We have been inundated with news on how COVID-19 has disrupted global supply chains. My counterparts in supply chain management talk about how their supply chain organizations are working long hours under great pressure. But it turns out that not all the impacts of COVID-19 have been detrimental. One nice side benefit is that has made it possible for retailers and consumer goods manufacturers to reduce the number of products they carry.
Distinct products are called “stock keeping units” (SKUs). SKU’s are very specific product/packaging combinations. A 12-pack of 12-ounce Diet Coke cans is one SKU. A six-pack of Diet Coke in plastic bottles would be a different SKU. That same six pack for Cherry Coke would be another SKU. Supply chains operate with lower costs and better service the fewer the SKUs there are.
The Wall Street Journal published an article called Why the American Consumer Has Fewer Choices—Maybe for Good. Here are a few excerpts from the article:
“In grocery stores, the average number of different items sold was down 7.3% over the four weeks ended June 13, said Morgan Seybert, a director of analytics at market-research firm Nielsen. The variety in some categories, such as baby care, bakery and meat, fell as much as 30% earlier in the pandemic. Executives at Kraft Heinz Co., Coca-Cola Co., Hershey Co. and other food giants have said they are trimming less-efficient and less-profitable products, while shelving some in development.”
Steven Williams, CEO of PepsiCo Inc.’s North America foods business, said the company stopped producing a fifth of its products during the Covid-19 crisis, including lightly salted Lay’s potato chips. He said he and his colleagues spoke with grocery executives as the pandemic deepened, determining that PepsiCo should focus on its fastest-selling products.
PepsiCo is starting to bring some items back, but Mr. Williams said he expects its Frito-Lay snacks business to emerge from the pandemic with 3% to 5% fewer products. The company is taking the opportunity to discontinue some items that have few fans or are complicated to produce, he said, making its factories and distribution network more efficient. ‘There were some no-regret moves,” he said.’”
The average US grocery store now stocks about 33,000 SKUs, nearly four times as many as in 1975. Walmart’s Supercenters stock 120,000 items. Campbell’s Soup carries 400 different SKUs. This is what is known as “SKU proliferation.”
SKU Proliferation Has Negative Impacts on Supply Chains
SKU proliferation has many negative impacts on supply chains. For a consumer goods manufacturer it makes forecasting less accurate. It is easier to forecast a fewer numbers of fast-moving SKUs than a plethora of slow-moving products. Further, it makes it harder for stores to have an accurate count of how much inventory is in the store. An accurate inventory count at the store level is also important in making accurate forecasts. When store level forecasting is less accurate, consumer goods companies are not replenishing the correct items and consumers don’t find the items they are looking for when shopping.
SKU proliferation raises supply chain costs. In the factory, fewer products means longer production runs and thus fewer production line change overs. The packaging line also has many, many more change overs the more SKUs there are. Labor costs go up in the warehouse. It requires less labor to pick a full pallet of an individual SKU than to build a rainbow pallet. ‘Rainbow pallets’ have one layer of one SKU topped by layer of a different SKU, topped by yet another type of SKU.
SKU proliferation also makes understanding the true profitability of a product more difficult. Companies that practice activity-based cost accounting have a very accurate understanding of their costs. For most companies, profit margin is an average that lumps together the costs of higher cost/lower velocity products and high velocity/less costly products into one number. An accurate understanding of product profitability is clearly more difficult the more SKUs a company carries.
For the retailer, less accurate inventory levels lead to shelf level stockouts. This means consumers don’t find the product they want. And if the product is important to the customer, brand loyalty trumps store loyalty. In other words, it leads customers to shop at a competing store rather than buying a competing product in that store. Too many SKUs can also lead to stores looking cluttered, which can also adversely affect store loyalty.
But, the Wall Street Journal article reports, “as panic buying in March cleared supermarket shelves of staples, retail executives fretted over how fast they could replenish supplies. Retailers and food companies over the past several months have convened calls on which they decided food makers should cut back on options, streamline supply chains and concentrate production on the most-demanded goods.”
Further, careful shoppers in the habit of reading labels and making thoughtful choices no longer have that luxury. Social distancing has shoppers wanting to get in and get out of the grocery store.
Supply chain professionals would love to see this trend toward fewer SKUs continue and even accelerate. Supply chain professionals battle with marketers and merchandisers who favor introducing new SKUs that rarely get retired. My supply chain counterparts believe that if marketing was operating with a true understanding of product profitability there would be far fewer SKUs. I suspect that with the end of the pandemic, the supply chain organization will lose the SKU battle; we will again see SKUs proliferate.