Product Rationalization Checklist

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About Product Rationalization:

• Product Rationalization is a process of justifying continued production (or sales) of a product, service, or a whole product line. It is based on a variety of factors, including:
  • Sales volume, growth and revenue;
  • Profitability;
  • Competitive advantages;
  • Customer demand;
  • Functionality and worth in comparison to other products;
• It is used by businesses for analyzing and assessing rationality of selling or producing specific products, services, their variants, product lines, etc. Product rationalization helps a company to optimize nomenclature of goods it proposes by withdrawing any gainless items;
• Once a product or service gets qualified as unprofitable and generally unclaimed, the reasons of this issue should be immediately investigated, and if it cannot be rectified by other efforts (such as a better marketing), then a product must be dismissed from sales or production processes; 

Product Rationalization Metrics:

• Sales-to-Stock Ratio = (Net Sales/Average Inventory):

The inventory to sales ratio means a company’s investment into inventory in comparison to its monthly sales amount. Sales-to-stock ratio is a method to measure the relationship between how much stock a company owns and how much it is selling. This ratio should be kept low, but not too low as this would mean an empty stock (let’s say a deficit of goods in a store). Good sales-to-stock ratio enables you to meet increasing customer demand, accommodate increasing sales, keep an adequate supply of inventory, and benefit from adequate cash flow;

• Gross Margin = (Gross Profit /Net Sales):

Calculating Gross Margin by a product or service is a good indication of how profitable it is. In general terms Gross Margin is Gross Profit (total sales revenue minus its COGS, cost of goods sold) divided by Net Sales, expressed as a percentage: this number shows how much a company earns from selling certain product or service, involving the costs it incurs for producing or acquiring this product or service. This measure is used to represent the margin made on every dollar of net sales: the proportion of each dollar from revenue which a company retains as gross profit to service its other business operations and obligations;

• Gross Margin Return on Investment (GMROI) = Gross Margin x Sales-to-Stock Ratio:

This is a metric which appraises a company’s ability to turn its inventory into cash: amount of profit that the inventory returns above its cost. With a help of this metric a company’s managers can see how a product is contributing to overall company profitability. In other words they can measure how much every dollar invested into acquiring this product earns back;

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