September 4, 2009

basic training

tips for taming the SKU monster

Here are some strategies for dealing with SKU proliferation.

By Art van Bodegraven and Kenneth B. Ackerman

A century ago, Henry Ford might have gotten away with telling customers they could order Model Ts in any color they wanted, as long as it was black. But few manufacturers today would take such a risk. In fact, most have gone to the opposite extreme, offering consumers almost limitless choices in color, size, flavor, scent, packaging, and more, no matter how much it might complicate their manufacturing and supply chain operations.

Like it or not, SKU proliferation is a permanent fact of modern business life. The issue is not how to stop it, but how to deal with it—proactively and efficiently. Here are some strategies:

• Postponement, postponement, postponement—great solutions when specific SKUs 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.
• Do be prepared with data—especially cost data—to aid in the discussion about the potential contribution of new lines and items. The people making the go/no-go decisions need to know if there will be unusual handling, packaging, preparation, manufacturing, and/or storage costs involved. Assuming that the new stuff will have the same cost requirements as the old stuff can be a deadly error.
• Even if you're 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.
• 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—or an extra $17 million in sales at a 10-percent 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 SKUs 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 those plans with timeliness and discipline. Don't let the obsolete goods dilute attention and effort needed for active SKUs; remove them to an off-site location, 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 it 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 U.S. environment may be more accommodating than the European.)
• Pull out all the stops in building flexible and dynamic manufacturing capability, one that:
  1. Maximizes effective capacity by increasing first run yield, improving process dependability, reducing downtime
  2. Creates rapid changeover capability, to accommodate change and short runs with little capacity loss and cost
  3. Incorporates the best aspects of JIT, TQM, Lean, Six Sigma, and Kaizen.

• Teach your suppliers how to be lean and flexible as well, especially if they are the manufacturers.
• Above all, evaluate proposed new SKUs for their special handling and storage requirements. That alone will rob future generations of page after page of SKU proliferation war stories.

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