SKU proliferation is a common problem in companies experiencing growth and/or diversification of product offerings. Balance must be struck between sales and costs. In order to determine whether or not you are maintaining too many SKU’s, look throughout your organization at the costs and benefits of carrying those items.
- Additional sales generated
- Customer service
- Additional carrying capacity needed
- Carrying expenses
- Capital Equipment
How SKU’s Grow
Too many SKU’s add unnecessary complication to your business. SKU proliferation can occur in several ways. Sales may want to add more products in order to attract new customers and increase revenue. Additionally, as the pace of technology change increases, product life cycles decrease. This can result in “extinct” products and a company must be willing and able to write inventory that is antiquated and does not sell. This inventory causes crowding of storage and operational space, poor use of equipment, and increased labor costs.
Impacts of Proliferation
The following costs of SKU proliferation must be considered:
- Space constraints
- Pick face constraints
- Labor and operational cost to work around above constraints
- Reduced fulfillment capacity
- “Extinct” inventory tying up capital
- Tax issues
- Storage clutter creates safety issues
Because so many departments are impacted by excessive SKU’s, it is important to take a cross organizational approach to resolving this issue.
Departments to Engage:
- Supply Chain Management
- Store Operations
What Percentage of Your SKU’s Have Not Sold in the Last Year?
Once you have assembled your team of stake holders, use the chart below to determine whether or not you are exhibiting some of the common symptoms of SKU proliferation.
The above charts are examples of a few ways to analyze SKU velocity. A thorough analysis looks at SKU’s by velocity, inventory turns, storage capacity, seasons, and storage media requirements.
- Which SKU’s move fast, slow, or not at all?
- What is the financial impact of each of these?
- How much storage is used by each type?
Looking at the example above, we can see that SKU groups A and B account for less than 6% of the total SKU count, but make up 97% of total sales. Conversely, groups C and D account for 37% of total SKU’s but only 3% of sales. Group E represents 56% of all SKU’s, 10% of inventory, and yet 0% of sales. A great case could be made for abandoning support for these SKU’s.
Rationalizing your SKU’s is both art and science. Analysis must be used to find opportunities for reduction. At the same time, there can be a justification for keeping some seldom used SKU’s. Perhaps the cost is low, maybe they are unique products that although not ordered often, are typically ordered by large customers. This is why a cross organizational approach must be taken in the development and implementation of a SKU reduction strategy.