Winning the Losing Battle of SKU Proliferation

The Bottom Line

Like it or not, SKU proliferation is a permanent fact of modern business life. We’ve know for a long time that it stresses supply chain operations and planning - sometimes beyond reason. Get a grip – you may not be fighting the right battle. The real issue is not how to stop it, but how to deal with it. Proactively and efficiently.

In The Beginning

In the early days, when supply chain concepts were just being discovered, activists seized on the phenomenon of SKU proliferation as a critical point of attack in making supply chains more responsive and effective. We all “knew” that the model of continuous expansion did not make real sense in satisfying consumer desires, and was not ultimately sustainable.

Think conditions have improved in that arena over the past fifteen or twenty years? Of course they haven’t.

Every time we, as consumers, turn around, there is another wave of brand extensions to sort through and select from. New flavors, new scents (including scentless), new colors, new sizes, new packaging, new deals. And, when one manufacturer ventures into “new” territory, the competition is sure to follow, often trying to go the pioneer one better.

New competition abounds, as well – people selling basically the same stuff as other people, but with some twist, or perceived difference, or hoped-for advantage. Do you doubt it? Just take a close look at the daily avalanche of catalogs arriving at your home or place of business. No wonder the postman (or woman) drives the route these days – no way could all that stuff be carried in a pouch the way mail used to be.

SKU proliferation used to be the province of the mega-consumer goods manufacturers. No more. It’s affecting (or afflicting) companies of all types and all sizes. Today’s SKU proliferation has many ramifications – fighting for shelf space at the retail store, fighting for location at the malls, fighting for share of mind in alternative modes of mail order and e-tail.

Recent reports have indicated that pressure from Wal-Mart has led a couple of fast-moving-consumer-goods (FMCG) producers to ratchet back on SKU counts. Time will tell if this is a lasting – or market-wide – development.

SKU Proliferation – Pernicious Evil or Harbinger of Destruction?

We all know how dangerous unfettered SKU proliferation is, don’t we? As logisticians and supply chain managers, we’ve had to live with the consequences for years, fighting the same battles over and over – only to have them crop up again with the next round of proliferation.

1. They clog the supply chain. Too many items, too nearly the same. Too much item master maintenance, too many product life cycles to manage.
2. They cannibalize the movement and positioning of the “good” SKU’s. Turning “A” items into “B’s,” turning “B’s” into “C’s,” creating more “D’s.” Where to locate things in the distribution center? What deserves to be in the “golden zones? Who knows what’s hot, and what’s not? Will customers (and consumers) stop ordering a good SKU in order to make room for one of the new ones?
3. They force smaller orders for a greater variety of products. Too many onesie-twosie orders to try out the new items, or to reflect low demand.
4. They complicate product life cycle management. We get so busy managing the new items that we neglect to manage (or promote, or plan) the old ones.
5. They increase total inventories, eating up capital and space.
6. They need too many set-ups in manufacturing, adding cost and using up production capacity.
7. They defy forecasting. How can we project accurately when everything is new? What happens to historic data on old SKUs’ when we’re flooded with new ones? SKU proliferation can easily take one stable and predictable Item, and turn it into several highly unpredictable ones - with nasty safety stock consequences.
8. They change the storage and shipment mix. They often have different cube/weight profiles than the “normal” SKU’s. That affects trailer loading, pick ergonomics, material handling parameters, specific rack suitability, and who knows what else.
9. They can obsolete, or degrade, material handling system performance.
10. They confuse the customers. Well, they certainly confuse us, so the customers must be confused, too. We struggle with accuracy, inventories are suspect, and the continuous change keeps us on edge.
11. They take space that could be used more effectively with fewer, better, SKU’s. They use up pick faces, the critical commodity in effective fulfillment.
12. They stress the warehouse, driving down productivity and driving up inventories.
13. They add cost, the result of complexity, and don’t drive revenue.
14. They are even worse in extended (a code-word for “off-shore”) supply chains.
15. Bain (1) says it’s bad, and they know. So does InnOvations, citing Forte Industries (2).

What else? Probably an almost endless list. One well-known observer has gone so far as to proclaim that SKU proliferation is “wreaking havoc” on the economy.

The Devil’s Advocate

But, how bad is it, really? And, is the fact of proliferation really the problem? Let’s admit a few things up front. Mindless SKU proliferation is a losing proposition. Failure to manage and discipline product portfolios is foolishly dangerous. Hesitation in killing off SKU’s that aren’t delivering is a weakness that competitors won’t hesitate to capitalize on. But none of those situations relate to the supply chain consequences of proliferation.

In fact, there are any number of excellent reasons for SKU proliferation – enough so that there’s no chance of the condition going away any time soon.

A Radical Thesis

In looking at some positive developments in the realm of SKU proliferation, while considering the struggles and frustration of related supply chain management, a new view emerges: The fundamental cause of supply chain execution problems in an environment of SKU proliferation lies in failures to communicate the implications of planned proliferation on supply chain operations. In other words, not setting a place at the table for everyone ultimately involved with fulfilling orders for the total product mix.

The Usual Suspects

To be honest, that place at the table has not customarily been set. Too often, the warehouse discovers new SKU’s when they begin to arrive. How many there might be, and what their attributes are, may not be learned until they’ve all been received. And this can happen several times a year. No wonder supply chain managers – and distribution operations - are over-taxed in a new-SKU-happy world.

Too typically, supply chain management and logistics functions are not only uninformed about SKU-related developments, they are under pressure, as well. Pressure to maintain or – better, yet - reduce costs, pressure to increase productivity and asset utilization, pressure to consolidate and standardize, pressure to do more with less, no matter what – all antithetical to the natural, possibly even desirable, outcomes of dealing with SKU proliferation.

The value of the supply chain seat at the planning table is not a nicety; it is critical necessity. The legendary, but true, tale of misdirected patriotism illustrates. One well-known catalog merchant found a deal on flag poles. Brilliant in the wake of 9/11. Not only were putaway and storage found to be impossible when the poles arrives, they were also too long to be carried cross-wise down aisles by forklifts. The simple, but costly, solution of shipping them back to the supplier for conversion to a drop ship product would have been avoided with the right early involvement of logistics and material handling people.

So, what are some of the real-world SKU proliferation stories that might be instructive in thinking about how to get at the logistics aspects of the situation?

SKU Eruption versus Proliferation

Take the case of a major office products distributor. Recognizing early that their logistics service performance would continue to be the competitive differentiator with the market leader, the company took a gigantic strategic decision to increase their SKU base by approximately 5,000 SKU’s – a 25% increase, virtually overnight.

Before executing the decision, however, the company took a hard look at their supply chain network, as well as at the planned SKU expansion. The findings were significant, but not unexpected. The new SKU’s would be concentrated in product families with radically different weight/cube and handling characteristics than the traditional book of business.. The existing distribution network could not hold the inventory required, nor physically move the new items to established standards of quality and timeliness.

In order to support the corporate strategic move, a new network would be needed, involving additional facilities, facility enhancement, redefinition of facility missions, and the overlay of a Master DC concept on the network.

An enormous amount of expense and effort? Sure. But, clearly what was necessary to make the company’s strategic direction work – a strategic direction based on highly desirable SKU growth that redefined “proliferation.”

A Magic Carpet Ride

Then there was the importer/distributor of Oriental rugs – a major player in the Middle East and the US. Operating under tight budget constraints, the outbound supply chain had under-performed for years.

Constantly struggling to cope with growth, the company’s extra-budgetary expenses for additional/overtime labor and off-site storage constantly exceeded the budgets. With a history of double-digit annual growth, projections called for a doubling of physical volumes over the coming five years.

Eighty percent of the business (“Hello, Signore Pareto!”) was imported from the Middle East. While much of the business concentrated in some standard traditional styles, floor coverings have become a fashion business, so each season saw the introduction of new styles, colors, and sizes. Wisely, and unusually, these introductions were accompanied by trimming of the SKU’s and families that were not performing satisfactorily.

Net SKU growth was moderate, and, again, highly desirable in meeting customer interest. The logistics consequences could be confidently predicted, even if budgets would not permit fully accommodating them.

The remaining twenty percent of the business was imported from the Far East, and managed by a different senior executive. A newer segment of the company’s marketplace offerings, it lacked the “anchors” of high-volume long-standing SKU’s. Each season saw the introduction of several new families, each with many SKU’s – even more of a fashion business than the other side of the house. Importantly, no existing SKU’s were eliminated to correspond with the new introductions.

After a few years of this, the 20% segment of the business commanded over 33% of the SKU’s and 33% of the inventory pieces. The logistics effects of each season’s increases were unknown and unknowable.

At a critical juncture, the company found itself with:

1. A DC at 98% of cube capacity
2. A newly constructed DC annex at 85% of cube capacity
3. An overflow warehouse for obsolete stock
4. An overflow warehouse for excess stock
5. A third-party facility in another city for Far East merchandise, with 99% of the resident SKU’s being “C” items

A happy ending – long-term supply chain solutions, with controlled overall annual actions - is on the way, based on:

• Getting the supply chain (inbound and outbound) planning functions ahead of the wave, and working hand-in-hand with Sales and Marketing plans and initiatives
• Establishing a portfolio management approach for Far East SKU’s, balancing adds and deletes for a more measured (and customer-considerate) SKU growth

Serving New Channels

A major manufacturer of outdoor power equipment faced a dilemma. It had totally committed to a strategy of moving increased overall product volumes through “big box” channels. They were a hit with Wal*Mart, Home Depot, to a lesser extent, Sears, and a host of smaller DIY and gardening chains.

In the process of succeeding with the strategy, they had gradually pulled out of their original market of independent dealers and distributors. But, these “little boxes” added up to a significant market that they were not positioned to penetrate. And, they could no longer leverage their existing brand and models – now committed to the “big boxes” – into the old channel.

The answer clearly lay in – you guessed it – SKU proliferation. Plans were developed to duplicate the existing lines with a parallel family of products – re-engineered, re-badged, and re-positioned as a “professional” line of high-quality, heavy-duty products – available only through the dealer/distributor channel.

Notably, an early conclusion was that the line would need a parallel outbound supply chain, too. The existing distribution network had been compromised, over time, to feed directly into Wal*Mart and Home Depot networks, and could no longer effectively support dealer distribution.

“My Kingdom For a (Clothes) Horse!”

Retail apparel faces a different kind of challenge. There is a certain, but limited, amount of SKU proliferation. But, store dimensions and layouts prevent rampant growth over any period of time. The challenge there is that each new season brings a wholesale swap-out of new SKU’s, with hundreds and hundreds of existing SKU’s being replaced in total every several weeks. Even though we think of a specific chain as the place to go for certain items and styles, the number of staple SKU’s is relatively small.

The number of “seasons” is on the increase. It’s been a long time since they thought in term of winter, summer, Easter, and ”back to school.” What used to be 9 or 10 seasons a year has gone to 16. Just before the last shipments of the old season have gone to the stores, the entire season’s worth of merchandise for the new one is arriving.

Where to put it all? It’s tough. The old merchandise must be pulled, processed, tagged, and moved out to whatever its post-season distribution destinations may be. The new merchandise must be put away, to prepare for the initial store sets, and for store replenishment. But, there’s no way to know what the hot items, that might benefit from “golden zone” placement, are going to be.

A complicating factor? Dude, apparel isn’t all apparel. There are a seemingly infinite number of gew-gaws, lotions, pins, draughts, and potions that are loads different to pick/pack than pants and shirts, that must be handled equally effectively. Difficult when the supply chain is plugged in to Merchandising; impossible when it’s not. And, the trend is accelerating, with pins and lotions morphing into even-less-related hard goods.

Can’t Wait For The New Issue!

The situation is different still for those with a heavy promotional content to their offerings, notably catalog merchants. There is typically a core of constant – at the least, changing very slowly – products, perhaps those with which the merchant is most closely identified. But a significant component of each offering is new to the specific issue – that form of SKU proliferation associated with SKU replacement.

The process may appear to be an endless series of crap-shoots, with items and quantities contracted for and received before the first order has been received. There is often little recovery opportunity for an item that doesn’t work out.

When a food manufacturer, for example, runs a promotion, it can ratchet suppliers and factories up or down, depending on early results, and manage the promotion inventory/availability end-game quite closely. Not so, when you’ve ordered 50,000 units from China and they sell out in the first week – or don’t sell at all through the life of the catalog.

What makes life difficult for the logisticians in this instance is:

• They don’t know how many new items there will be (not to mention whether they are bedknobs, broomsticks, or something entirely different, with attendant space, weight, and cube issues), and
• They may not be told what to do with the leftovers, a deadly condition when the new catalog’s merchandise is already on the way.

So, the imperatives in this environment are to be thorough in communicating the composition of the new product mix, well enough in advance that something might be done about it, and to be merciless (and most timely) about disposing of unsold merchandise. How often does hoping that it will sell through in the next issue work out, do you suppose? Be honest, now.

Change of Seasons

The challenge gets exponentially more difficult when the promotional business is also highly seasonal, and the stakes for the crapshoot are significantly higher. The impacts of keeping the supply chain folks out of the loop are also much greater.

When something about the new product mix is going to require different handling, different storage, back-up and/or overflow facilities, the time to discover this is not when the containers are being unloaded.

So SKU Proliferation Is Always A Good Thing?

Of course not. There are plenty of times when proliferation is not competitively necessary, economically justified, or even mildly attractive. And it’s high-risk, as well as high-cost. In the consumer products world, 90% of the new items introduced in supermarkets don’t even last two years. (2)

The foremost example involves product categories in which purchases are value-driven, and past expansion and diversification have been met with indifference. Why bother? (Exceptions are always possible for paradigm-changing fundamental innovation).

Another “bad” scenario involves an overabundance of promotional SKU’s. When they are already out of hand, adding more is seldom cost-effective. (Of course, some number of them can be positive – generating sales lift at manageable cost.)

Whenever the added SKU is unlikely to generate sustainable incremental revenue, or worse, will certainly cannibalize existing sales, the cost/complexity factor needs to be closely examined. (But, there are also times when cannibalization is preferable to competitive losses.)

Any time the new item(s) require inordinate up-front investment commitment, are known to add significant cost, and can’t generate high confidence in customer acceptance and revenue enhancement/protection, it’s time to tread carefully.

And, the idea of adding SKU’s “just ‘cause we can” is a dangerous counterpoint to planned, strategic product management.

The Cost Of Complexity

Knowing – really knowing – cost and cost components is critical to evaluating the prospects and performance of added SKU’s. Added inventories, higher obsolescence risks, added processes and labor, order fulfillment efficiency, manufacturing set-up/changeover capacity losses, transportation impacts, packaging costs, and more come into play.

These help to be appropriately hard-nosed about proliferation, while avoiding knee-jerk negative rejections of real – and important – extensions and expansions. In fact, oftentimes, costs blamed on proliferation can be attacked and reduced with time-based manufacturing practices, allowing less-costly and more effective support of added SKU’s.

It can be easy, over time, to generate many low-performing SKU’s in an uncritical environment of proliferation. One great myth, however, involves the savings to be generated by rationalizing (the code word for “reducing”) SKU’s. Research demonstrates that, unless enough SKU’s can be cut to allow shutting down a shift or closing a plant, the savings are minimal and often illusory. (1)

Getting rid of obsolete and inactive SKU’s that are cluttering up inventory in the warehouse is always a good thing, even when the accountants don’t want to deal with the associated write-offs. But, that step is not necessarily the same as trimming back – rationalizing – the active SKU population.

So, trimming away a few low performers is really (generally) a Marketing exercise, done with an eye to customers, market share, and revenue.

You Ain’t Seen Nothin’ Yet . . .

It is now easier than ever before to acquire too great a quantity of too many products, and that ease is made more seductive by the ability to do so (apparently) on the cheap. The culprit? China!

Manufacturing capacity, inexpensive – and capable – labor, technology competence, and government support all combine to make it ridiculously easy to get products that are, even with the cost of time and transport figured in, a fraction of their US cost. Whatever you want, how ever many you want, in as many sizes, shapes, and colors as can be imagined, and at laughable prices – of course companies are going to be able to invest in more SKU’s than ever. Hey, how much can you lose?

But, the easy availability is another factor driving up the SKU count. And, when there are more SKU’s, as we know, there are more leftovers, more obsoletes, more stuff in the aisles, and more headaches for supply chain operations. And, the disease – yes, it’s a disease when SKU proliferation is willy-nilly acquisition instead of careful and thoughtful product line management - is spreading to smaller enterprises.

There are no real acquisition cost barriers to either good proliferation or not-so-good proliferation, even if there are prices to pay down the road. So, $20 million, $50 million, $100 million enterprises can source offshore and drive SKU expansion - at bargain prices. Even if their supply chains are less-prepared than some others to deal with the physical consequences. And, they generally are.

Meanwhile the merchant side of the brain is enchanted with the idea that anything can be easily and cheaply acquired, and therefore, sold. The quaint notion that the catalog or retail store ought to build from its core identity can be abandoned in a Beijing minute. Whether that’s strategically right or wrong is arguable, but, without supply chain input and evaluation, the physical feasibility of the new products and lines comes into immediate question. The more failures that are observed, the more cynical that question becomes.

Summing Up

Okay, logisticians. It’s time to get real. The march of SKU proliferation, like Mickey Mouse’s bucket brigade in The Sorcerer’s Apprentice segment of Fantasia, isn’t even going to slow down, let alone stop. How can you deal with it? Get a seat at the planning table; get in the loop on new products, on corporate strategies, on seasonal plans, on catalog content.

It’s up to you to make the case to management for having that seat. But, the cost and service consequences of not being there ought to be clear enough by now. How many products that are too long or too wide or too heavy to be stored, or picked, or conveyed effectively is it going to take to hammer that message home?

Look, the buyers are going to continue to make mistakes, some of the merchandisers’ gambles aren’t going to pay off, and a lot of your peers aren’t going to fully appreciate that the supply chain can’t operate either in the dark or on auto-pilot.

But someone else will be evaluating the players’ performance in those other areas of the company. Our worry isn’t whether they’re doing a good job or a bad one, it’s how we can get enough insight into the supply chain ramifications of their actions and decisions to make the right decisions in our world.

In the meantime, there are channels to conquer, competitors to vanquish, catalogs to fill with stuff that sizzles, stores to energize with stuff that’s even hotter, and consumers – who actually seem to like things like peanut butter and jelly in the same jar, or lime-flavored cigarettes, or detergent in buckets too heavy to lift, for example – to both entice and satisfy. It all adds up to SKU proliferation. So, buckle up, supply chain professionals; the seat at the table is yours to claim.

Denouement – What Else Can We Do?

All the conversation above should not be taken to mean that our only option is to take it on the chin when proliferation continues without abate. But, once we are involved in the communications about new lines and SKU’s, it becomes incumbent on us to do everything in our power to accommodate the challenges with grace, style, and effectiveness.

Specific things for supply chain professionals and others to think about could include:

• Postponement, postponement, postponement – great solutions when specific SKU’s can be created simply with labeling, tagging, final packaging, over-packing, configuring, and/or accessorizing to satisfy different channels, retail customers, countries of destination, individual consumers, and promotions – among others.
• Despite all that’s been said, periodic analysis of the costs involved with FISH inventory (You know FISH, right? First In, Still Here.) can be a useful stimulus to the marketing people who grapple with product and portfolio management issues.
• Even if not permitted to dispose of ancient inventory, clear it out of active distribution areas to maximize effectiveness there, and store it off-site. Use the off-site cost as part of the discussions suggested above.
• Do be prepared with data – especially cost data – to help out the discussion about the potential contribution of new lines and items. The people making go/no-go decisions on them need to know whether (or not) there will be unusual handling, packaging, preparation, manufacturing, and/or storage costs involved. Assuming that the new stuff will have activity and costs just like the old stuff can be a deadly error.
• Learn to think of, and express, costs in terms of the pre-tax dollars needed to pay for them. It makes a much more dramatic – and appropriate – case. For example, to carry an extra $1 million in inventory requires an extra $1.67 million in pre-tax earnings to accommodate – or, an extra $17 million in sales at a 10% margin.
• Don’t be afraid to climb out of the box in crafting solutions for sudden and unusual conditions. Nobody wins if we stubbornly keep trying to put five pounds in a two-pound bag, speaking metaphorically of the physical supply chain. So, when the new SKU’s can’t be handled effectively in the old warehouse, don’t put them there! Put them somewhere else, and learn to assemble and merge order components. And, know the costs of the solution - to the penny.
• Explore the possibilities of mid-stream exit strategies if a new line is not performing at expected levels, e.g., cutting off new orders to suppliers, returning unsold goods, and early diversion into alternate channels.
• Be sure to have in place (and update, periodically) policies and processes for removing and processing obsolete, out-of-season goods. Execute them with timeliness and discipline. Don’t let them dilute attention and effort needed for active SKU’s, removing them off-site, if necessary. In the converse, don’t let handling the active goods delay processing the inactive. Consider third-party processing as part of the solution.
• Create a nimble, lean, and flexible distribution operation - one that can turn on a dime when the changing SKU mix shifts the physical components of handling and storage. This is part process, part planning, and part people, and depends a lot on attitudes as well as on education and training.
• Leave flexibility in material handling system design, along with space for workarounds and alterations. The precision and discipline of total automation could prove difficult to alter, as product mix and characteristics change. (Note: When staffing changes accompany material handling changes, the US environment may be more accommodating than the European.)
• Pull out all the stops in building flexible and dynamic manufacturing capability, one that:
• Maximizes effective capacity by increasing first run yield, improving process dependability, reducing downtime
• Creates rapid changeover capability, to accommodate change and short runs with little capacity loss and cost
• Incorporates the best, and relevant, aspects of JIT, TQM, Lean, Six Sigma, Kaizen
• Teach your suppliers how to be lean and flexible, as well, especially if they are the manufacturers.
• Above all, evaluate proposed new SKU’s for their special handling and storage requirements. That alone will rob future generations of page after page of SKU proliferation war stories.

All the answers you’ll need aren’t provided above, but maybe there’s enough to get you started in thinking about how you’ll make a difference in managing SKU proliferation when you get to take your seat at the table.

(1) The Complexity of Reducing Complexity, Bain Strategy Brief, 1/1/1997

(2) InnOvations, Marketing/Headline News, 12 June 2003

(3) Insight Magazine, PRTM, Archives

Art van Bodegraven is Partner Emeritus in The Progress Group, LLC, a founding member of The Supply Chain Group, of which he is Chairman. The Progress Group is a supply chain and logistics consultancy headquartered in Atlanta; The Supply Chain Group is an international consortium of consultancies organized to deliver global supply chain solutions.