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Growth Through SKU Optimization - Part 4 of 4: SKU Your Optimization

Use strategy as a guidepost to align SKUs with operations for winning growth.

At its most basic, a SKU (stock keeping unit) is the unique identifying code for an item or service. SKUs hold information such as price, color, style, brand, type, and size. 

But, they can be utilized to do more. So much more. 

The past three articles have covered much of the how, what and why SKU optimization can do to support growth in an organization. In the growth trajectory of many organizations, SKU optimization is usually a progressive process. To simplify, it goes something along the lines of:

  1. Early-stage growth companies often begin with a SKU rationalization exercise. This means regular reviews of the company’s sales focuses on the lagging 10-20 percent of products sold. These SKUs are then discontinued. 
  2. As the organization grows, SKU optimization and analysis becomes more complex and includes a multitude of other factors, including overhead absorption, manufacturing optimization and margin analysis. 
  3. High-performing companies start with reviewing and defining their overall strategy, and then optimizing SKUs to align with their strategy.

Align mission, vision and strategy with SKU optimization.

SKU optimization cannot truly be successful unless it is conducted within the company’s larger strategic framework. Critical disconnect can occur when Operations is tasked with achieving operational or supply chain goals that are set independently of the company’s strategic vision. This is because bottom-up efforts to lower costs use functions and metrics that don’t necessarily align, and in fact, usually conflict with corporate strategy and the manifestation of the strategy in the eyes of customers.

“A company needs to make a conscious choice based on connecting the decisions about lifetime management of products to broader corporate goals … the company’s top-level vision, mission and strategy should be the ‘North Star’ governing the rules for decision making about how the SKU optimization process is set up,” says Janet Suleski, director analyst in supply chain research at Gartner

One of the best ways to visualize this overall SKU operation strategy alignment is to look at a couple of examples. Below are stories in two very different industries.

Don’t leave your strategy up in the air. 

When Herb Kelleher started Southwest Airlines he had a vision: “To be the world’s most loved, most efficient and most profitable airline.” This ambitious vision required a well thought-out strategy. Kelleher started his analysis from the bottom up, analyzing where and why other airlines fell short of his vision statement.  

The key to the strategy was the phrase “most efficient.” Kelleher wanted to know what made other airlines less efficient. He discovered it was due in large part to the many different types of aircraft airlines had in their fleet (a type of SKU). The average major airline had around 20 different types of aircraft. That meant 20 different jet-way configurations at the airports, mechanics trained on 20 different aircraft, parts for 20 different aircraft and engines, and so on. This large number of SKUs creates inefficiencies, which was the opposite of Kelleher’s vision. Inefficiencies drive up costs, which puts a strain on profitability. Inefficiencies lead to delays, which reduces customer satisfaction. A lot of unhappy customers wouldn’t make Southwest the “most loved” in the airline industry.

This kind of strategic analysis showed what kept other airlines from being able to live up to Kelleher’s vision statement. So, Kelleher decided his strategy would be the opposite of the major airlines. He started Southwest Airlines with a single type of aircraft, the Boeing 737-200. With a single type of aircraft, he could have all the mechanics trained on the same plane. He could stock the same parts. He could configure the jetways the same. The standardized aircraft, parts, maintenance, supply chain, and operations helped them to become efficient.

The pilots had the same training and the flight attendants had the same training. The employees had a great deal of familiarity with the aircraft, which gave Southwest an opportunity to deliver on the vision of “most loved.” As the flight crews didn’t have to remember new specifics about new aircraft constantly, they were able to have more fun with the passengers. If you have ever flown on Southwest, you know how enjoyable the flight crew are when interacting with the passengers. 

Starting with a strategic vision that governed the rules for decision making all the way through operations and supply chain helped Southwest Airlines not only become incredibly efficient, but one of the most loved airlines. They are now one of the top companies in their sector and in 2020, they were rated as the nation’s best carrier,  according to The Wall Street Journal

Great SKU strategy is no chicken feed.

Another example of a great company that has aligned SKU operations to their strategy is Chick-fil-A. Their value statement combines client-service perfection, high-quality food and an ethical culture of care

The founder, Truett Cathy, based his business on Biblical principles that he believed were also good business principles. Turns out he was on to something. The chain places tremendous importance on treating their employees with honesty, dignity and respect. Their vision of “client-service perfection” is baked into their culture. In fact, they invest more in training and promotion opportunities for their employees and pay them 6 percent more on average than their competitors. They want their employees to stick around, and they do. The chain consistently ranks first in customer service surveys, where the restaurants' cleanliness, quick, convenient service, and hardworking employees are also lauded. So how does this apply to SKUs?

They serve high-quality food (which gets high ratings from customers), and is in line with their strategy of keeping people—both customers and employees—at the heart of what they do. By focusing on chicken as the core item on their menu, Chick-fil-A is able to have only 30 core ingredients for the entire menu. Now that’s SKU optimization. 

Almost half of their food items are pre-made and ready to go from a refrigerator. The remaining items are prepared in a fryer or on the grill. This helps streamline their equipment purchases and layout at each location. Limiting core ingredients makes for a more efficient supply chain with additional buying power on a per-item basis. The labor steps involved in preparing an item is anywhere from one to four steps. Keeping the steps simple also keeps costs down, increasing service speed and customer satisfaction.

Compare this to another major fast-food chain, McDonalds. With more than 50 ingredients for their menu, they require more storage and cooler space. The staff requires more training to prepare these items. The increase in items means more food is pre-made and therefore has a higher probability of expiring before being served, which increases waste and cost. Preparation of their food can be between one to seven steps, which increases cost and slows customer service. 

Aligning SKU operations with strategy can make a remarkable difference in revenue. According to Entrepreneur.com, the average Chick-fil-A store earns more per store than any other restaurant. A lot more. The average store made $4,090,900 in annual revenue. That is more than the average annual revenue of McDonald’s ($2,670,320), Starbucks ($945,270) and Subway ($416,860) combined. 

Chris Briscoe, a business consultant and former vice president at PNC Bank says, “Banks recognize the scalability and profitability of companies that have aligned their SKU operations to their strategy. They are more likely to lend larger amounts to these companies at more favorable terms. This in turn, helps the company continue to expand.”

Start with why.

The first step is to define your vision. A vision will provide purpose and direction for guiding the decisions you make. Stay focused and avoid a shotgun approach. As discussed in the first article Growth Through SKU Optimization - SKU Your Proliferation, don’t try to sell everything to everyone. This will immediately set up misalignment between strategy, operations and supply chain.

When brainstorming what products and services to offer to execute on your vision, roadmap out the tactics of delivering those items (SKUs). Some types of questions to consider include, but are not limited to: What will that supply chain look like? How many different vendors will you need to service it and what are the lead times? What are the min/max inventory reorder points? What equipment will be needed to prepare the items?  What will a per-store footprint look like? How often and diverse will the employee training need to be?  

Diving into specific questions that will challenge your thinking will lead to deeper analysis. Then, as you answer these questions, you will refine the vision and develop a strategy for achieving that vision. As you move forward, you will develop solutions that will enable your organization to align strategic, tactical and operational activities with your chosen strategy. 

The key to developing strong, consistent growth across an organization is having SKU optimization work in conjunction with the overall corporate strategy. 

When fully executed, you will have a streamlined operation with an optimal number of SKUs that are consciously aligned with your strategy. All of this will lead to high customer satisfaction, lower cost and superior profits. 

Early in this series of articles, we recommended that companies “SKU from the start.” On the surface, SKUs may seem like ordinary ol’ bar codes. However, we’ve shown that SKUs can be complex and multi-layered. The great thing about SKU optimization is you can start as a beginner and keep learning. The deeper you go into the world of SKUs, the more there is to know. The SKU optimization process is one that never ends and never gets old because you will always see the results of your work—superior growth, increased profitability and a strong position in your industry. And that is what makes getting close to your SKUs a very worthwhile endeavor.

About the Author

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: rn@orchid.black.