More is not always better and for today’s supply chains, an excess of pretty much anything can spell huge costs and huge losses. SKUs are no exception. And these days, an excess of them is more likely to indicate a poorly performing business.
The tragedy of Toys R Us should serve as a cautionary tale of why ‘more of everything’ only results in more losses. Rather than immediately improve its use of SKUs and incorporate the online retail model of its internet competitors, it wasted time and money stuffing it’s shelves with more unwanted inventory. By the time they realized these mistakes (and many others), the damage was done and the historic toy chain now faces liquidation(1).
The University of Tennessee’s Global supply chain institute(2), reports that companies that have a documented active process for managing SKU complexity at either the beginning or the end of product life, had higher profit margins than their competitors. Those companies managed inventory levels more effectively, had better fill rates and had a lower cost structure.
“Go hard or go home” sounds like a nice war cry but in reality, all it does is betray a huge lack of smart processes around your SKU management. Whether it is having a lot of items per SKU or having too many SKUs for essentially one product, both extremes create only confusion, waste and add unnecessary complexity, which according to J.Paul Dittman (2) is one of the ‘greatest and most intractable impediments to supply chain performance.’
So what are SKU’s and why are they important and necessary?
SKU (pronounced “skew”) stands for stock keeping units. The SKU is a unique identifier for a product or intangible service, that is billable.
Each company assigns its own SKU numbers. SKU numbers are distinct from product model numbers, which are assigned by manufacturers. However, some companies sometimes include model number information in their SKUs for identifying purposes.
SKUs are frequently used by warehouses, marketplaces, fulfillment centers, catalogs and ecommerce sites. For example, Amazon assigns products it sells a special 10-character Amazon SKU number, known as an Amazon Standard Identification Number (ASIN). ASINs are distinct from manufacturer model numbers and from SKU numbers used by other sellers in Amazon’s supply chain.
SKU’s are used touniquely identify inventory (“What is it?”), track inventory (“Where is it?”), replenish inventory (“Do I have enough of it?”) and manage inventory in terms of turnover rates and profitability (“Do I have enough of it to keep selling or is it just wasting my money?”)
Note (3) It’s worthwhile understanding the differences between SKU’s and UPC’s (Universal Product Code). SKU’s are alphanumeric codes used by companies to track units of products in inventory and products sold. UPC is a unique 12-digit number assigned to retail merchandise that identifies both the product and the vendor that sells the product. The UPC is assigned globally from the US GS1 (not for profit) and stays with the product from manufacture until end of life. UPC typically covers US, UK, Australia, NZ, Canada. EAN is European Article No and is the European equivalent..
What can I do to start the process of better managing my SKU’s? Here are just four simple ways you can start.
- Incorporate only the most significant product details in your SKUs.
The code itself shouldn’t be compromised with abstract meanings (e.g. using numbers to identify shapes or only using additional letters to describe silly details like packaging color). An SKU should focus on a product’s most unique, intrinsic, relevant attributes. Stick to what is in the product itself and avoid attaching anything else that’s outside it. The same goes if you feel that there is significant variation between certain iterations of the same product. Have a documented process in place for the creation of new SKU’s or how you will combine products from different suppliers in your range.
- Use SKUs to identify best performing and underperforming products.
Some days you have to face the truth: You have products that just don’t sell as well as you would hope. The sooner you can use SKUs to track underperforming products, the sooner you can spare yourself the pain of constantly making, moving, and storing excess inventory that will only sit in your shelves.
You could do an ABC analysis by SKU to work out your best sellers and slow movers and make your inventory policies match these categories.
This information can also provide insights into your target market. Are your products ill-suited to their market preferences? Is there a competitor in the same space that offers a better value for the same items you are selling? This needs to be a regular and ongoing process because markets and target audiences are changing their preferences faster now than ever before.
- You are trying to save too many failing products.
Under what circumstances do you discontinue an SKU?
There are plenty of success stories around about businesses who were in trouble and their first action was to slash (sensibly) the number of SKU’s that they were handling.
You must understand your SKU’s in terms of product portfolio. What does the product actually contribute to the business now and in the future and how should the product be treated as the result of that contribution?
Which ones are profitable now, which are profitable in the future, which ones are there to generate cash, which ones need more development, which ones need product extension and which ones need to just go. Importantly where do we put our sales and marketing support and where don’t we put it. Where do we put our R&D? Where is our phase in and phase out process? Who is managing that and is it working out? (Strangely, ‘phase in’ always seems to be managed really well and by the time we get to phase out there isn’t any!)
There is a limit to how many failing products you can persist in selling before you fail. Use something like a three-strike system in your software to determine products that need redevelopment (or in the worst case, discontinuation).
Make sure that this information is all input into your S&OP via step 1 the strategic portfolio review. These decisions are critical to the entire business and everyone including R&D and marketing need to understand why these decisions are being made and how this changes their day to day business as usual.
- Avoid SKU details that only muddle up valuable insights for sales.
It’s generally better to not put an additional SKU but instead use a current one and then trace it down the chain. For example, instead of having a separate SKU for store-bought products versus those bought online, use the same code and then analyze its performance in either channel. This approach can also be applied if you are selling in different regions. Some things will sell better in some areas but you don’t need an SKU to determine that! Any good SCM software can measure the numbers of individual channels without creating more needless codes.
So in conclusion, more is not necessarily better. You can do more with the new innovative information systems of today’s SCM software beyond adding more SKUs. You can be smarter about using them for analytics instead of letting them sit there in your database (much like unwanted toys on shelves)!
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Notes(1) USA Today 5 reasons Toys r us failed to survive Bankruptcy.Nathan Bomey, March 18, 2018.
Notes(2)J. Paul Dittman: Supply Chain Transformation: Building and Executing an Integrated Supply Chain Strategy 2013.
Notes (3) Wikipedia and Quickbooks.