Kevin Smith, the President of Sustainable Supply Chain Consulting, gave an entertaining speech at the Descartes Global User Group Conference last month. Before starting his own consulting practice last year, Kevin spent eight years as the SVP of Supply Chain & Logistics, followed by a year as the SVP of Corporate Sustainability, at CVS Caremark Corporation.
One of the best ways companies can save money in the supply chain is by reducing inventory carrying costs. In retail, it is common for stores to carry too much inventory. According to Kevin, the average drugstore carries 20,000 to 30,000 stock keeping units (SKUs) at the front of the store–i.e., not including the behind-the-counter prescription drugs. This large number of SKUs makes forecasting difficult. At CVS Caremark, there were 2.5B to 4.0B DC/store demand pair comparisons per week to forecast volume. You need a highly-scalable demand management solution to handle this level of complexity.
Having a large number of SKUs also increases the number of slow movers you have. For example, 88 percent of CVS’s SKUs sold less than 0.6 units per store per week. The top 12 percent of SKUs at its stores represented 75 percent of total unit sales by store by week. You might conclude there was a lot of room for rationalization, but the slow movers represented 70 percent of the front-of-store profit. Many of the fast movers are loss leaders designed to get people in the store.
Kevin told a familiar story. Even though most SKUs sold less than 0.6 units per store per week, the marketing organization wanted strong on-shelf, in-stock performance. It was not unusual to see 24 items of a slow-moving product stocked at the store. The supply chain organization began educating the marketing organization and aligning replenishment to demand more closely (the company replenishes stores twice a week). They were able to show that even with lumpy demand and twice per week replenishment, you often only needed 2-3 units on the shelf at the store. By eliminating just one item per week per store across 7,000 stores the company saved half a billion dollars a year.
According to Kevin, “space is the currency of retail; it is hoarded jealously and sold dearly.” Historically, the decision to carry a SKU was based on consumer marketing, volume projections, marketing money, and pragmatism (i.e. space availability). As Business Intelligence improves, these decisions will increasingly be based on cost-to-serve and profitability by supplier. When decisions are made on these criteria, we will likely see SKU rationalization and the winners will be those suppliers who can demonstrably drive higher profits.