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SKU (stock-keeping-unit) Optimization

One of the best aspects of pursuing (part time) my Ph.D in Supply Chain Management is that I get to research certain topics and apply them to help my valued Clients.  I am currently writing a academic paper on SKU Optimization.  It is based on a method that is case studied in this month’s e-newsletter.  Below is a fantastic example of the power of using multiple criteria for classifying and optimizing inventory at an industrial distributor.   And, it falls into the subject area I find absolutely fascinating, linking sales strategy to operational capability.

Lean Six Sigma Tools
Multi-Variable Pareto Analysis (also called multiple criteria inventory classification)

  1. This industrial distributor was struggling with fill rate, a common performance measure for distributors.  They were regularly stocking out of what seemed like their best sellers.  Yet inventory investment was increasing!  A lower fill rate and higher inventory investment was an unacceptable combination.
  2. We began by determining what made a great SKU (stock keeping unit).  Using a technique called the analytical hierarchy process we determined it was margin $, the number of times a SKU was sold, the unit volume/sales and the number of customers who buy that item.  See the attached file SKU Rationalization
  3. In the linked slides I show the Pareto analysis for each measure separately.  As you can see the steepness of the chart indicates there are a vital few SKUs.
  4. The Multi-Variable Pareto analysis is shown on Pages 10 – 14.  We used all four performance measures to calculate the Overall Performance Factor (OPF).
  5. Then using Pareto analysis methods we simply cut off the A’s at 50% of the total OPF, B’s at 80% and C’s at 99% of OPF.   (One clarification, the B SKUs are only 24.7% of SKUs, I didn’t subtract the A’s.
  6. Slide 14 shows the greatest benefit of this analysis.  We discovered 1343 SKUs that we classified “F”.  These failed the “stocking-test” and we made them non-stock.
  7. The President of the company did something I thought was brilliant.  He did not reduce inventory investment.  He used the freed up funds from not replenishing F’s to increase his inventory of A’s and B’s.
  8. Fill rate is up dramatically and back-orders of A SKUs have been virtually eliminated.