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Incremental SKU Optimization

Pruning is painful. You probably know from your personal life when you’ve had to cut out certain activities or certain relationships that are not profitable or are even harmful. It comes up in supply chain strategy when someone in marketing and/or product development has to face the fact that their SKU is no longer valuable. Simplification is rarely easy, or popular. It challenges the status quo. It is in vogue in many organizations to boast about the complexity of their work, even if the complexity is non-value added and self-inflicted. In contrast, simplification is profitable and one of the key common denominators of successful supply chain organizations.

Instead of radically cutting back in the beginning our clients have had success in piloting and implementing SKU optimization incrementally. An example incremental SKU optimization from the CPG industry is provided in Figure 3.11. The program yielded a $7,000,000 increase in profitability.

Once the ideal portfolio has been developed, diligence is required to maintain it. With one retail client we implemented a simple rule requiring every new SKU introduction to be accompanied by the SKU that would be pruned as a result.

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