SKU optimization is a process usually not well understood in many organizations. People will complain and wonder why a product that makes considerable revenue needs to be stopped.
This might even involve complete brands and sometimes the emotional appeal of the organization can be a constraint. But reality is that SKU optimization makes sense, and is a process that marketers should assess regularly. The analysis should tackle both, the SKUs’ financial performance and commercial importance.
This might even involve complete brands and sometimes the emotional appeal of the organization can be a constraint. But reality is that SKU optimization makes sense, and is a process that marketers should assess regularly. The analysis should tackle both, the SKUs’ financial performance and commercial importance.
However, and most importantly, the final goal of SKU optimization should not be reducing operational costs. This might lead you to the wrong decisions. The most important goal of SKU optimization is to allow and speed up GROWTH.
I have noted below the most important reasons that will help your organization understand the need for optimization:
1. Consumers are increasing demanding higher value on their products, and are less and less willing to pay higher premiums for marginally better products. Most of the times the trade is saturated with products, and launching new better products might require sacrifying others.
2. Strategic fit is another good reason. If a company for instance wants to be perceived as the leader in nutritional products, it will necessarily have to start delisting the less nutritional products and substitute them by better one. This can be something that companies will even do for entire categories. Sometimes a formula rework will also have such an impact on the product that it will be better to rebrand it under a different umbrella.
3. Retail consolidation might also be a powerful force for reducing SKUs. As retailers expand and grow internationally they might require homogenized products. Why have different products for Germany, Switzerland and Austria? Involve your retailers in the SKU optimization process and make it a win-win situation!
4. Profitability. Whether its because of the high production costs, low volumes or high trade expenses, it’s difficult to justify non profitable SKUS. Furthermore, SKUS that are below average profitability will also be on the black list, as they are value destroyers for the overall portfolio.
5. Prioritization. Resources are by definition limited and sometimes marketers need to increase focus and investment behind powerful brands.
6. For certain products there can be significant savings potentials in the sourcing, manufacturing and logistics, affecting other products. Just the fact that complexity is reduced is already a saving!
Furthermore, I would like to share with you some interesting articles from Bob Byrne (AT Kerney).
He gives some additional good advices on how to tackle the process. Most interestingly he points out the need of going further than just focusing on the low volume SKUS, as they will not be able to trigger any savings nor big organizational changes. In order to do so, you will need to tackle medium-to-high volume SKUs, not just the easy 30 percent tail. If SKU optimization is done on the premise of what the consumer and trade needs, and not on what the company can produce more efficiently, then the end result will be FEWER but BIGGER products in your portfolio.
For understanding the thinking/reasoning behind SKU optimization from the retailers point of view I recommend you also this article by Warren Thyer. At the end it all comes to the same, putting the consumer and the shopper at the core of your decisions!
http://www.symphonyiri.com/portals/0/articlePdfs/RFFR_March06_IRI.pdf
Posted by Ignacio Molins
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