Findings at Unilever Illustrate Why SKU Rationalization Can Be So Essential

By Markets Fool.com

Boasting over 400 brands in its portfolio, Unilever (NYSE: UL) carries thousands of different products across its varying businesses, all sold in varying sizes and types of packaging in countries all over the world. With an estimated two billion people using Unilever products each day, it becomes clear just how complex the company's operations can be.

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In this video fromIndustry Focus: Consumer Goods, the cast discusses howUnilever is working tocontrol the impact of proliferating product variations on its business.

A full transcript follows the video.

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This podcast was recorded on Oct. 12, 2016.

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Vincent Shen: I think it's important to point out that with every item that a company offers essentially, that has costs and investments associated with it. Think the storage of your completed product and the materials needed to create it, packaging, your supplier relationships, the marketing of your offerings, and also disposal in some cases for some products or SKUs that have gone obsolete.

So every dollar a company spends toward one SKU that would have been better spent on another will potentially result in a reduction in the top or bottom line. Or both. So, I think for publicly traded companies, it's fair to say that investors and shareholders place a high value on also the predictability and accurate guidance from management. I think you had mentioned earlier a little bit about forecasts; if you have an overabundance of offerings and SKUs, I think it becomes increasingly difficult to essentially forecast out your expected sales and that can reduce profitability if discounting, for example, is needed to reduce stock or you have to send additional stocks to suppliers because items sold out unexpectedly.

And let's jump directly into one of our two companies. Let's start with Unilever. No. 3 consumer-goods product company by revenue, behind Procter & Gamble and Nestle. Can you tell us a little bit about their efforts and how they've approached SKU rationalization?

Asit Sharma: Sure. So, our supertrend for today is this idea of shrinking SKUs or SKU rationalization and why it's a supertrend and why Unilever is such a great example. We, in our last episode, separated the idea of just a trend from the idea of supertrend by saying if many corporations are out there jumping on this trend and they're both big and small, that is a great indication we're seeing a supertrend.

Unilever fits right in because they're one of the biggest, baddest consumer goods companies on the planet. They have hundreds of brands and literally thousands and thousands of SKUs, and they practice what Vince has mentioned a couple times: SKU rationalization. Let's quickly define that term if you're not familiar with it. It's a really simple concept. SKU rationalization is when you use data and analytics to pare down those underperforming SKUs and then you transfer your resources into the SKUs which are getting market share.

So we're going to use this term a lot, and it's a great way to sound really smart if you're talking to other investors; you can talk about SKU rationalization and your favorite companies. Unilever's multiyear goal is to reduce their SKU by 20%. When you visualize a company which is in hundreds of countries around the globe dealing with local markets, you can imagine the complexity of their operation. So for a company like this to decide to reduce SKUs ... well, let me stop here. Last week we talked about Nike, which I also call "nyke," SKUs are often pronounced as "skews," so if you hear me start saying "skews," same thing.

But this multiyear goal sprung from management's realization that if we undertake this investment, we may reduce revenue somewhat but we're going to have more profitable products. I'd like to talk about one case study. This is something that happened several years ago, when Unilever's U.K. and Irish units combined into one group. When they got together, this was around 2008 to 2009, and they performed an analysis of their SKUs and they found that 60% of product variance contributed just 5% of their sales, but that made up 20% of inventory. And Vince, I know you had also seen that case study. What are your thoughts about that? That really opened my eyes to why a company should jump in and perform SKU rationalization.

Shen: Yeah, those numbers -- notably the 5% of sales and the 20% of inventory -- is unbelievable. This case that you mentioned, I think it was from 2008 to 2009, but even as recently as 2014 Unilever still had about 50,000 SKUs in its portfolio. So it's a monumental task. You know, keeping track of that, managing that, and the fact that, as we'll get into more detail, about how the company and specifically the U.K. and Irish units kind of approached this issue. Really, the results you'll see have had a very direct impact on their financial performance.

Asit Sharma has no position in any stocks mentioned. Vincent Shen has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Nike. The Motley Fool recommends Nestle, Procter and Gamble, and Unilever. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.