It’s less than 10 days until Christmas and I have yet to buy many gifts. You may think that it’s good old procrastination on my part, but I have an excuse, or an “exSKUs,” as you’ll soon understand.
Honestly, I have tried to shop for a new digital camera for my wife. But have you purchased a camera lately? The variety of brands, features, and prices will overwhelm you. One electronics store that I like offers 280 different cameras on their website, ranging from $28 to $1,800. In addition to sticker shock, I am suffering from SKU (stock keeping unit) shock.
The experts say that my shopping paralysis is due to the paradox of choice. They claim that choice overload can make you question your decision-making ability, set unrealistically high expectations, and blame yourself for poor decisions. In the long run, too much choice can even lead to clinical depression, according to Barry Schwartz, who wrote the book The Paradox of Choice: Why More is Less.
Now, I may get a bit stressed over this camera decision, but you need not worry about my long-term mental health. The people who really face a cerebral challenge are the supply chain professionals who have to manage the flow of 280 different cameras, 100 flavors of jelly beans, or 350 SKUs of shampoo through the channel. And that’s just the tip of the iceberg. The typical US food retailer has nearly 47,000 products filling their shelves, thanks to a 50 percent increase in new product introductions, according to the Food Marketing Institute.
This extreme SKU proliferation results from the quest for market share, dubious justifications for new product introductions, and poor management of existing SKUs, according to an Accenture/Economist Intelligence Unit. Regardless of the drivers, this continuous flow of new products triggers supply chain complexity, inventory inefficiencies, and customer service challenges. In short, SKU proliferation negatively impacts supply chain performance and company profits, notes a recent DC Velocity article.
The antidote to costly SKU proliferation is SKU rationalization, an analytical process used to determine the merits of adding, retaining, or deleting items from a company’s product assortment. To gain the greatest benefit from rationalization, companies should establish an ongoing process to review the contribution of each SKU. Successful items should receive greater marketing and logistics support while those items that are past their prime or simply never lived up to their promise should be discontinued.
Optimizing the SKU base involves ongoing analysis and decisions that sometimes do not resonate well with marketing people. Still, end of life cycle products and poorly conceived new products must be quickly eliminated so that limited resources can be devoted to successful SKUs.
Rationalization options include the following:
- Delphi studies, market research, and other qualitative analysis tools use expert opinions to drive SKU retention and elimination decisions.
- Quantitative rationalization tools like ABC analysis use SKU revenue, profit contributions, and other data to make fact-based product retention/elimination/modification decisions.
- De facto rationalization is accomplished by supply chain professionals who take steps to postpone SKU production and deactivate SKUs that have become obsolete.
It is also important to understand that implementing a SKU rationalization program can backfire. Recently, Walmart brought 300 SKUs back to store shelves after finding that their “Project Impact” rationalization effort negatively impacted sales.
As Walmart and others have learned, it is important to avoid SKU rationalization pitfalls. They include:
- Simplistic SKU rationalization methods that rely only upon aggregate data. You risk eliminating lower volume SKUs that are important to key customer segments and profitable for your company.
- Sweeping decisions to cut SKUs without considering the customer response. You must pretest rationalization decisions on small groups to assess the likelihood of customer defections.
- Rushing judgment on the viability of new products. If you don’t give products enough time to build customer traffic, then you could jettison SKUs with long-term profit potential.
- Failing to develop disciplined, long-range SKU rationalization programs. You risk being mired in poorly conceived and managed initiatives that lack impact.
Avoid these problems and you will improve your odds for SKU rationalization success. Of course, other challenges will arise along the way. Stay vigilant and engage your colleagues in the effort.
So there you have it. If retailers and manufacturers would effectively rationalize the SKU base, then I wouldn’t be hindered by the paradox of choice. That’s my “exSKUs” for not being done with my gift buying. What’s your explanation for shopping on December 24th?
Additional insights regarding these topics will be provided in Dr. Gibson’s newest Supply Chain Academy course Applying SKU Rationalization Methodologies. It will be available in early 2011.