Cut laggard SKUs, boost margins

Product SKUs that are prime for elimination eat up a lot of warehouse space and complicate the production schedule.

Photo: iStockphoto

In these post economic-apocalyptic times, mid-size manufacturers looking for more creative ways to cut costs without crippling the business should think product rationalization. That’s the advice offered in a Grant Thornton white paper titled Survival of the Fittest, Uncovering the benefits of product rationalization.

Even thinking about cutting products out of the line-up may make some in the senior management ranks and members of the sales team blanch, but if the Pareto principle—80% of your profits are coming from 20% of your offerings—applies to your business, it’s likely time to start trimming. The global tax and advisory firm suggests a sound rationalization program will help you identify the slow movers and less profitable lines, and potentially increase the margins on the products that remain.

Too many stock-keeping units (SKUs) rack up administration and purchasing costs that don’t show up in the sales data, says the consulting firm. There are also production costs from frequent line and machinery changes, plus costs attached to warehousing space.

What kind of savings can you look forward to?

Starting with the low hanging fruit, 10% to 15% right off the top, says Toronto-based Vivek Kalwani, results manager, productivity improvement with Grant Thornton in Canada and one of the authors of the white paper. “And there’s probably another 10% in there but you’d have to get into the numbers.”

For example, one area to look at for savings is the warehouse and carrying costs. “Another would be direct labour costs,” says Kalwani. “Look at the SKU. What are the activities involved in getting it produced? If you eliminate it, what impact would it have on labour costs?”

Another area to consider is energy use. You may be using a piece of machinery to produce a product that isn’t particularly energy efficient. Also consider the time spent producing that line: he says it may be better spent on something else.

Focus on variable and fixed costs. Determine the key activities involved in making a product. And gauge how it’s selling, where it’s being sold and to whom. Kalwani says rationalization may not be the issue: it could be a matter of revitalization by repositioning the product or changing the pricing.

Here are some key points:

• Re-evaluate your business strategy. Understand the types of business, consumers and niche markets you are going to target.