Sku Reduction

In a famous 1997 Supply Chain paper, “What is the right supply chain for your product,” Marshall Fisher (a Professor at the Wharton School of Business) stated that the level of variety that exists in most grocery categories is dysfunctional. He purchased 28 varieties of toothpaste from one manufacturer to demonstrate this dysfunction for a food industry group where he was a guest speaker. Years later the problem of SKU proliferation has only grown. A number of researchers point out the origins of SKU proliferation. Byrne (2007) states that SKU proliferation began as companies tried to get close to the customer, used target marketing to respond to consumer needs and fill shelves with a spectrum of choices. This has produced more than 500 shampoos at Wal-Mart, 85 thirty-inch televisions at Best Buy, 80 varieties of pens at Office Depot.

…the problem of SKU proliferation has only grown.

The reason this is important from a sales and marketing perspective, is that the proliferation of choices means less room for popular brands, causing these popular items to be out of stock. In addition, you will certainly increase supply chain complexity and cost. However, as any good operations and supply chain professional has experienced, it is easier for a business to add items than remove them from the assortment.

SKU Reduction (also known as SKU Rationalization) can be an important part of SKU Management. In addition to classifying inventory items into A, B or C categories for inventory management, you must add an additional category, “F”. If you use Optimal Velocity’s Inventory Optimizer™ software, it will automatically determine which inventory items do not deserve to be stocked. However, even without our software you can set up a SKU Reduction / SKU Rationalization system using Multi-Criteria Inventory Classification. Either inventory optimization software, or the multi-criteria method must be re-run at least every 6 months to ensure you are properly moving weak SKUs out of your assortment.

Multi-Criteria Inventory Classification combines multiple measures to make sure all parties in your company who care about inventory are aligned. In most companies these departments include Sales, Marketing, Finance, Operations and Supply Chain.

Multi-Criteria Inventory Classification – Outline

1. Form SKU Rationalization Team
   • Sales, Marketing, Finance, Operations, Supply Chain
2. Brainstorm SKU performance criteria
   • Unit volume
   • Annual revenue generated by each SKU
   • Gross profit $ generated by each SKU
   • # of lines for a SKU (# of times a SKU is ordered)
   • # of customers who buy a SKU
   • Shelf life
   • Monthly demand variation
   • Yes/no variable if SKU is purchased by critical customer
3. Combine metrics into a “Inventory Item Score”
4. Rank all inventory items by their Inventory Item Score
5. Determine how much of the bottom of the assortment will be eliminated
   • Before eliminating ensure that there are substitutes for this SKU in your assortment
6. Replace eliminated SKUs with new items that may perform better

The reason you should use multiple criteria is to make sure that all departments can support the SKU Reduction decision. Often these decisions are made just on volume or revenue metrics. By incorporating multiple criteria, you allow everyone to include metrics that are important to them and their department. As mentioned above, aligning the different departments in this decision is the way to make it successful.