Today's consumers want greater product selection and they value variety more than ever before. Today, over half of the world population has mobile internet access, growing at 4.8% CAGR1. E-commerce2 drives over 13% of total retail sales in top-10 developed countries. The continued growth of e-commerce is helping drive SKU variety and complexity. CPGs (Consumer packaged goods companies) are facing enormous pressure to balance consumer demands with product variety. The result is often ever growing levels of stock keeping units (SKUs) and corresponding supply chain complexity. SKU proliferation can be seen as an indicator of innovation, signaling a positive outlook for CPGs. More often, when new products and variations are not strategically introduced and rigorously assessed, they fail to produce the anticipated bottom line results.
1 Source: Global Entertainment & Media Outlook 2019–2023, PwC
2 Source: UNCTAD
Most CPGs are willing to launch a new SKU as long as its standard Gross Margin (Gross Sales - Standard COGS) is positive, without looking for true, incremental bottom-line profitability.
The concept of holistically determining the true health of a portfolio is simple on the surface. In reality, companies face significant challenges:
- Clear strategic objectives - The approach to optimizing the product portfolio across product groups and brands is not always aligned across stakeholders - e.g., top-line growth through volume and market share vs. bottom-line profitability.
- Cross-functional collaboration and communication - Assortment choice decisions are inherently cross-functional, yet many decisions are made in functional silos, optimizing for narrow objectives and not fully assessing the overall result.
- SKU-level data accuracy and availability - Systems often do not capture activity-based, actual costs accurately or completely at the SKU level.
- Substitution effect - It is challenging to measure the true incremental impact of new SKUs after accounting for substitution or cannibalization of the full portfolio.
- Operational excellence - Data to measure the effect of portfolio size and complexity on the supply chain and sales channels is limited.
Leading CPGs nurture healthy, high-performing product portfolios by following a proven, pragmatic approach.
- Develop analytical capabilities to understand the true drivers of incremental bottom-line profitability.
- Establish cross-functional teams and rigorous processes to actively review and rationalize the SKU portfolio.
- Define metrics and develop leadership dashboards to monitor product portfolio performance.
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