I’ve walked into more warehouses than I can count and seen the same scene over and over again.
Walls of inventory. Aisles packed floor-to-ceiling. Stock rooms so full that overflow pallets sit in the hallway.
When we started digging into the numbers, the truth was almost always the same: a huge percentage of that inventory was sitting there for items the company sold only occasionally — sometimes only once or twice a year. They kept it “just in case.”
And here’s why it happens: Sales didn’t want to miss any opportunity with a customer.
They wanted to be a “be-all” supplier — everything to everyone — instead of focusing on and selling a specific niche. Sales and Marketing were afraid they would lose business if they couldn’t compete on options. On top of that, there’s the constant push to grow quickly and “be more.” In this huge effort to over-serve, we often forget a simple reality: if we’re only delivering these products once or twice a year, not having them means we’re really only missing out on one or two sales per year. Those customers are going to be filtering for that at the door. They’re not going to grow into it.
The result? Cash tied up, space consumed, and the company quietly subsidizing low-volume items with the profits from its real winners.
The truth is simple: What you sell makes you money. What you don’t sell never does.
Knowing it and doing something about it are two different things.
Product rationalization is simply the process that finally separates the true profit-makers from everything else. It replaces opinions, politics, and “we’ve always done it this way” with clear, objective facts.
It works whether you manufacture physical goods or deliver services. The logic is exactly the same.
Step 1: Set a Focused Scope
Don’t try to rationalize your entire catalog at once. Pick one product family and focus only on the top 20 options or features. Experience shows these usually account for 80% of the impact. The rest can wait.
How to Collect the Data
Two methods that actually work in the real world:
- Modified Delphi — Ask the people who do the work — schedulers, engineers, order-entry staff — to rank which options consume the most time and resources. They already know. They just haven’t been asked.
- Sampling — Have order-entry or sales teams track every option selected during a short, representative period — one week or one month. Fast, practical, and often the most accurate method you’ll find.
Step 2: Look at the Right Numbers
To make objective decisions, analyze each option through four lenses:
- Sales Revenue generated by that option or feature over the past 12 months.
- Assets Inventory required to support it; plant space or capacity it consumes; specialized equipment or tooling.
- Support Costs All the hidden overhead: order processing, engineering reviews, special handling, quality checks. These costs are often the same whether an option sells $500,000 or $500.
- Profit & Return on Assets (ROA)
Profit = Sales – Assets – Support Costs
ROA = Profit ÷ Assets
A high ROA means the option is genuinely profitable. A low or negative ROA means your winners are carrying it.
Step 3: Visualize the Results
Create a simple chart that plots each option by Sales, Profit, and ROA. You’ll immediately see which items are true winners and which ones are dragging everything else down.
Step 4: Make the Hard Decisions
Once you have clear data, you have four practical choices:
- Eliminate — Drop the low- or negative-ROA items, after checking for any critical system-sale dependencies.
- Raise the price — Charge what the option is actually worth.
- Reduce the cost base — Lower inventory, simplify support, or eliminate special tooling.
- Keep it — If it’s a necessary loss-leader for a high-value customer or product line, at least now you know the true cost.
Important Cautions
- Product Life Cycle — New products often show poor ROA early. Don’t kill innovation before it has a chance.
- Traditional Costing Lies — Standard cost systems distort the real picture by spreading overhead evenly. Use actual support costs instead.
- Data Must Be Current — Markets Change Fast. Re-run the analysis regularly.
The Bottom Line
The painful truth is this: What you sell makes you money. What you don’t sell never does.
Every dollar locked in “just-in-case” inventory, every square foot of warehouse space occupied by slow-moving items, and every hour spent supporting products that rarely sell is money and capacity being quietly taken away from your real winners.
Product rationalization is a straightforward, do-it-yourself toolkit that shines light into the dark places and gives you the information you need to make better decisions.
This approach has worked for my clients and the companies I’ve worked with for more than forty years. At one customer, we reduced thousands of choices down to the 12 that actually mattered. The impact on inventory, cash flow, and profitability was dramatic.
When you complete this process you’ll have:
- Simpler operations and dramatically lower complexity
- Significantly lower inventory and support costs
- Cash freed up that was previously trapped in slow movers
- Higher overall profitability
- A much clearer, data-driven picture of what your business should actually be selling
The tool is yours to use and improve. Put it to work and watch what happens.