How to Control Proliferation of SKUs?
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?