SKU Optimization Strategy

Another example of the phenomenon is illustrated below. The figure is a deliverable from a recent client engagement focused on SKU strategy in the food and beverage industry. Note that 28% of the SKUs yielded the first 90% of total operating profit. 39% of the SKUs yielded the first 95% of operating profit. 28% of the SKUs yield return on invested capital lower than the corporate threshold of 10%.

Their hope, as it is with many organizations, was that more SKUs would translate to more sales and profit. In Figure 2 you can see that the introduction of new SKUs did not yield more sales, but spread the same sales over more SKUs. Maintaining sales may seem like a victory; however the introduction of the additional SKUs and their related complexity works against supply chain, inventory, and profit performance. In this case, inventory investment grew from $51 million to $69 million; a 35% increase in inventory investment coming with a 44% increase in SKUs (Figure 3). To make matters worse, by spreading the same demand over more SKUs, forecast accuracy declined, resulting in significantly higher out of stock levels; growing from a low of 2% to a high of 7%; a 250% increase in out of stock rates (Figure 4)!

The additional warehousing space, warehouse congestion, longer pick lines, increased planning cycles, and shorter run lengths all resulted in a 27% increase in total supply chain cost per case from a low of $2.56 to a high of $3.26 (Figure 5).  In this case turning back the clock to the good ole days of $2.56 per case was worth in excess of $50,000,000 per year in supply chain cost savings. Lastly, without an increase in sales, with higher inventory levels, and reduced gross margins due to higher supply chain costs, GMROI declined from a high of 1143% to a low of 848%; a 26% decrease (Figure 6). I coined the phrase, “You SKUs, you lose.” to help them remember the performance burden of more, underperforming SKUs.



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