in the business of marketing, it is recognized that offering a variety of products is necessary to increase the performance of a company, as this variety would allow it to conquer other consumer niches, which would stimulate more sales and lead to an increase in market-share. On the other hand, it is also recognized that the excess of options can confuse the consumer at the time of purchase, reducing the advantages of offering this diversity of products.
As for operations management, we know that the diversity of SKUs*¹ increases the operational complexity of sales forecasting, inventory management, warehousing and picking operations, and transportation, which can also impact sales. Since the diversity of products makes forecasting accuracy difficult, an imbalance between production and demand can lead to stockout of products, making the customer decide for a substitute product that may be from the competitor. In the consumer goods industry, this happens quite easily: if you go to the market to buy a carton of milk, but the product you want is out of stock, you probably won't stop buying it, resorting to another brand.
Figure 1 - Market shelf
Hence the concept of SKU rationalization, which is nothing more than using historical data to identify and eliminate underperforming SKUs, transferring resources to products that really bring profit to the company. Unilever is an example of a company that is continuously working on the rationalization of SKUs. After all, it has more than 400 brands in its portfolio, working with thousands of products in different segments and regions of the world. In 2009, Unilever's UK and Irish units were combined into a single group, and found that 60% of their products contributed only 5% of their sales but made up 20% of their stock levels. P&G, another consumer goods giant, works even at the brand rationalization level. From mid-2015 to October last year, the company cut and consolidated around 61 brands, intending to discontinue another 44.
Mondelez, manufacturer of cookies Oreo, streamlined its SKUs by standardizing cookie diameters, significantly reducing production costs. Cristian Negrescu, director of supply chain leaders global company reports that the marketing area is still responsible for defining product requirements, but there is a team made up of professionals from R & D and by professionals from supply chain leaders who work together to introduce products as efficiently as possible. A change like this, involving “conflicting” areas within the company, is not easy, but it certainly brings many benefits, aiming at the global optimum of the business.
*¹ One SKU (Stock keeping unit) references a single item of inventory. Any change to a product's characteristic (size, packaging type, label) results in a different SKU. As an example, a 1,0L bottle of soft drink is a different SKU than a 1,5L bottle of the same soft drink.
References:
Industry focus podcast: What is an SKU and why can it matter so much to investors? https://www.fool.com/podcasts/industry-focus
University of Tennessee Supply Chain Forum. Interesting Presentations from Caterpillar, Unilever, Procter & Gamble, Mondelez and More. http://www.scdigest.com/firstthoughts/16-04-15.php?cid=10561
Thatiana Nomi
5 years of experience in consulting projects in Logistics and Supply Chain. Worked on logistics network optimization projects, service cost, logistics master plan, inventory policy definition, sales forecast, S&OP (Sales and Operations Planning) and transportation planning and management.
