SKU Rationalization - the analysis of your product range to streamline inventory - takes effort but pays dividends
For beverage suppliers and distributors, new types, flavors, containers, and packaging driven by consumer demand can create more cost in the supply chain, as well as a logistical nightmare. SKU rationalization is a powerful tool to simplify operations and improve financial performance. But the process isn’t always easy. Getting the right balance requires a mix of quantitative and qualitative analysis, and a specific action plan to keep management aligned and focused on execution.
The general idea is to carry fewer products to reduce supply chain costs - but not too few to meet customer needs. SKU rationalization is not just about managing capacity constraints around warehouse space and logistics. Longer term, it reduces inventory carrying costs, the high cost of short runs and changeovers, and it keeps your organization focused on the star products that build your business.
SKU rationalization projects can be tough. There are bound to be disagreements between operations, sales and finance. By limiting your scope and developing quantified metrics for decision making, you’ll go a long way to meeting your goals. Some common wisdom we’ve collected includes the following steps:
- Focus on specific products – not the entire product line;
- Maintain a single source of the truth – don’t let teams get mired in arguing their point with their own data and forecasts;
- Include both hard metrics and subjective/expert input from your teams – you need to decide with facts, but get buy-in by building ownership in the process;
- Model the P&L impact of your decisions before you make changes – this step reduces anxiety and is easily accomplished with modern tools;
- Create an action plan with communications – ensure every department has SMART goals tied to the SKU rationalization program.
A disciplined SKU rationalization program will have defined inputs, analytical processes, and outputs to act on. Inputs include volumetric and financial data on all products as well as context provided by sales, operations, marketing and finance. Structuring these inputs in a reporting and analytics tool up front ensures data credibility for everyone.
Second, the analytical process should include a baseline assessment, gap analysis, segmentation of products and actions for each segment, modeling the financial impact of those actions, and reporting out the results and plan.
Third, the outputs should be structured and simple. These include:
- Charts for product volume, gross margin and velocity
- A P&L “what if” calculator
- A final action plan
- A raw materials runout report
- An internal and customer communication plan
- Identify candidates
Evaluate every SKU on volume, margin and variable contribution margin. Then target those that are in the lowest 10-20% on every measure. Next, search for product level redundancies that could be eliminated and substitute products. Lastly, gain input from operations and logistics to validate your cost assumptions. From here, build your target list.
- Present your list to the sales and marketing team
Explain your assessment of each product and gain input. Work with them to develop your action plan. This should include Invest (‘up or out’), Maintain (‘tolerate’), Substitute (‘drop and replace’), and Sacrifice (‘drop’) categories.
- Model the financial impact
For each product in your Invest, Substitute, and Sacrifice categories, develop a light, medium, or severe action step and model the annual P&L impact at a product, category and company level.
- Take action
Finalize your action plan and make plans for execution based on current status. You likely have inventory decisions to address. What are your runout dates? What are the timelines for discontinued products?
At the end of the day, a lot of one-off effort will go into a manual SKU rationalization project. Ideally, you would like to do your analysis, execute your plans, then monitor and evaluate those plans systematically. By using reporting and analysis software, you can turn your project into an ongoing initiative. Software can be used to house your data, perform and document your analysis, share and collaborate on results, and provide managers a way to easily check in on status over time.