Getting �SKU Rationalization� Right

Presented by Dave DeWalt

Franklin Foodservice Solutions

December 6, 2005

Franklin Foodservice Solutions Background� Fifteen years of Foodservice Marketing and Sales Management

� Two years of General Consulting with A.T. Kearney

� Launched Franklin Foodservice Solutions in 1996

� a trusted partner for foodservice business improvement projects

� help food manufacturers who are short on resources or expertise,taking on projects which produce immediate financial results

� we work in the �nuts and bolts� of your foodservice business operations, helping you extract higher profits from your existing customers and products

� Publisher of free monthly �Foodservice Marketing Insights� e-newsletter

� Subscribe on the website: www.franklin-foodservice.com

� or drop me an email and I�ll see that you�re signed up dave@franklin-foodservice.com

Today�s Agenda

� Why Most �SKU Rationalization� Projects Fail to Deliver

� The Case for Doing it Right

� The Four Steps to Effective Product Line Optimization

� Questions and Feedback

�SKU Rat� Projects Usually Begin Like This�

YEAH!

We�ve GOT to cut at least 150 SKU�s! I can�t run my plants

or get my lift trucks down the aisles!!!!

(ulp!)

�and by the way, how come you�re behind

plan???

�But Often End Like This:

If we cut even ONE of those

products, we�ll go out of business!

YEAH! And we�re rolling out 20 more next

month�

�and by the way, how come our service level is

slipping????

The Result is Frustration for Everyone

� Operations, Supply Chain, and Finance don�t get the benefits they want

� But Sales and Marketing cause just enough disruption for their customers to create ill will!

� Senior Management applies a lot of resources to the effort, but gets a low return

�Our SKU Rationalization Projects always end up as SKU Justification Projects!�

�Every time we try to do this, we all just end up mad at each other�

�We�re constant wrestling with this issue, but can never seem to get it right!�

Why Most �SKU Rationalization� Projects Fail to Deliver

� The pain is felt in Operations and Supply Chain, but the cure rests with Marketing and Sales

� Even if everyone is aware of the problems caused by having too many products, the benefits of dropping some are not clear on the P&L (but the lost volume certainly is!)

� There is a natural �distrust of the numbers,� especially when they are developed by one department and presented to another

� Likewise, the �voice of the customer� is often misrepresented�

� Gathering input, analyzing the problem, developing and implementing a solution is time-consuming and cuts across functional lines

� And seems to be counter-productive in an environment focused on building volume

The Case for Doing it Right

� Product Line Optimization requires a long-term perspective

� Unless you have capacity constraints, it�s hard to see the financial case

� But it creates long-term benefits

� Reduce Inventory Carrying Costs- finished goods and raw materials

� Reduce Changeover/Short Run costs

� Eliminate waste of scarce resources

� Sharpen everyone�s focus behind winners

� Open slots for star products

� Support annual planning efforts

Keys to a Successful Process

� Use quantitative/financial data as well as soft/marketing & sales input

� Balance rational with emotional, �head� with �heart�

� Focus on �problem products,� not the entire line

� Get all parties dealing with the same information

� Separate fact from myth, and bridge the �credibility gap� among departments

� Be ready to take action to move products off of the �problem list�

� Predict the P&L impact of your decisions before pulling the trigger

� Reduce the uncertainty and fear that often derails these projects

� Clear and complete communication once decisions are made

� Internally: What is expected of support departments

� Externally: To Sales and Customers

Recommended Inputs, Process, and Outputs

�Analyze Data and Identify Candidates�Evaluate and Develop Action Plans

�Project the P&L Impact�Decide, Communicate, and Implement

Volume, GP, VCM, other Product Data

Marketing, Sales,Operations, Finance

Input

Inputs

Process

Outputs

Volume, GP, VCM Mix Charts

S K U V o lu m e G P V C M P & L +

2 9 3 4 8 7 3 , 3 8 0 # # # # # # 8 7 . 8 8$ # # # # # #

5 0 5 4 9 8 3 8 9 5 0 . 5 7$ 10 . 11$ # # # # # #

3 4 4 9 5 8 9 3 2 12 1. 16$ 2 4 . 2 3$ # # # # # #

12 4 3 0 9 3 , 0 4 9 # # # # # # 7 9 . 2 7$ # # # # # #

2 3 4 0 9 8 4 0 , 5 9 8 # # # # # # # # # # # # # # # # # #

P&L ImpactCalculator

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Final ActionPlan

S K U V o lu m e G P V C M P & L +

2 9 3 4 8 7 3 , 3 8 0 # # # # # # 8 7 . 8 8$ # # # # # #

5 0 5 4 9 8 3 8 9 5 0 . 5 7$ 10 . 11$ # # # # # #

3 4 4 9 5 8 9 3 2 12 1. 16$ 2 4 . 2 3$ # # # # # #

12 4 3 0 9 3 , 0 4 9 # # # # # # 7 9 . 2 7$ # # # # # #

2 3 4 0 9 8 4 0 , 5 9 8 # # # # # # # # # # # # # # # # # #

Finished Goods/Raw Mat�l

Runout Plan

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Internal, Sales,And Customer

Communication

Step 1. Identify Candidates

The Four Steps to Effective Product Line Optimization

Quantitative RankingAnnual VolumeAnnual GPAnnual VCM

# of SKU�s Contributing Each 10% of Volume

SKU/Volume Mix

86%

5%3%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

% of SKUs % of Volume

467 SKU's

29 SKU's

10 SKU's

10 SKU's

7 SKU's

5 SKU's

2 SKU's

2 SKU's

2 SKU's

2 SKU's

# of SKU�s Contributing Each 10% of Annual Gross Profit

SKU/Annual GP Mix

69%

13%

7%

4%3%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

% of SKUs % of GP

526 SKU's

97 SKU's

54 SKU's

31 SKU's

21 SKU's

14 SKU's

9 SKU's

6 SKU's

4 SKU's

2 SKU's

SKU/VCM Mix

69%

10%

11%

10%

9%

10%

4%

10%

2%

10%

2%

10%

2%

10%

1%

10%

0%

10%

0%10%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1 2% of SKUs % of VCM

# of SKU�s Contributing Each 10% of Variable Contribution Margin

List of CandidatesWith supportinggraphs & info

Supply Chain InputOperationsLogistics

Category AnalysisID redundancies

ID substitutes

�3 Strikes� AnalysisID bottom X% on all

criteria

Quantitative RankingAnnual VolumeAnnual GPAnnual VCM

Step 1. Identify Candidates

The Four Steps to Effective Product Line Optimization

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Drop & Sacrifice

Drop & Substitute

TolerateUp or Out

SupplyChain

DuplicateVCMGPVolumeDescriptionSKU

PROPOSED ACTION PLANREASONS/CRITERIA

Step 2. Evaluate and Develop Action Plan

The Four Steps to Effective Product Line Optimization

� Present List of Candidates to Cross-Functional Team

� Discuss and understand why each Candidate is on the list

� Develop Proposed Action Plans for all Candidates

Step 3. Project the P & L Impact of Potential Action Plans

The Four Steps to Effective Product Line Optimization

� Define 1-5 Action Plan Scenarios ranging from Conservative to Aggressive

� Perform P&L calculations to determine the annual impact

Step 4. Decide, Communicate, and Implement

The Four Steps to Effective Product Line Optimization

� Finalize Action Plan

� Determine Finished Goods and Raw Material inventories and runoutdates

� Develop timetable for discontinued products

� Communicate with Sales, Internal Departments, and Customers

List of CandidatesWith supportinggraphs & info

Supply Chain InputOperationsLogistics

Category AnalysisID redundancies

ID substitutes

�3 Strikes� AnalysisID bottom X% on all

criteria

Quantitative RankingAnnual VolumeAnnual GPAnnual VCM

2. EVALUATE AND DEVELOP ACTION PLAN•Present List of Candidates to Marketing and Sales•Discuss and understand why each Candidate is on the list•Develop Proposed Action Plans for all Candidates

XXXXStuff8191

XXProduct7281

XXGizmo9827

XXWidget8293

Drop & Sacrifice

Drop & Substitute

TolerateUp or Out

SupplyChain

DuplicateVCMGPVolumeDescriptionSKU

PROPOSED ACTION PLANREASONS/CRITERIA

3. PROJECT THE P&L IMPACT OF POTENTIAL ACTION PLANSDefine 1-5 Action Plan Scenarios ranging from Conservative to AggressiveLoad each into P&L Impact Calculator to determine annual impact

4. DECIDE, COMMUNICATE, AND IMPLEMENT• Finalize Action Plan• Determine Finished Goods and Raw Material inventories and runout dates• Develop timetable for discontinued products• Communicate with Sales, Internal Departments, and Customers, using Communication Templates

1. IDENTIFY CANDIDATES

The Four Steps to Effective Product Line Optimization

Vision for Software includes:

� Step-by-Step Guidance Through the Process

� Import of Standard Product Data

� �One Click� Volume, GP, VCM Mix Charts

� Instant Identification of Candidates

� Templates for Creating Action Plan Scenarios

� P&L Impact Calculator

� Finished Goods/Raw Material Runout Plan

� Internal, Sales, and Customer Communication Templates

Contact me if you�d like to preview or test an early version in 2006

Product Line Optimization Should be�

� Part of the annual plan process�not a knee-jerk reaction to short-term problems

� Undertaken with a long-term focus

� Addressed start-to-finish by a cross-functional team

� Respectful of data as well as marketplace realities

� Communicated consistently and clearly to all stakeholders

Questions or Comments?

Feedback

� What do you like about the process presented today?

� What don�t you like?

� What other problems have you experienced?

� What else would you like to see in a software solution?

Contact me any time:

Dave DeWalt

Franklin Foodservice Solutions

248/539-9370

dave@franklin-foodservice.com

Thank You!