Uncontrolled product proliferation can have bad consequences, and these are well recognized. There is certainly extra cost and complexity in managing more SKUs (rather than fewer SKUs). And it is unlikely that each new offering adds entirely incremental volume. Instead, the increased product overlap just leads to increased self-cannibalization. We end up with a portfolio of the haves and the have-nots -- successful high-volume products, and a bunch of laggards that are barely selling.
A logical step, taken by many organizations, is to go through an SKU rationalization or "pruning" exercise. The idea is to weed out those products that are no longer worth the trouble of providing.
What sounds like a good idea, however, can quickly run into organizational roadblocks. Procurement, manufacturing, inventory management, and distribution may be pleased to see these products done away with, so they can focus their limited resources on higher-volume / higher-revenue products. But sales, marketing, and finance may not be so sure, plagued by the fear that they are giving up sources of revenue.
Can Pruning Increase Revenue?
It is not entirely unreasonable to expect that pruning the extremely low-volume / low-revenue products can actually increase revenue. This could happen if service level (i.e. order fill rate) increases for the remaining products once the laggards have been pruned.
Extremely low-volume / low-revenue products can make up a substantial portion of your product portfolio. At a meat processing company, 25% of items yielded just 0.5% of total revenue. At an apparel company, half of their products generated just 1% of total revenue. (You can determine these rates at your own company with a simple Pareto chart ranking products by volume or revenue.)
Suppose your company does $100 million in sales, and you decide to prune those bottom ranking items that make up 1% of your revenue ($1 million). Doing so will almost certainly reduce your costs. And if you are able to better focus attention on the remaining products and increase their order fill rate by just one percentage point, you've essentially made up the lost revenue. ($99,000,000 x 1.01 = $99,990,000, just $10,000 short of pre-prune revenue.)
This crude calculation is based on the (implausible) assmption of there being no other impacts (good or bad) of the pruning. (Also, if your service level were already extremely high, it may be mathematically impossible to make up the lost revenue by service improvements alone.) By providing suitable substitutes for the pruned items, and the expected reduction in complexity and costs, it is not at all implausible that revenue and profit will improve.
If financial analysis arguments won't satisfy the doubters of the value of pruning, perhaps an argument from horticulture can help:
You can quickly beautify your home’s landscaping with new flowers and shrubbery and trees—but what happens after that? If you let nature takes its course, within a couple of years your beautiful landscape will have grown into a wild and out-of-control mess. To regain control and return the beauty, you need to prune things back. Pruning sets the stage for a new burst of growth.*
Have you trimmed your organizational landscaping lately?
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*From the article "SKU Rationalization: Pruning Your Way to Better Performance" in the Fall 2011 issue of Journal of Business Forecasting.
