Product rationalisation or more SKUs in supply chains?

Roger OakdenLogistics Management, Operations Planning, Procurement, Supply Chains & Supply NetworksLeave a Comment

Business strategy to planning

Consumer facing businesses

A consumer facing business is identified as either FMCG ‘fast moving consumer goods) or CPG (consumer packaged goods – governed by ‘use by’ dates). The previous blogpost identified that for these types of business, the Supply Chains group should have a product line elimination process as part of inventory management.

Consumer facing businesses have the perceived need to appeal to many market segments, so there is a natural encouragement to add stock keeping units (SKUs). This is done by ‘product line extensions’ – packaging size variations and optional materials. At the other extreme, there is often a low emphasis on managing products near the end of their life cycle. These new and dying stock keeping units (SKUs) are mainly in the Lumpy Group/Class within CoVM, which contains up to 70 percent of all SKUs – the ‘long tail’.

Complexity challenges

Additional SKUs can reduce the effectiveness and efficiency of your company’s supply chains and adds to complexity in the business. It can impact areas of an organisation including:

  • Marketing: Ineffective shelf space utilisation at retailers, resulting in dilution of the brand
  • Customer order processing: Available to Promise (ATP) capability compromised due to scheduling errors
  • Demand forecasts more likely to be inaccurate, resulting in increased inventory and transport costs
  • Sales & Operations Planning (S&OP) process is less effective
  • Production: Frequent setups and short production runs increase manufacturing costs
  • Production support: Frequent setups and short production runs increase engineering costs
  • Procurement: Low purchase volumes for some items can result in a loss of buying leverage

Depending on the industry and operational processes, a reduction of SKUs can yield benefits, but rationalisation is not just eliminating low-selling SKUs, which are identified using the diagram analysis shown in the previous blogpost. For a start, the estimated value of lost sales must be less than the internal cost savings from inventory and production. Also, identify which SKU(s) will absorb the sales value lost from each eliminated SKU. And identify if other SKUs have a sales dependence on the variable sales by the eliminated SKU.

The key to a successful product rationalisation effort is twofold. The first is for the Supply Chains group to gain a commitment for the proposal by the person(s) responsible for Marketing and Sales. The proposal also needs sponsorship by the senior executive responsible for supply chains – they must sell the project to the senior executive group. Without these two steps, the proposal is a ‘non-starter’.

Assuming that the executive group agrees to eliminate the proposed SKUs, there must be a timetable and process for the phase-out. While the inventory of an SKU is being sold, the product data file must be isolated, so there are no updates of forecasts or schedules.

Want more SKUs

But suppose the senior executive group does not agree to the rationalisation proposal. Instead, they are sold on the idea that the business should have a sufficient range of SKUs to satisfy each identified market. But if the production and distribution processes do not change, the supply chains will incur additional inventory holding costs. The Supply Chains group must therefore change their proposal to identify action that reduces complexity, initially in the ‘core’ supply chains. The proposal identifies how the ‘long tail’ of low-selling SKUs exerts an influence on supply chains:

  • Order size decreases, but (hopefully) total delivery volumes increase
  • More unpredictable demand patterns do not provide a normal distribution, used in sales forecast calculations
  • Longer replenishment times from higher forecast errors due to the increased uncertainty of future demands
  • A higher number of demand locations (retailer shelves and on-line shopping site)
  • High service levels expected for ‘new’ but low selling items

To overcome these negatives, lead times through the supply chains must be shortened, which requires flexibility. And the term used to denote flexible is Agile. An Agile approach works best in a Make to Order (MTO) and Assemble to Order (ATO) environment, which require that the time for production and delivery is less than the customers’ expected lead time:

  1. Make to Order: low volume, high variety. Adaptation of pre-designed products – provide designs that enable quick change for option selection onto the base products
  2. Assemble to order: low volume, high variety: Assemble discrete or ‘mix and stir’ process (non-discrete) products, based on specific orders from either customers or sales for pre-defined catalogue or recipe products. Make or buy materials, components, sub-assemblies, packaging and options to:
    • Immediately assemble into finished goods and deliver, using ‘just in time’/lean flow manufacturing processes
    • Assemble from stocked input items or ‘mix and stir’ ingredients and deliver. This is an example of ‘form postponement’ or ‘delayed configuration’, where product lines have a common platform of modules, components and materials held in inventory. The product customisation (for MTO) or final assembly (for ATO) only occurs when the customer requirement and/or market destination is known.

An Agile approach has a best fit in businesses that are less capital intensive (but open to incorporate ‘new’ technologies). They are more reliant on their human capital to implement flexibility, but this requires higher skill levels and additional training. As more skills are acquired, so a higher wage is paid, but the flexibility covers the payment.

Planning factors to be considered when moving to an Agile (MTO and ATO) operations model:

  • Excess capacity is placed closer to customers to allow quick response to orders
    • Equipment utilisation will most likely be lower
    • Accountants need to understand the benefits of flexibility in addition to costs
  • Flexibility must increase closer to customers i.e. packaging machines purchased for their flexibility (i.e. quick changeover time) rather than high output speed
  • Downstream from the Order Penetration Point (OPP) customer or sales orders influence the schedule of SKUs; while upstream, the drivers are usually forecasts and plans. But if flexibility of equipment allows it, the upstream operations should be Made to Order (MTO):
    • In a flow process situation, rather than a few large holding tanks for liquid ingredients, it is better to instal multiple small holding tanks. This enables low volume requirements to be processed in short-run batches on flexible packing lines using ‘quick changeover’ delivery pipes to filling machines
    • For discrete products, production machines must have a capability for ‘single minute exchange of dies’ (SMED), to minimise downtime between producing different SKUs

Agility is helped if the business owns or controls it warehouses and distribution centres, has a core fleet of owned delivery vehicles and a ‘direct to retail outlet’ delivery model. But while all the planning factors may not be present, re-organising to achieve agile operations is fast becoming a necessity.

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About the Author

Roger Oakden

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With my background as a practitioner, consultant and educator, I am uniquely qualified to provide practical learning in supply chains and logistics. I have co-authored a book on these subjects, published by McGraw-Hill. As the program Manager at RMIT University in Melbourne, Australia, I developed and presented the largest supply chain post-graduate program in the Asia Pacific region, with centres in Melbourne, Singapore and Hong Kong. Read More...

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