It started with a simple e-mail from our Global Director of Manufacturing, wherein he asked his Supply Chain Managers to provide him 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 COPQ (cost of poor quality) to soar came rushing to mind. As I started to list all the items, a management decree came to my mind: "Don't go to your boss with problems, give him a solution." Hence began the process of how to eliminate those items.
Project Stage 1: Scoping and Planning
Formation of the Headache Index:
The word headache spurred a thought in me, and I asked myself, "What if I created a 'Headache Index,' which would simply represent a list of items, sorted high to low, signifying the most disliked items?" And then, how would I calculate the most disliked items?
I started with my trusty Excel and extracted the Sales history for all SKUs for the past year. I applied three financial filters for starters (see Exhibit A.), but decided that couldn't be enough, as Marketing would have eliminated these SKUs before now if it had been. So then I came up with questions to ask other departments in order to grow the list of criteria that would make the Headache Index more comprehensive. Those were:
- R&D for design Stability
- Manufacturing for Complexity and Capacity/Changeover Issues
- Quality Control for Spoilage
- Marketing for:
— Was it a core product and
— Whether the product was replaceable by a close alternative or not
- EH&S (Environment, Health and Safety) for any safety issues that were associated
I gave the above departments the "Headache" list grouped by product families and asked them 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, which was a bit subjective to begin with. The most weighting I gave was to the individual Gross Margin contribution and the Marketing Core Product Strategy and Replaceability questions. I did this primarily 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. Once Excel did the math I had a weighted "Headache Index." Then I plotted the distribution of the index and determined three categories, "Green" for "Go," "Orange" for "Check," and "Red" for "Gone" (See Exhibit A.). This result told me that I needed to get rid of 50 percent of our SKUs.
Exhibit A (Formation of the Headache Index)
What's In It For Me — the Total Cost Model
I sent the in-depth Excel analysis to my boss and the Global Director of Manufacturing. Their comments were, "Superb analysis; now how do we sell this? What are the rewards?"
Depending on the industry, type of Company and extent of rationalization, SKU reduction could yield the following tangible benefits:
- Improved manufacturing efficiency by reducing changeovers, leading to reduced unit cost.
- Inventory reduction for both finished goods and raw materials (including packaging) leading to an improved cash flow position or better return on assets for the company.
- Reduced warehousing, cost of capital and obsolescence tied directly to inventory reduction
- Raw material and packaging spend reduction due to consolidation, once again leading to reduced unit cost.
I set up a spreadsheet that captured the above benefits with some assumptions. Some of the data would have to come from individual departments, but standard industry benchmarks could be used for initial model creation, which could be tightened later once buy-in is created and a team is formed. Initial assumptions and calculations would have to be made regarding: