The more catalog companies I advise, the more I am convinced that product retirement is an unknown component of catalog management. In most instances, 20 percent of the inventory is old and needs to be eliminated.
The causes of obsolete inventory fall into four categories: parental pride, denial, omniscience and creep. Allow me to explain.
Parental pride stems from creating a product idea. Whoever conceives the product will always remain the champion of the product, regardless of the product’s success or failure. When the owner of the catalog company is also the conceiver of the products, generally all products will be great ideas. In fact, there is often a warehouse full of great products. Unfortunately, few people are willing to actually buy those products. Since retiring these products would require an admission of failure, pride demands that the problem be denied.
Denial is the inability of owners or management to even recognize that there is a product obsolescence problem. If it is faced, it will require a financial adjustment. If it is faced, it will also require product replacements. That is a challenge and, often, denial is preferable to an uncertain new product challenge. Denial is very easy to spot. When asked about obsolete product levels, one of the senior managers will usually say something like, “We’ve probably got about 10 percent of the inventory in slow-moving products.”
Whoever is in denial or suffers from parental pride will almost always say, “Oh, it’s nowhere near that much, maybe 3 percent, at most.” At this point, I know the real obsolete product number is 20 percent. The first manager intentionally started the conversation at 10 percent, at half of what she really knows is out there in the warehouse. The ensuing argument brings us to the third category.
Omniscience comes from the erroneous belief in knowing more about the product lines than anyone, including the customers. When we are the creators, we are omniscient. And the omniscient creators continue to believe what has always been true, and what has always been true is that they know more about the products than anyone else.
Creep occurs because no one knows what is selling, how many are selling, what is being returned, how many there really are in inventory and where they are stored. Creep is almost always caused by poor systems and minimal attention to detail. The final result of creep is inventories that are bloated by obsolete products that will never sell and that no one will do anything about.
What is the solution? First: face reality. Second: clean up the systems and the numbers. Third: implement a zero-based new product program.
If we accept that a business-to-business catalog requires somewhere around 35 percent new products a year just to maintain customer interest, then a zero-based new product program demands that 35 percent of the old products be retired. My own formula has been 35 percent new products and 25 percent old product retirement for a 10 percent total product net gain.
Product retirement, however, requires discipline. It’s a lot like breeding champion horses. You have to do a lot of culling and selection before you have a stable of winners. Product discipline begins with the first timeless maxim of product development: Never fall in love with a product.
Minimum sales thresholds must be established as a part of the new product R&D process. There must be adequate merchandising and time devoted to the new product. One catalog cycle is not enough to condemn or praise a new product. But when it does not sell, be ruthless. Sell it off at cost. Ship it to a liquidator. Get rid of it and re-invest the money in another attempt.
When product retirement is ignored, the result can be devastating.
Many components exist in managing a thriving catalog company and all of them demand attention. But when the focus is removed from the product backbone of the company, the influence on profitability and valuation is rapid. Product relevance – the flip side of product obsolescence – is a critical management skill and one of the cardinal capabilities of catalog masters.