As a decision-maker at your OEM (original equipment manufacturer) company, you might have some tough decisions to make in regards to your legacy products. When a particular product line has shrinking sales, it’s convenient to think that product line simplification (PLS) is the best course of action. Why lose money manufacturing a product if it’s nearing obsolescence, right?
Not so fast. It’s equally important to determine if your legacy product still holds substantial market share.
One helpful way to determine the benefit or detriment of your legacy product is to apply the 80/20 Principle to your decision-making process.
Applying The 80/20 Principle To Better Understand Your Legacy Products
The 80/20 Principle (also known as the Pareto Principle, after Italian economist Vilfredo Pareto) works like this:
Approximately 80% of your company’s value (measured by revenue or profit) is derived from only 20% of your resources or efforts (such as product lines and customers). Conversely, 20% of your company’s value is utilizing 80% of your precious resources.
The fact is, through study after study, the 80/20 Principle has proven to be consistent.
Legacy products usually fall into the 20% category. Many OEM companies have chosen to eliminate a legacy product from their offering through PLS before ever considering outsourcing the lower-revenue-generating products.
This could be a mistake, as certain legacy products play a supporting role to your business. If you simply stop manufacturing legacy products that still carry market validity, your customers are going to buy them from your competitor.
Legacy products that customers still need may be outsourced to a contract manufacturer (CM). This viable option allows your customers to purchase the legacy product without spending your valuable resources, such as, floor space, capital equipment and labor force.
Understanding and applying the 80/20 Principle helps you focus limited resources in the areas that offer the greatest return, without alienating your customer base.
Embrace The Truth And Develop A Legacy Product Strategy
When it comes to turning a profit, you may attempt to grow by adding products, customers, employees and factories, but this doesn’t change the fact that a minority of your customers are responsible for the majority of your profitability.
That’s why implementing PLS to become leaner is ineffective if you don’t have a complete understanding of where and why your resources are being used.
Partnering with the right contract manufacturer that’s experienced in legacy manufacturing helps to give you valuable 80/20 insight into how to get the most from your products nearing obsolescence.
What The Market Wants, The Market Gets
To maximize your profit potential, you need to understand the product lifecycle and the current market value of your legacy products.
Once you know how much your legacy products contribute to your overall revenue versus resources, you may then decide to continue making those products internally, eliminate them altogether or outsource production to an experienced contract manufacturer that specializes in legacy product manufacturing.
Ready to understanding the market value of your legacy products and what strategies work best to protect profits? Call me, Craig Zoberis, at 630-948-4879 or click on the button below to speak with a legacy manufacturing expert at FusionOEM.