Track: Supply Chain

Abstract

The focus of this work is the problem of structural complexity emanating from the firm’s business strategy and associated to the proliferation of products, channels and markets. Structural complexity makes difficult for allocating fixed-costs and obstruct the understanding the true cost of a SKU. The understanding of that cost is necessary for correctly computing profitability of each product and consequently sizing the capacity of a facility and making hard product portfolio choices. In this work we introduce a way for systematically evaluating profitability and apply it for the case of two very large global firms. We find that in more than 75% of the cases studied, production facilities should reduce the number of products in the portfolio even though their capacity utilizations were relatively low. The effect of the changes on product portfolio and facility utilization improved EBIT profits from 10% to 60% and, in some cases, helped facilities’ financial performance to change from red to positive values in the bottom line.