Recondite complexity?

I recently discussed how complexity negatively affects cost and service including how a floppy SKU tail inhibits growth. Do you understand the impact unnecessary SKUs have on FMCG success? CEOs should be seeking leaner and performance-focussed SKU portfolios but how do you approach this ongoing challenge?

Even at the best of times, your business may be struggling to cope with day-to-day forecasting and sales execution while managing innovation and range extensions. You can do much worse than give your price list a thorough, periodic review. Not just a cursory glance over a coffee and a croissant but a detailed, scientific evaluation of what brings in the turnover and what eats into profits.

Your SKU tally, do you really know?

Few businesses are lucky enough to operate with just 1 or 2 powerhouse SKUs but an excessive list of items on the price list can severely affect your customer service and sales performance. In the service performance link above I looked at the estimated cost to have a single SKU on the books and it is not insignificant when you take all elements of the extended supply chain into account. This threshold value will vary from company to company and sector to sector but there will be a roughly estimated value for your situation. We will look at this later.

If SKUs do not pay for themselves and contribute to the bottom line then why do they remain on the price list? SKUs plodding along with low margin AND low sales turnover cannot be worth the cost and effort of maintenance, can they? They are simply taking resources away from those more profitable SKUs and activities.

If you could base your business on a few high margin/high turnover SKUs then of course you would and at the drop of a hat. However, life is not that simple as the physical and online marketplace is becoming ever more competitive so you need to constantly review the wisdom of what you are putting in front of consumers. Decisions taken even 12 months ago may well have been based on sound analysis but are those assumptions still robust? Is anything the same 12 months later these days? How many of your innovations actually reached the business proposal financial delivery assumptions? Time for a check, perhaps?

Quartile conundrum

Unless your business is in dire straits already, a proportion of your SKUs will be either low margin/high turnover or vice versa. Both situations could provide reasonably healthy growth but wouldn’t it be better if you could edge them towards the high/high green quartile as per the image below? This a very simple approach but you should adjust to suit your particular priorities.

he first step is to make that 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, e.g., 30,000Eur for a 300M Eur business. If the profit of a particular SKU does not at least break-even then delisting must be considered. Similarly, low turnover SKU may be covering fixed manufacturing costs but are they actually a key element of your growth ambitions?

Staff who look after the supply and market performance of those SKUs in the amber quartiles need to be challenged on a quarterly basis to get more of their SKUs towards the green quartile, or else! 

Anything in the red quartile really is a liability!

Help, I need somebody!

If you conduct such an assessment and find that a majority of your SKUs are in the red segment then you might benefit from a professional, unbiased spring cleaning of your portfolio.  Such an approach will remove any emotion and bias when clinically assessing what you should be placing on shelves. Once you have cleaned up your price list and established a routine process, you can easily manage this internally.

Inevitably, there will be push-backs from sales and marketing about local jewel SKUs or important range offerings. Some of these arguments may be valid but it is up to the CEO to decide if another SKU or no SKU would be more profitable for the company.

The market is hugely competitive so why would you continue shooting yourself in the foot with an unprofitable and out of focus SKU portfolio? Stop!

Reach out, I'll be there.

If you have any Supply Chain or Route to Market problems or opportunities you would like to discuss, then please reach out to Enchange.com via telephone, email, or live chat.