Get Rid of that Headache for Good

A practical guide to product rationalization using real-life best practices for getting excess product off your company's bottom line


Project Stage 5: Go-live

In preparation for going live, inventory of any old SKUs was reviewed weekly. We worked with Sales to sell the remaining inventory, sometimes at a discount. We flagged the deleted SKUs in the enterprise resource planning system. We monitored inventory levels for make-to-stock strategy SKUs that were being eliminated. Finally, we had Customer Service focused on providing superior service during the change-over process. The concrete deliverables of this phase were no stranded inventory and the old SKUs flagged for deletion by our master data group.

Control Plan (How to Avoid SKU Proliferation)

Now that we have successfully implemented the project, how do we make sure that what was done sticks? A key measure of success for the effort is to have a solid control plan in place that keeps the proliferation from creeping in again. Some of the key elements of the control plan are:

  • Planning and Inventory Management: Inventory of rationalized SKUs is monitored and only the agreed upon SKUs are planned to be produced.
  • Deletion of Rationalized SKUs: The master data group makes sure the SKUs in question are deactivated from the enterprise system, so that no new orders can be entered against them and they will not linger.
  • Customer Conversion to Chosen SKUs: Sales validates that targeted customers actually convert to the agreed alternatives.
  • Sunrise and Sunset Rules: Sunrise rules need to be created where a cross-functional committee makes a decision on whether a new SKU is viable by focusing on the same criterion described in the formation of the "Headache Index" above. The same thought process is applicable with the creation of sunset rules for identifying and retiring SKUs at the end of their lifecycle.

Benefits Accrued

While I left the company for another opportunity as we went live on Phase 2, I was able to find out the results. They were:

  • While adding a handful of new innovative items, the North American sales SKUs for 2006 were cut by 55 percent. More importantly, revenue increased during this time.
  • The impact on working capital was over $1.2 million. Total inventory, as measured in days-on-hand, was reduced by 39 percent.
  • Operationally, the project strengthened the level loading in all three departments and freed up some hourly positions. This allowed the company to staff a second shift in one of the departments to support the growth driven by new products.
  • Customer service level as measured by on-time deliveries was up in 2006, averaging 95-97 percent, compared to 90-95 percent previously.
  • Revenue increased by 5 percent with 1.5 percent volume increases. Gross margins improved enough to offset the raw material and commodity cost increases, which was partially driven by keeping higher margin SKUs in the core portfolio.

Key Success Factors

Here are some of the key success factors for any product rationalization/complexity reduction effort:

  • Senior management sponsorship. Everyone in the organization, especially the project team, should understand that it is a high-profile effort and results need to be delivered.
  • Marketing/Sales partnership and commitment, without which the effort would go nowhere.
  • Replacement strategy, where Marketing/Sales decide whether products can be replaced and are able to drive the strategy to the customer.
  • A well-thought-out control plan with metrics to avoid reverting back to the original state.
  • Accessible sales and cost data to develop a clear understanding of the impact caused by SKU proliferation, which is the starting point of the "Headache Index."

About the Author: Sanjiv Mahajan is director of Materials Management at Sara Lee Corp. He can be reached at sanjivmahajan@yahoo.com. Mahajan has held several leadership positions in the supply chain space in his career, both in the industry and as a consultant. He has been involved with successful supply chain turnarounds and his focus is on crafting and implementing supply chain strategies, using strategic sourcing and supplier integration to reduce waste, and designing agile supply bases.

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