I recently wrote a posting about Walmart’s Project Impact initiative and how it enables beneficial synergies between merchandizing and the supply chain (see “Walmart’s ‘Win-Play-Show’ Assortment Strategy”). On the merchandizing side, Walmart is ending up with stores that are less cluttered and more customer friendly, and on the supply chain side, these stores are carrying fewer stock keeping units (SKUs).
The remodeled stores (the “Project Impact” stores) have sales that are 75-125 basis points higher than the rest of Walmart’s stores in North America. These remodeled stores also have inventory reduction rates 5 to 6 times greater than Walmart’s traditional stores. The company plans to reduce the number of SKUs it carries by 10 to 15 percent (and by as much as 50 percent in some product categories), and Walmart will likely eliminate some vendors as a result of these efforts.
Where Walmart leads, other retailers tend to follow. According to an article in Retailwire, Kroger is in the midst of a significant SKU rationalization program. Don Becker, the head of merchandising at Kroger, noted that they have eliminated nearly 30 percent of all the SKUs in the breakfast cereal category. “We did it with our data,” Mr. Becker said. “The customers were telling us with their wallets what they were buying. And so we eliminated some sizes.” Kroger is reportedly 25 to 50 percent through this initiative, and it appears that they are further ahead than Walmart in rationalizing its product selection.
According to financial analyst reports, other large retailers are at the beginning stages of similar SKU reduction initiatives. And “portfolio pruning” is a something a growing number of retailers are talking about, so it’s clear to me that this trend will extend beyond Walmart and Kroger.
What does this mean for the supply chain teams at consumer goods and food and beverage companies? This is an opportunity for you to proactively reduce your SKUs. In the longer term, fewer SKUs sold at higher volumes will be easier to forecast, and you will reap some of the same inventory savings that retailers are currently experiencing. Warehousing and transportation savings are also possible.
In the short term, this pruning will require some financial pain, as manufacturers resort to markdowns to get rid of underperforming SKUs. This will lead to increased returns and disposals, as well as create added complexity in the Sales and Operational Planning (S&OP) process. When embarking on this initiative, the supply chain and marketing organizations should collaborate closely with their retail customers, not just the big retailers that are further along in this process, but also important customers who are just beginning to think about SKU rationalization initiatives.
Nevertheless, the consumer goods manufacturing supply chain team should view this as a golden opportunity—one that doesn’t come along very often—to substantially reduce the complexity of their supply chains. In this environment, it should be clear to marketing that preemptively pruning your SKUs is apt to lead to better sales than if retailers go through this exercise for them.
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