December 1996 € Volume 6 € Number 12

The SKU Police

By Tom Wallace

Earlier this year, I spoke at an executive education session at Northwestern University. In addition to Big 10 football (a hot topic in those parts), we discussed some business topics including product proliferation -- the massive growth in the number of stockkeeping units (SKUs). We talked about line extensions, the battle for shelf space in retail stores, and how the prevailing mind-set used to be that if some SKUs are good, many are better. Well, that mind-set may be changing.

One of the people attending the session works for a large consumer packaged good manufacturer on the East Coast. He said that his company had launched a serious attack on products and package sizes that didn't add value but did add costs. He talked about a group they created called the "SKU Police," whose job it was to ferret out these underperforming items and relentlessly eliminate them.

An important point: This is not just a manufacturing initiative. He stated that the SKU Police has enthusiastic members from the company's marketing and sales departments, among others. I suspect that some of these folks may have been saying not long ago that "we need all those items to have a full line -- our customers demand it." But do they really?

An important question is "What do the customers really want?" Do they really care if they can choose from four flavors in five colors in six package sizes? Or do they want an effective product that's not only simple to use but also simple to buy?


Less is more, sometimes
Yes, companies are beginning to realize that less may be more. Fewer SKUs may mean more value to both their external customers, the distributors and the end consumers, as well as their internal customers, the stockholders.

A recent article in Business Week, concerning Procter & Gamble's drive for simplification, stated: "Does the world really need 31 varieties of Head & Shoulders shampoo? Or 52 versions of Crest? Procter & Gamble Co., the world's preeminent marketer, has decided the answer is no ... that it sells too many different kinds of stuff. Now, it has started doing the unthinkable: It's cutting back. Procter's U.S. product roster is a third shorter today than it was at the start of the decade.

"P&G's drive to trim its product list is just one piece of a larger strategy of simplification. The company is now taking an axe to many of its marketing practices, hacking away at layers of complexity in a drive to cut costs, serve customers better, and expand globally. Besides just saying no to runaway product proliferation, it's standardizing formulas and packaging worldwide ... " And while all this is going on, sales and market share are up, not down as one might expect. In addition to P&G, this article cites simplification activities at Toyota, Nabisco, and others.

In a statement with faint echoes of the SKU police, one investment analyst is quoted as saying, "Most cosmetic and household product companies need an in-house Dr. Kevorkian."

A study by Kurt Salmon Associates, Inc., a leading consulting firm in the grocery field, shows an extremely sharp Pareto curve at work: Less than 8 percent of all personal care and household products in a typical supermarket account for more than 80 percent of sales, while almost 25 percent of the products sell less than one unit per month. It's mind boggling, especially when one thinks of the costs involved in producing, distributing and stocking those slow moving items.

Here's a call to action, aimed mainly at you graduate business students. How about doing your doctoral dissertation or your master's thesis on developing what I call "a SKU cost calculator" -- a technique that would answer the compelling question, what is the cost of an incremental SKU? This would be a real contribution: to develop a methodology and a process to aid decision-making regarding the value of the next item to be added to (or dropped from) the product line. I suspect that a version of this exists in one company or another, but it would be good for a rigorous tool like this to be in the pubic domain.

And maybe, just maybe, the numbers coming out of this hypothetical SKU calculator would sometimes indicate that cutting back the product line isn't the right way to go.


Manufacturing's primary job
Yes, there are cases where the very best thing a company can do is to offer more variety, launch more new products, exploit more market niches. Strategically this may be exactly what a given company should do at a given time.

A question arises: What about manufacturing? Isn't it in manufacturing's best interest to have to deal with fewer, not more, products? After all, less variety means more efficiencies, and on and on.

My response: Sorry, it doesn't work that way. At least it's not supposed to. Manufacturing's job is not primarily to have longer runs or fewer changeovers or higher efficiency. These things may be important, but they're not the essence of the task. I believe that manufacturing's primary job is to create exploitable opportunities in the marketplace. Do the customers want more variety, and will the company prosper by providing it? If so, I believe it's incumbent on the company to arm its manufacturing function to deliver this variety -- quickly, economically and with high quality. Shipments should be made on time and complete, all the time. For more details, see this column for September 1996: "Can You Make Mass Customization Work?" and the column for February of the same year: "The Strategic Disconnect." It all gets down to determining what the customers really want, and then providing it to them.

Commentary Being a car nut, it's great to live and work where I do. My home's in Cincinnati and one of my offices is in Columbus at Ohio State. During my frequent drives on Interstates 71 and 75, I marvel at the new vehicles being hauled from the factories to the dealerships: Big Three sedans, trucks and minivans heading south from Michigan and northern Ohio; Toyota Camrys and Avalons coming up from Georgetown, Ky.; Ford Explorers from Louisville, Ky.; Chevy Blazers and GMC Jimmys from Dayton, Ohio; Accords, Civics and Acuras from the Honda complex in nearby Marysville; Jeep Cherokees from Toledo, Ohio and Grand Cherokees from Detroit; Subaru Outbacks and Izuzu Rodeos from Lafayette, Ind.; and heading north out of Tennessee come Saturns from Spring Hill and Nissans from Smyrna. What a wonderful array of vehicles is being produced by American manufacturing people! During the fall, as the new cars move from the factories to the dealerships, I have to concentrate extra hard on my driving. There are lots of distractions out there.