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How to Control Proliferation of SKUs?

One of the current biggest challenge faced in supply chain management is explosion of number of SKUs. It is very common scene that total number of SKUs are 50 to 100 times the number of "Real" product offerings. By "Real" product, I mean, a product which customer buy to satisfy some of their needs. SKU is something which is created out of "Real" product so that it can be sold to a customer in a specific market place. There are many reasons for which multiple SKUs are created from same "real" Product. Some of them are listed below.

1) Customer Segmentation - Some customer can buy in big size but others do not have paying capacity so they buy in small quantity so business create different SKUs to cater to each of these customer segment


2) Consumer Behavior - Irrespective of paying capacity in some markets customers have inbuilt tendency to buy in bigger or smaller sizes. Depending on that for same product in different markets we need different size SKUs


3) Seasonal Consumption - Same product can be consumed differently depending on time of the year. Winter products will have smaller demand during summer. Accordingly you need different SKUs to tackle different seasonal requirements


4) Legal Requirement - In some territory there are some mandatory information that need to be printed on Labels. Hence Label has to be customized depending on market which lead to multiple SKUs for same product even for same size.


5) Marketing Campaigns - Packaging is called 5th P of marketing. To catch the eye of the customers in crowded market place packaging is changed often creating new SKUs

 
6) Logistics Considerations - Packaging that works in one geography context does not necessarily fits with logistics practices in some other geography. This warrants creation of additional SKUs to suit logistics scenario in each of the geographies product is sold

We can keep adding reasons to above list but bottom line is simple....supply chain management is getting complicated because of explosion of SKUs. It is very common that core number of product offerings of the company is 50 to 70 products whereas total number of SKUs are between 5000 to 7000. Another dimension of the problem is number of storage locations in distribution network. If company has 100 distribution warehouses then effectively supply chain management has to deal with 700,000 SKU-Location combinations. Imagine the amount of Planning and Execution effort spent in ensuring that each of these SKUs reach at the right place at the right time. We see very sophisticated planning engines and army of planers employed by most of the CPG companies to tackle this planning activity. Why CPG even other industry verticals are experiencing the same problem. In one of my recent assignments with leading Chemical company which operates in more than 100 countries, number of SKU-Location combination crossed 200,000. Same is story with Pharmaceuticals so this problem is very generic. I have rarely seen any initiative taken by any company to reduce the number of SKUs, on the contrary I see more eagerness to create a new SKU for flimsy reasons. In fact proliferation of "Unwanted" SKUs, in my opinion, is the source of biggest waste in Planning activity. My rough thumb rule estimate is that 20-30% of total SKUs are unwanted and created without proper thought. So effectively speaking 20 to 30% of effort in planning activity is a waste. I have following thought process which is one of the way to control SKU number.

Perform SWOT analysis for your core product offerings. Surely there must be some products which are real champions. Customers simply crave for these products. Every company has such block buster's. SKU strategy followed hardly matter in case of these products. Customers will "Pull" these products out of your supply chain in whatever size, shape or packaging they are available. In fact if the products are extremely good and low quantity SKUs are not available then couple of customers can combine also to buy a bigger size. In one of my assignments with Crop Protection company, some of their products offerings were so good that few farmers use to combine to buy bigger size package if smaller one is not available in the market place. You can surely reduce number of SKUs for these champion products without affecting sales revenue. On the other hand if product is facing stiff competition in marketplace because it is "Me Too" type then you need battery of SKUs to tackle competition.

But I have seen companies doing exactly opposite. For block buster's they create more and more SKUs as they are center of attraction for everyone but for the products which are not doing so well they cut down SKUs using some vague profitability and contribution logics. Just a thought worth putting your mind into. Are we following right strategy to control number of SKUs?

Comments

Thought provoking blog. Its very true that most effort is spent on KPI optimization of Supply chain metrics and this could majorly affect the effort spent and results achieved. Though it is more dependent on external conditions as market competition,Buyer segmentation, Purchasing power, distribution constraints, Storage capacity of retailers but still the focus on it is quiet less. As you rightly said, Doing a proper SWOT and focussing on controlled proliferation can directly effect the bottomlines and supply chain metrics improvement.
Great blog..

Nice blog - however i disagree on the solution provided... The solution might work for things like crops, however, for some retailers selling furniture for instance, that might not be the correct approach. Customers are pretty specific and demanding in these scenarios, for example, they might want 1 brown colored chair and 1 black colored chair. The retailer cant force the customer to purchase both the black chairs just because he was trying to maintain the sku numbers.

Just a point of view :)

Some of the strategies that organizations can adopt for keeping control on the number of SKUs and still provide the desired level of variation could be as follows:
1. Implement policies and procedures for handling goods that are obsolete/not in demand any more.Do Pareto analysis for the existing portfolio of SKUs.
2. Postponement of the variation. This will simplify planning. However applicability of this starategy will vary from industry to industry.
3. Before introducing a new SKU, analyse the existing portfolio for similar SKUs and identify the ones that can be pulled back from market and removed from portfolio.From a warehousing point of view, strategies for hybrid palletisation may also be used to increase cube utilization. (Usually each SKU needs a separate pallet space in the warehouse).
4. It would be good to have an estimate of introducing a new SKU and then use that as a check before introducing new SKUs. Any SKU that does not promise to give profits over and above the SKU intrduction cost should not be launched at all.

Please feel free to share your opinion.

Nikhil... A very pertinent topic... Any Supply Chain professional will vouch for the constant pressure they are under while having to support the drive for organizational growth, which is often done by introducing newer variants of the same products or new products altogether and at the same time to support the drive to reduce costs and eliminate waste from the Supply Chains…
As is apparent from the reasons mentioned by you, a majority of these are driven from the Marketing and Sales Organization or by the New Products Introduction groups, wherein the Supply chain professionals have not much say. In these instances, having a formal Sales & Operations Planning Process would be of immense help to provide the right kind of visibility into the demand plans for new and existing products and gear up the supply networks to meet the demand projections and highlight any capacity constraints and devise optimal inventory strategies and strike the right balance between Product volumes and mix.
This phenomenon is further exacerbated for the high-tech companies, where there are governmental and legal regulations in many developed countries mandating the support for the products for as long as up to seven years after the end of production or sales for the products. Combine this with an ever-accelerating pace of new product introductions and we have a huge number of SKUs that need to be managed.
This is the new reality that we cannot avoid… but we can certainly take steps to deal with it… To state a few –
1. A formal S&OP process with involvement from cross functional groups with some key KPIs related to product rationalization tracked
2. As mentioned by Indrajit rightly, postponement is one effective strategy that can be deployed to introduce the required differentiation at the point as near to the Customer as possible and this has the potential to provide quantum savings where the parts are transported half way across the world to be made available to the Customers. Also, by reducing the number of nodes in which the part is stored, you also achieve a reduction in the total number of SKUs
3. Classifying the Products based on Pareto Analysis complemented with the appropriate segmenting of Supply Chains, like you and Indrajit have rightly mentioned
4. While we have been discussing a lot on the proliferation of the finished goods level products, there is a potential to achieve reduction in the number of lower level parts by designing the products in a modular form with the modules being used across multiple products, thus reducing the need to plan for more number of lower level components
This is a vast area with ample potential for improvement and I am sure there are many more ideas to share…


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