April 2007 | Commentary | Viewpoint

Easing the Pain of Product Proliferation

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Product proliferation—the explosion in the number of individual stock-keeping units (SKUs) that has occurred over the past decade—poses a major challenge to supply chain managers and adds millions of dollars to logistics costs.

In large part, product proliferation stems from the trend toward mass customization—providing consumers with custom-designed, personalized products at affordable prices.

Other trends and established business practices—such as the demand for private-label merchandise, and the increased use of store-ready displays and promotional packs—also contribute to product proliferation.

Meeting Global Requirements

Globalization, too, plays a role. Vendors must modify products to meet varying global regulatory requirements, and translate product labels into different languages for foreign consumers.

Many companies don't fully appreciate the true cost of carrying too many SKUs. One consumer products manufacturer, for example, estimates that 10 percent of its products don't appear on store shelves because of unsynchronized product IDs. The company's customers often attempt to order products that are no longer in stock, and are not aware of new products that have replaced discontinued items.

Another company was forced to develop overflow warehousing because of expanding product lines, and as a result, handles its products up to three times before completing orders.

To combat these problems, supply chain managers are increasingly adopting postponement strategies that delay the production of finished goods until the receipt of firm customer orders.

Take one food products manufacturer, for instance. After expanding the number of SKUs in one product line from 40 to more than 800, its bottom line declined, and finished goods inventory occupied an exorbitant amount of warehouse space. The company's solution was to replace its label-to-stock manufacturing strategy with a label-to-order strategy.

The food company now stores generic, unlabeled product at its plant. When a customer places an order, the product is then labeled and shipped to the manufacturer's distribution center. There, the private-label product merges with other merchandise destined for the same customer.

This solution helps the manufacturer reduce transportation costs, while meeting customer delivery requirements.

Managing with Postponement

Postponement also eases proliferation woes for one hardware company that relies on Chinese manufacturers. The company's private-labeling requirements grew 15-fold within a few years, resulting in a dramatic increase in finished goods inventory. Long lead times from Asia compounded the problem.

The company adopted a postponement strategy, and now ships its Asian product to a packaging center in Mexico. Once the company receives an order for that merchandise, it is labeled and packaged in Mexico—at one-fifth the U.S. labor rate—and shipped to a U.S. distribution center. The DC carries finished goods inventory, but has significantly reduced total inventory.

In addition, the company benefits from a six-day lead time from Mexico rather than six-week lead times from China.

The bottom line? Mass customization is here to stay. As the number of SKUs continues to escalate, so does pressure on companies to control, limit, or shrink those SKUs.

This is one supply chain challenge that will never go away.

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