SKUs (Stock Keeping Unit) are unique identifiers for a product or service, called a Stock Keeping Unit. In a beverage company, for example, different SKUs are generally used for beverages stored in packages of different sizes, as well as to differentiate liquids by flavor and by the addition, or not, of sugar. Over time, the tendency for many companies is for the phenomenon known as “SKU Proliferation”, that is, an excessive increase in the number of SKUs to occur. That's what happened to Lay's French Fries: in 1975, four varieties were offered. Currently, there are more than 60. The same was seen in the American soup industry, Campbell Soup Co., which quadrupled the types of soups manufactured since its inception, currently selling around 400 options. When brands decide to increase the number of SKUs, the impact extends to retail. According to the Food Industry Association, the average US food retailer has seen a 370% in-stock growth of different items since 1975, reaching 33.000 products in 2018. For the large Walmart, the inventory is about 120.000 different items.
However, an opposite flow has occurred due to the Coronavirus crisis. In its first month, the pandemic brought a “boom” in demand for various items in the food, beverage, cleaning and personal hygiene industry. The need to replenish stock quickly has led many factories to focus on items with the highest demand, rather than producing all SKUs that are generally sold. Another reason for the decrease in items offered is the need to reduce employees in the factory, which limits production capacity. Furthermore, the economic crisis that has affected the entire world since March of this year has led many companies to cut costs, with cutting different items being one way of doing so. For restaurants, reducing the size of the menu is necessary when some dishes do not adapt well to transport for delivery, in addition to being a way to reduce waste and optimize production. This is the case of Outback, which removed about 40% of its menu, and the Olive Garden restaurant.
The rationalization of SKUs, even if momentary, brought into question the real need for this large number of products. John Ross, chief executive of IGA, an American supermarket brand that operates in more than 30 countries, said that the impact of Covid-19 was able to show retailers and consumer goods manufacturers that there is an “addiction” to marketing numerous varieties of the same item. According to him, "Maybe we don't need 40 different options of toilet paper". It is the same thinking of the managers of companies like Pepsico, Harley-Davidson, Nestlé and the already mentioned restaurant chains, Outback and Olive Garde, who informed that they are studying the reaction of the clients in front of the reduction of the portfolio and the real need the return of some items.
To find the ideal number of items to produce and sell, it is necessary to understand the benefits of offering a wider range of products, as well as the operational impacts. The arguments generally used by sales and marketing teams about the need to increase the number of SKUs offered revolve around market gain. It is believed that the greater the segmentation of items, the greater the adaptation to customer requirements and the greater the relevance of the company to them. In addition, mention is made of the fact that the greater the breadth of the portfolio in relation to the price of its products, the greater the number of income ranges of the population that it is possible to embrace. The two mentioned points increase market penetration and capture, improving the competitive positioning against competitors. In addition to the aforementioned, another fact commonly discussed for the proliferation of SKUs is the idea that the more items available, the greater the company's revenue.
On one side of the coin, the sales and marketing teams and their high expectations regarding the launch of new products. On the other, the planning and operations teams and the negative consequences of a stuffed portfolio. Below is a list of the main negative impacts of a large number of SKUs, many of them related to management complexity and increased operating costs.
Figure 1: Negative impacts of SKU proliferation. Source: ILOS
The balance between the two visions is the best way to find a sustainable path for the company, serving customers, working with an efficient operation and achieving the company's goals. It is the alignment between Operations and Sales that delivers the “ideal quantity” of products to be sold. The decision to add, retain, or delete a SKU is called rationalization and is part of a process that involves analyzing various data related to each SKU, such as those listed below.
Figure 2: Data to be analyzed for SKU rationalization. Source: ILOS
Based on the knowledge of these metrics and the understanding of the advantages and disadvantages of the proliferation of SKUs, decision-making has a greater foundation and is done more fluidly. If you decide to use a high number of SKUs, there are still ways to optimize the operation, reducing the negative impacts. Some known options are: investment in a WMS that can accurately track items along the supply chain and deliver detailed data on flows and costs, use of technologies such as RFID (which collaborate with stock control and picking work), automation of storage and order picking process, change in traffic inside the warehouses (reducing the travel time of forklifts and labor).
The fact that the rationalization of SKUs is one of the actions used by several companies to face the moment of Covid-19 is an indication that there is an exaggeration in the size of the portfolios offered, which results in an increase in the complexity of the supply chain and decreases its performance. According to market research firm Nielsen, the number of items traded in US markets fell by around 7% in June/2020. As already mentioned, many companies do not consider the return of all items in the post-pandemic period, as is the case with Pepsico, which expects to continue with a reduction of 3% to 5% of products. Operating costs are known to increase when operating with high SKU counts. Each company's homework is to determine whether the additional revenue from offering more product options outweighs the negative impacts. The moment of the pandemic can be used as a laboratory to feel the reaction of customers, as well as the positive operational effects. However, the rationalization of SKUs is an ongoing process, which always requires the company's engagement in identifying which add value and which do not.
Between October 13th and 15th, the 26th. International Supply Chain Forum will have e-commerce and new retail as one of its verticals. The proliferation and rationalization of SKUs and their impacts on supply chain management will be addressed in discussions with guest speakers. This year, the event will be completely digital and will bring many other innovations. Follow updates related to the forum by our LinkedIn page e our Instagram profile.
Marina Pomaleski
He has been part of the ILOS Team since 2018, working on projects focused on Logistics and Supply Chain. His experiences encompass major players in the cement, polymers and consumer goods industries, as well as retail companies. Types of projects carried out at ILOS: Transport management, transport contracting strategy, advice on the impacts of setting minimum freight levels, fleet sizing, process mapping and optimization, reduction of return rates.
