Recently, in an article for APICS Magazine, Jonathan Thatcher, director of research for APICS (an organization long dedicated to supply chain operational excellence), listed a few tips for companies challenged by an ever-increasing number of SKUs (stock-keeping units, or inventory items) they are required to manage. We thought we’d reprise a few key highlights here today.
Thatcher recommends starting at the top of the cycle: by developing greater “systemic visibility” in your organization using hard numbers and data to support a “systems concept,” which the APICS dictionary defines as “an attempt to create the most efficient complete system as opposed to the most efficient individual parts.”
To begin with then, you must identify the flow of many individual components while also reviewing the performance of the overall supply chain. Each new SKU increases cost and complexity to the entire system. As these costs grow, it gets harder to maintain an accurate “cause-and-effect vision” of expense and value for the entire system. “Even if a new SKU does deliver some new net value,” he writes, “is it enough to profitably pay for the cost of the increasingly complex stocking options?”
Next, he advises, talk to your customers to figure out where to draw the line for SKU proliferation. Ask them to identify the point where more SKUs become a burden instead of an asset. This can help determine a potential SKU limit.
To gain executive support for your SKU reduction endeavor, Thatcher says you then need to explain a few things:
- SKU innovation may be at war with Pareto’s 80/20 law that states that 20% of inventory items make up 80% of inventory value.
- The right number of SKUs likely reflects the amount of variation and complexity sought by your customers.
- The wrong number of SKUs squeezes resources and can divert them away from the products that deserve them.
- Realize that it’s a complicated and often nuanced topic that requires ongoing, shared management effort to overcome these complexity costs.
And finally, Thatcher suggests, “develop a policy prohibiting a net increase in SKUs. As new ones appear, retire old and low value SKUs to make room.” Just be sure that these efforts form a part of your overall supply chain strategy that prioritizes innovation, customers service levels and reduced costs.