Portfolio rationalization solve supply chain challenges & be good for business

Most of today’s medtech supply chains are quite complex. Tight regulations and rigid specifications play a role, though many more challenges are nowadays causing stress. Material flow disruptions, the chip crunch, cyberattacks on oil pipelines, port congestion and many more similar topics have been on the news for a while, and supply chain resiliency has become a favorite concept across industries. We believe large product portfolios complicate supply chain challenges and that there is no better time than right now to look at opportunities to streamline the portfolio.

Product lies at the core of everything related to supply chains. Simply put, the more products a company has, the more complexity it will need to manage. A diverse portfolio will usually require a larger machine park and more calibration work, change overs, suppliers, contracts, spare parts, labor force expertise and capable planning systems to optimize the process. Large inventories require more capital, and an increasing number of products can easily reduce the overall utilization of the investment, triggering a significantly higher cost of goods sold (COGS).

Of course, there’s the counter argument, which usually is right, that more products will bring more revenue. That is true, so long as the complexity is manageable and growth is in place. With the macro-inflationary environment, the ability to grow revenue via incremental innovation and price increases is challenged. Portfolio decisions should be made with a bolder view of what really works and what causes more pain than gain. Global business leaders have to take a hard look at ways to streamline without sacrificing critical investments that drive top-line growth.

While many medtech companies historically have prided themselves on their broad product portfolio and ability to address a variety of customer needs, a new strategy might be needed to direct the resources from handling complexity to true innovation. It may come to a point where the trade-off is between today’s situation, where most medtech companies add new products (innovative and line extensions) but rarely retire products, and a situation with truly streamlined portfolios that drive growth and innovation with the tailwind created by efficient operations. Keeping the status quo alive can result in paying the price both internally and externally as customers are faced with shortages, unpredictable timelines and rising costs, while the sales rep experience deteriorates. All in all, portfolio rationalization can be a part of the solution for the near-term supply chain situation and can drive stronger long-term growth.

Given the pressure on the profit-and-loss (P&L) statement from market dynamics, executives must ask these hard questions to deliver on their commitments to customers and shareholders:

• Why are portfolios overinflated? A strong historical focus on top-line growth has driven medtech companies to add products to address specific country or customer needs. Some new products address sizable market opportunities, while the opportunity for others is small. Often a portfolio has expanded over time as companies have merged and combined their product lines.
  

Another reason stems from the historical practice of adding products to the sales rep’s bag to capitalize on related opportunities in a single customer visit. For example, in orthopedics, companies believe that having a big bag offers a competitive advantage.

In some companies, we see a lack of global governance over this process. Local commercial organizations have been allowed a direct line to the new product development process, often ignoring cross-functional risks and burdens. For example, one entrepreneurial country manager was fighting for a big tender and felt that a new product was needed to win the business. He called a friend, a research and development (R&D) manager who helped get the new product developed and released. The custom solution helped the country manager win the deal, but the annual cost of keeping the product alive is close to the value of the tender itself. Because the product was so highly customized for this situation, no other customer or business unit wants to sell it.

Combining these views with the dominant historical supply chain drive of optimizing costs paints today’s picture of the market. Resiliency is lacking, complexity is everywhere and agility as a capability is rarely seen in the industry.

• What are the implications of a large portfolio on other functions? The benefits of a broad portfolio are clear: the ability to address a variety of customer needs, the availability of a broad package to win against competitors and more stuff to sell to drive revenue. However, there are many other implications, both externally and internally.

From the customer perspective, a broad portfolio can be negatively perceived. Sometimes it means a product is backordered, so it takes a long time to receive—especially in today’s world of supply chain disruptions that quite frequently shake enterprises. The buying process can become complicated with so many choices, including many that address similar use cases. From the sales rep’s perspective, it can be nice to offer the customer a wide variety of options, unless they cause the narrative to become complicated and unwieldly, with too many things to learn about and keep straight. In some cases, a large portfolio available for a single visit works out, but in others, where the acquiring company didn’t fully understand the customer buying process, the synergy isn’t there.

Internally, there are several other implications significantly affecting company performance. R&D is forced to sustain the portfolio, a scenario that may distract resources and budget from growth opportunities, such as innovation. Marketing faces pricing and positioning issues when differentiation between similar products is not that clear anymore. Digital capabilities and transformation costs are affected negatively because of larger master data management requirements. Quality assurance must spend time on remediation when increased complexity requires increased headcount. Even human resources shares the pain because such complex challenges easily amplify attrition rates.

Based on our work with many medtech companies, product lines often are less profitable than they appear. Portfolio leaders typically have a decent view of global product line revenue, but they often find it difficult to synthesize a comprehensive picture of all the costs to sustain a product line. Given the matrix structure of most corporations, along with the fact that many companies have grown through acquisition, costs are distributed across multiple areas of the company—in the business unit P&L, within regional P&Ls and across myriad functional areas that have a solid- or dotted-line reporting into the business unit (e.g., quality, regulatory and manufacturing). Once all these costs are aggregated, along with a reasonable picture of relevant selling, general and administrative expenses, the financial picture may be less positive than is currently known.

• What should medtech do? We believe someone should be responsible for balancing the internal forces with the needs of the customer or commercial business. This someone should be marketing. A cross-functional team should be formed to perform an objective, ongoing assessment of portfolio relevance and long-term viability by synthesizing external data, including evolving customer needs, market dynamics and the competitive landscape. Internal data on the true costs of keeping a product line alive, including well-understood facts such as revenue, gross margin, growth rates and operational complexity, also should be monitored.

How can this be done?

1. Start with leadership. Articulate that portfolio rationalization is an important strategy and good for customers, employees and shareholders. Acknowledge that it is a cross-functional exercise that requires close collaboration and change management, internally and externally.
2. Commission the team and develop a standardized process. This process should comprehensively address the need and avoid unintended consequences. While profit and loss should be the top decision driver, other topics such as environmental challenges, manufacturing practices that risk employee safety and high energy consumption of a production requirement should be considered from an operational standpoint. Rely on data and insights, and enforce the portfolio monitoring process through metrics and risk indicators. Once those metrics are clearly understood and owned, the perception of portfolio management will shift from a risk discussion to an opportunity identifier.
3. Identify and prioritize the best opportunities. Consider the growth outlook (revenue and gross margin), costs to sustain, alignment to go-forward strategy and value proposition. Then create a cross-functional assessment that objectively includes the future global opportunity for each product, the use cases and the true financials—not just what shows up in the business unit’s P&L but also the “hidden costs” that might exist in other functional P&Ls in a matrixed organization. Systematically identify the opportunities for retirement. Often there are obvious, “no-regret” opportunities with low growth potential, high cost to sustain and overlapping use cases with other products.
4. Develop the right implementation plan, execute and closely monitor. Communicate internally with cross-functional teams and local commercial organizations, preferably through a well-defined and established gate review process. It’s critical to understand the implications of retirement and develop mitigation plans. For example, if there’s an existing tender in Sweden for a product prioritized for retirement, determine how to address those obligations, even if it means sourcing from a competitor or outsourcing manufacturing. This may be a tough conversation with the country manager or labor unions, but it’s the best thing for the company. Even if the company has a clear business case for retiring a product, it’s still critical to involve local teams who will be negatively affected in the short run. Find a win-win scenario—for example, retiring a product frees time for innovation. And who doesn’t want to innovate?
   
   Communicate externally with customers, tender authorities, regulators and other relevant stakeholders, not just on the legal issues but also on timing and what the company will do instead. It’s common in other industries for products to be retired, so customers may not be as upset as you fear. After all the hard work is done, the company needs to have the courage to follow through. Define the project plan, have a project manager and ensure that everyone lines up across business functions to do their part.
5. Incorporate portfolio optimization into the long-range strategic planning and annual operating planning mechanisms. Explore scalable enterprise and functional solutions that become more automated and leverage modern analytical and data management approaches. Leadership buy-in and support is critical. Make portfolio effectiveness a companywide initiative and continuously communicate that it’s mutually beneficial for customers, employees and shareholders. 

Retiring products is not an easy decision. It means taking something that generates revenue and removing it from the market. It may mean not addressing a customer use case that you could address. But taking this step can have a real and positive impact on the P&L, on the customer, on cross-functional teams and on the ability to drive innovation.