Tag: sku rationalization
Connect With Us
How Fat is Your Supply Chain?
An overwhelming number of products today fit into one of these two categories: configurable products or products with a fixed bill of materials (BOM). Configurable products are also called Dynamic Configurations. Fixed bill of material products are also called Static Configurations (typically for off the shelf products like pencils, shampoo, etc).
Companies offer configurable products to allow customers the luxury of mixing and matching feature choices in order to customize the products they want to buy. continue reading »
Comments Off
SKU Rationalization and Affinities With Tobacco Products
I read this very interesting analysis of why Tobacco isn’t Going Up in Smoke.
The author argues that for 20 years the industry faced increased social, legal, and political pressure yet; it is still here, still profitable, and still reinventing its marketing to fuel growth.
The analysis is based on the following reasoning. Some investors avoid the industry due to its declining volume and regulatory, political, societal pressure. Despite those headwinds, here are four reasons why tobacco will remain a profitable for many years to come. First, the distribution network and restrictions on advertising keep SG&A 15 to 20 percentage points below other consumer sectors as a percent to gross sales. Second, regulatory pressure will meet reality. Record budget deficits at the federal, state, and local level will necessitate tax revenue from tobacco long term. Third, under the Master Settlement Agreement, the industry has made great strides to educate people about the dangers of smoking, curb underage smoking, and limit advertising. The next generation of people that get smoking related illnesses will have a more difficult time building cases against tobacco companies for loss compensation. Fourth, SKU rationalization remains an untapped lever to protect profit amidst relatively predictable volume declines.
Items (and Categories) with affinities to Tobacco Products Are Impacted When Tobacco Prices Fluctuate
As retailer look to rationalize the tobacco product, they also need to know what items in the store have strong affinities with tobacco products. As tobacco prices have fluctuated the sale of these items has been impacted dramatically. The risk of SKU rationalization is eliminating low volume sellers that are connected with other low volume sellers. You will end up losing more sales that you bargained for; not a good thing in this economy.
SKU rationalization remains an untapped lever. There are many instances where companies have rationalized products only to bring them back and more. The failure rate of SKU rationalization is due to the lack of quantitative analysis on the item affinities on low volume sellers. There are two kinds of low volume sellers:
1. Low volume sellers that sell with other products.
2. Low volume sellers that sell in singleton baskets. These are candidates for SKU rationalization.
A complete affinity analysis of your products will reveal opportunities and low hanging fruit that you can benefit from today.
Assortment Planning and Up-selling based on “This Sells With That”
Walmart’s (formerly Wal-Mart) announcement of a SKU rationalization project contained in this year’s 10-K filing with the Securities and Exchange Commission confirms the importance of this initiative for all retailers. In SKU (Stock Keeping Unit) rationalization, a retailer examines the profitability of items and vendors as a whole. When done in a linear fashion it results in lost sales and bringing back the SKUs.
SKU rationalization projects look for “What items are bought together” so that retailers and distributors can improve assortment planning. As shoppers, we all know that we buy items in groups. It is the job of the retailer to figure out what kind of stuff we buy together, so that they can optimize their assortment planning. Simple example – If I cannot buy both bagels and cream-cheese at the same time, I will go to a store where I can find it!
SKU Classification Based on Frequency of buys and Product Relationships
SKU analysis for assortment planning is based on two key metrics:
- The frequency of buys. This is a metric that measures true popularity of an item based on how often customers buy this product. For measuring popularity, it is better metric than volume as it is not skewed by one-time large volume purchases by a few customers.
- How often this item is bought with other items. This metric is a measure of how strongly correlated this item is with other items that you sell. If an item is always purchased with another item (like bagels and cream-cheese), it is very important to know the “often bought with” items, and ensure that they are stocked together and in the right proportions. Not having one item from a basket of high affinity products will result in loss of the customer.
These two metrics also apply for Amazon-esque suggestive selling for online sales. Items that have high correlation with other items are candidates for suggestive selling, up-selling, cross-selling and add-ons. For example, this would be a way to detect that cables, cartridges and paper that are bought with a particular printer. So when that printer is bought, you can automatically suggest the other items as add-ons. (Not to get too technical here, but the suggestions are not symmetrical. So – you cannot suggest a printer when a customer buys paper!)
The implications of these product relationships cannot be emphasized enough on your merchandising strategy and your supply chain planning. Manufacturers, distributors and retailers struggle to manage thousands of SKUs. This SKU classification presents a methodical approach for assortment planning to maintain the most profitable portfolio.
SKU Categorization For Merchandising, Up selling and Cross selling
The second chart presents a more detailed discussion of the SKUs based on frequency of buys and affinity with other products. (Affinity simply means “this items sells with that”. )
I - Items that have low-frequency/ high correlation are important to detect. These are trouble-maker SKUs. As companies goes though SKU rationalization projects, these items often end up on the chopping block, only to brought back again because they caused lost sales. These items are difficult to identify and there is a need for sophisticated analytics to easily identify these items.
II – Items that are bought in high quantities, but always with other items are great candidates for merchandising and bundling. They are a natural for creating sales lift and revenue lift. It is often counter-intuitive, but your #1 top seller may not be in the #1 pair of top selling items. That is why linear analysis of the SKUs based on volume or frequency results in incorrect merchandising.
III – The low frequency/ low correlation items are the targets for SKU rationalization projects. However, these items are very difficult to identify. Hence SKU projects typically end up cutting the wrong SKUs. We call these items Low-Loners. If you are a distributor, you do not want to carry these items. They are perfect candidates for drop-ship.
IV – Items that sell in high frequency, but usually on their own, require high service levels. We call these Hi-Loners. Examples of these items are cigarettes and gas at a convenience store. And by the way, beer also falls in this category. And please do not believe the beer and diapers myth! It is a myth!
The challenge with SKU management is that companies make decisions based on product relationships from hear-say, industry veterans or tribal knowledge. I think that’s how the beer-diapers myth was started! Across thousands of SKUS, and with fast changing demand patterns, this results in errors, and not a sustainable process for assortment planning and SKU management. There is too much at stake to base a companies sales and revenue on hear-say.
As SKU management is getting a lot of attention, there is need for robust solutions based on real customer buying behavior, to help companies maintain their SKUs on an continuous basis. The value is high sales, higher margins and improved customer service.
Comments Off
Increasing Order Size With Basket Analysis
I came in to buy milk and I am walking out with 10 things in my basket. The man behind me had only one item in his basket. “How do you do that?” I asked. “It depends on what you come in to buy,” he responded.
There are a few “seed items” in the store that drive additional sales because of key concept ‘this is often bought with that’. These items are often found together in customer baskets and orders. Smart retailers will put these items as far away as possible, so that you have to walk through more aisles to get from one item to the other, in hope that you will buy more along the way. Bread and milk is a good example of that. The reverse is also true. For items that are often bought together, if the store does not carry both, they will lose the customer.
Every retailer knows that it is very profitable when a customer comes in to buy one item, but ends up with many more in his basket. Understanding the product relationships in the market basket is key to driving up the order size or basket size.
Understanding the Customer basket make-up
A retailer typically carries thousands of items. A small convenience store may carry 1,500 items. A grocery store typically carries 15,000. And the super stores like Wal-Mart and Targets carry well over 25,000 SKUs in each store.
Insight Into Customer Baskets and Product Relationships Based on Buying Behavior
The SKU management is a tremendous challenge because the buying pattern is truly a long tail. Retailers know their top sellers; these are easy to identify, but the frequency of buying falls of very sharply. The chart shows an example of one retail store operation over a 3-month period. The store carries 25,000 SKUs, has 100,000 transactions per month. The analysis covers a 3-month period, and shows the distribution and popularity of SKUs based on the frequency of purchase.
Here are some quick stats for insight into the baskets and buying behavior – The most popular SKU has a frequency of 3,435. That means is has been bought in 3,435 baskets. The frequency of the 100th most popular item drops off to 225. That means it is only in 225 baskets over the 3-month period. There are 4,000 SKUs that are bought only once. But the really interesting fact is that 1,800 SKUs are bought together 98% of the times. None of these 1,800 SKUs are top sellers! But when they are purchased, they are very often paired with other items. This intelligence is key to increasing basket size and ensuring the store is carrying the right items. SKU rationalization analyses that view each SKU as an independent item, that is bought in isolation, will result in incorrect merchandising and lost sales.
There basket analysis also showed the low-frequency/high-correlation SKUs. Every retailer knows the challenge with these items. These items sell rarely, they sit on the shelf for along time, and when it is placed in a basket it will only sell if the paired item is available! These are problem SKUs because they are capital hogs and always show up in inventory issues.
Insight into the basket make-up and the product affinities based on buying behavior is key to merchandising and increasing order size. Merchandizing, up selling, cross selling and add-ons based on buying behavior results in increased sales and enhanced customer experience. On the other hand, suggestive selling based on tribal knowledge and ‘he said/she said anecdotes’ will result in poor results and loss of customer good will.
Adding one more item to 10% of the baskets can increase sales by 5%
Sales Impact Of Increasing order size
The basket size or order size analysis shows the revenue potential of increasing the order size. The chart shows a typical basket size analysis and the upside opportunity of increasing order size. The results from this case study showed that adding one more item to 10% of the baskets can increase sales by 5%.
Manufacturers, distributors and retailers offer thousands of products. There is a significant opportunity to increase sales across all channels with knowledge of product relationships (what items sell together), when and where. It is commonly agreed that B2B purchase behavior is “need based” while a large percentage of B2C sales is emotion based. Hence, in B2B commerce, the product relationships have to be highly accurate to be relevant.
Quick review of definitions:
Frequency – Number of orders that contain this item
Volume – Number of items sold.
The volume of an item may be high because one customer bought a lot. However, frequency is better measure of popularity and is not skewed by a one-time large volume sale. In fact, SKU analyses will often remove large volume buyers to reduce this bias.
SKU Rationalization Demands Market Basket Analysis (aka Customer Buying Patterns)
SKU Rationalization Demands Market Basket Analysis (a.k.a Customer Buying Patterns)
Wal-Mart Stores Inc., the world’s biggest retailer, is bringing back some products it had removed from shelves last year as shoppers turn to competitors for a wider selection of merchandise. A failed SKU rationalization effort?
The company met with suppliers about reinstating items to keep customers from going to other stores, said Leon Nicholas, a director at consulting firm Kantar Retail who has spoken with manufacturers about the move.
Wal-Mart is telling suppliers it cut too much in some areas and wants to bring some items back, Smith said. The retailer is noticing that consumers are visiting other stores and no longer going to Wal-Mart for everything they buy, he said.
“I’m learning this from my suppliers who were down to one SKU in the store,” said Smith, who helps vendors hire account managers and other representatives to call on Wal-Mart merchants. “Now they’ve got a seat back at the table.”
Sales at Wal-Mart’s U.S. stores open at least a year declined 1.6 percent in the fourth quarter, more than its forecast of a sales decline of no more than 1 percent. Declining store traffic reflected disruptions caused by store remodeling, Wal-Mart Chief Financial Officer Tom Schoewe said last month.
Why did Walmart’s SKU rationalization effort fail? Because Walmart ignored the market basket effect. It is not an issue of cutting too many SKUs; it is an issue of cutting the wrong SKUs because you do not know the product associations in buying patterns. A low frequency items can be profitable and may be often bought with other low frequency items. If you cut one of these SKUs, you will lose the customer. On the other hand, there are SKUs that are bought in low frequency in 1-item baskets. The loners! These are typically low margin, high capital utilization SKUs. These SKUs can be easily identified with Customer Buying Patterns Analytics.
What most retailers ignore in SKU rationalization is the market basket effect. Profitable customers may take their entire basket elsewhere, if they can’t find certain items (even if those items are “slow-moving”). The market basket analysis across hundreds of thousands of SKUs requires advanced analytics. Based on testimonies from Wal-mart customers, people were in fact choosing to go elsewhere for many of their shopping trips. This is why Wal-Mart has changed their tune very quickly.
“They are calling me back and saying, ‘We need to hire somebody who has experience in this category and knows this buyer — it looks like we are back in business,’” said Smith, who is based in Rogers, Arkansas. I think Walmart does not get it. They need help not just in categories; They need help across the categories. They need help on what items are typically in a basket – also called Customer Buying Patterns!
Comments Off
Q&A with Mark Gottfredson, Bain & Company
In today’s post, we talk to Mark Gottfredson about product complexity and customer choice.
Emcien: It’s natural for companies to add products and features to keep customers happy. What are the downfalls?
MG: The challenge of adding complexity is it’s the most natural thing in the world. Marketing comes up with new ideas for products or configurations to get the next bit of market share or a little bit more share of wallet. But most companies aren’t so good at retiring products; they don’t have a similarly robust process for taking things out of the catalog that no longer sell, or sell only small amounts. They don’t do a good job of balancing.
Most decisions we make are based on incremental economics. Each decision makes sense in its own right, but the costs of complexity tend to grow systemically. You can’t tie them to a single product decision. Take tinted windshields, for example, that you can sell as an option for $120 and 40% of customers will buy. Assuming the costs of tinting the windshield including inventory impacts, etc., are $9, it will always make sense to add the option. By itself, it is a rational decision, but when coupled with hundreds of other decisions, we end up with dozens of options like power windows, 13 exterior colors, 10 interior colors, 7 different radio and speaker combinations, etc. Eventually, the vehicle can be made in 10 billion different ways, and you don’t know what the next order will be. Since you can’t effectively forecast anymore, you get frustrated and buy a $50 million forecasting module to try to manage all the complexity. You have difficulty balancing your lines, build inventory and increase supply chain costs. Unfortunately, when most companies finally decide to reduce complexity, they “cut off the tail” of low-running options or SKUs. But they don’t remove the systemic costs, and they don’t see any benefits.
Emcien: Companies often overestimate the value buyers place on having many choices. What are the downsides?
MG: Go to a banking website like Citibank or Bank of America. The site describes itself as a full-service bank that has all the items you could want. There are long lists of products like credit cards with different reward programs, as if to say, “We have a lot of products. Surely there’s one here for you. Good luck finding it.” High complexity is a priori evidence that you don’t know what your customers want.
Emcien: When do fewer choices mean higher sales?
MG: When you understand customers. Dell understands customers well. Dell’s website is Spartan; there are just a few choices. If you choose a desktop, up pops three computers: high, medium and low cost. These three configurations are what your segment – home, professional, government – wants. You can customize each one, but you’ll make it as expensive as the next higher model, so then you switch to that and you’re still buying a standard configuration. Every time I have seen complexity reduction done right, sales have increased.
Emcien: How do overoptimistic sales expectations help to spread complexity?
MG: What happens is sales looks for a gimmick that gets them the next sale. Many manufacturers think whatever’s thrown over the wall from product management and sales must be good to go. And sales thinks more is better! Engineers love to engineer; they’ll give you complexity. Most firms build complexity systematically into operations, and then they build systems to handle the complexity, and that’s high cost.
Companies should think about what business would be like with a zero-complexity baseline – how they would operate if they offered just one product or service. The purpose of zero-based thinking isn’t to eradicate complexity; it’s an exercise to reimagine the business with the optimum amount of complexity.
Mark Gottfredson is a director of Bain & Company’s office in Dallas, Texas, which he founded in 1990. Over the past 26 years, he has advised chief executives and top-level managers in a wide range of industries. Currently, he serves as the Global Head of Bain’s Performance Improvement Practice and is also a leader in the firm’s business strategy, airline, financial services, manufacturing and energy practices.
Comments Off
Stop product complexity at the door
In any manufacturing company that builds configurable products, there is a lot of discussion around what product complexity is. What’s interesting is that when times are good and there are lots of sales, the discussion is usually around how to simplify or streamline with the goal to sell more product even faster, that complexity is keeping sales from going even higher. In bad times, the discussion typically moves to how complexity is causing undue stress on the supply chain, creating problems with parts forecasting, quality and finished goods inventory.
Rarely do these discussions end with participants really agreeing about exactly what complexity is or how to reduce it. Solutions are attempted with internal projects like SKU reduction and part number reduction initiatives driven by Six Sigma teams that mean well and do good work, but usually are chasing the tail of the complexity dog, rather than leashing it for good and guiding it to higher profits, lower forecasting errors, even shorter sales cycles.
Comments Off