In today’s dynamic business world, companies face the constant challenge of optimizing their product portfolios to keep the complexity and costs under control and thus ensure their long-term competitiveness. Only a small, single-digit portion of companies are responsible for the vast majority of the positive productivity growth. These companies achieve impressive productivity growth primarily through strategic portfolio decisions; by shifting product portfolios to areas with higher value-added and focusing on product lines with higher customer value.
The Challenges of a Growing Product Portfolio
However, many industrial companies face various challenges with their current product portfolio:
- A sizable portion of its portfolio generates little revenue/value
- There is no complete cost transparency, which is why the actual margin of the products is difficult to determine
- There is a wide variety of different interests within the company’s own organization (regions, disciplines, etc.)
- A wide diversity of customer requests must be managed
- There are various dependencies between sales figures and margins of products, especially when common parts are used or major customers purchase multiple products
- Market developments are difficult to predict due to changing customer needs, new regulations, or technological innovations
These factors often lead to unstructured portfolio growth, in which few products are removed. This leads to increased complexity costs. A few examples: lack of economies of scale, more complex manufacturing processes, longer setup times, and higher costs in sales and product management.
TARGUS in Practice: Successful Product Portfolio Optimization at a Mechanical Engineering Company
This is precisely where TARGUS’s product portfolio optimization comes into play. This approach takes a holistic view of the product range and optimizes the portfolio so that it aligns as closely as possible with the company’s financial and strategic goals and ensures the optimal use of resources. This was demonstrated, among other places, at a mechanical engineering firm. The company faced the challenge of future-proofing its product portfolio in a changing environment.
The Initial Situation
The restructuring of its portfolio proved challenging due to a multitude of unclear conditions.
For one thing, there was a lack of sufficient transparency regarding the actual profitability of individual products. On the other hand, there was considerable uncertainty regarding the future development of various technologies, the expansion of infrastructure, and national and international regulatory frameworks. This was accompanied by unanswered questions regarding the future market size and specific requirements. Nevertheless, fundamental strategic decisions had to be made early on in order to be able to offer competitive solutions in the future.
Changes to the portfolio were further complicated by numerous interdependencies, including customer requests, common parts, supplier dependencies, prices, production line capacity utilization, and location issues.
The TARGUS Approach
TARGUS developed a structured approach to optimizing its product portfolio, which followed these steps:
- Establishing comprehensive cost transparency within the product portfolio
- Identification of dependencies within the portfolio
- Definition and evaluation of scenarios for a future-oriented product portfolio, considering various parameters such as technological trends, regulatory changes, and market developments using a standardized portfolio simulation tool
- Comprehensive understanding of the impacts of all scenarios as well as formulation of action options taking into account dependencies on customers, suppliers, the production network, and the resource and budget requirements
- Definition of a flexible, long-term implementation roadmap considering uncertain boundary conditions
To enable the continuous evaluation of the roadmap, processes and routines should also be established that are to be followed when defined trigger points occur.
Definition of Scenarios
In addition to traditional scenarios such as discontinuing or further developing products, more far-reaching strategic options were also systematically evaluated. These included M&A activities related to product lines, partnerships with competitors, and the expansion into new markets and application areas. This created a solid foundation for expanding the range of viable solutions and fostering creative approaches to identifying options.
The Portfolio Simulation Tool
A key component for evaluating the scenarios was the development of a portfolio simulation tool that consolidated all the necessary information to simulate the Net Present Value (NPV) for each scenario. By conducting a Monte Carlo simulation of the NPV for various scenarios, significant differences between the scenarios were identified, which enabled a fact-based decision regarding the optimal strategy.
The Benefits for the Customer
Through the approach which TARGUS has established at the engineering firm, several key objectives were achieved:
- Full transparency regarding the actual profitability of the products, including indirect factors such as product maintenance costs and service costs/revenue
- Specific scenarios for portfolio development and the methodology, to derive additional scenarios in the future
- Establishment of a structured approach, which evaluates scenarios based on reliable data under various uncertainties and recommends prioritized measures based on these evaluations
The project enables the company to make informed portfolio decisions even in the face of significant uncertainty regarding future technologies and market conditions. This ensures long-term competitiveness. Thanks to a flexible implementation strategy with clearly defined trigger points, the company can also respond quickly and effectively to market changes.
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