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Finding the Right Balance for Procurement & End-User Stakeholders

Managing inventory levels of all types of products, industrial spares, components, tools, and consumables is complex, time-consuming, and expensive. There are often thousands of items to manage across multiple locations. Every item takes up space, uses energy and resources, and contributes to an administrative headache.

What is an SKU?

Individual items are identified using a unique Stock-Keeping-Unit code (SKU). SKUs can be classified in whichever way suits a particular organization’s operations. SKUs are the basis for establishing inventory levels and tracking the location of items, often using barcodes. One SKU, e.g., a drill bit, could be coded as TNNBRA004. This identifies it as a drill bit size 4 from supplier Branded Inc., located in the north section of the Tennessee warehouse.

Controlling the total number of SKUs is a balancing act. Operations want to have efficient warehouses with the optimum stock levels, Production wants items on demand and Procurement is under pressure to save money. SKU complexity impacts demand planning and scheduling, procurement and inventory management. Over time, the number of SKUs tends to rise, and sooner or later, controlling the issue will be required.

Too many SKUs means more:
  • warehouse storage space
  • working capital to fund
  • suppliers to manage
  • administrative work
  • labor and moving equipment
  • energy and facilities used

All manufacturing organizations want to minimize their costs of MRO. Selecting the supplier with the lowest initial purchase price is short-sighted. The total cost of ownership (TCO) of an item is much more than first cost. There are many hidden costs - everyone needs to understand the true cost of an item or service over its whole lifespan.

Rationalizing SKUs

At that point, we must establish how to reduce the complexity. Which items do we need to continue to buy? Which ones can be discontinued, and which items are obsolete and can be scrapped?

Data Integrity

Accurate data is required before any decision relating to how to rationalize SKUs can be taken. Raw or uncleansed data is a perennial problem for all supply chain operations, but it is vitally important for inventory information to be correct. SKU item codes and descriptions must be standard, both internally and with supply chain partners. Ensuring this will eliminate confusion and minimize problems with data analysis and reporting.

Validated data can identify:

  • slow-moving items
  • obsolete and expired items
  • usage levels by warehouse location or region
  • stock turnover per item
  • losses and damage
  • any item sourced from multiple suppliers

Benefits of SKU Rationalization for Procurement 

Reducing the number of SKUs simplifies many activities and creates opportunities for cost reduction. One of the main areas for cost savings is inventory reduction. Less warehousing space required means lower costs; reduced stockholdings mean less money is tied up, which can be used for other purposes.

A second important area for saving is supplier rationalization. Volume aggregation and consolidation of supply lead to better pricing, fewer suppliers, and simpler supplier management. Resulting from this is a reduction in administration and acquisition costs. Fewer SKUs also free up available human resources so they can focus on other tasks.

Any project to reduce the number of SKUs must involve the collaboration of all stakeholders. When an SKU rationalization project is successful, the number of suppliers you must deal with is less, and warehouse storage requirements are reduced. Both lead to substantial cost savings. Consolidation of SKUs helps procurement become more efficient in delivering contracts, reduces inventory management activities, limits working capital, and cuts overhead costs.

Rising SKU levels require constant monitoring. Clear metrics should be agreed upon and implemented to avoid reverting to the original state or worse.

How a GPO Can Help

Your GPO can play a key role in achieving SKU consolidation by monitoring and analyzing expenditure data and identifying areas of opportunity. There are often multiple suppliers for the same item, which leads to the loss of volume leverage and higher prices.

OMNIA Partners has expertise in reducing the costs of managing MRO. We work to bring procurement and supply chain executives tangible value and evidence that the GPO partnership can add value to their business. We have built our Facilities Management and MRO solutions around TCO so we can best address: value-added service, risk mitigation, hard cost savings, consolidation, efficiency, and continuous improvement.