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To SKU or not to SKU: Is that the question?

By Richard Roth - September 23, 2010

Today’s expanding global marketplace brings opportunity. For a business’s supply chain function, it can also bring on an ugly side: complexity. For customers, flexibility and quick response are not appreciated — they’re expected. That requires a supply chain that can withstand the impact of economic trends (i.e., recessions), government policy (i.e., taxes and tariffs), and the unexpected (i.e., product recalls). Factors like these can disrupt supply/demand patterns or ruin a well-earned reputation, leading to considerable damage to shareholder value.

Looking at cost, quality, cycle time and customer service metrics from our recent global study on supply chain performance, Deloitte’s Global Benchmarking Center gathered insights across the three drivers of shareholder value: revenue growth, operating margin and asset efficiency. Supply chain activities play a major role in shaping these drivers, but even the best supply chains can’t have it all. 

For example, our research suggests that new products – also known as SKUs or stock-keeping units—are required to maintain and grow revenue levels, but that can also lead to greater global supply chain complexity. We’ve found that SKU proliferation, the practice of creating “new and improved” versions of products, drives both indirect supply chain costs and staffing levels. These are costs associated with activities that are unrelated to production, such as maintenance, operations, sales, etc.

Figure 5 v3In other words, as the number of active SKUs increases, indirect supply chain costs and staffing levels increase as well. True, more active SKUs can contribute to a higher share of revenue.  But the added complexity can diminish returns. In addition to the higher staffing levels needed to support new SKU introduction and ramp to volume, the trade-off for a higher number of new SKUs can also lead to reduction in forecast accuracy, which then ripples through the supply chain to impact inventory levels and perfect order delivery rates; that is, how often items are shipped complete, on time, in perfect condition and with perfect documentation.

Is there good news? Of course. It’s all about the overall global business strategy. Structure your supply chain around the drivers that make the best sense for your business’s goals and objectives. Supporting strong revenue growth may mean some sacrifices in asset efficiency; but that may suit the business strategy just fine. Understanding the trade-offs is key to making the most effective decisions for your organization.

Looking for additional discussion? A recent Deloitte Debate offers a point/counterpoint perspective on the merits of supply chain performance benchmarking and its affect on shareholder value.

Rick Roth is a principal in the Strategy and Operations (S&O) Practice in Atlanta, and the U.S. Leader for the firm’s Global Benchmarking Center (GBC).

As used in this post, “Deloitte” means Deloitte Consulting LLP, a subsidiary of Deloitte LLP.  Please see www.deloitte.com/us/about for a detailed description of the legal structure of Deloitte LLP and its subsidiaries.


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