SCdigest continues the saga of the growing resistance to SKU proliferation in its recent Will Large Retailers Help Manufacturers Drive Out Supply Chain Complexity?. Once again we get exemplars of proliferation and the economic impact such proliferation has on corporate performance and profitability.
And, once again, we're informed that the largest retailers in the world are combatting SKU proliferation with an overt effort to reduce their SKU count while making a business case attempting to justify doing that.
If I may put it bluntly, here's the message: "We're throwing up our hands at complexity. It's just too complex for us to deal with. Instead, markets and sub-markets that exist because customers have expressed their choices are going to be ignored. Deal with it because we are the big companies where you get your stuff."
This strategy is fallacious in many respects. Let me make a list:
1) The reductions they are talking about don't effectively reduce complexity. The trial balloon being floated says: "Overall, leading retailers may reduce total SKUs counts by as much as 15% in the next two years, some experts are predicting." Retailers that we work with currently manage somewhere between about 4,000 SKUs and 40,000 SKUs. Honestly, once you reach a few thousand SKUs, the things that make SKU management complex won't be appreciably altered by a 15% reduction. It isn't the raw number of SKUs that makes SKU management inherently complex, it's the operations that surround them that does. If revenues roughly follow Pareto's Law for retailing, removing the challenges for forecasting, replenishing, ordering, receiving, putting away, picking, consolidating, shipping, displaying, and demand measuring for the bottom 15% of SKUs, accomplishes absolutely nothing for the top 20%, and leaves 65% of the tail as complex as it was beforehand. It's just not the case that reducing SKU count will reduce complexity by a corresponding percentage. The very most it can do is buy a little retail shelf space.
2) It assumes that the large retailers can dictate market and consumer preference. Can you imagine in the health care industry if the large providers said "We will no longer perform quintuple bypasses because having too many procedures is just too complex. We'll do singles through quadruples, but we're reducing our available procedures by 15%"? If a consumer wants their cola decaffeinated and the retailer or the manufacturer no longer offers it what do you think they're going to do? And if you argue that most preference will still be supported then refer to #1.
3) It asserts that markets and consumers don't really want the choice that they've been given. Consumers are confused? The article linked above has a Walgreen's executive saying: "Whoa, you're bombarding me. Help me figure out what I need." Seriously. Have these folks not ever looked at a chart that shows Amazon's revenue numbers versus Barnes and Noble and Borders, for example? It's readily discernable that a very significant part of Amazon's revenue stream involves extremely disparate, slow moving merchandise - as they approach 10 million SKUs. As a market dynamic, we're approaching the "one of, one-off" market, not "Joe Stalin's Detergent #1 - and that's it".
4) It asserts that profitability is enhanced by resisting SKU proliferation. Undoubtedly this is true in certain contexts and for certain markets at least for the short term. But overall, profitability is far more impacted by operational efficiency than it is by SKU reduction. If you don't know the locations of SKUs in the distribution center, reducing the number of them doesn't help you efficiently locate the ones that are there. If you have inventory errors that are created by operations, reducing SKUs won't have any impact on the errors associated with the SKUs that are there. In any reasonable ROI assessment, reduction of labor costs and increased space utilization drop far more dollars to the bottom line than anything else that can be done.
You may ask "So what's the alternative?"
We answer that it is what it has always been: Embrace complexity. Accept it. Love it - managing it well is what gives you competitive advantage in your markets. Operating with extreme inventory accuracies and extreme efficiencies is optimally profitable regardless of the number of SKUs that you have. We live and breathe this with customers every day and we know that it works.
Perhaps the largest retailers will all change their logo to the hammer and sickle and we'll all use the same toothpaste from here on out. But I think that such action opens up enormous competitive opportunity for other retailers, e-tailers, 3rd party logistics firms, and specialty startups to take market share from companies that are telegraphing that they don't want it.
Who's game?
