How many SKUs does your company carry? If you are like most middle market manufacturers and distributors, the answer is somewhere between too many and way too many.
The Complexity Tax
Every SKU incurs a cost that goes far beyond its cost of goods sold. It requires warehouse space. It needs inventory management. It generates customer service inquiries. It demands engineering support. It consumes sales attention.
These costs are rarely allocated to the individual product. They live in overhead. Which means your profitable products are subsidizing your unprofitable ones, and your P&L does not show it.
The 80/20 Reality
Run the analysis. You will find that roughly 20% of your SKUs generate approximately 80% of your gross margin. The bottom 50% of your SKUs probably contribute less than 5% of total margin while consuming a disproportionate share of operational resources.
I have run this analysis at every company I have led. The results are always the same, and they are always surprising to the leadership team.
How to Rationalize
Do not eliminate everything at once. Start with a pilot in one product category or one business unit.
Identify your critical few: the SKUs that drive margin and volume. Protect them. Invest in them.
Identify your tail: the SKUs that barely move. Raise prices to test elasticity. If customers will not pay more, they are telling you the product does not have enough value to justify its existence.
Sunset the losers: products with negative contribution margin after allocating their fair share of complexity costs.
The Result
Fewer SKUs. Higher margins. Simpler operations. Happier customers because you can actually serve the products that matter. This is 80/20 in action.
Book a strategy call at the8020institute.com to find the right program for your company.