Management by product line has been used successfully in the manufacturing industry for decades. As the healthcare industry evolves, implementation of Product Line Management is emerging as one strategy to increase efficiency, effectiveness, and profitability. Product Line Management is an organizational scheme and alternative management system for focusing on the programmatic scope of operations in order to achieve particular objectives.
The main management challenge is to provide always a product line infrastructure with the required functionality and quality. To this end, the management is subdivided into product line management and product management as presented in the product management is responsible for a concrete product, thus it can provide direct feedback to the product line management to maintain and evolve the required functionality and quality of the product line infrastructure. From the early adopter segments to the mainstream market requires a “whole product”. From a narrow perspective, this means having a product that is complete and debugged. From a slightly broader perspective, this means having a full set of complementary products that provide a complete, workable solution to customers.
Many marketers (and most sales forces) often argue that a broad product line is required to fully cover all customer / market requirements, and to erect barriers to fend off competition. So, there is a prevalent tendency to add product lines, extend product lines to more categories, and add products to lines, and add basic product choices (e.g. features, size, color, and package) or quality variants geared to hit different price points
Many of these line extensions do, in fact, provide meaningful strategic or tactical benefits. For example, a longer product line may allow a company to:
(1) Leverage costs via economies of scale and scope
(2) Insulate customers from competitors by enabling one-stop shopping
(3) Offer more choices that are more closely tailored to specific customer requirements
(4) Access incremental profit opportunities (e.g. add-on sales)
Traditional financial analysis, and most compensation systems, tends to encourage line extensions. When assessed on a marginal cost basis, individual line extensions are typically appealing. The logic is simple: since the overhead and infrastructure (e.g. manufacturing facilities, sales force) is already in place, any contribution (excess of price over variable cost) that is generated falls directly through to the bottom line.
Unfortunately, the logic isn’t quite right. Each and every item added to a line has associated costs. Some of these costs are visible, some are hidden in traditional financial accounting, including:
(1) Administration: the cost of setting items up for processing, reviewing their status, and placing purchase orders
(2) Cannibalization: diverting sales from other models rather than generating true incremental volume
(3) Inventory: disproportionate safety stock is required to maintain service levels when volume is spread across multiple models (the reverse of the pooling effect )
(4) Repair parts: separate inventories of model-specific parts may need to be provided throughout the market life of the product
While adding products to a line may have low apparent marginal cost, in fact, operating complexity and the corresponding costs increase exponentially as product lines get long. So, the strategic benefits of product line proliferation must be carefully weighed against the stark financial realities.
In other words, managers must treat line extensions as major decisions, not marginally incidental ones, and consider all relevant costs. Further, managers should constantly monitor product-specific profitability and make on-going adjustments to optimize the product portfolio.
As a general rule, a company should strive for the shortest line of products that is strategically viable, and manage its product mix by rigorously screening line extensions, being constantly vigilante of product-specific profitability, and being willing to manage losers aggressively.