Complexity hides in plain sight—often starting in the aisles.
A plant manager once described his operation to me with the kind of honesty that only shows up after the third “quick” meeting of the day.
“We’re busy,” he said, nodding toward a humming line. “But we’re not productive. We’re running hard—and still missing.”
The work orders were full. The overtime was steady. Expedite fees had become routine. Inventory sat everywhere—raw, WIP, finished goods—like the organization had decided that owning the problem was easier than solving it. Sales had explanations. Operations had explanations. Finance had spreadsheets.
What they didn’t have was a shared answer to a single question that determines whether a manufacturing business scales or suffocates:
What should we stop doing—on purpose—so we can do the right things exceptionally well?
Portfolio rationalization is not a cost-cutting exercise dressed up for the board. Done correctly, it is a CEO-level discipline of focus: reducing complexity to release cash, improve throughput, and restore operational control—without damaging the strategic positions that matter.
The real cost of complexity isn’t visible on the P&L
In manufacturing, complexity doesn’t announce itself as “complexity.” It shows up as:
- Longer changeovers and more schedule fragility
- Rising SKU count with flat or declining profitability
- “Special” customer requirements becoming the rule
- Quality drift as variation multiplies
- Inventory growth that outpaces revenue
- New product introductions that never retire old products
- A footprint designed for yesterday’s mix
The hidden cost is not just labor. It’s managerial bandwidth, planner time, supplier disruption, rework, excess safety stock, and the quiet tax of being unable to say “no” with credibility.
And that tax compounds because complexity multiplies. One SKU becomes ten variants. One customer exception becomes a policy. One extra material becomes a permanent line item in the warehouse—then another, and another.
The CEO’s framing: simplify without surrendering the strategy
Rationalization fails when it is framed as “cut the bottom 10% of SKUs.” That approach is clean on paper and messy in reality—because it confuses accounting margin with strategic value.
A CEO-level rationalization uses a more durable framing:
“We will reduce complexity where it does not buy us strategic advantage, and we will invest where it does.”
That requires two things before any SKU list is touched:
- A clear statement of strategic positioning (where you must win, and why).
- A decision architecture (how choices will be made and defended).
If the organization cannot articulate what it stands for—markets, customers, differentiated capabilities—then rationalization becomes politics. If it can, rationalization becomes execution.
The 3-layer portfolio: Product, customer, footprint
Portfolio rationalization is not a single list. It is three interdependent portfolios that must align:
1) Product portfolio (what you make)
- SKUs, variants, options, packaging formats
- NPI pipeline vs. end-of-life discipline
- Make/buy decisions and complexity drivers (materials, routings, testing)
2) Customer portfolio (who you serve and how)
- Profit pools (not just gross margin)
- Service models and exception policies
- Contract terms that create operational volatility
3) Footprint portfolio (where and how you make it)
- Site roles (specialize vs. duplicate)
- Capacity allocation (strategic vs. accidental)
- Logistics and inventory strategy across the network
A business that simplifies only SKUs but keeps the same exception-heavy customers and the same fragmented footprint will not get durable results. Complexity will simply shift locations.
A practical CEO framework: the 5 decisions that unlock capacity and cash
The best rationalizations I have seen do not start with debate. They start with rules—clear, defensible, measurable. Here are five decision categories that consistently unlock results:
Decision 1 — Define the “non-negotiable” strategic lanes
Pick the few areas where you will not compromise:
- The customer segments you will protect
- The capabilities you will remain best-in-class at
- The geographies or channels central to your future
- The compliance, safety, or mission constraints that are immovable
This is not a branding exercise. It is a governance constraint: it prevents simplification from becoming strategic drift.
Decision 2 — Segment by operational behavior, not just margin
Two SKUs can have identical gross margins and entirely different operational costs. Segment products using operational drivers such as:
- Changeover time and frequency
- Yield and scrap sensitivity
- Quality/test complexity
- Supplier risk (single-source, long lead, volatile commodities)
- Forecast volatility and minimum order requirements
This is where truth tends to surface: some products are “profitable” only because their complexity cost is smeared across the rest of the system.
Decision 3 — Establish explicit exit and redesign pathways
Rationalization cannot be a blunt instrument. For each target, choose one of three pathways:
- Exit: retire the SKU, customer, or facility role
- Consolidate: fewer variants, fewer routings, fewer materials
- Redesign: keep the strategic intent, but engineer out complexity (platforming, modularity, packaging harmonization)
Organizations fail when they only choose “exit” and trigger customer backlash—or only choose “redesign” and never actually remove anything.
Decision 4 — Lock exception policies and price them
Most complexity is not created by product design. It is created by exceptions:
- Rush orders
- Non-standard packaging
- Custom labeling
- Unique inspection/test requirements
- Low MOQs and high mix volatility
A CEO-level rule set says: exceptions are either strategically justified, priced, or eliminated.
If you do not price exceptions, you subsidize them—and starve the core business of capacity.
Decision 5 — Re-assign footprint roles (and stop moving work “because we can”)
Footprint drift is common: work moves to whoever is available this week. That feels agile; it is usually expensive.
A rational footprint assigns roles deliberately:
- Plant A: high-volume, stable runners
- Plant B: high-mix, engineered-to-order
- Plant C: regulated / validated processes
- Plant D: regional fulfillment and customization
When site roles are clear, scheduling stabilizes, inventory falls, and quality improves—because repetition is the friend of manufacturing excellence.
The operating cadence: 60 days to diagnose, 90 days to execute
Portfolio rationalization becomes real only when it has owners, milestones, and metrics. Here is a cadence that works:
First 60 days — Diagnostic with decision-ready outputs
Deliverables that matter:
- A SKU/customer complexity heat map (margin + operational burden)
- A “where complexity lives” report (materials, routings, changeovers, forecast volatility)
- A footprint role assessment (what each site should do)
- A draft decision rule set (what you will keep, redesign, exit)
Crucially: the diagnostic must produce decisions, not insights.
Next 90 days — Execution plan with irreversible moves
Make the plan real by forcing commitments:
- SKU end-of-life dates and customer communications
- Engineering backlog prioritized for platforming/modularity
- Commercial policies revised (exceptions, MOQs, lead times, pricing)
- Capacity reallocation and site role lock-in
- Inventory strategy reset (where safety stock belongs, and why)
Metrics that prove simplification is working
Avoid vanity metrics. Use indicators that show complexity is truly leaving the system:
- SKU count (overall and by plant)
- Active materials count (raw materials, packaging, purchased parts)
- Changeover hours per week and schedule adherence
- Inventory turns and obsolescence write-offs
- OTIF (on-time, in-full) without expediting
- OEE and throughput stability (especially on constraint resources)
- Engineering cycle time (time to implement a simplification change)
The goal is not just cost reduction. The goal is control—the ability to run a predictable system that produces cash.
The human side: rationalization fails in silence
The hardest part is rarely the analysis. It is the conversation.
Sales will fear losing accounts. Operations will fear disruption. Product teams will fear admitting that “innovation” became clutter. Plants will fear losing volume.
So the CEO must lead with clarity:
- “We are simplifying to protect what makes us strong.”
- “We will exit what steals capacity from the future.”
- “We will support customers through transitions, but we will not subsidize exception culture.”
Then—critically—make it visible. Rationalization should be communicated like a strategic shift, not a cleanup project.
A closing thought: simplification is a growth strategy
The most important reframing is this:
Portfolio rationalization is not about becoming smaller. It is about becoming sharper.
When complexity falls, you do not merely reduce cost—you release the organization’s ability to perform:
- lead times drop,
- quality stabilizes,
- planning becomes credible,
- cash returns,
- teams stop improvising and start improving.
That is how manufacturing businesses reclaim the margin they thought they had—and build capacity for the growth they actually want.
