SKU proliferation is a rampant disease that afflicts a huge number of consumer goods producers. Merchandisers claim the buyer is demanding endless variations on familiar products, whether they be Crest toothpaste, Oreo cookies or the Mini Cooper. That assertion is highly debatable, but whatever the reason for the current explosion in variety, it raises a lot of questions for the supply chain. How does one schedule manufacturing runs for each type of product? How can plant activity be tied to reasonably accurate demand forecasts? How can planners forecast so many SKUs in the first place? And what's the point, given the alarmingly brief lifecycles of many products today?
Clearly, a manufacturer needs to quantify the impact of its product portfolio on operations. But how to communicate that message across the organization? Executives need to be able to speak multiple "languages": for sales, product design and any number of other functions within the company.
To Stan Aronow, research director with Gartner Inc., it all boils down to a basic question: What's the right amount of complexity? Not surprisingly, the answer is rarely a simple one.
Variety is important, said Aronow, who spoke at eyefortransport's recent Hi-Tech & Electronics Supply Chain Summit in San Jose, Calif. Merchandisers use the concept to differentiate their offerings, trump sleepy competitors and expand into new markets. Consumers appreciate some degree of choice, based on the belief that the retailer is catering to their unique needs.
Still, there's a limit as to how much variety a supply chain can support. And the challenge is only increasing. Aronow quoted Terra Technology chief executive officer Robert Byrne, who has observed that "the CPG industry appears to be adding cost and complexity, rather than removing it."
The "long tail" of demand planning is getting longer, as companies struggle with predicting sales of both high- and low-volume items. In the age of SKU proliferation, forecast accuracy is going down, while errors are up. "Nearly half the portfolio has arrived in the last two years," said Aronow.
To a supply chain manager, added complexity means more of everything: raw materials, suppliers, inbound orders, safety stock, packaging. In the process, companies find themselves unable to make informed decisions about how much product to make, which SKUs to retain in the portfolio, and which ones to dump.
Managers need to be able to quantify the cost of complexity, said Aronow. Start with a SKU density analysis: which are the products that are driving 80 percent of revenue and margin? Which are the high- and low-velocity items?
He spoke of one maker of business machines that created a guided sales tool. It took old sales orders and plugged them into the system, accounting for some 20 separate features that could be combined into an end product. The company then performed a detailed analysis, employing pattern recognition, and including the characteristics of the end customer.
The intelligence was then passed up to the supply-chain team, which came up with a cost structure to support various configurations, along with an estimate of how long it would take to deliver each of them to the customer.
The system coded each product green, yellow and red, based on the cost of production and delivery. A green product was one that could be provided under the lowest lead time and cost. Yellow involved some degree of tradeoff by the customer, either in the form of a longer wait or higher price. And red? That required sign-off by a vice president of sales or operations, who would only allow it for strategic reasons.
The tool allowed sales to steer customers toward items with configurations that were most profitable to the manufacturer, and most available to the buyer. Life for the supply chain became easier. Sales was happy as well, "because the system was recommending what would sell best," said Aronow.
Good product portfolio management is essential. Aronow cited Kellogg Co., which measures its products using a four-quadrant graph that plots gross margin along one axis, and inventory turns along the other. Anything that appears in the upper right-hand quadrant is yielding the highest profits. In the lower left fall the least profitable items.
As a result, Kellogg can compare each item against a minimum gross-margin threshold. The findings might lead to heightened promotion of some products, and the combination or deletion of others. "It's a discussion that's based on data," said Aronow. "It's a best practice."
About that multilingual requirement, for top managers who are looking to optimize their portfolios. To sales, they need to talk about customer engagement, collaboration, improved product availability, increased revenue and faster commissions. To product development, the discussion should be around time to market, better return on innovation, and serviceability. To marketing and the business unit, it's about clarity of message, improved profit-and-loss performance, and the need to avoid cannibalizing profitable products.
Aronow urged companies to treat product portfolio management as an ongoing process, not a one-off project. New products are always on the way, and conclusions about their worth are ever-changing. SKU proliferation is a disease that's here to stay, but there's medicine at hand to keep it under control.
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