Expert Insight: Gilmore's Daily Jab
By Dan Gilmore
Date: July 2, 2009

Supply Chain News: Thinking About SKU Proliferation


SKU Reduction Clearly Drives Cost Efficiencies - but is that too Much a Supply Chain View?

One of my favorite supply chain presentations is a bit that John Bermudez used to do when he was an analyst at AMR Research (last I knew, John was at Oracle, but that’s been awhile).


Somewhere in the mid-1990s, John got the bright idea to start collecting various iterations of Crest toothpaste. He would come out with a big box and start going through literally dozens of changes in packaging and formulas.


I wish I could remember some of the specifics, but it was hilarious. The number of “SKUs” that Procter & Gamble generated over some period of years was simply staggering, mostly chasing finer and finer segments of the market. I don’t think there was a “lemony fresh” toothpaste, but if there had been, I wouldn’t have been shocked.


The point, of course, was the complexity that both the sheer number of SKUs and the speed of the new SKU introductions introduced into the supply chain.


I thought about that this week when we ran our story on the recent trend of retailers starting to reduce SKU counts – perhaps by as much as 15% in 2-3 years. Wal-Mart, for example, has gone from 24 different tape measures to just 4, but other retailers are making similar moves. (See Will Large Retailers Help Manufacturers Drive Out Supply Chain Complexity?)


The article discusses the specifics, but here are the questions I have:


First, such strategies are clearly appealing in tough economic times, when cost reduction and consumer prices clearly favor the efficiencies such SKU reductions can bring. Will they continue to be as appealing when the economy starts to recover?


Second, will we start to see more differentiation in manufacturer and retailer strategies with regard to product segmentation? Will some in each category continue a more restricted, but efficient, SKU strategy, while others pursue more micro-segmentation even at the cost of complexity?


Third, how should we even think about this issue? How, in the end, do you really balance supply chain efficiency and cost versus giving consumers more precisely what they want to buy? Do we risk taking a view that is too supply chain oriented?


Bob Nardone, a former supply chain executive who now does some work with SCDigest, commented that “The portfolio “tail” [low-volume SKUs] is fraught with forecasting problems, stock outs, higher manufacturing and distribution costs, and inventory obsolescence. The ability to capture these costs at the SKU level and to calculate the return on inventory investment are critical to determining which are the truly profitable products and which products negatively impact profits and growth objectives.”


He added that “While the reduction in complexity will free up shelf space and reduce consumer confusion, it will also improve manufacturing and distribution operations and lead to a more effective and efficient supply chain.  It’s a win/win formula for profitable sales growth!”


I largely agree – unless you are the consumer whose favorite product is the one that gets cut in the move.


I really hope we see different retailers and manufacturers pursuing different SKU count strategies here – and let’s see what model really works best.


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Dan Gilmore is the editor of Supply Chain Digest.

Gilmore Says:

I really hope we see different retailers and manufacturers pursuing different SKU count strategies here – and let’s see what model really works best.

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