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Route to Market & Supply Chain Blog

FMCG SKU Proliferation: How this affects your Customer Service

Posted by Dave Jordan on Wed, May 13, 2015

Complex_SKUFMCG SKUs sneak onto price lists when nobody is looking! Sales & Marketing colleagues prefer new launches to have lengthy lists of SKUs; different flavours, different sizes, different colours, different shapes. How many shelf facings do they want and how many do they really need? How do these decisions get through S&OP meetings? (Assuming you do actually run a Sales & Operational Planning process......)

Do you know how this proliferation is likely to be affecting your customer service? One thing for sure is that it is affecting the same and always negatively. Rather than delighting more and more consumers you are likely to be disappointing them and wasting countless Euros/Pounds/Dollars at the same time.

Factory complexity. Time is money in factories as they try and make their assets sweat and get as much out of the gate as fast as possible and as cheaply as possible. Each colour or perfume change or label or pack size adjustment stops the production line and steals valuable time and money.

Each individual SKU requires a dedicated pallet or rack location. The more SKUs you have the more money you are paying for space. When you have 16+ variants of the same shampoo pack size you can understand why picking errors occur, stocks become inaccurate leading to lower customer service levels.

Cost per SKU. Have you ever sat down and calculated how much it costs to have an SKU on your price list? Sales staff will bemoan the rising listing fees but in reality the cost of an SKU is much, much more. Including, for example

  • Someone has to develop the product/pack/bottle case.
  • A colleague has to find suitable suppliers.
  • An employee has to buy the different label, dyestuff, cap, box etc.
  • The new raw material/packaging has to be stored in a warehouse.
  • Someone has to call it off at the factory.
  • The factory has to make the SKU.
  • The finished product is stored in a warehouse.
  • Someone at the operating company has to supply plan the SKU.
  • Transport ex factory.
  • Storage at operating company warehouse.
  • Transport to Distributor or Retailer.

All of these activities and more ensure that the cost of having an SKU on the books is significant. In a very rough calculation the cost of having 1 SKU on your books is typically 30,000 Euros in a medium sized business.

SKU rationalisation. Ok, so you are in FMCG and drowning under SKU complexity. Far too many organisations launch a new SKU and then fail to revisit the data assumptions on which it was launched. Firstly, if a new SKU is not even planned to deliver at least 30,000 Euros profit (or whatever your in-house rule of thumb figure may be) then DON'T LAUNCH IT! For all SKUs on your price list you must carry out an SKU rationalization exercise at least annually and preferably quarterly. SKUs that do not meet profit/volume/margin criteria should be placed on watch. If they remain below your cut off points then it is time to propose a delisting.

Of course, there will always be special cases like SKUs that constitute a range or a niche regional product. As long as these are the exceptions then you have a chance of a fast flowing, efficient supply chain.

Introducing an SKU is a cross business decision, or should be! When considering new SKU introduction at your next Board or S&OP meeting then the supply chain people should be asking some very testing questions.

Need more expert advice on SKU complexity and how to define necessary complexity? Contact Dave!

Image courtesy of Gualberto107 at FreeDigitalPhotos.net

Tags: SKU, FMCG, Dave Jordan, S&OP, Inventory Management & Stock Control

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