The Value of an SKU?

Very recently we got a phone call from an old colleague who works for a home decor company. He was about to go into a meeting with the executive committee where he was going to propose an SKU management process. He was trying to justify the need and wanted to pick our brains specifically on determining the total cost of carrying an SKU. He said that he had done an internet search on the subject and came up with nothing.

We were glad he called us. We live for questions just like this.

We offered him the following. Most people that look at SKU management look at the contribution to sales. They evaluate eliminating the lowest contributors. The decision is easier if there are other offerings of the same product to absorb the revenue that is being cut. Not moving on SKU management because of not having the exact costs is just an excuse not to manage, i.e. reduce, SKUs. 

It is not an easy question.  

This problem is the same as trying to find the profit by SKU. This is something that consumer products companies have struggled with for years. It is easy to track revenues by SKU. That comes right off of the invoices.  The hard part is to apportion the cost properly. This can be done but it is not an exact science. The best we can do is approximate the costs. The easiest way is to use the percentage of sales to whatever cost base one chooses to use. This will provide as good as an estimate as one could get in short order. Getting an exact measure would require a very sophisticated accounting system and probably not worth the cost of tracking and maintaining the data to that level of granularity.

If we are to use Percent of Sales by SKU to evaluate SKU costs, why not just use Percent of Sales?

We had another colleague that ran the supply chain of a $1B Latin American subsidiary of a consumer products company. He had a very simple rule for which SKUs ought to be deep sixed. He simply said, “If we sell less than a pallet of an SKU per month, it is not worth keeping. It should be cut.” It was a brilliant and visual rule. It resonated with Sales, General Management, and certainly in the Supply Chain. Even marketing folks, who are always the most reluctant to cut SKUs, could not really argue with this very simple logic. On a sales volume of $1B, everyone understood that an SKU that sold such a paltry amount had to be absorbing more cost per unit than other products. Simply changing over in the factory, several months of supply run, and the inventory carrying costs probably made the costs of such an SKU disproportionate.

SKU management need not be complicated. It can and should follow some pretty simple and clear guidelines. It can be accomodated via spreadsheets or a tool such as DemandCaster which incudes an SKU rationilization component. We have found that this either is something that resonates with the executive team or not. If it does not resonate, they will ask for numbers and justifications they know cannot be obtained.

What are your experiences in this area?

Can you determine the cost of maintaining a single SKU?

What are your rules of thumb for putting an SKUs on the consider to cut list?

Comments

[Kurt Whitner]

I'll go for the use of Percent of Sales. SKU Management is good but I guess POS is a lot easier.