Do too many SKU’s hamper growth?
Do you really want to sell anything to anyone? Without sales, you don’t have a company. So often, younger companies sell without giving much thought to their SKUs. Their objective is to generate revenue, build and grow their business. And yes, SKUs can be a tremendous tool for growth in young companies. While this is often a necessary evil in the early days of a business, eventually the “sell anything to anyone in any manner” mentality will hamper the business. At this point, the company needs to start thinking more rationally about their SKU offering. Optimizing your SKUs and aligning them with the corporate strategy can streamline your operations and unlock the next phase of your growth.
Okay, remind me what a SKU is again.
A SKU is a stock keeping unit that serves as a unique identifier for an item or service. The SKU (alphanumeric or bar-coded equivalent) differentiates one product from another and holds a great deal of data such as price, color, style, brand, type, and size.
Why SKU’s matter so much.
While SKUs are tools that track inventory, differentiate products and services, and measure sales by product and category, in actuality they do so much more. SKUs can be analyzed to give insights into deviation from standard, or expected cost. They can hold insights into trends, both good and bad, pertaining to current customers' wants. They can show gross margin at the product/service level. There is much insight to be gleaned from a company’s SKUs.
SKU optimization is really a progressive process.
The initial step companies usually take is to perform a basic SKU rationalization exercise. The basic SKU rationalization includes regular reviews and tends to focus on the “tail” or lagging 10-20 percent of SKUs sold. By eliminating these underperforming SKUs, a company can reduce inventory and supply chain complexity with nominal impact on sales.
Slightly more advanced companies will analyze their SKUs with some additional criteria than just the amount sold. Other analytical components may include, but are not limited to, overhead absorption, manufacturing optimization, or margin analysis. With this type of analysis, a company may find some of the “tail” SKUs should actually be retained. Companies also find this data analysis can be used to help refine strategy.
Finally, high-performing companies start with reviewing and defining their overall strategy and then optimizing their SKUs to align with their strategy. That’s where things get really interesting. The great companies formalize and align their knowledge of SKUs across the entire organization—operations, sales, accounting, etc. Everyone is brought into the process. The result is higher sales, lower cost, streamlined operations, and high customer satisfaction.
SKU optimization is for everyone. You should be doing it.
Jon Orban, CEO and Founder of Integrated Genetic Solutions (IGS), GeneSolve and Third Pillar Systems states, "I have been a CEO of several companies. One of the first things I do when I arrive is see what SKUs are contributing to the business and which are not. Then, I discontinue the laggards and have the R&D teams start working on new winners."
While big corporations have been getting better performance from their inventory and service offerings through SKU optimization for years, that success is now trickling down across companies of all sizes. ERP and MRP systems, even for smaller companies, now have robust SKU capabilities, which allows businesses to capture the information needed to begin the SKU optimization process.
Start your company’s journey on the track toward full SKU optimization by taking the first step with a simple rationalization.
Trade-offs are a necessary part of SKU rationalization.
Ensuring you’re only carrying your most successful products is an ongoing challenge within most companies. Operations might view the subject through one lens, while sales will view it through an entirely different lens.
Let’s take a look at how this plays out in a well-known hamburger franchise.
The franchise sells a standard hamburger on their dollar menu. The profit on this item is .08 cents, or an eight percent margin, which means the item would most likely show up on the “tail” of a SKU rationalization review.
However, 93 percent of the customers that buy the hamburger also buy a soda. The average soda sells for $1.99 and costs the company .16 cents, for a 92 percent margin. This item certainly qualifies as a high performing SKU. However, cutting the hamburger SKU would impact this SKU’s sales.
So, as companies do more advanced SKU analysis, they would want to review the combination of SKU sales so they don’t overlook high-margin SKU sales that may be tied to low-margin SKUs. The combination analysis of the hamburger plus drink would show (weighted average) a sale of $2.85 with cost of $1.08, and a combined margin of 62 percent.
Data, data, data.
SKU rationalization is not a straightforward process. Fortunately, there are SKU rationalization consultants, software and mathematical formulas to assist in decision making.
It’s important to start with understanding the current state of your SKU affairs and the “what if” scenarios for rationalization of your SKUs. Your company, customers and bottom line will thank you for undertaking the effort.
Stay tuned for Part 2: Looking into SKU rationalization.
Robert Nix has more than 25 years of experience in accounting, financial and operational leadership roles. He is an expert in cost accounting and a lean six sigma certified. He believes in utilizing processes, data and technology to drive revenue improvement, cost savings and scalable efficiencies. He also believes in servant leadership; putting the needs of the team first and driving a strong group performance towards helping our clients.
To learn more about SKU management, contact Robert Nix at: email@example.com.