How SKU Analysis Helps DCs Assess the Impact of SKU Proliferation on Their Operation

SKU proliferation is a real problem being faced by distribution centers and order fulfillment operations today: In an attempt to attract more customers and increase sales, operations are adding items to their offering and holding onto obsolete or slow-moving inventory.

Though the added inventory does bring in more customers and increase sales volume, is that added business truly worth the costs? In addition to the added cost of purchasing or producing the new SKUs, SKU proliferation also drives up the costs of customer service (more items for customers to complain or ask about), overhead (more items requires increased floor space for storage), and decreased output (more items makes the job of picking orders more complex and time-consuming, leading to an increase in labor and operating costs).

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But before discussing the positives and negatives of SKU Proliferation (as well as strategies for managing your increasing SKUs) it’s important to first have a firm understanding of what, exactly, we mean when we say “SKU proliferation.”

What is SKU Proliferation?

In its simplest terms, SKU Proliferation is the process in which a retailer or distributor increases the number of products (SKUs) that it offers to customers. It’s a natural part of a business and something that every operation will go through as it learns more about what its customers want and tailors its offerings to meet those desires.

For example, a distributor of hygiene products might start out offering just five different SKUs for toothpaste. These SKUs might simply be five different flavors of toothpaste, all in the same size, and all by the same brand.

But as the distributor continues to do business, they might learn that their customers really like toothpaste offered by two competing brands. To earn those customers’ money, the distributor adds five flavors of each of those brands, raising total toothpaste SKUs from 5 to 15.

Then, six months later, the distributor learns that customers want travel size options for all flavors and all brands of toothpaste. Accommodating this demand effectively doubles the number of toothpaste SKUs from 15 to 30. And for the sake of illustration, let’s say the customers also want double-packs of the standard sized tubes, to make it easier to buy in bulk. This adds another 15 SKUs, bringing the total from 30 to 45.

You can see, then, just how easy it is for SKUs to explode in number in a relatively short period of time.

Key Causes of SKU Proliferation

There are a lot of reasons that your operation might be experiencing an increase in the number of SKUs that you handle and stock. Though SKU proliferation is stressful, it is also a natural part of any maturing operation and something that should be expected at least in some amount.

Pro Tip: The goal is not to prevent SKU proliferation from happening, but to regulate it so that when SKUs do increase in your operation, you are sure that they are adding value and not damaging your ability to effectively conduct business.

Here are some of the reasons you might be experiencing SKU proliferation:

• Customers demand a wider variety of products, driving the development and introduction of more goods for you to stock (as illustrated above).
• Because of customers’ changing expectations towards delivery speed, you are forced to hold more items in-stock so that you can complete same-day or next-day orders. This could mean that you are holding onto extremely slow-moving items simply because a customer might place an order for it and want it delivered next day.
• Technological advances mean that more items are being produced and entering the market (and thus your inventory).
• Poor inventory lifecycle management on the part of your operation means that you do not have a strategy or method in place to remove slow-performing SKUs from your supply chain.
• The decision makers at your operation are not willing to write off inventory even if it is non-performing.

If you are concerned with the rate of SKU proliferation that you are experiencing in your operation, a high-quality SKU analysis might be just what you need to assess the impact that SKU proliferation is having on your ability to do business effectively.

SKU Analysis

A common rule of thumb used by DC managers is called the 80/20 rule, which dictates that just 20% of your SKUs count for 80 percent of all of your sales. The other 80 percent of SKUs are slow movers that tend to sit in the warehouse longer, tying up capital that you could use elsewhere in your business. On top of this, the slower moving SKUs rack up expenses in other ways: Housing more items requires larger space, which increases land cost or rent, and a more SKUs, in general, lowers worker efficiency by making the picking/packing process more convoluted.

SKU analysis can help you put this into perspective. By looking at your SKUs in terms of velocity, inventory turns (days on hand), storage capacity, seasonality, and storage requirements, you can walk away with a clearer understanding of your SKUs and how they impact your business. Some key takeaways from an effective SKU analysis would include:

• Fast-moving vs. slow-moving vs. non-moving SKUs
• How each of these categories are financially impacting your operation
• How much of your floor space is devoted to housing each category of SKU

With all of this information, you will have a clearer sense of which SKUs should be eliminated and which are worth retaining. For example, though doing so will be a loss, expunging non-moving SKUs and writing off the losses may have a substantial positive impact on other areas of your business by reducing storage space requirements and making the picking process more efficient.

Managing the Tail without Wagging the Dog

In a study of abandoned e-commerce carts, it was found that customers were more apt to leave for another site if even a single item of their multi-item order could not be fulfilled from a site, whereas 100 percent of their order could be fulfilled from a competitor’s site. The takeaway is clear: If today’s clients are looking to fulfill 100 percent of their order from a single supplier, whenever possible this inventory must be on hand and available.

This means that not only do distributors need to have the core SKUs within a product offering on hand, but also those slower, complementary product offerings that surround each SKU family. For example, in the case of a distributor who sells toothpaste, it would also be wise to sell toothbrushes, mouthwash, and dental floss.

As you can see illustrated in the chart above, typically 80% of annual sales volume will come from just 20% of SKUs. The rest of your inventory consists of slow-movers that ultimately comprise only around 20% of your sales.

This proliferation of SKUs results in an exponentially larger number of items. But being of a slower moving class, there will be fewer of each on hand in the DC. We can rationalize that the total demand for these complimentary SKUs in total can be consolidated into a compressed storage space.

Usually, the debate boils down to: What is the total number of SKUs represented in this segment of the item master? What is its proportional movement in lines and pieces? While individually they may not amount to much, in their total they may quickly amount to the total number of lines that can equal the total number of lines of only 10 or 20 percent of the remainder of the SKUs.

Negatives of SKU Proliferation

While SKU proliferation is a normal, and even essential, part of most businesses, it can also bring with it a number of challenges and costs that a distributor needs to be aware of. These downsides include:

• Increased Order Cycle Time: While most operations are trying to reduce order cycle time so that orders can be picked, packed, and shipped as quickly as possible, huge levels of SKU proliferation can make it difficult for pickers to pick their orders effectively, especially if an efficient warehouse slotting process has not been put in place.
• Decreased Accuracy: It is important for your operation to have high order accuracy. If you mess up an order, a customer will notice, and they’re likely to take their business elsewhere the next time around. By increasing the number of SKUs (especially by increasing the number of SKUs within a product category or line), you increase the likelihood of mistakes happening, especially if you don’t have a process in place to verify that correct product has been picked.
• Increased Facility Costs: When you increase the number of SKUs your operation handles, you increase the total space that must be allocated to inventory, which can be a challenge for smaller operations. If you don’t limit the number of SKUs that your operation handles, you will eventually be forced to expand your warehouse or move to a new, larger, and more costly facility.
• Trapped Capital: If 80 percent of your inventory represents slow movers, this means that you have capital trapped on your warehouse racks. This is capital that you could be using to make your business more effective, for example by hiring more employees, implementing new technologies, or even through increased marketing efforts. But because it is sitting on your racks a tube of toothpaste, you don’t have access to that capital until it sells. Even worse, if you deal with perishable goods, you may lose that capital altogether if it does not sell before it expires.

Knowing When Enough is Enough

SKU proliferation is a natural part of most businesses and something that is especially common as operations mature in today’s business environment where the customer is king and where variety is expected.

It is important to keep in mind that SKU proliferation is not necessarily a bad thing in all cases:  It can lead to increased revenue as distributors are able to sell more to each customer, and can lead to higher customer satisfaction because customers have shown they prefer to order all of their items through a single merchant whenever possible.

At the same time, when SKU proliferation is left to occur unchecked, it can have detrimental effects on a DC’s ability to operate efficiently. By conducting the careful financial analysis of what sells, and most importantly what doesn’t, an SKU analysis can help you better understand how SKU proliferation is impacting your business.

Since this is one area that can impact operations, customer service, and ultimately the bottom line, proactive measures and monitoring of your SKU base will allow you to take incremental corrective action, if necessary, as your operation matures.