A manufacturer generally has no problem coming up with new product ideas. The major problem for most manufacturers is to find a systematic way to say “no” to projects that in the end consume a lot of resources with little return in terms of margin and growth. Instead, many manufacturers are saddled with huge portfolios of ongoing projects. These projects quietly acquire new commitments and, before you know it, years have passed since the initial approval.
A portfolio of value is constrained in four ways, by the individual project constraints, by the lack of comparability between projects, by the lifecycle position of individual projects and by the governance rhythm of approval after initial approval.
Treat engineering capacity as the binding constraint, not capital
While the capital budget may constrain the portfolio of products a manufacturer can support, the more severe constraint on sustaining engineering is skilled technical time, i.e., program managers, test engineers, tooling specialists, etc. As well as those individuals knowledgeable of the appropriate regulatory bodies and the required engineering to comply with their rules and regulations. Such individuals cannot be hired in the same manner in which one would hire a marketing or sales person.
Model the load before approving the list
Getting a solid ranked list of projects to invest in typically takes a few months to complete. First, gather data on the committed demand against available skilled hours over the next four to six quarters. There are three key variables that influence this.
- Sustaining and compliance work already locked in, including field issues, supplier changes, and certification renewals
- Named-role capacity for the two or three disciplines that gate every project, rather than a total headcount figure
- Realistic ramp time for new hires or contract resources, counted as a cost to existing staff, not a free addition
Now that you have a feel for the committed demand versus available hours of skilled personnel for the next four to six quarters, you can begin ranking the various projects. Initially, you will want to determine how attractive individual projects are. But eventually, you will begin to ask how individual projects fit into your overall portfolio. And in the end, you will have to stop some individual projects to make room for others.
Make dissimilar investments comparable
Programs such as a new platform, variants, cost-down programs and tooling programs for their net present value have problems. The risk and payback in terms of time are different for the most valuable programs. Before scoring anything, it is worth grounding the exercise in the established practice of product portfolio planning in manufacturing, which gives these very different investment classes a common frame.
| Investment class | Typical payback horizon | Dominant risk | Decision test |
| New platform | Three years or more | Market and technical uncertainty | Does it open a segment the current architecture cannot reach? |
| Derivative or variant | Six to eighteen months | Portfolio complexity creep | Is incremental volume greater than cannibalization plus support load? |
| Cost reduction | Under twelve months | Quality and supplier risk | Is the saving durable at current and reduced volumes? |
| Compliance and sustaining | Not applicable | Revenue loss if deferred | What is the exposure if the work slips two quarters? |
| Capacity and tooling | One to three years | Demand forecast error | Is the asset useful across more than one product line? |
Weight criteria to reflect stated strategy
If scoring projects within a portfolio then ensure that all criteria carry different weights and that these weights reflect the overall strategic intent of the company (i.e. Margin defense, share growth in a specific segment or part count reduction, for example). Furthermore, the weights must remain constant for at least a year to enable comparison of results between review cycles.
Use lifecycle position as a live input
Each project in your portfolio is most valuable to you at different points in the product’s lifecycle. To manage a portfolio effectively, you must know where each line is on its lifecycle curve. Here’s an example of the value of spending on feature additions to a product in decline versus not spending enough to reach the ceiling of a product just launched.
Build a rationalization habit
Manufacturing has the highest return on investment from retirement decisions of products and features. Program Managers get the least amount of practice at these decisions. Identify products and features that meet two or more of the following conditions for standing review.
- Declining volume across three or more consecutive periods with no defined recovery plan
- Gross margin below the portfolio average once sustaining engineering and inventory carrying cost are allocated properly
- Unique components or tooling supporting a small revenue base
- Dependence on a single customer or a single-source supplier at end of life
Flagging a project to be deleted from your portfolio versus deleting a project are two different scenarios. The decision to delete a project will be made within one of the four following scenarios, reprice, redesign, transfer or exit. This decision will be made by a named owner or owners within a specified time frame or dates.
Set a governance cadence that revisits, not just approves
While an annual approval of a portfolio constitutes portfolio planning, portfolio management requires periodic review, decisions on projects and programs, and a schedule for such review. The evidence to be considered in such a review should have arrived after the last such review. This could be, for example, validated cost estimates, results from customer trials, supplier commitments, etc.
Make stopping a normal outcome
18 months of Portfolio Management has to come to an end at some stage. If no projects have been stopped for reasons of Portfolio Management then all effort has been in vain. Early stopping of a project has to be seen as a saving rather than a failure. People can utilize the space of released resources that was locked up by committing the best people to work on a project, faster than ever before. Without career risk there is no problem in reallocating the best people on earth.
