10 WAYS TO BOOST YOUR COMPANY’S VALUE: Practice #2: Reduce and Refocus Your SKUs
Many middle market companies took a big hit in the market downturn when they were left with previously well-selling inventory sitting on shelves longer than expected. This is a key warning sign most of you already know well. The best practice here is to rebalance your stock-keeping unit (SKU) mix and focus more on higher profit margin products until things improve.
Many companies hesitate to reduce high volume, low margin SKUs because they don’t want to cut back on anything that sells and contributes to positive cash flows. But you need to look at the longer-term analysis of total costs and capacity utilization. Total costs include inventory-carrying costs such as direct warehousing and storage, transport and logistics, indirect selling, general, and administrative (SG&A) overhead, and financing costs, among others. Often the results are surprising and now more than ever you should be compelled to compare high margin versus low margin products and channels on a spreadsheet each month.
In addition, there is evidence that higher-end consumers are increasing their purchase behaviors faster than lower-end consumers. According to a study released in 2010 by Bain & Co., “High-end retailers, home sellers and car dealers are all experiencing an uptick in business” coming off a historically bad 2009. If your products can cater to an upper-income crowd, focus more on them.
Hence, your strategy should not be to simply try and wait it out for your lower-margin customer segments to return, but rather you should meet those who are still buying with new, high-end, high-margin products, thus creating a relative SKU re-balancing in your product portfolio.
Stay tuned for the next tip on re-evaluating your supply chain!