Supply chain versus product proliferation

Remedying some of the root causes of growing supply chain complexity will be another important benefit of enhanced collaboration in the C-suite. Take the complexity associated with product portfolios. Sales and marketing organizations work hard to create new products, explore new market opportunities, and respond to emerging customer needs. As they do, products and variants tend to proliferate, creating portfolios with long tails of niche offerings. A consumer goods maker we know, for example, recently found that nearly one-third of the 6,400 SKUs¹ in its product portfolio together represented just 1 percent of total revenues.

This complexity comes at a cost, since low-volume products cost more to make per unit than high-volume ones (because of economies of scale). The consumer goods maker, for example, found that production costs for low-volume products were 129 percent higher than those for its best sellers. Low-volume products also require disproportionate effort in sales and administrative processes. Finally, they drive up supply chain costs: a company must hold higher inventory levels to meet agreed service levels across a broad range of low-volume products than it does over a narrow range of high-volume ones. When all these extra costs are taken into account, the impact can be eye opening. One company we studied found that 25 percent of its SKUs actually lost money.

In the face of these numbers, companies might be tempted to take an ax to the long tails of their product portfolios. Yet blind cutting based on sales figures alone often does more harm than good. Some low-volume products have benefits that outweigh their costs, and only through close collaboration across functional boundaries can companies make the right decisions. Such collaboration won’t eliminate the need for more carefully segmented supply chain strategies, but it should help ensure that such efforts are well targeted.