Portfolio Management & S&OP

4 Copyright © 2016 Journal of Business Forecasting | All Rights Reserved | Winter 2015-2016 | www.ibf.org

Awaken Your S&OP Process with Product Portfolio ManagementBy Patrick Bower

As consumers, we regularly face a host of product dynamics relating to the various goods

we purchase, whether or not we realize it. Every year brings a plethora of new product offerings as well as old favorites touting enhanced claims: brighter, whiter, tastier, spicier—all intended to make a given product

more appealing. Marketers employ countless strategies to position their brands as more affordable, more interesting, or more likely to stand out on a shelf. Consumers may notice a familiar product available in a different size, a new flavor or fragrance, or with packaging that features distinctive new graphics or a reconfigured item

count. It is also quite common to browse a shelf and discover that one of your favorite products has been discontinued. As everyday shoppers, we have come to recognize that most products are in a state of perpetual flux. As manufacturers, however, we are challenged to manage this constant change.

PAT R I C K B O W E R | Mr. Bower is Senior Director, Global Supply Chain Planning & Customer Service at Combe Incorporated, producer of high-quality personal care products. A valued and frequent writer and speaker on supply chain subjects, he is a recognized demand planning and S&OP expert and a self-professed “S&OP geek.” Prior to Combe, he served as the Practice Manager of Supply Chain Planning at a boutique supply chain consulting firm, where his client list included Diageo, Bayer, Unilever, Glaxo Smith Kline, Pfizer, Foster Farms, Farley’s and Sather, Cabot Industries, and American Girl. His experience also includes roles at Cadbury, Kraft Foods, Unisys, and Snapple. He has also worked for the supply chain software company, Numetrix, and was Vice President of R&D at Atrion International. He was recognized three times by Supply and Demand Chain Executive magazine as a “Pro to Know,” and Consumer Goods Technology magazine considered him one of their 2014 Visionaries. He is the recipient of IBF’s inaugural Excellence in Business Forecasting and Planning Award in 2012.

E X E C U T I V E S U M M A R Y | Despite the ever increasing rate of product innovation, one of the most underutilized S&OP process steps is product portfolio management. This S&OP process step is designed to manage the complex processes from ideation to commercialization, as well as the myriad of renovation projects and product discontinuations. This process is not for the fainted hearted—but yields enormous alignment and synergy benefits when implemented.

Copyright © 2016 Journal of Business Forecasting | All Rights Reserved | Winter 2015-2016 | www.ibf.org 5

So, what forces drive the seemingly never-ending product innovation? Sometimes, a new product is in-troduced to serve a previously unmet need; a genuine “new to the world product.” Other times, market research reveals a white space in consumer tastes that may be exploited. Some companies are compelled by competitive forces to build a better mousetrap—almost a form of product Darwinism. Occasionally, the desire for

Figure 1 | Product Life Cycle Curve

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It bears noting that while much of this discussion centers around consumer goods, most non-consumer goods manufacturers also have some variation of a product portfolio that needs to be managed. These companies will have new, mature, and soon-to-be-obsolete products in their lines. A chemical manufacturer might strive to introduce a new compound each year while at the same time discontinuing an older compound. And a silicon chip manufacturer often has a new technology to offer every 3-4 months. Such companies must diligently plan their innovation backlogs and herald new offerings with sales and marketing initiatives while also trying to gracefully exit old solutions with a minimum of inventory or obsolete risk. With few exceptions, non-consumer product companies share the same concerns, issues, and process requirements as their consumer-based counterparts.

NON-CONSUMER PORTFOLIO MANAGEMENT

variety can be a motivating factor. One needs only to consider the number of cola beverages that have cycled into and out of existence over the years to acknowledge this fact. Most of the time, however, product innovation is driven by a simple desire to increase revenue and profit. Product innovation is rarely an altruistic endeavor.

In the consumer goods sector, innovation matters—a lot. It is commonplace for new product intro-

ductions or product line extensions to account for 25% or more of a company’s top-line volume, clearly a significant portion of overall revenue. Regardless of market sector—whether chemicals, confectionaries, or be ver-ages—innovation is the core go-to-market strategy of most companies. And although innovation is most often associated with new product introductions, innovation can and does influence sales at any point throughout the lifespan—the product life cycle—of any item.

FROM IDEATION TO BIRTH TO DEATH: UNDERSTANDING THE PRODUCT LIFE CYCLE

To understand product portfolio management in the context of sales and operations planning (S&OP), you first need to understand the product life cycle, the conceptual phases of revenue and profit typically observed over the lifespan of any commercial product and expressed in terms of a product life cycle curve (see Figure 1).

As you might expect, most companies have a backlog of ideas for new product introductions crowding their innovation agendas. Yet more than ever before, renovation projects are also populating these dockets. As organizations trend toward scrap-pier, grittier approaches to the marketplace, existing products in their mature or declining phases are reworked or renovated to satisfy new market requirements. A mature product may be changed in response to a competitive threat or to qualify for a different class of trade—by changing its size or usage count, for example.


Figure 2 | Fundamental Structure of a Sales and Operations Planning ProcessThink of all the bulk items packed for sales in club stores, or brand-name consumer goods that are scaled down in size to serve as price-fighter SKUs (low-cost offerings designed to create barriers to entry in a price-sensitive class of trade like dollar stores).

Today’s innovation agendas are also chock-full of product renovation work including special pack outs, IRCs (instant redeemable coupons), consumer displays, new and aggressive marketing claims on packaging, compounding, or integrated pack-aging—all innovative product variations that are used to fight for every last dollar of top-line volume or to beat back competition. Such variants add inventory, item count, and cost to the product portfolio; but they also lend resilience to products that would likely be lost to delisting at retailers or discontinued in other sectors.

Most organizations have a class of vestigial, near-defunct products that cling to some small dollar volume and linger on the long tail of their product life cycle. These items present considerable planning challenges as organizations attempt to orchestrate a smooth inventory run out of these products, hoping to mitigate the cost of obsolescence while exiting the marketplace.

Complicating matters even fur-ther, outside influences such as industry sustainability initiatives, green packaging, banned chemicals, and heightened regulation of both raw materials and finished goods are driving considerable changes. (A 2014 Accenture study suggests 2-5% of product innovation is attributable to sustainability initiatives, up from 1% just two years prior.) The reformulation and repackaging of existing products due to such influences are adding to

an already heavy burden on innovation resources.

Considering all of this trans-formative, transitional activity, it is not uncommon for product managers to have up to 75% of their portfolio in flux in any given year. Long gone are the days when supply chain practitioners focused on SKU-count reduction and the efficiency of supply chain operations. The pendulum has swung toward more complexity in the product mix rather than less, and agility and expedience seemingly have replaced stability as the focal point in most product portfolios. Leon Megginson has correctly said:

“It is not the most intellectual of the species that survives; it is not the strongest that survives; but the species that survives is the one that is able best to adapt and adjust to the changing environment in which it finds itself. ”

Of course, in response to so much activity centered on product change there is a corresponding and ever-pressing urgency to seamlessly manage all such activity throughout the various life cycle phases. This is where the product portfolio management process adds value.

S&OP OR BUSTS&OP purists would advocate that

all activities related to innovation—and product transformations of any sort—should be managed within the product portfolio management review sub process (or step) of a broader

S&OP process. Essentially, the product portfolio step is a blend of multiple, smaller discussions, sub processes, and meetings all rolled into a single monthly status update meeting—the product portfolio review step in an S&OP process. Given the potential for so many touchpoints relating to product innovation, it should arguably be one of the S&OP steps garnering the most attention. Ironically, however, it is the step most often missing from real-world S&OP implementations.

To better understand how, where, and why the product portfolio review step fits into the S&OP process, it may be helpful to take a step back. In the most of basic definitions, S&OP centers on the demand and supply plans of an organization. As S&OP participants, we work to reach consensus on a demand plan, then balance demand to supply, raise issues, and place an economic value on the result. The outcome of these efforts is reported to the executive team for approval.

Figure 2 shows a classic process flow for S&OP. It seems straightforward, right? Well, not really. If S&OP were as simplistic as this model suggests, most meetings could be conducted over the course of a few hours and with minimal work. Planning the demand and supply for base products tends to be very easy in most sectors; the complexity arises when change is introduced into this simple model. Most change involves new products or those in various states of transition. Discussions about new product launch details,

Figure 2: Fundamental Structure of a Sales and Operations Planning Process

Issues, Changes, Gaps, Metrics, Financial Implications, Strategy


forecasts, and capacity requirements, for example, can easily double or triple the complexity of the planning process, resulting in a trickle-down effect that can alter every associated discussion throughout the process flow. And when you introduce all other transformational activity associated with products—from product reno-vation to discontinuation—the dis-cussion can double yet again.

Imagine the conversation in a demand consensus meeting when a new product forecast is discussed. Questions come fast and furious. What is the total volume opportunity? How large is the pipe fill? When will advertising commence? How will this new item affect other products in the marketplace, both ours and our competitors? Who is the consumer? How big is the opportunity? What share are we targeting? How will we go to market? Will we support the new product launch with trade spend and promotions? How will this new product impact the profitability of the company? As a consensus group tries to nail down volume and understand market opportunity (and resultant revenues), the questions pile up.

Similarly on the supply side, advancing the same new product through the supply and demand balancing process, and determining the proper build-out of the pipeline inventory while at the same time banding several different demand and supply scenarios, will raise even more questions. Will we have enough capacity to meet demand for this new product? What will we do if the product is successful beyond our expectations? Do we have slack capacity to leverage? How do we prevent the build up of excess inventory? Each of these questions is essential, meant to determine the best supply scenarios

to meet expected demand.As you move to the reconciliation

and executive review process steps, S&OP continues to focus on all the questions—the gaps and issues—raised during the demand and supply review phases. Innovation can be disruptive to planning and will likely inject more uncertainty in the demand and supply plans. The result: there will be numerous gaps to the plan involving one or many of the products in a state of transition. What is the impact of these gaps on the bottom line? On subsequent investment in the product? Is the product going to succeed?

S&OP thrives and succeeds on the seamless transfer of information and decisions. Within the framework of a product portfolio review, many of the aforementioned questions would have been asked and answered, and the collective strategic intelligence gleaned in the course of their discussion would be available to all of the other process steps that follow, helping to remove the inherent uncertainty that exists within the planning process.

A TWINKLE IN THE EYE

Before the first unit sells—indeed,

before any mention of a new product even appears in any product portfolio review agenda—it first has to exist as the twinkle of an idea in someone’s eye. That sparkly product concept is matured, vetted, and if it is deemed to be a viable concept then it is commercialized and launched. New products do not appear out of thin air and certainly not before considerable organizational engagement, analysis, and planning.

To bring an idea to fruition, many companies leverage a stage and gate process to manage the ideas and workflow required to make a product concept a reality. While not a direct S&OP sub process, stage and gate is an interrelated supporting process that helps manage the workflow and timeline of all tasks required to mature a product concept, qualify it, and then advance it toward a potential commercial launch. Think of it like a waterway canal with gates and locks. As an idea floats up the innovation canal, it is allowed to pass through a gate only if it has merit. Each gate—representing financial, legal, operational, or commercial hurdles—has a different requirement or threshold that must be met or exceeded to allow passage. The gates along this canal may have a variety of names, depending on the organization, but their purpose is

Some businesses use the metaphor of an innovation funnel to describe the stage and gate process. Ideas start at the top of the funnel and proceed through a series of conceptual sieves or filters (gates). As ideas flow down the funnel, the sieve traps unrealistic product ideas and prevents them from progressing further. The sieves or filters are conceptually equivalent to the gates of a stage and gate process. It is the same process model but with a different metaphor.

GATES, FILTERS, AND SIEVES


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the same: to serve as a successively challenging and increasingly rigorous validation of any new product concept.

The first gates in the process may be called scoping or investigative, intended to determine (in broad strokes) if the idea is viable. Next is the business case or development gate, wherein the concept is further explored via analysis like mock P&Ls to confirm whether there is a business reason to proceed. Then comes the test/validate gate, which employs home use tests, concept surveys, and pilot batches to determine whether the volumetrics, manufacturability, and commercialization makes business sense and can be executed. Finally, the production and launch gate usually details the project planning needed to bring a product concept to launch. If an idea fails to pass through any of these gates for whatever reason, it is killed or sent back for more study; otherwise, it proceeds toward launch.

While most marketers are enamored with the creative side of new product development, few companies approach the matter as if indulging someone’s pet project or whimsical idea. New products represent a huge investment of time, money, and resources; they require concept designs, market research, and consumer testing to prove if an idea is viable. Legal and regulatory hurdles need to be cleared, and manufacturability needs to be determined. New products also require cost and pricing analysis, share analysis, and other quantitative analyses before they can be considered for launch—all expensive undertakings. This is why using the stage and gate process is so important. As a product idea matures throughout the development process, both risks and costs increase, so filtering marginal product ideas early is essential—to help mitigate these exposures.

As ideas pass through successive

gates they become more likely to launch; once cleared for commercialization, they become an official project. At this point (and in no particular order) there will be pilot batches to run, a sell into the trade, creation of sales collateral, package design, stability studies, tooling, workflow systems entry, new equipment purchases and installation, trial runs, component ordering, bottom-up demand planning, capacity estimates, costing, and more. It takes a lot of work to commercialize a product, and in an ideal world all of it is tracked, managed, and reported within the portfolio management review step.

If you are not dizzy already, let me recap. Within the product portfolio review meeting, there is a lot of information that needs to be transferred to the other S&OP process steps to aid in planning. There is a process within a process (stage and gate) that helps qualify an idea for commercialization. And if an idea is brilliant enough, there is yet another process-in-a-process (a project plan ning exercise) to make sure all the details needed to commercialize a product are managed. And this is just for new product introductions.

In a well-orchestrated S&OP process, the product portfolio review step encompasses a snapshot discussion of each conceptual product’s:• passage through the various stages

and gates,• time spent within each gate,• and the rationale used to determine

go or no-go decisions.Each month, all participants in

this meeting share vital insight into the status of all projects progressing through the stage and gate process.

As I have indicated, a lot more takes place in the portfolio manage ment review meeting than just discussions around stage and gate/project progress and the sharing of information. It is

also the S&OP step during which all discussions about product renovation initiatives should take place. Topics may include cost-reduction, reformulations, packaging changes and claims enhancements, sustainability initiatives, and market-driven changes such as special pack outs and the like. Some of these will yield modest action items that require little more than a status update, like an artwork change notice for a claim enhancement on a package. Sometimes, though, a resulting change may spawn a much larger project that requires significant planning to execute. Reformulations are an example of a much larger-scale renovation project, since they tend to trigger many of the same hurdles as a new product (i.e., legal, regulatory, environmental, manufacturability). In many organizations, these items are added to the stage and gate process workflow.

As if all this weren’t enough, the product portfolio management meet-ing also is the forum for discussing which products are to be slated for discontinuation, and the implications of obsolete inventory. Discontinuation (also called product rationalization) requires understanding the strategic importance of an item as it may relate to your entire portfolio. It is rare that such decisions are made lightly, but once a product is marked for discontinuation, all the actions that follow are best managed within the product portfolio review step.

And finally, do not forget about metrics; they are an important part of the discussion as well. To assure smooth flow through stages, there is typically a standard measure of time allocated for each initiative to dwell within each gate. The percentage mix of portfolio initiatives is also measured, to assure the investment in any one portfolio is


adequately blended across a number of different types of initiatives. It does not bode well for only renovation projects to be worked on, since older products—even new and improved ones—eventually wear out their wel come with consumers and begin to decline. Many companies tally up the projected benefits of cost-reduction innovations, while others sum the top-line value of anticipated revenue residing in the stage and gate process.

When done right (if done at all), portfolio management review is a meaty conversation. The meetings tend to be long in duration and comprehensive in scope, covering not just the projects and their movements through various gates but also the top-line and bottom-line implications of the innovations being discussed. Figure 3 shows most of the elements considered during a typical product portfolio management pro cess meeting.

Of course, none of this activity prescribed for the portfolio manage-ment review step stands to bear any fruit without a loop back to the other steps

in the S&OP process. Demand forecasts should be offered. Supply requirements should be requested, either for pilot runs or pipe fills and ongoing capacity needs for new products. And there should be a connection back to the executive review step, for guidance to help determine the relative priority of projects on the innovation agenda.

IT’S ALL IN THE DETAILS

Unfortunately, experience proves that product portfolio review meetings in the real world tend to be as rare as left-handed spaghetti benders. Few S&OP implementations even include the step, and those that do use it in a limited way—mostly for new product introductions. Those advocating for this step within their own S&OP process will find it useful to offer even more details—to facilitate understanding and help strengthen executive buy-in.

According to S&OP process design, the portfolio management step should

track metrics, decisions, and progress for any new product concept: from ideation, through commercialization, and launch (presuming the idea progresses to launch). It should also encompass post-launch tracking of new products for some period of time, which applies as well to the numerous types of product-related renovations projects. This process step should also be the focal point of all end-of-life product decisions, including the selection of items for discontinuation and run out. The best practitioners of portfolio management within S&OP consider any activity—related to any product—worthy of discussion within the process step itself.

The cadence and timing of the portfolio management review meeting is critical to success. The meeting generally occurs in the early part of a monthly S&OP cycle so that all product decisions are discussed and questions about new and renovation products are answered prior to the demand-consensus and supply-balancing steps. The underlying premise of this step is to cull data from the new-product development process so that enough information about product plans may be passed along to the other S&OP process steps—so that participants in these subsequent steps may leverage (within their own planning processes) all previously vetted, measured, and approved inputs.

The portfolio management step is a formal meeting in which all parties interact and engage in decision making regarding transformational products. It is typically orchestrated by marketing personnel, with either project management or research/innovation groups serving as the chair of the meeting. Governance of these meetings tends to vary from sector to sector, company to company. For example, a chemical firm might assign a

Figure 3 | Scope and Substance of Product Portfolio ManagementFigure 3: Scope and Substance of Product Portfolio Management


technical business development leader to facilitate the meeting. This is a logical choice because these are the people with a front-seat view of customer needs in their industry and who carry a lot of influence and sway over the direction of future products. Participants will also vary depending on company and sector, with personnel from operations (planning and execution), sales, marketing, and finance typically included in the process. Operations staff will eventually have to plan the demand and supply aspects of any new product or product change, and sales members will have to sell the product to the eventual customer.

As for the S&OP process itself, the model remains mostly the same, with the portfolio management step inserted early in the process cycle and following the same monthly cadence, as shown in Figure 4.

The agenda for the product port-folio review meeting is centered a round understanding the progress on the myriad initiatives at hand. Some companies will discuss all initiatives (even if affording them only a cursory mention), others will only highlight the projects that are off-course or delayed. Here’s a typical agenda:• Review of Metrics—Such as dwell

time for ideas in each gate, portfolio mix (new, extensions, renovations, etc.), on-time launch, gate failure rates, post-launch metrics (relative to plan).

• Review of Innovation “Funnel”—Which ideas are new to the funnel, which are in concept design, status of prior items in the funnel, and a review of those obstacles that may be preventing an idea from moving forward. This review should also include summaries of all gate activities (failures and passages).

• Review of Commercialization Pro-

ject Plans—A status update of all projects approved for com-mercialization, typically with red/yellow/green designations indicating whether they are on time. This review includes both new innovation and major product renovations.

• Review of Critical Resource Load-ing—This review may en compass anything: from the availability of a chemist who can address product renovation issues, to how long it may take a designer in an art department to develop an approved package design.

• Review of Current Demand/Supply Plans for Products in Commerciali-zation Stage—Requires detailed assum ptions to help set up inputs to be passed to the demand review and supply review steps.

• Review of Items Targeted for Dis-continuation and Run Out—Includ-ing the financial implications of lost-volume dollars, returns, and obsolete inventory risk.

• Review of Progress of All Renovation Project Plans That Fall Outside the Commercialization Project Plans.

• Decisions or Exceptions for Executive Review—Typically addressed when a project is off-course, delayed, or requires prioritization of resources.For a process step that is often

overlooked, malformed, or utterly forgotten, product portfolio manage-ment review is nonetheless vital to ensuring a smooth-flowing S&OP pro-cess in those organizations where innovation is a priority. The benefits

of having a well-run product portfolio management step are many: a well-managed innovation agenda; better, more cross-functional conversation regarding all initiatives; and a clearer perspective of the product pipeline for both planning and execution. And the single most important key to success is simply to start meeting.

To the average S&OP lead, product portfolio management will look like a daunting hot mess and a lot of work. It is easy to get overwhelmed. But simply starting the process, and then adding an agenda item per month or per quarter will help you begin to determine the norms, metrics, and level of information most appropriate to your organization. Just start meeting is the simplest, best advice. And avoid the inclination to over-design this step; it will only exacerbate cognitive dissonance and likely lead to failure.

Of course, while everyone hates to see another meeting on the calendar, this meeting—once implemented—can replace countless hours of one-off conversations and convoluted e-mail trains. The daunting mess will eventually trend toward alignment, well-constructed decisions, fewer delays, and shorter innovation cycles.

An S&OP process leveraging a well-executed portfolio management review step will serve as a conduit through which a twinkle in your eye can travel a canal, make its way through a Gantt chart, and end up as a product ready for launch.

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Figure 4 | Sales and Operations Planning Including Product Portfolio Review Figure 4: Sales and Operations Planning Including Product Portfolio Review

Products, Issues, Changes, Gaps, Metrics, Financial Implications, Strategy


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Portfolio Management & S&OP