The above departments were given the "Headache" list grouped by product families and asked to rate them on a scale of 1 to 5, 1 being worst and 5 being excellent for the criteria listed above. When the data came back, I consolidated the list by weighting the criteria. The individual Gross Margin contribution and the Marketing Core Product Strategy and Replaceability questions were weighted most heavily to balance profitability with potential for loss of revenue. This balance is extremely important, as lost revenue can very quickly offset the complexity related cost reductions. Then I plotted the distribution of the index and determined three categories: "Green" (Go), "Orange" (Check) and "Red" (Gone). The results showed that 50 percent of our SKUs should be gone.
Exhibit A (Formation of the Headache Index)
What's In It for Me — the Total Cost Model:
Depending on the industry, type of company and extent of rationalization, SKU reduction could yield such benefits as improved manufacturing efficiency, reduced inventory, reduced warehousing, and reduced raw material and packaging spend.
I captured the above benefits with some assumptions as standard industry benchmarks could be used for initial model creation, which could be tightened later once buy-in was created and a team was formed. Initial assumptions and calculations would have to be made regarding:
- What SKU will replace the rationalized SKU?
- What is the cost of manufacturing complexity (cost of changeovers)?
- What is the lead time and inventory strategy (make-to-stock v/s make-to-order) of the SKU being rationalized v/s the SKU replacing it?
- What are the historical obsolescence and warehousing costs as a percent of inventory?
- What is the inventory carrying cost as per the company financial policy?
- What is the contribution to the overhead calculation?
Once the model was created, the rolled up number was large enough to turn heads. We presented it to our division general manager and got his buy-in; he agreed to sponsor the project and create a high-level team.
Project Sponsorship and Project Team Formation:
Under the direction of the general manager we formed a cross-functional team that included members from the surveyed departments. The key members of this team were from Marketing/Sales, as they had the toughest job at hand. They would first work with their teams to understand what SKUs would replace the rationalized SKUs, and then get their teams to sell that change to their customers and receive their input.
Project Stage 2: Analysis and Negotiation
Marketing and Sales Work Sessions:
We spent countless hours with the Marketing team members, going through the entire SKU list. From this effort emerged the core packages the company was to carry. The data actually drove us to the answer, but there were some outliers, which the Marketing folks promised to sell to their teams. The list was presented at the next national sales meeting, which included a working session to educate the sales team on the list and our findings. They spent a good half day further refining the list and suggesting alternatives where applicable.
Two-phased Implementation Plan:
When the project team met next, Marketing came back with their finalized list. They suggested a two-phased implementation strategy.
The first phase would start quickly (within the next month) and cover about 70 percent of all SKUs. These SKUs would not require any customer trials. The second phase would be longer term (within the next six months) and cover the rest. These were the items the team thought they needed more time to convince the customers and would require trials.
Both phases had a conversion or rationalization date that was within three months of implementation. The timing and two-phased implementation plan was to bleed the inventory at the customers and conduct trials if necessary.
Project Stage 3: Communication & Preparation
We created an implementation plan that was communicated to all internal departments as well as customers. A comprehensive list of original v/s replacement SKUs were created. This included the switchover timing, a product/engineering change number if required and action items. We used the list to track the progress of the project.
Project Stage 4: Inventory Ramp Up/Ramp Down
Next was the inventory ramp up/ramp down phase. We created and processed product/engineering changes for the affected SKUs, analyzed consolidation and change of demand, and updated replenishment parameters in the company's materials requirements planning system. We also updated and issued a new product/sales catalog to internal and external customers. Updated forecasts were also sent to the affected raw material and packaging suppliers where impact was significant (+/- 10 percent).