By Sanjiv Mahajan
Headaches have a way of coming back if not treated properly. If you have a recurring headache, you can either run to the closest pharmacy to pop in aspirins, or get a root cause diagnosis to treat the real problem. Similarly, supply managers plagued with factories and warehouses that are littered with product find that no short-term fix like expedites, renting more storage space or using the latest supply chain visibility software can provide a permanent cure. The only long-term fix is to focus on substantially changing operating practices, and part of it means dealing with complexity management.
Complexity, in this instance, refers to the proliferation of individual items, either in input components and subassemblies or finished goods. Excessive item counts are a sure way to bring a supply chain improvement effort to its knees. No one magic pill or technology will provide a solution for managing complexity. Rather, it takes a structured, holistic team approach to methodical product rationalization.
Insidious Product Proliferation
Much has been written about what causes product proliferation. This article will focus on how to deal with it, rather than the "why's" and "what's."
Nevertheless, to put product rationalization in perspective, some of the major reasons why companies amass countless SKUs in their arsenal are due to mergers and acquisitions, companies placing more emphasis on new product introduction than end-of-lifecycle management, and product families growing into multiple SKUs as packaging variations are put in place, among others.
But all this proliferation leads to complexity. In manufacturing, SKU proliferation can lead to frequent setups and short production runs, driving up manufacturing costs. For supply chains, proliferation of SKUs can cause difficulties in forecasting sales volumes, ultimately resulting in increased inventory and transportation costs. For Sales and Marketing, proliferation can result in dilution of brand power and sub-optimized shelf space. And finally, for Procurement, proliferation can create supplier fragmentation leading to loss of buying leverage and ultimately higher material costs.
Getting a Handle on All that Product
Now that we understand SKU proliferation, the question is how do you deal with it to make it go away? While narrowing the component selection and finished goods offerings to just a few items would be a logical decision, it's not that simple. If not managed carefully, the same steps that might simplify the supply chain can more than offset that benefit by reducing revenue. Here is a real life example, from one of my previous employers, where I led a team successfully through the product rationalization effort.
It started with an e-mail from our global director of Manufacturing wherein he asked the Supply Chain managers to provide a list of items that gave us the most headaches to manage and what would we gain or lose if we eliminated them. For me, images of items that caused stock-outs, created warehousing pandemics and caused our cost of poor quality to soar came rushing to mind.
Project Stage 1: Scoping and Planning
Formation of the Headache Index:
The word "headache" in the e-mail spurred a thought. "What if I created a ‘Headache Index,' which would simply represent a list of items, sorted high to low, signifying the most disliked items?" But then, how would I calculate the most disliked items?
Using Excel I extracted the Sales history for all SKUs for the past year. I applied three financial filters for starters, but decided that couldn't be enough, as Marketing would have eliminated these SKUs before with this information. I then came up with questions to ask other departments to grow the list of criteria that would make the Headache Index more comprehensive. Those were:
- Marketing for whether a product was core and whether it was replaceable by a close alternative or not
- Manufacturing for Complexity and Capacity/Changeover Issues
- Quality Control for spoilage history
- R&D for design stability
- Environment, Health and Safety for any associated safety issues