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)
- 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.
- 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
- 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.
- The Multi-Variable Pareto analysis is shown on Pages 10 – 14. We used all four performance measures to calculate the Overall Performance Factor (OPF).
- 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.
- 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.
- 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.
- Fill rate is up dramatically and back-orders of A SKUs have been virtually eliminated.