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Over the years I have worked with a number of companies in the consumer products arena. One of the critical topics of discussion is always product line profitability. Which of our products truly contribute the most to our bottom line? In connection with the issue of profitability is how can we seamlessly introduce new products that do not cannibalize the existing products and therefore thus creating an obsolete inventory problem.

Many companies are very good at introducing new products but not so adept at trimming the products that do not contribute substantially to the profitability of the company. I regularly encourage my clients to go through a product line pruning exercise by calculating the gross margin return on inventory “GMROI” by product line. This is simply multiplying the gross margin % of each product by the annual turnover rate of that product.

Sometimes managers overstate the importance of an individual product line by evaluating products based on the gross margin % solely. The real opportunity in terms of dollars is that gross margin and how many times per year you generate those dollars (e.g. the turnover rate).

In the table below Product A generates 60% gross margin but only once per year, whereas Product C generates 40% gross margin but three times per year – thus double the return on investment in inventory. While there are other factors to be evaluated when phasing out product lines (e.g. complementary products, sales dollar value, etc.) “GMROI” is a good starting point in a product pruning exercise. Even in a strong economy as we are operating in now we need to manage the inventory dollars – inventory can be turned into cash.

 

This is just one example of how CDH helps its clients through our Executive Focus service offering. If you would like to learn more about the Executive Focus process, please contact Dennis Pierce, Director of Management Consulting at [email protected] or 262.784.4040.