During the pandemic, many supply chains have been stressed with rapidly changing demand and disruptions in supply.
One way to reduce this stress is to simplify operations. The supply chain can function better with fewer SKUs (Stock Keeping Units). This allows supply chains to focus on fewer, more important items, which helps offset some of the additional problems added by the pandemic.
Many organizations are reducing their SKUs, including Kraft Heinz, Coca-Cola, and Hershey. Coca-Cola has a goal of reducing SKUs by 25%, and has established a mechanism to identify SKUs to be eliminated.
To give you an idea of the complexity of the supply chain, the average grocery store stocks 33,000 SKUs; a Walmart Supercenter will carry around 120,000 items. Over the years, the number of SKUs has tended to increase.
Offering a greater variety of SKUs provides the customer with a greater selection of items. This works well when customers are taking their time shopping for items. During the pandemic, however, many customers are trying to reduce their time in the store to avoid potential exposure to the coronavirus. Reducing the number of variations of products allows customers to more easily find their desired items in a shorter period of time.
An added benefit is that this reduces the number of SKUs, thus simplifying operations.
Video Spotlight: Coca Cola product shortage (July 27, 2020, WCPO 9)
This post is based on the Food and Business News article, Mondelez To Reduce Number of SKUs by 25%, by Jeff Gelski, July 29, 2020; the Forbes article, COVID-19’s Beneficial Effects on The Consumer Goods Supply Chain, by Steve Banker, July 9, 2020; and the YouTube video in the Spotlight. Image source: DreamPictures/Shannon Faulk/Blend Images LLC
1. What advantages are gained by reducing SKUs?
Guidance: Reducing SKUs simplifies the supply chain. It makes it easier to manage, and will tend to increase fill rates, and reduce inventory levels. All of this will lead to reduced costs. Simplification in the supply chain is very helpful with the pandemic impacting demand patterns, and suppliers having problems producing items. During this time, having “essential” items on the shelves is more important than providing the customer a greater variety of products.
2. What are the drawbacks to reducing SKUs?
Guidance: Reducing SKUs could eliminate a product that appeals to your customer—possibly resulting in lost sales or lost customers.
3. How would you identify SKUs to eliminate?
Guidance: A good starting point in deciding which SKUs to eliminate is an ABC inventory analysis. Determine which items have the highest dollar volume (sales times price). Emphasis should be placed on those items (Class A) that have the highest dollar volume. While Class C items (those with the lowest dollar volume) should be considered for elimination (or temporary elimination).
Another consideration would be to look at variations of products, and reduce the number of variations. Many firms offer a wide variety of sizes, packaging, or flavors. Reducing these variations may not have a major impact on sales, but simplifies the supply chain. An organization might be better off providing a steadier supply of products that have fewer variations, than having shortages with products having greater variations. This is especially true with the added complexities in the supply chain associated with the pandemic.