focus on some of them, reducing the effectiveness of the

overall project.

- 54 -

- Portfolio management cannot be an SKU elimination exercise that is done every

now and then and later abandoned or forgotten. It needs to be a permanent and

strategic action involving multidisciplinary teams that constantly evaluates and

challenges the existing portfolio, addressing the required measures. The

continuity of this initiative needs to be embedded in the company processes.

14 – CONCLUSIONS

The review done shows that successful companies have addressed the complexity

issue and achieved significant financial results from it. Companies that systematically

maintain complexity under control perform better than the ones that do not on benchmarking

done by consulting companies and there are good examples of benefits inside of Whirlpool as

well.

Considering at the value chain concept as proposed by Porter, where the business is

separated in to value generating activities, the benefit of the complexity reduction and

portfolio management is that each primary activity inside the company can become more

efficient and focused, reducing its costs and adding more value. None of those activities exist

by themselves, but rather they interact with each other through many interfaces. The relations

between the activities get also simplified and more efficient, which adds additional value and

create competitive advantage over companies that don´t practice complexity control and/or

portfolio management.

The approach of reducing complexity through a modular approach helps dealing with

the dilemma of reaching competitive advantage through cost OR differentiation as it is a cost

competitive way to deliver what consumers want without sacrificing cost as the traditional

approach does. It allows to add variety that consumers indeed want and are willing to pay for

it.

Portfolio management helps to define what level of differentiation to offer by

evaluating which configurations and products are adding value to the company and which

ones should be phased out due to lack of profit. This should be done in line with the strategy

of the company for each product line and segment. Experimentation on products launched can

be done, but it is key to follow up the performance of the products in production over time in

- 55 -

order to verify if they are meeting their objectives or not. If they do not meet the requirements

after some time, it is preferable to eliminate them, than to keep them in production adding

expenses and penalizing the company´s bottom line results.

Literature shows a multitude of tools and analysis possible to evaluate portfolio

management, but there is no clear methodology “one size fits all” or a “cake recipe” to do it.

The benchmarking at the cosmetics company helped to give some direction on how to bring

strategy definition to the portfolio management and complexity control, something that was

not so clear in the literature review. This tool is also a recommended approach for Whirlpool.

Linking strategy to portfolio definition improves the accuracy of the portfolio and increase the

chances of meeting the strategic goals, keeping competition at bay and focusing on what

really matters and make a difference to the company.

Actual data sales and revenue from Whirlpool for the domestic and export markets

were analyzed to certify that current portfolio does offer opportunities for optimization. A

significant number of SKUs could be eliminated with minimum or no penalty to the

profitability of the company.

Based on the analysis done, a new methodology was proposed in this work in order to

classify the products according to their financial results and strategy. The tool allows for

automatic update every time a new financial result is issued and in one picture shows the

actual situation versus desired profitability and strategy. A tool was also proposed to compare

products within the same family and raise questions about their similarities and differences

versus financial and sales data. Adopting this methodology allows clear and fast visualization

on what models are in line with the strategic goals and which are not and require correction

on price, cost or strategy. It may indicate also that the model has become obsolete and needs a

redesign, for example.

Processes were proposed in order to review portfolio performance periodically in a

way to raise awareness and guarantee focus on its profitability and life cycle of products.

With the entrance of new competitors in the Brazilian market this would be key decisions to

to increase our competitiveness.

On the complexity reduction side, new processes were proposed in order to improve

what is already being done between Technology and Procurement on the modularity and

standardization process to speed up cost and quality projects.

- 56 -

Since the export market is responsible for a significant portion of the complexity in

place today, it is key that the entrance of new models is subject also to a process with the right

level of visibility and basic requirements or restrictions for the creation of new parts based on

the sales volume for each market was also recommended.

The project deals with multiple actions that will deliver better efficiency and financial

results, although its effects are not easily measured in a straightforward manner. Some KPIs

are proposed to verify its effectiveness.

- 57 -

REFERENCES

BRENNAN, J., CHRISTIANI, P, SÄNGER, F., SPILLER, D., When less is more: How to

manage portfolio complexity in consumer goods, Consumer and Shopper Insights; 2011

BYRNE, R., Stop Chasing Your SKU Tail, ATKearney Executive Agenda, Volume IX,

number 1, 29-35; 2006

EAGER, A., ELSAM, K., GUPTA, R., VELINDER, M., Modular Design Playbook, The

Corporate Executive Board, 2010

KLUGE, J., Reducing the Cost of Goods Sold: Role of Complexity, Design, Relationships,

The McKinsey Quartely Report Number 2, 212-215; 1997

MAHLER, D., BAHULKAR, A., Cultivating Smart Complexity, ATKearney Executive

Agenda; 2009

MARTI, M., Complexity Management: Optimizing Product Architecture of Industrial

Products. Dissertation. University of St. Gallen; 2007

MARIOTTI, J.L., The complexity crisis: Why too many products, markets and customers

are crippling your company – and what to do about it. Platinum press; 2008

OYSTEN, E., Modular Product Development. Norwegian University of Science and

Technology; 2003

SCHEITER, S., SCHEEL, O., KLING, G., How much does complexity really cost?,

ATKearney; 2007

SCHUH, G., Lecture Notes – Production Management I

SCHWARTZ, B., The Paradox of Expanded Choices. Fast Company; 2011

- 58 -

The complexity challenge: A Survey on Complexity Management Across the Supply

Chain. A.T. Kearney; 2004

VINEET, M.S., SKU Rationalization. Beroe; 2011

WILSON, S.A., PERUMAL, A., Waging War on Complexity Costs. McGraw-Hill; 2010