Reader V. G. writes: Because of a recent merger and a deluge of new product launches, we are drowning in a flood of new stock keeping units (SKUs). How can we best manage our growing collection of SKUs and determine which to keep and which to eliminate in order to stay afloat?
SKUs seem to drench today’s supply chains with numerical complexity. In anecdotal research about SKU growth, one professional told me, “Almost half of our current SKUs did not exist 36 months ago.” This situation points to a few possible scenarios:
- Nimble, responsive companies are striving to meet ever-changing market opportunities and competitor demands.
- Businesses creating excessive amounts of new products are chasing an impossible dream of being all things to all people.
- Companies have ineffective product exit strategies, new product marketing, or product research and development and are not focused enough on lean practices.
- Organizations use an innovation metric that rewards SKU proliferation as proof of innovation.
The way to address the problem is by developing greater systemic visibility in your organization with hard numbers or data supporting a systems concept. The APICS Dictionary, 15th edition, defines a systems concept this way: “An attempt to create the most efficient complete system as opposed to the most efficient individual parts. A ‘whole process’ or ‘whole company’ operating system that is driven by cause and effect.”
Supply chain management must first look at both the flow of many individual components and the performance of the overall supply chain. Each new SKU increases cost and complexity to the entire system. As these costs accumulate, maintaining an accurate cause-and-effect vision of expense and value for the entire system becomes challenging. For example, a new product SKU might cannibalize sales of existing items and fail to create new net value. Even if a new SKU does deliver some new net value, is it enough to profitably pay for the cost of increasingly complex stocking options, reduced forecast accuracy, increased cost of counting inventory, or reduced efficiency in pick-and-pack operations?
The second step is to talk to your customers in order to figure out where to draw the line for your SKU proliferation trend. For example, if your customers prefer to hunt through paper-based sheets and catalogs, they might not appreciate having to look at several more options. However, if you sell many lines of products to large customers who are accustomed to SKU proliferation, ask them to identify the point at which more SKUs becomes a burden instead of an asset. This will at least help you figure out a potential SKU limit.
Next, gain executive support for your SKU-reducing endeavor. Explain that
- SKU innovation may unknowingly be at war with Pareto’s law, which states that 20 percent of inventory items make up 80 percent of inventory value
- the right number of SKUs likely reflects the amount of variation and complexity sought by your customers
- the wrong number of SKUs squeezes resources and can divert them away from the products that deserve them
- this is a complicated topic and requires ongoing, shared management effort to overcome the costs of SKU complexity.
Lastly, consider developing a policy prohibiting a net increase in SKUs. As new ones appear, retire old and low-value SKUs to make room. Ideally, these efforts will form part of an overall supply chain strategy that prioritizes innovation, customer service levels, and reduced costs.
Jonathan Thatcher, CSCP, CAE, is director of research for APICS. He may be contacted at email@example.com.
Send APICS your supply chain management questions at firstname.lastname@example.org.