In this article, I will try to provide insight on the topic of how to de-couple complexity by using a structured method and approach to product rationalization. Complexity in this context refers to proliferation of individual items, either in input components and subassemblies or finished goods. Excessive item counts can bring a supply chain improvement effort to its knees.
In recent surveys, company executives have repeatedly said supply chain improvement initiatives and investments in systems are top corporate priorities. Successful initiatives have cut total supply chain management costs up to 50 percent and improved performance on inventory turns up to 100 percent among top industry performers. A lot of companies, however, focus on technology-based Supply Chain enhancements, and rightfully so, as advancements in Web-based optimization have convinced many executives that the time for breakthrough performance improvement is now. However, as companies are gaining experience with these initiatives, they are finding there is more to a solution than just installing software. Real gains depend on substantial changes in operating practices. One practice presenting challenges in supply chain is complexity management.
Product complexity and product/stock-keeping unit (SKU) proliferation reduce the efficiency and effectiveness of a company's overall supply chain. Product complexity and proliferation impact areas of the organization that include: customer order processing, manufacturing planning and scheduling, purchasing, inventory management, and quality. The ability of an organization to manage product complexity and proliferation generally results in cost avoidance and better control of operations.
Why Does Product Proliferation Happen?
Much has been written about what the causes of product proliferation are, so as part of this endeavor more of my focus will be on how to deal with it, rather than the why and what of it. Nevertheless, to put product rationalization in perspective, some of the major reasons why companies get countless SKUs in their arsenal are:
- One family grows into multiple SKUs as the packaging variations are put in place
- As companies go through acquisitions, they acquire more SKUs
- Sales incentive structures in some companies tend to cause more proliferation as the salesmen will sell whatever "a" customer wants as long as their incentives are tied to just how much they sell.
- Companies do not put the same emphasis on managing the products at the end of their life cycle as they do when new products are introduced, leading to lingering SKUs.
What Does Product Proliferation Create? Complexity.
- In Manufacturing, SKU proliferation will 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 shelf space clutter amongst other things.
- For Procurement, proliferation can create supplier fragmentation leading to loss of buying leverage and ultimately higher material costs.
How to Manage Product Proliferation
Now that we have SKU proliferation, the question is how do you deal with it to make it go away? It's not as simple as just dropping SKUs. It might seem the answer to all these problems is to narrow component selection and finished goods offerings to just a few items. After all, manufacturers frequently hear that 20 percent of products account for 80 percent of sales. But it's not that simple. If not managed carefully, the same steps that may help simplify the supply chain can more than offset that benefit by reducing revenue. I will provide you a real life example, from one of my previous employers, where I lead a team successfully through the product rationalization/complexity reduction effort. This is a large publicly traded specialty chemical manufacturer, supplying various industries including consumer packaged goods (CPG), construction, defense, etc.