Product mix optimisation: how to decide what to make and procure to maximise profitability

Product mix optimisation is one of the most complex decisions and one with the greatest impact on the supply chain. With broad portfolios, limited capacity and constant pressure on margin, deciding which products to prioritise is not just a commercial choice. It is a strategic decision that directly affects operations, inventory and financial performance.

Many organisations still manage their product mix reactively, guided by historical sales or theoretical margins. In this article, we look at why that approach is no longer enough, which variables you need to consider optimising the mix realistically and how to use demand, capacity and operational profitability data to make decisions that improve efficiency and business stability.

Why optimising the product mix is a critical business decision

Product mix optimisation is one of the decisions with the greatest cross-functional impact across the supply chain and business results. It affects not only what is sold but how planning is done, which resources are consumed, how much inventory is tied up and what real margin is generated. That is why the mix cannot be defined as an isolated decision or as a purely commercial one.

In environments with limited capacity, broad portfolios and cost pressure, every product competes for critical resources. Prioritising over others shapes operational stability, system efficiency and the ability to meet service commitments. Optimising the mix means consciously deciding where to focus the business to maximise overall value, not just revenue.

When the product mix stops being a commercial decision

Traditionally, product mix has been defined by Sales, prioritising sales volume or catalogue growth. However, this approach overlooks a key fact: not all products affect operations or real profitability in the same way.

Every decision about what to manufacture, procure or keep in the catalogue drives production load, the use of critical resources, inventory levels and operational complexity. When the mix is decided without considering these variables, the supply chain becomes a stretched system with constant cross-functional conflict and financial results below expectations.

Operational complexity and hidden costs by product

A broad product mix does not only increase potential sales. It also introduces hidden costs: more format changes, more set-ups, greater planning complexity, and more effort in picking, transport and customer service. These costs are rarely allocated accurately to each product.

As a result, many SKUs that look profitable on paper end up consuming critical capacity and creating inefficiencies that affect the whole system. Optimising the mix means identifying these invisible costs and deciding which products create real net value, not just revenue.

The common issue: deciding the product mix with incomplete data

One of the most frequent mistakes in product mix optimisation is not a lack of information but fragmented analysis. Many organisations make major decisions based on a single dimension (demand, capacity or margin) without integrating the impact each product has across the full system.

This partial approach leads to decisions that seem reasonable but, in practice, are unworkable or unprofitable. The mix is defined using good data but poorly connected data. When demand, operations and profitability are not analysed together, the result is an unbalanced portfolio that puts the supply chain under strain and erodes margin.

Mix optimisation requires the opposite: bringing these three dimensions together and understanding how they interact. Only then can you identify which products to prioritise, which to limit and which to challenge, not through a local lens but based on their overall business impact.

Demand without operational context

Demand forecasting is often the starting point for defining the mix, but in many cases it is analysed in isolation. Products with the highest expected volume are prioritised without evaluating whether operations can absorb them efficiently.

When demand is not matched against real capacity constraints, lead times or critical resources, the result is an unworkable plan that drives expediting, delays and extra cost. Demand alone is not enough to decide the optimal mix.

Capacity without a profitability lens

At the other extreme, some organisations prioritise the mix based on what “fits” in the plant or warehouse. This approach reduces operational pressure in the short term but can lead to making or procuring low-profit products simply because they are easier to manage.

Capacity is limited and valuable. Using it without a clear view of operational profitability means missing opportunities and sacrificing margin in exchange for a false sense of stability.

Theoretical margin vs margin you can actually deliver

Commercial margin does not reflect a product’s real impact on the supply chain. It does not account for changeover costs, logistics complexity, associated inventory or obsolescence risk.

Optimising the mix requires moving from theoretical margin to deliverable margin: what is left after producing, storing, serving and planning the product under real operating conditions. This gap explains why many “winning” mixes on paper fail in practice.

The three variables that should guide product mix optimisation

Optimising the product mix is not about choosing the best-selling products, the easiest to manufacture or the ones with the highest margin in a spreadsheet. It is about understanding how each SKU behaves within the full supply chain system and what real impact it has on operations and business performance.

To do this, you need to assess the mix through three inseparable dimensions: demand, capacity and operational profitability. These variables do not act independently. A product that looks attractive commercially can be highly inefficient operationally, and a product that is easy to make may not justify the use of critical resources if its economic contribution is limited.

When these three variables are evaluated together, the mix stops being a set of isolated choices and becomes a strategic lever. It is at this intersection that you identify which products truly deserve priority, which should be managed with caution, and which should be reconsidered in the catalogue.

Demand: volume, stability and consumption pattern

Not all demand is the same. High-volume products with high variability create more pressure than items with stable, predictable consumption. Seasonality and intermittency also directly affect planning difficulty.

Optimising the mix means analysing not only how much you sell but how you sell it. Demand stability is a key factor in reducing expediting, defensive inventory and constant replanning.

Capacity: bottlenecks and critical resources

Some products consume capacity on key resources: constrained lines, manual processes, specific machinery or specialised labour. Prioritising these products carries a high opportunity cost.

A well-optimised mix protects critical capacity and allocates it to the products that generate the most value per unit of constrained resource consumed. This is particularly relevant in finite-capacity manufacturing environments.

Operational profitability: beyond commercial margin

Operational profitability integrates demand and capacity with real costs. It answers a key question: which products create the most value for the business when you consider their full operational impact?

This approach avoids local optimisation and supports consistent decisions across functions. The mix stops being driven by intuition and starts being based on connected data that reflects supply chain reality.

Optimising the product mix is not about picking products. It is about evaluating scenarios

Product mix optimisation is not about labelling SKUs as “good” or “bad”. It is about understanding what happens when you prioritise one criterion over another. Every mix decision creates a set of operational, financial and service level consequences that need to be assessed in advance.

That is why mix optimisation requires scenario work. Analysing how the system changes when you prioritise volume, margin or stability helps you make conscious decisions aligned with business objectives and with the supply chain’s real capacity.

What happens if I prioritise volume

Prioritising volume can increase revenue, but it often drives higher inventory, more operational pressure and greater risk of bottlenecks on critical resources. Without upfront evaluation, this approach degrades service levels and efficiency.

What happens if I prioritise margin

Prioritising unit margin can reduce complexity, but it can also increase dependence on a small number of SKUs and expose the business to greater demand volatility. Risk becomes concentrated.

What happens if I prioritise stability

Prioritising stability usually reduces expediting and improves operational reliability, but it can limit growth or leave margin on the table. The key is finding the right balance based on strategic objectives.

How product mix optimisation changes by company type

Although the principles of mix optimisation are consistent, practical application varies significantly depending on the type of company and its operating model. Manufacturing, distribution and retail share the goal of maximising value, but they do so under very different constraints around capacity, inventory, service and complexity.

That is why an optimal mix is not universal. It depends on where the bottleneck sits, how capital is consumed and what impact each SKU has on day-to-day operations. Understanding these differences is essential to avoid generic approaches that work in one environment but create inefficiencies in another.

Manufacturing: finite capacity and changeover cost

In manufacturing environments, the product mix directly determines how production capacity is used. Not all products use the same resources or create the same level of complexity. Set-ups, format changes, sequencing and the use of specific machinery mean that producing one SKU rather than another can have a very different impact on overall plant efficiency.

Optimising the mix in manufacturing means prioritising products that maximise value generated per unit of critical capacity, not simply those with the highest demand or commercial margin. A product that looks profitable on paper can become a problem if it blocks a key line or drives up changeover time. In this context, the mix is a tool to stabilise production, reduce operational variability and protect flow.

In addition, a poor mix decision often pushes the issue into the short term: expediting, overtime, constant replanning and service deterioration. An optimised mix, by contrast, helps you anticipate load, smooth the sequence and align demand and capacity realistically.

Distribution: turns, space and cost to serve

In distribution businesses, the product mix directly affects inventory efficiency and the use of logistics space. Each SKU takes up locations, ties up capital and generates handling, storage and transport costs that are not always reflected in the commercial margin.

Optimising the mix in distribution requires understanding which products turn healthily and which become structural stock. Low-turn, highly variable or intermittent items often absorb space and capital for long periods, harming cash flow and increasing obsolescence risk.

A well-optimised mix prioritises products with consistent turns and real operational profitability, factoring in cost to serve by SKU. This does not mean removing variety. It means consciously deciding which products deserve a stable inventory presence and which should be managed through more flexible or make-to-order models.

Retail: assortment, availability and margin by channel

In retail, mix optimisation requires a particularly delicate balance between assortment, availability and profitability. A wide catalogue can improve customer perception, but it can also dilute sales, complicate replenishment and increase the risk of stockouts on key products. On the other hand, an overly narrow range can limit sales and damage the shopping experience.

Optimising the mix in retail means deciding which products must always be available, which drive traffic and which deliver real margin by channel. Not every SKU plays the same role: some drive volume, others profitability and others brand perception. Treating them all the same typically leads to inefficiency.

In addition, the channel adds another layer of complexity. A product can be profitable in stores but not in e-commerce or the other way round. An optimised mix lets you adapt assortment, stock levels and replenishment priorities by channel, reducing unnecessary inventory and improving availability where it truly creates value.

The role of advanced planning in product mix optimisation

Optimising the product mix is not a one-off exercise or a decision that can be made in isolation. It involves assessing multiple interdependent variables (demand, capacity, inventory, profitability and service level) that change continuously. In this context, advanced planning becomes a key enabler for moving from reactive decisions to structured, forward-looking ones.

Without tools that connect these data sets and allow them to be analysed together, mix optimisation relies on partial views, intuition or simplified analysis. Advanced planning helps model the system’s real complexity and evaluate the impact of each decision before executing it, reducing risk and improving the coherence of the overall plan.

Why Excel is not enough

Spreadsheets are still widely used for product mix analysis, but they have clear limitations as complexity increases. Excel relies on static scenarios, requires significant manual effort and does not handle interdependencies well. Any change in demand, capacity or policy forces you to rebuild the analysis, which slows decision-making and increases the risk of error.

In addition, Excel often fragments information across functions. Demand, operations and finance analyse the mix through different lenses with assumptions that are not always aligned. This makes it hard to build a single, coherent view of each product’s real impact on the system. As a result, decisions are made late, with incomplete information and without properly evaluating trade-offs.

When the mix is broad, demand is volatile or capacity is limited, these limitations become critical. Excel stops being a decision tool and becomes a barrier to real mix optimisation.

Simulating impact before executing decisions

Advanced planning allows you to simulate product mix scenarios before executing them operationally. Instead of deciding what to make or procure and dealing with the consequences later, you can assess upfront how each option affects capacity, inventory, service and profitability.

This simulation capability helps answer key questions: what happens if I prioritise certain products? Which SKUs block critical capacity? How does margin change if I adjust the mix? What service level can I sustain without increasing inventory? By quantifying these impacts in advance, decisions stop being reactive and become informed choices.

In addition, scenario simulation supports cross-functional alignment. Demand, operations and finance can work from the same assumptions and results, reducing friction and contradictory decisions. The mix stops being defined by intuition or urgency and becomes the outcome of conscious planning designed to maximise value under real execution conditions.

From reactive decisions to product mix governance

The real step change in maturity is not analysing the product mix better. It is governing it in a structured, continuous way. In many organisations, the mix is adjusted reactively when service issues appear, the plant is overloaded or margin drops. At that point, decisions tend to be urgent, partial and expensive.

Governing the mix means integrating demand, capacity and profitability within a shared decision framework. The mix stops being a consequence of operational emergencies or commercial pressure and becomes a strategic lever reviewed regularly, anticipating impacts and aligning business objectives.

Reducing conflict between Sales, Operations and Finance

One of the biggest benefits of an integrated approach to mix is reducing internal conflict. Sales typically prioritises volume and availability, Operations looks for stability and efficiency, and Finance demands profitability and capital control. When each function makes decisions based on different data and criteria, the mix becomes a constant source of friction.

A data-driven mix governance model based on shared assumptions and common scenarios changes this dynamic. All functions work from the same inputs: expected demand, available capacity, inventory impact and economic outcome. Discussions stop being driven by perceptions or urgency and focus instead on explicit, quantified trade-offs.

This does not eliminate conflict but it makes it productive. Instead of debating what we want, the organisation decides what we can do and what makes sense given clear objectives. It becomes an alignment point rather than a blocker.

The product mix as a recurring strategic lever

The product mix is not a one-off decision made once a year during budgeting. It is a living variable that must adapt to changes in demand, capacity, costs, competitive context and business strategy. Treating it as static exposes the business to margin losses, operational rigidity and late decision-making.

Ongoing mix governance makes it possible to anticipate deviations and act with time in hand. Shifting manufacturing priorities, redefining assortment, protecting critical capacity or limiting low-value SKUs stops being a reaction and becomes part of the normal planning cycle.

With this approach, the mix moves from being a problem you have to live with to a strategic tool for running the business. Managed well, it helps balance growth, service and profitability consciously, adapting to the context without losing control or operational coherence.

Optimising the product mix is optimising the business

Optimising the product mix is not about expanding the catalogue or prioritising SKUs based on intuition or theoretical margin. It is about making conscious decisions on where to allocate capacity, capital and operational effort to maximise the business’s real value. When the mix is defined by integrating demand, capacity and operational profitability, it stops being a source of tension and becomes a direct lever for efficiency, stability and margin.

The most mature organisations do not react to the mix when problems arise. They govern it continuously. They evaluate scenarios, understand trade-offs and adjust priorities before operations become unstable. In this approach, the mix is no longer a consequence of commercial or operational urgency. It is a strategic decision aligned with business objectives and the supply chain’s real constraints.

At Imperia, we help organisations make this shift by integrating mix optimisation into an advanced planning model. Our Supply Chain Planning software enables you to analyse each product’s real impact, simulate scenarios and prioritise SKUs using connected data and an end-to-end view, protecting critical capacity and margin without losing operational control.

If you would like to see how to govern your product mix through forward-looking, coherent decisions, request a free demo with our experts.