Stock Keeping Unit (SKU) proliferation is a tempting thing. It can be hard to argue against the logic of adding another product or service type to your catalogue to increase sales.
The problem is that every SKU carries real costs with it. In an article published in the Journal of Operations Management “Too much of a good thing: The impact of product variety on operations and sales performance” Xiang Wan and his colleagues examine the sales and operational performance of a major US soft drink bottler that distributed 328 SKUs from a network of 108 distribution centers where the range of SKUs ran between eight and 114. They determined that the optimal number of SKUs was 84. Below 84 there was opportunity to better serve customer niches and above that the cost of lower operational performance exceeded any benefits.
Cost per SKU should take into account factors including the following:
- Capital for production
- Capital for inventory
- Productivity losses due to changeovers
- Labeling and cataloging
- Obsolescence and damage losses
- Reduction in inventory turns
- Increased forecasting problems
- Cost of stock-out
- Clogged supply chain
- Added complexity
- Customer confusion
The bottom line is to apply the Pareto Principle wisely when tempted to add SKU’s. You just might find that you have too much of a “good thing” and that less is more. I have personally worked with clients who have put hundreds of thousands of dollars back into cash and increased profitable sales significantly just by eliminating 10-20% of their SKU’s.