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Are any of your OEM products nearing obsolescence? It’s important to take action on legacy
product lines before their obsolescence affects your bottom line. The only way to stop that from happening is to extend the life of your legacy product while reducing the costs of continued manufacturing (both direct and indirect costs).
Remember that many OEM products follow the 80/20 rule (or Pareto principle):
- 80% of your profits come from 20% of your production staff’s efforts
- 80% of your product sales comes from 20% of your products
That means your legacy products could be taking up to 80% of your production time or floor space but only contributing to 20% of your revenue.
You have the potential to realize significant improvements in profitability by focusing on your most effective production efforts and eliminating work that doesn’t contribute to your profits – either through Product Line Simplification (PLS) or outsourcing. The bottom line: You need to identify your legacy products early and take the appropriate action. Does your manufacturing company currently have legacy products on its assembly floor? Use these seven measures to find out:
#1: Decreasing Sales Volume
The number one sign of a legacy product is a significant decrease in sales. While other market
factors may be at play (such as temporary unpopularity), a steady, enduring decline in product line sales is an indication of legacy status.
#2: Shrinking Gross Margins
Though your sales may not be decreasing dramatically, the direct and indirect costs associated with manufacturing continue to increase. If your gross margins are shrinking for a particular product line, then this may also indicate you have a legacy product.
#3: Entering the Decline Stage
Products start in the Development stage and advance through Introduction, Growth and Maturity until they reach Decline. As markets mature and new products are introduced, your legacy products enter the Decline stage of the product life cycle, when popularity and sales volume begin to decrease. Once your product line has entered the Decline stage, it has become a legacy product – so plan accordingly.
#4: Nearing Obsolescence
Sales, margins and life cycle stages aren’t the only measure of a legacy product: You should also consider obsolescence. If your product includes parts that are now obsolete or nearing obsolescence, you may be dealing with a legacy product.
Legacy products often require your team to re-engineer the product around an obsolete part in order to satisfy customer demand (which may still be going strong). Or, a legacy product line might force your supply chain managers to search the globe for a manufacturer of quickly obsolescing replacement parts. This parts obsolescence scenario is especially common for electronic components.
#5: Is Still Currently In Use
Your product may be showing some, or all, of the signs of legacy status above, but if your product is still installed in key end-user facilities you may have a legacy product that your business shouldn’t yet abandon.
#6: Is Still Preferred By Customers
You’ve already created the next version or latest iteration, but your customers keep coming back for more of your older legacy product lines. You know that this maturing product line isn’t the future and you won’t keep it forever, but as long as customer demand exists, you need a strategy for keeping this legacy product as profitable as possible and for as long as the market requires it.
#7: Still Absorbs Key Assets
Many OEMs make this common mistake: They recognize the declining sales of a legacy product but continue to commit valuable manufacturing resources to its production, such as floor space, capital equipment and key personnel.
Avoid that classic mistake by always measuring the viability of a legacy product against these four ROI metrics:
- Inventory ROI
- Factory floor space ROI
- Labor force ROI
- Supply chain management ROI
Remember the 80/20 rule: 80% of your revenue comes from 20% of your products, so don’t let legacy products tie up your production floor if they aren’t major contributors to your revenue.
The upside: Legacy doesn’t have to equal languishing for your business. Before you eliminate your products, consider a life-extending legacy manufacturing program that allows you to manage older products with a year-by-year plan, taking into account parts obsolescence, sustaining engineering, inventory management, technical support and repair services. The right contract manufacturing partner stems the declining revenue of your legacy product and takes your most nagging production – and profitability – challenges off of your hands, allowing you to focus on what’s next.