A Case for SKU Management: The Implications of SKU Proliferation

You’re being pushed to add SKUs or hold on to obsolete or non-moving inventory. But how do you communicate the full implications of holding and handling those additional items to your entire organization? You may get additional sales, but what does that cost you in carrying expenses, capital equipment, customer service, additional cube and strained capacity? This article will help you understand the total impact of SKU proliferation so you can make a case for what to do with all those SKUs.

Merchandising wants to add new products in order to attract more customers or increase sales volume. SKU lifecycles are being compressed by changes in product form or functionality resulting from advances in technology. When the company is not willing or able to write-off obsolete or non-performing inventory this results in higher SKU counts. More SKUs add complexity and costs to your distribution operation. Slow-moving or obsolete inventory clogs storage cube and makes less efficient use of material handling storage equipment. Operating space and primary pick faces diminish while labor and operating costs to work around these constraints rise. It’s time to consider the full impact of SKU proliferation on your business.

What’s Behind SKU Growth

Organic growth and the introduction of new products are obvious drivers of SKU growth, but there are other good reasons for a rise in SKUs either over time or even quite suddenly:

• Customers demand higher levels of responsiveness and greater product availability than ever before. This may cause you to carry inventory longer or carry more products in order to honor delivery promises to your customers.
• Advances in technology mean there are new items entering the market and inventory reaches obsolescence at a faster pace than ever before. Poor product life cycle management–not having a mechanism to get old or non-performing SKUs out of the supply chain before new ones are introduced – is a leading cause of SKU growth.
• Additionally, mergers/acquisitions can cause both organizations to look at ways to consolidate and reduce inventory and operating costs in order to show value to the market.

The Pain is Real

There may be good reasons for SKU growth, but the burden of that growth is often underestimated. Companies often carry too many SKUs because they don’t understand the full impact of:

• Running out of space
• Lack of pick face availability
• Labor and other operating costs to work around constraints
• Reduced “capacity” to serve
• Capital tied up in dead/obsolete inventory
• Tax issues related to carrying extra inventory
• Safety incidents related to storage hazards

So, how do you make a case for better management of SKUs?

It starts with an integrated approach. SKU management strategy should be an integrated, cross-organization conversation. Managing your SKU growth effectively requires true business alignment across departments, including stakeholders from Merchandising, Sales, Marketing, Operations, Distribution and Finance. And don’t forget to include Supplier Management and Store Operations. The best approach is one that takes a view that includes the broad spectrum of the supply chain—-manufacturers, retailers, wholesalers and customers.

Understanding the Full Impact

Once you have the right stakeholders involved, how do you communicate the impact of rising SKU counts? A holistic look at the score card and key indicators will give you a better picture of what SKU growth is really costing you. The chart below shows some typical symptoms associated with SKU proliferation and metrics that paint a picture of the implications to your business.

When considering the impact of SKU proliferation, these things must be balanced against the benefits of:

• Better customer service and ability to provide more options to existing customers
• Ability to expand in new markets, new geographies and attract new customers
• More variety and customized products, allowing for broader offerings and wider reach
• Opportunity to lead in innovation with faster response to market demand

What can you do about SKU proliferation?

In order to decide on a course of action you need a clear view of what SKU growth is doing within the four walls of your DC and across your network. There are several ways to get a better view of what is happening.

SKU Analysis and Cube Utilization

Applying the 80/20 rule, 20% of your SKUs represent 80% of your sales volume. In many DCs, a disproportionate amount of on hand inventory is tied to slower moving SKUs. Slow-moving inventory can not only tie up capital that could be used for more important initiatives, but can cost you in other ways, such as buying or leasing space and equipment, higher inventory taxes and increased labor costs/lower productivity as workers take longer to travel (in larger facilities) and re-trace steps.

SKU Analysis looks at SKUs by velocity, inventory turns (days on hand), storage media requirements, storage capacity and seasonality. A good analysis will help answer these questions about your inventory:

• Which SKUs are slow-, fast- or non-moving?
• What is the financial impact of each of those on your business?
• How much of your storage capacity is being used by each type of inventory? The results should lead to better decision-making about what to do with each of these types of SKUs. FORTNA uses FORTNADCmodeler®, a proprietary DC modeling tool, for this type of analysis, which can be performed quickly and provide data that is useful for order profiling, storage media calculations, and “what if” scenarios based on storage media.

Media Profiling, Pick Faces and Productivity

SKU growth can erode operational efficiencies in other ways too. When the storage capacity of a DC exceeds 85%, you start to see inefficiencies in material handling, such as inefficient travel and timing issues between replenishment and picking. Labor productivity decreases as order fillers are forced to pick from reserve locations or racks not accessible by foot. And safety incidents rise as hazards associated with improper storage abound. Lack of available pick faces requires more manual and frequent handling of inventory. Even automated systems can be hamstrung for lack of pick face availability. Pick module management costs increase as slotting requirements become more dynamic to ensure the right SKUs are slotted in the limited number of pick faces available. And the cost increases become exponential as capacity gets closer to 100%.

SKU Rationalization

When there is a large amount of dead or non-moving inventory, SKU rationalization may be the answer. Where the number of SKUs eclipses the capacity the DC was designed to hold, a cross-organizational exchange of information must take place as Merchandisers and Buyers look to Operations to provide the data needed to rationalize their lines. Trade-off decisions must be made, like whether to carry a large assortment of a particular item or reduce the number of SKUs based on sales volume. Finance needs to get involved as profitability analysis and activity based costing helps to determine which SKUs are driving the business and the true costs to hold, purchase, meet demand and markdown a particular set of SKUs. Alternative analysis helps paint a picture of the impacts to reserve storage and other parts of the operation and organization as decisions to eliminate or reduce SKUs are considered.

Summary

New product innovation is the ante for the game these days. And it may be necessary to carry slow-moving items to maintain SKU availability or for a myriad of other reasons. Where and how you store, pick, pack, handle and replenish them can make a huge difference in the productivity of your overall operation. The impact of decisions around buying, holding, handling and shipping is felt most profoundly in the DC, but has impacts across the supply chain.

Making the case for better management of SKUs requires an integrated approach involving stakeholders from across the organization and a true understanding of the impacts of SKU proliferation. If you are experiencing symptoms associated with SKU growth, there are several ways to get a view of what is happening– and the implications of that growth. As your DC approaches 85% capacity and beyond, now is the time to make some decisions about what to do with all those SKUs.

Published/Updated 1/11/21