Ford T or the Long Tail ?

The drivers of product complexity

Since the Ford Model T and the famous quote “you can have any color, as long as it’s black,” companies have learned to satisfy customers’ growing appetite for customization and for products that differ from those of their neighbors.

Efforts to meet customer expectations, or even create new ones, often lead companies to introduce increasing complexity into their product portfolios.

The rise of e-commerce has amplified this phenomenon by enabling the sale of a large number of products in small quantities, a phenomenon commonly referred to as the “long tail.” The Internet facilitates connections between buyers and sellers for niche products with low distribution volumes.

This phenomenon is one of the foundations of Amazon’s success : the combined sales volume generated by low-volume products, the “long tail,” exceeds the total sales generated by high-volume products.

With nothing more than a website indexed by search engines, a company can now sell products in “exotic” markets around the world. It must then manage products adapted to the constraints of these markets, including language requirements, local standards, and regulations.

Product range complexity in consumer goods

Product range complexity generally translates into a very large number of SKUs, some of them highly similar, reduced readability for customers, and significant disparities between flagship products and low-selling references.

Several factors contribute to increasing product range complexity :

• Offer differentiation by country
• Differentiation by distribution channel
• Segmentation by customer type
• Creation of new SKUs without discontinuing older ones
• Permanent retention of promotional references
• Market-driven reactions
• The desire to occupy shelf space at the expense of competitors
• The absence of effective governance or “counterbalance” mechanisms capable of limiting uncontrolled range expansion

Spectacular savings : production cost reductions of up to 30%

These complexities generate additional costs, whether visible or hidden, including production costs and management overhead, while sometimes failing to create value for customers, or even destroying value by making product ranges difficult to understand.

The complexity-reduction approach presented here can generate spectacular savings while simultaneously creating value for customers : based on our experience with clients, production cost reductions can range from 5% to 30%.

To ensure the effectiveness of such an initiative, the first phase must begin with a deep reflection on customers, their segmentation, their needs, and the associated marketing and commercial strategy.

Each brand and each product reference delivers specific benefits to consumers. The company’s marketing strategy must ensure clear differentiation between them.

This upstream positioning work then enables companies to define :

• Brand presence across distribution channels
• The size of product assortments available in stores, often referred to as the “range effect”

These preliminary strategic phases may also lead to real-life in-store testing in order to evaluate different options and measure their impacts.

Once the marketing and commercial strategy has been defined, the next step is to define a relevant cost indicator.

Here again, there is no miracle formula, only an answer adapted to the objective being pursued. To measure and counterbalance product range complexity, the most relevant indicator is the cost per SKU, combined with an indicator capable of measuring the factors generating complexity.

How should a SKU be defined ?

Despite its apparent simplicity, the question deserves to be raised. As industries have learned to standardize and manage small production runs, several types of references now coexist : the master SKU (coming off the production line), the stocked SKU, the labeled SKU (with branding), the sold SKU, etc. Whatever the terminology used, what matters is that it reflects the company’s operational reality and speaks to operational teams.

A concrete illustration in consumer goods

We have chosen here a representative case of product range complexity within the consumer goods sector.

The company complained about excessively high production costs and an ambiguous market positioning : hesitation between a premium positioning and responding to low-cost competitors, resulting in a confusing product range. The need to rethink the portfolio was quickly accepted by senior management. The project was conducted over three months with an internal team and three consultants.

The additional costs generated by diversity were evaluated. They resulted from format changeover times between references, but also from the organization required to produce and manage the range : planning, scheduling, errors caused by SKU mix-ups, marketing management, and more.

The additional costs generated by diversity amounted to €30,000 per year per master SKU and €300 for a labeled SKU (products sold in an “exotic” export market), provided this reference was produced on demand.

This clearly illustrates the impact of delayed differentiation and build-to-order differentiation processes implemented by manufacturing plants, as well as the importance of segmenting processes and tools according to product ranges. It is entirely possible for bespoke production and mass-market operations to coexist within the same company.

The product range was analyzed through SKU trees, making it possible to identify similar references and quantify diversity drivers : the objective set was to reduce the number of SKUs by 40%. An objective likely to upset everyone, especially sales teams, the very people responsible for generating revenue. “They have always tended to offer tailor-made solutions to distributors in order to win more contracts,” commented senior management.

The target was achieved, and the product range optimization initiative reduced production costs by 10%. Exotic products were identified and build-to-order differentiation processes were implemented. Customers were retained, revenue remained stable despite a difficult market environment, and the cost reduction almost entirely translated into net value creation.

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Tell me about labels !

Along the way, we also had to solve a problem related to labels. One of the identified costs was inventory immobilization and obsolescence. But here again, choosing the right indicator matters.

Indeed, label production costs follow a typical printing industry cost curve : high fixed costs (plates, setup, calibration, etc.). In reality, the marginal cost is almost zero. Valuing excess inventory and obsolescence at average cost leads to management errors : limiting order quantities in the name of inventory reduction was actually creating stock shortages that were three times more costly : lost sales, operational disruption, and the need to place additional orders that incurred fixed costs a second time.

We developed a simple probabilistic model, based on game theory, allowing order volumes to be optimized and these effects to be minimized as much as possible. Even if it meant carrying a small amount of “zero-value” inventory.

A real opportunity for the company

The project was perceived as a genuine opportunity for the company.

Industrial managers welcomed the simplification of the product range, which enabled them to reduce costs both in the short term and over the medium term following organizational adjustments.

Marketing and sales teams appreciated the qualitative benefits : improved product positioning and greater visibility for customers, the creation of a shared vision across departments, increased awareness of the management costs associated with each SKU and the operational constraints faced by different teams, as well as better consideration of the real value generated by export sales without disrupting production operations.

Sustaining the approach

One of the major values created by the project was the long-term sustainability of the approach : the creation of cross-functional teams and knowledge transfer processes, the definition of a virtuous product range management process, and the implementation of KPIs and benchmark figures consolidated into a dedicated dashboard.

A contagious success

Senior management viewed this project as a concrete way to restore margins and therefore committed significant personal involvement to its success.

This commitment proved highly valuable : the project’s return on investment was achieved within only a few months.

Building on this success, the initiative, initially launched within the French subsidiary, was progressively extended to multiple European subsidiaries under the coordination of a European Marketing function.

Morand Studer

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