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SKU Proliferation, Rationalization, and Prioritization - September 2023

Dear Readers, I recently faced a conundrum while shopping for a new coffee maker and simultaneously feeling amazed and confused by the wide array of choices on display. Both sides of the store aisle were chock full of a myriad of machines that did everything short of harvesting the beans and drinking the darn coffee for you! This included machines that made coffee, iced coffee, iced tea, expresso, cappuccino, café latte, hot chocolate, single serve, French press, K-cup, milk frothier, bean grinder, and an all-in-one coffee station that seemed to be a countertop version of a Starbucks. The prices ranged from $10.99 (yep, that is the one I bought) to $229.99 (are you kidding me? It better come with a full breakfast, and a song-and-dance routine… for two Benjamins I am getting entertained!).

Some noteworthy examples of SKU proliferation:

-       Carol Ptak delivers sessions on DDMRP in which she points out that in the 1960’s American shoppers had at most a half-dozen choices of toothpaste. Today, Crest alone offers more than that: breath freshener, plaque remover, teeth whitener, sensitive, kid’s, peppermint, densify, detoxify, gum, etc. and all combinations of these. The cynic in me wonders if it is not all the same toothpaste and the only difference is the packaging.

-       One of my earliest consulting jobs was with an artistic paints company, who proudly declared that the proverbial “poor starving artist” was a more important customer than retail chains. They would create a new color of paint based on a swatch submitted from an artist, investing countless hours of lab work to get a perfect match. While I was impressed with the wide spectrum of color choices, I pondered whether the sales of seafoam green generated any additional revenue, or merely cannibalized sales of light green.

-       General Motors was for many years a conglomerate of six automotive brands: Chevrolet, GMC, Pontiac, Buick, Oldsmobile, Cadillac. GM long had success promoting the concept of climbing the tiers, for example going from Pontiac to Buick to Olds. The consumer marketplace eventually figured out that there were at best subtle differences between these name plates, resulting in Pontiac and Oldsmobile being phased out, like what Ford Motor Company did with Mercury.

The question becomes what is the right number of SKU’s? The answer you give may depend on which function you work in. One of the exercises I include in certification courses asks the audience to assume distinct roles and consider their self-interest regarding SKU’s. I first ask them to imagine they are in Marketing & Sales: how many SKU’s do you wish to offer? Most students get this right, suggesting as many as possible, or even infinite. This will maximize customer service. Now assume you work on the production floor, same question, how many SKU’s do you wish to offer? The preferred answer is just one to allow for a long, continuous production run with no lost time due to setup/change over, simplifying the manufacturing process, as well as limiting the labor skills required. Lastly, assume you are the financial controller. In this case, you prefer just the right amount of SKU’s that result in the highest profitability, or perhaps maximize revenues. The latter suggests we have lost some profitability due to increased costs but are still gaining market share from the competition. Beyond this point, adding SKUs provides neither additional profit nor additional revenue, but a company may go this route in the interest of saturating the market and promoting the brand.

From www.answerrocket.com:
"SKU rationalization is the process of determining which products should be kept, retired, or improved based on the myriad of factors that contribute to performance."

Let us recognize the role of Pareto Analysis regarding prioritizing SKU management. We would expect 20% of our items to generate 80% of the sales revenue. Some may insist that all products are created equal, yet we know some products are more equal than others (paraphrasing from George Orwell’s “Animal Farm”). The heavy-hitters demand more attention to ensure there is product in the pipeline, as a stockout could be cost-prohibitive in terms of damage to the brand.

Thank goodness for the inherent conflicting objectives and need for prioritization described above. Materials management would be so much simpler without them, and perhaps consequently many of us, especially corporate trainers, would not have jobs. 😊

Hope to see everyone at ASCM GNJ’s 12 Oct. PDM in Fairfield, NJ where I will deliver a new presentation, “DFTPM: Design for Total Productive Maintenance.” CLICK HERE TO READ AND REGISTER

Yours in ASCM,

Ford