Tips on how to deal with long tail SKUs
Does your company hold on to relatively slow moving SKUs while simultaneously arguing they should be terminated? It’s a love/hate relationship that could be reconciled if these long tail SKUs continued to generate revenue but without tying up cash or capacity.
Often, sales for slow moving or long tail SKUs are lumpy and difficult to forecast. When these SKUs are made to stock then you tie up cash while the product simply sits in inventory, otherwise you may miss your customer’s expectations by being out of stock. However, if you shift the product to made to order then you must establish new expectations for lead times or improve your process to shorten the lead-time.
While 10% of your products may represent the majority of your revenue, the other 90% of the SKUs will likely be the most difficult to forecast due to the lumpy nature of their sales. This can lead to the situation where large parts of your capacity are consumed by the most difficult parts to manage. A common solution is to disrupt your planned schedule in order to meet customer needs, however this leads to further chaos and inefficiency.
When you are at or nearing capacity in your manufacturing facility and you have to choose between making one of your top selling SKUs or one of your long tail SKUs, which will you choose? If the margins are the same, then most likely the long tail SKU will hit back order before you have the capacity to make the product. Adding further insult, dealing with the long tail SKU results in higher manufacturing costs via overtime in labor.
There are many ways to approach this situation but I suggest an approach that:
- Maintains margins
- Frees up capacity
- Meets customer expectations
What if you are able to maintain your margins but share the cost of the overhead needed to expand capacity? This is possible through the use of contract manufacturing services. A nimble contract manufacturer has the ability to manufacture different products for many customers, all while sharing the cost of capital and labor. This results in renewed capacity for key SKUs to be produced by your organization by utilizing your current capital and labor. Now customer expectations will be met for your legacy/long tail SKUs without impacting your ability to produce your latest top selling product!
If you are interested in learning more about how contract manufacturing can help your organization free up capacity, reduce cost, and meet customer expectations, please contact the Argonaut team.