80/20 Graphic

Legacy Products: The Basics Of The 80/20 Principle For OEMs

When you have a product line that’s continually shrinking gross margins or consistently lacking in sales, it is on the decline of the product lifecycle.

As the decision-maker at your OEM (original equipment manufacturer) company, when you have a legacy product on your hands, you need to take the best course of action.

Before eradicating the product from your manufacturing line via the product line simplification (PLS) methodology, you first need to determine if your legacy product is draining too many key assets or if it still has real market value.

This is where the 80/20 Principle comes into play for the OEM.

A Brief Background Of How The 80/20 Rule Began

The 80/20 Principle was derived of the Pareto Principle. The original observation was made in connection with population and wealth in Europe. In 1906, Vilfredo Pareto observed that 80% of Italy’s land was owned by 20% of the population. Pareto later developed this principle by observing that 20% of the pea pods in his garden contained 80% of the peas.

Over time, the 80/20 Principle has been proven, again and again, to the point where it’s now a common rule of business, as in “80% of your sales come from 20% of your clients.”

Determining What’s Bogging Down Your Business

The hard part of the 80/20 Principle isn’t determining what products make up the 80/20 ratio. The tough decision is what to do with your legacy products that are using up 80% of your valuable resources that are only contributing to 20% of your revenue.

This is a classic legacy product scenario, where either sales numbers have been down month over month or production of that particular product is eating up too many key assets.

Once you’ve identified a product on the decline, you have two choices:

  • Remove the legacy product from you manufacturing process through PLS
  • Outsource the product to a contract manufacturer (CM) that specializes in legacy manufacturing

Don’t be quick to stop manufacturing a legacy product without considering the possibility that enough customers still want the product. If you stop making the product, your customers are going to seek out your competitor who is still making it and buy it from them. For you, that’s a lot of business lost without even considering the alternative of partnering with a contract manufacturer.

Legacy Manufacturing Leverages The Value Left In Your Product

Outsourcing to a contract manufacturer that’s experienced in legacy manufacturing allows you to extract the remaining market value from your legacy product without using up your own valuable resources, like floor space and labor force. This is a more even-keeled approach to turning a profit, especially in terms of the 80/20 Principle.

Try as you might to add products and customers and get rid of what’s not working in an effort to be a leaner manufacturer, but this doesn’t change the fact that 80% of your products are only contributing to 20% of your revenue.

Partnering with the right contract manufacturer for legacy manufacturing is a sensible way to still give your customers what they want while using your own manufacturing resources to produce more of your popular products.