SKU Reduction – Reverting to 1913 Thinking

   

‘The customer can have any color they want, so long as it is black – and white in the middle.’ That seems to be the latest mantra at a growing number of companies as they wrestle with the philosophies of lean and the lack of responsiveness in their unwieldy supply chains. The ‘black – and white in the middle’ part comes from Mondelēz International, the folks who make Oreo’s and Cadbury products. After waxing euphorically in their latest conference call about their commitment to lean and Six Sigma, they said “by really zeroing in on key consumer needs we can simplify product formats, packages and recipes. This enables us to eliminate skews, reduce complexity and deliver preferred products with stream line technology on fewer production lines. For example, when we acquired the LU biscuit business, it had over 4000 skews in Europe. By applying simplification tools that number will fall to 2500 by 2016.”

SKU reduction is not lean. In fact, it misses the point entirely.

That Henry Ford pioneered lean in the modern era is not up for debate. He did, and Toyota quite openly acknowledged as much. The huge, far and away, critical contribution Toyota made that took manufacturing to dizzying new heights was Single Minute Exchange of Dies (SMED). They had a lot of other very good ideas, but SMED was the critical one – the one that everything else derives from.

Ford was a flow fanatic and his near obsession with continuous flow and absolute faith in its economy enabled doubling worker pay through the $5 day, while simultaneously cutting prices every year until they were half of their original levels; and making staggering profits at the same time. The “every color so long as it is black” adage reflected the core principle that nothing could be allowed to interrupt the flow. Stopping to change paint – or stopping the flow to change just about anything else – would seriously injure the goose that was laying the golden eggs.

Ford’s problem – the big fly in the ointment – was that customers wanted other colors, and a lot of other variations too. One size fits all is a myth. One size actually fits no one and customers will buy that product only until they find the one that fits them precisely. GM solved that problem with batch manufacturing – disjointed manufacturing lines that followed Ford’s continuous flow logic …. to a point. Then they stopped and switched over to something else. And they put mountains of inventory in between the disjointed lines to keep the whole thing moving. Solved the customer problem, but lost out on most of the economics that drove Ford.

Whether Shigeo Shingo actually thought up SMED (as he claims), or he just happened to be hanging around the stamping area at the Toyota plant when others thought it up and rushed out to document it and take credit, SMED was the big breakthrough. Learning to change on a dime from one product to another was the magic key that enabled Toyota to solve the problem – keep the flow going without all of the inventory and thereby realize Ford’s manufacturing excellence and economics, with GM’s ability to deliver more customer specific products.

That is the heart and soul of one piece flow – heijunka. Everything flows from that – 5S to keep the workplace organized to make a wide range of products and keep the flow going, kanban and JIT to keep these flexible operations fed with just the right parts, and kaizen to keep a fine edge on the whole thing. While Ford ran a manufacturing centered business and GM was sales driven, Toyota was able to keep both sides of the house happy – manufacturing excellence with the range of products customers want.

When the Oreo/Cadbury folks eliminate SKU’s to achieve flow they are not pursuing Toyota-style lean; they are reverting to Henry Ford-style lean. The same is true with their Indian competitor Britannia who is “reducing complexity in the front end by cutting down on the long tail of brands/ SKUs, which do not add much value but tie up resources.” They claim to be “aiming at simplifying the systems and processes with focus on bigger manufacturing plants, bigger innovations, lean organisation structure and better distribution, which will enable further cost reduction in coming periods as well.”

The logic seems to be to improve flow by eliminating set-ups and change-overs all together. No doubt it will greatly improve manufacturing costs and performance, but it is hard to see how very many customers are going to be happier as a result. The people who bought the 1,500 SKU’s that are falling by the wayside at Mondelēz International will either have to start eating the SKU’s that are left or, more likely, buy some other brand of cookies closer to their liking. I wouldn’t want to be the guy in charge of sales at either Mondelēz International or Britannia.

Occasional SKU elimination as part of annual housecleaning is common sense, but SKU reduction as a strategy is silly and unnecessary. Why start the lean journey by going back to square one – to 1913-14 thinking when you can skip all of those steps and go right to the next level?

Lean without SMED is not really lean at all. And solving the set-up problem by SKU reduction is simply buying into Ford’s any color so long as it is black theory.

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