Supply Chain Blog

A Practical Guide to FMCG SKU Complexity Reduction 

Posted by Dave Jordan on Tue, Mar 20, 2018

If your business is struggling to cope with day to day sales while managing innovation and range extensions then give your SKU list a thorough review. Not just a cursory glance but a scientific evaluation of what brings in the profit and what eats at the same. Few businesses are lucky to operate with just one or two monster SKUs but an excessive list of items on the price list can severely affect your customer service performance.

In the customer service link above we looked at the cost to have a single SKU on the books and it is not insignificant when you take all elements of supply into account. If SKUs do not pay for themselves and contribute to the bottom line then why do they exist? SKUs plodding along with low margin AND low sales turnover cannot be worth the cost and effort of maintaining them, can they? They are simply getting in the way of potentially more profitable SKUs.

If you could base your business on high margin/high turnover SKUs then of course you would. Life is not that simple and the market place is ever more competitive so you need to constantly review the wisdom of what you are putting in front of consumers. Unless your business is in dire straits a large proportion of your SKUs will be either low margin/high turnover or vice versa. Both situations can provide reasonably healthy growth but wouldn’t it be better if you could edge them towards the high/high green quartile as per the diagram below?SKU ComplexityThe first step is to make a very rough estimate of what your business spends on keeping an SKU on the price list. This is not an accurate science but you need to put a “stake in the ground” and agree a number, say 30,000Eur. If the margin of a particular SKU does not at least break-even then delisting should be considered. Staff who look after those SKUs in the yellow segments need to be challenged on a quarterly basis to get their SKUs away from the red and towards the green, or delist.

If you carry out such an assessment and find that a majority of your SKUs are in the red segment then you might benefit from a professional spring clean of your portfolio. Such an approach will remove any emotion and bias when clinically assessing what you should be placing on shelves.

Image courtesy of Enchange at Enchange.com.

 

Tagss: SKU, FMCG, Dave Jordan, Performance Improvement, Pharma, Supply Chain Analytics