Achieving SKU Optimization through Alignment with Corporate Strategy

Editor’s Note: Janet Suleski, Director Analyst, Gartner Supply Chain

Product portfolio management and SKU optimization are two subjects that are often linked together. When it comes to implementation, many companies want to start with SKU optimization as a foundation for adopting more advanced product portfolio management practices. However, it’s the art of product portfolio management that is needed to set the structure for SKU optimization.

SKU optimization is another way of saying “SKU rationalization,” or the retirement of products from portfolios, a phrase that often doesn’t sit well with commercial teams. Supply chain leaders don’t typically own strategic portfolio management, but they are often tasked with leading SKU health assessment and retirement process definition projects. These projects cannot be truly successful unless they are conducted within a larger strategic framework that sets the guardrails for defining what constitutes a healthy SKU in the context of a product portfolio.

Misalignment on strategy leads to differing goals

For example, a head of supply chain for a medical devices company is asked to create a process to remove complexity and lower costs, as part of a mandate to reduce costs by $10 million over the next fiscal year. Her performance evaluation and compensation are tied, in part, to achieving this goal. The target savings and the supply chain leader’s performance metrics are set independently of the company’s stated strategic vision to, “be the leading supplier of cutting-edge therapies to continually improve patient outcomes and quality of life until a time when a cure exists.”

However, developing and selling cutting-edge technologies may also mean that the products are best suited for a small number of the sickest patients. Low sales volumes may mean added complexity costs such as short production runs or high-value products sitting in a warehouse until a patient needs the medical device. Nonetheless, the supply chain leader may feel that it’s appropriate, or feel pressured, to propose the product as a candidate for retirement in the search for lower costs of complexity.

This action, if followed through to product retirement, creates a disconnect between the stated corporate strategy and the manifestation of the strategy in the eyes of customers. This type of conflict often manifests between the portfolio strategy and business unit strategies and goals. Challenges such as this can occur because different functions and reporting lines define “success” differently and use different metrics to measure it. Many companies do not have a forum where strategic and operational strategies, goals and metrics can be compared and the disconnects identified and addressed.

Without alignment between corporate strategy and execution of activities, the following dilemmas arise: Does the company trim the portfolio to satisfy short-term financial goals, but put its stated business strategy at risk? Or does it step back to think about what a consistent strategy framework should look like for the business?

To resolve the conflict, the company’s top-level vision, mission and strategy should be the “North Star” governing the rules for decision making about how the SKU optimization process is set up. A conscious choice needs to be made that connects the decisions about lifetime management of products to broader corporate goals.

Two Approaches for Resolving the Disconnect

For the medical supply chain example, there are two solution scenarios I would offer that enable the supply chain leader to align strategic, tactical and operational activities and decisions related to PLM to the company’s strategy.

The first option would prioritize the development of cutting-edge innovations that improve patient outcomes and quality of life. The supply chain leader may, in this case, design a complexity cost reduction program that includes ensuring supply chain is involved early in sourcing materials for new therapies still in R&D. This, in turn, would allow the team to vet suppliers and develop programs to source materials at acceptable costs to scale the therapy, if it’s chosen for launch and full production volumes. As a result, costs are lowered while the company continues to provide advanced therapies to the sickest patients.

The second option suggests a strategy cascade from the perspective of a company whose stated vision, mission and strategy are related to making its products available and affordable to a wide market. In this context, the supply chain leader may opt to design a supply chain and SKU optimization program that focuses on measuring product health. This type of program might retire low-revenue, low-profit products in the portfolio’s long tail in order to lower sourcing, supplier management and distribution costs. The second scenario may be entirely appropriate for a company with a strategy of making its products available at an affordable price, but is not likely to be appropriate for a company that seeks to provide cutting edge technologies to the sickest patients.

These two hypothetical companies may sell devices designed to treat the same medical conditions, and can simultaneously provide value through their differentiated offerings. Product life cycle management and product portfolio management decisions are the mechanisms to manifest the strategy, and different strategies require different decision-making criteria to successfully deliver the strategy to target markets.

There is never one “right” solution in these situations. In both scenarios, the program the supply chain leader develops to support SKU optimization is designed to be consistent with the overall corporate strategy. Either approach begins with the company or product portfolio management strategy defining the guardrails for decision making. The guardrails then apply in both the supply chain leader’s design of the SKU optimization program and in making the most fitting tradeoff decisions regarding SKU health and, if appropriate, product retirement, within that program.

SC
MR