08: A Solution to Control Runaway SKUs

An international manufacturer and distributor of electronics accessories was experiencing problems managing its diverse product portfolio. The organization’s product group (a type of process structure), which included product development, manufacturing, contract manufacturing, warehousing, and distribution was originally designed to be ‘forward’ looking. That is, it was built to identify product opportunities, get them in production, and fill the retailer pipeline as quickly as possible. This worked well. The organization increased its net shelf space and SKU mix in nearly all of its channels (defined by retailer type) in the previous three-year period.

Unfortunately, the sheer number of low velocity products, duplicates, and aging items buried in the thousands of SKUs across dozens of brands in the portfolio started to take a toll. Inventory turns slowed (hit zero for many items), production planning and related raw material inventories became out of sync with orders (particularly for products under contract manufacturing), and overall margins dropped dramatically. The basic problem was that while the organization focused so much attention on filling its distribution channels (and retailer shelves), too little attention was paid to inventory and product management, including planned product replacement. And, as inventory levels climbed and orders slowed it became apparent that sourcing, sales, and production activities were not as integrated as necessary.

The solution was to first create a new structure to disentangle product development from production, purchasing, and distribution. This allowed more narrowly defined product teams to focus on streamlining and maintaining a manageable number of products (including assessments to routinely discontinue the bottom portion of each category). But more importantly, it allowed manufacturing to be demand-driven based on sales rather than on product speculation. This brought significant cost control to operations and basic production forecasting to decision-making processes. Finally, a new product review process was designed and implemented. This required all new products to be evaluated in relation to the existing alternates (SKUs). The goal here was to evaluate features (not just products) and costs to support decisions pertaining to product adoption, replacement, or modification.

Back to Projects list.