A Practical Guide to Product Rationalization

Real-life best practices to get excess product off your company's bottom line


Control Plan (How to Avoid SKU Proliferation)

Now that we have a successfully implemented the project, how are we to make sure that what was done sticks? One of the key measures of success for this 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 where the inventory of rationalized SKUs is monitored and only the agreed upon SKUs are planned to be produced.
  • Deletion of Rationalized SKUs where the master data group in the company makes sure that 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 where Sales makes sure that targeted customers actually do convert to the alternatives chosen and agreed to.
  • 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 or not by focusing on some of 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 life cycle.

Benefits Accrued

I left for another opportunity as we went live on Phase 2 of the project and was curious to see what the results were. Here is what was reported to me as far as the results are concerned:

  • In spite of adding a handful of new innovative items, the North American sales SKUs for 2006 were cut by 55 percent as compared to 2005. More importantly, this did not reduce the revenue, infact the revenue was up.
  • The impact on working capital was over $1.2 million. Total inventory as measured in days on hand outstanding was reduced by 39 percent.
  • Operationally, the project strengthened the level loading in all three departments and freed up some hourly positions, thus allowing 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 were up in 2006, averaging 95-97 percent compared to a prior range of 90-95 percent.
  • Revenue increased by 5 percent with +1.5 percent volume increases, and gross margins improved enough to offset the raw material and commodity cost increases. This was driven partly by keeping higher margin SKUs in the core portfolio.

I was also told me that there have been several sincere debates, some rather passionate and heated, about a few SKUs that have been added, and he has played the role of keeping the complexity low.

Key Success Factors

In summary, here are some of the key success factors for any product rationalization /complexity reduction effort:

  • Sponsorship from Senior Management, so everyone in the organization, and especially the project team, understands 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. If I had to choose one, this is the most important factor contributing to the success of the effort.
  • 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 Corporation. 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 that are Lean, so they move as the customer does.

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