Stock keeping unit rationalization: a cross-functional, cross-firm perspective

• Date: 11 November 2019
• DOI: https://doi.org/10.1108/IJLM-06-2018-0150
• Pages: 994-1015
• Published date: 11 November 2019
• Author: Matias G. Enz,Matthew A. Schwieterman,Douglas M. Lambert
• Subject Matter: Management science & operations

Stock keeping unit

rationalization: a cross-functional,

cross-firm perspective

Matias G. Enz

Department of Supply Chain Management and Analytics,

University of Missouri –St Louis, Saint Louis, Missouri, USA

Matthew A. Schwieterman

Department of Management, Miami University, Oxford, Ohio, USA, and

Douglas M. Lambert

Department of Marketing and Logistics,

The Ohio State University, Columbus, Ohio, USA

Abstract

Purpose –Although managers hav e struggled with SKU prol iferation for decades, research has

provided inconsiste nt guidance, and the cro ss-functional and cros s-firm aspects of the p roblem were not

considered. The purpo se of this paper is to exp lore the factors that fa vor successful and sus tainable

SKU rationalization.

Design/methodology/approach –A single case study was used to investigate the implementation of an

SKU rationalization project by a national restaurant chain in collaboration with its food distributor.

Qualitative data analysis techniques were used to understand managers’perceptions about the SKU

rationalization problem and the financial results that were achieved.

Findings –The findings include seven propositions that begin to formalize theory for SKU rationalization.

Cross-functional involvement was both a challenge and a critical success factor, and the supplier was an

important resource for managing product variety and complexity.

Research limitations/implications –Seven propositions are provided that increase the likelihood of

successfully dealing with SKU proliferation.

Practical implications –SKU proliferation increases supply chain complexity and leads to higher costs.

The research reports on an SKU rationalization project that saved a company and its supplier $6.7m.

Originality/value –A previously unexplored theoretical perspective on SKU rationalization was employed

that emphasizes cross-functional alignment, buyer–supplier relationships and the impact on financial

performance of a firm.

Keywords North America, Case study, Supply chain integration, Buyer–supplier relationships,

Sourcing and supply

Paper type Research paper

Introduction

As a consequence of customers’increased demand for innovation and customization, new

products have been developed and introduced without careful consideration of the

associated supply chain management challenges and costs (Thompson et al., 2005; Berman

and Korsten, 2010). In one study, executives reported that an average of 1.7 products were

introduced for each product that was withdrawn (Hoole, 2006). SKU proliferation can

increase the costs of a firm’s operations by 15–30 percent and lead to situations where only

20–30 percent of products actually contribute to profitability (Wilson and Perumal, 2009).

Moreover, the complexity of holding excessive product variations can lead to reduced

service levels for customers (Closs et al., 2010; Wan et al., 2012). The need to abandon

unprofitable SKUs has been recognized in the literature for more than 50 years (Kotler, 1965;

Hamelman and Mazze, 1972; Lambert, 1985) and publications by consultants have brought

renewed attention to the issue (Byrne, 2007; Wilson and Perumal, 2009). However, managers

The International Journal of

Logistics Management

Vol. 30 No. 4, 2019

pp. 994-1015

© Emerald PublishingLimited

0957-4093

DOI 10.1108/IJLM-06-2018-0150

Received 15 June 2018

Revised 6 December 2018

11 April 2019

31 July 2019

Accepted 5 September 2019

The current issue and full text archive of this journal is available on Emerald Insight at:

www.emeraldinsight.com/0957-4093.htm

994

IJLM

30,4

still struggle with SKU rationalization and measuring the cost of complexity caused by SKU

proliferation (Berman and Korsten, 2010).

SKU rationalization is a complex problem because of its implications for multiple

organizational functions and relationships with customers and suppliers (Olavson and Fry,

2006; Enz and Lambert, 2012). The importance of a specific SKU is likely to be viewed

differently by marketing, sales, R&D, manufacturing, procurement and finance which

usually have conflicting goals that affect and are affected by the decision to add or eliminate

SKUs. The cross-functional, decision-making perspectives of the problem have not been

covered in previous research which may explain why SKU rationalization continues to be a

dilemma for managers (Gottfredson and Aspinall, 2005; Jacobs and Swink, 2011).

While much of the literature treats SKU rationalization as a concern internal to a firm

(Closs et al., 2010), product complexity has been shown to impact supply chain relationships

(Eckerd and Girth, 2017). As such, a strictly internal view of SKU rationalization is a

limitation that must be addressed. Also, relationships with customers and suppliers may

impact the success of SKU rationalization projects. Research is needed to understand the

cross-functional and cross-firm characteristics that enable successful SKU rationalization.

In this research, we used a case study approach (Eisenhardt, 1989; Ellram, 1996; Yin,

2013) to explore the key factors that favor the success of SKU rationalization projects. The

research question was:

RQ. How can managers achieve successful and sustainable SKU rationalization?

The remainder of the paper is structured as follows. First, the literature related to SKU

rationalization is reviewed. Next, the methodology is explained, and the findings and

implications are presented. The limitations and opportunities for further research are

described and conclusions are provided.

Literature review

Although SKU rationalization has been recognized as a business problem for more than five

decades, there is a paucity of literature on the topic and no established theoretical

framework. Consequently, we focus our literature review on the causes and challenges of

product variety and three themes in the literature that appear to be most informative:

product abandonment, cross-functional integration and supply chain relationships.

Causes and challenges of product variety

The main causes of SKU proliferation include an overuse of customer segmentation, an

excessive number of products tailored to each segment, end customers expecting greater

variety, multiple price points for product categories and competition based on variety as a

differentiation strategy (Quelch and Kenny, 1994). The proliferation of SKUs means that

customers’demand is spread over more products, thereby increasing the overall uncertainty

and variability of demand (Fisher et al., 1994). Many times, the market is divided into

smaller, less profitable segments. Product variations may proliferate until they exceed the

market benefits of diversification, which implies that “it is the effective management of

complexity that poses the difficulty”( Jacobs and Swink, 2011, p. 677).

The consequences of SKU proliferation include higher demand variability (Christopher,

2000), the need to invest in operational flexibility to cope with the proliferation (Soman et al.,

2004), end customers’difficulty in differentiating products within a firm’s product offerings,

lower brand loyalty, stagnation of category demand and increased costs (Quelch and Kenny,

1994). The literature on product variety is primarily focused on identifying the amount of

variety required to enhance revenues and avoid operational inefficiencies (Ramdas, 2003).

Variety is typically assumed to increase sales (Ton and Raman, 2010), to enhance market

share (Lindsley et al., 1991) and to lead customers to perceive the brand as being of higher

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Stock keeping

unit

rationalization