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How Portfolio Optimization for B2B Manufacturing Is Similar to Investing in Securities

Posted by Ashley J. Swartz on Jul 2, 2021 10:00:00 AM

Hoe Portfolio Optimization for B2B Manufacturing is Similar to InvestingAt Furious, we focus on helping sellers maximize the yield of their product portfolios—a concept that occasionally confuses people who are more familiar with the idea of portfolio optimization and management in the context of finance.

First, let’s start by defining a portfolio in the manufacturing lens. It’s simply the aggregate of a seller’s inventory of products or SKUs. You can think of each format like an asset class: In finance, we have stocks, bonds and commodities, while in manufacturing, we have product categories or product families. 

You don’t make the most money or manage risk by focusing on only one asset class to the exclusion of all others. Instead, investors diversify across asset classes to try to maximize the entire portfolio—finding the right asset class mix and allocation to deliver the highest risk-adjusted return. Indeed, many investment advisors believe that asset allocation is more important than asset selection (such as which stocks to hold). Similarly, every B2B seller’s obsession is (or should be) packaging and pricing that inventory in a way that maximizes their yield, or the total revenue available from their entire product catalog.

The best practices underpinning portfolio optimization for manufacturers and financial services are fundamentally similar, and finance principles can be instructive to B2B selling. With that in mind, I thought that a primer on how sellers should approach portfolio optimization and why it’s important—told via analogies to finance—would be useful. Here goes.

Hedge Your Bets

Fundamental tenets of investment portfolio strategy include allocation among different asset classes to modulate risk and hedge bets. This is why even investors with high-risk tolerance typically have some debt securities in their portfolios. In fact, debt is typically held in a portfolio regardless of where the investor is in their investment time horizon. 

Debt investments are considered less risky (and offer lower return potential) than equities and serve to protect a portfolio from volatility. Debt provides a tentpole that generates consistent, reliable income, and people tend to hold debt even when it is underperforming relative to other asset classes.

Ultimately, you’ll maximize your yield as a seller by hedging your bets, the same way you’d maximize your holdings as a financial investor. At a high level, this means not blindly over-allocating to a shiny object just because it fetches the highest price. By retooling and allocating capacity to a single product, for example, you can wind up cannibalizing other valuable parts of your portfolio and being very exposed if demand drops off or a market gets finicky. For example, products that are complementary but sell at lower volumes with higher margins but are often bundled with the ones that are selling like gangbusters. Over-indexing on the highest-risk, highest-return asset is fundamentally not a sound strategy.

Rebalance Your Portfolio

Smart investors adopt asset rebalancing as a strategy to reduce the effects of market movements on the desired allocation. Asset rebalancing calls for having a target equity-to-debt ratio in your investments and periodically reconsidering the allocation in light of portfolio performance and current market factors and adjusting it to ensure that a desired balance is maintained. So when equity has performed better than debt, you should sell some equity investments and invest the redeemed value in debt to rebalance your portfolio, and vice versa. This prevents you from taking on more risk than you had intended. 

Similarly, manufacturers should be monitoring their portfolio and rebalancing their assets each year by investing in R&D or innovation to improve performance of existing assets to respond to changes in demand and keep their risk in line. That calls for periodically assessing the relative contribution of each product category to total revenue and rebalancing their available inventory or allocation of production capacity to ensure that demand is being met and clients are being well-served and the greatest total revenue is achieved during the ensuing time period. 

High Price Doesn’t Equal High Profit 

Except when selling a specified, customized product as a sole source, trying to maximize the price of every single product may be a costly strategy. Manufacturers sell an array of products, often in bundles to different customer segments. Although it’s true that these bundles consist of individual “assets” (i.e., their SKUs), sellers need to actively manage the way they package and price to ensure they’re optimizing the total value of their portfolio across time. Think about your inventory and customers the way investors manage a diverse portfolio. It’s a different mindset and way of operating; it “pays dividends.” You’ll see that the results are worth it.

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