Case Study: More or Less Product Choice? Stock Keeping Unit (SKU) Management and internal alignment at Clorox

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1 Case Study: More or Less Product Choice? Stock Keeping Unit (SKU) Management and internal alignment at Clorox Remko van Hoek, Cranfield School of Management, UK and Anthony Mitchell, Ashridge Business School, UK Outline of Case The Clorox Company is a US-based leading manufacturer and marketer of consumer products with fiscal year 2007 revenues of $4.8 billion. With 7,600 employees worldwide, the company manufactures products in 25 countries and markets them in more than 100 countries. Clorox has grown for six consecutive years. In this case we will set a context with an overview of the US and then the European market in which Clorox operates. This will provide a background to key markets, competition, products, distribution / sales channels and to the recent trends in the market. The focus of this case then shifts to organizational alignment and managerial decisions on product range and in particular, stock keeping units (SKU) at Clorox. Exhibit 1: Clorox Product Range / Market segments

2 US Market Continued growth in The US household care industry has grown moderately in current value terms in 20, growing faster than in 20 and previous years. Laundry care, the largest range of household care, drove growth in 20, as did air care and dishwashing products. All three benefited from new product development accompanied by extensive advertising. Consumers proved willing to pay extra for added benefits such as a laundry detergent comprised of essential oils to offer new and relaxing fragrances such as Water Lily & Jasmine (Tide Simple Pleasures) and an air freshener that alternates between two complementary scents (Febreze Noticeables). Going green The green movement is becoming mainstream with consumers and manufacturers showing increased interest in environmental issues. In November 20, Wal-Mart CEO Lee Scott announced numerous environmental initiatives: to improve the fuel efficiency of its trucking fleet (the second largest in the US) by 25% in three years, doubling it within ten years; to reduce energy consumption in stores by 30%, and to reduce waste in US stores by 25% over three years. In September 20, the company unveiled an initiative to reduce overall packaging by 5% by 2013, encouraging its 60,000 worldwide suppliers to cut usage and conserve natural resources. As a result, Procter & Gamble announced in May 2007 that it would convert its entire liquid laundry detergent line to a 2x concentrated formulation beginning in September Discounters continue to gain share While supermarkets/hypermarkets still accounts for the largest share of total value sales of household care products in the US, discounters such as Wal-Mart and club stores and dollar stores (both tracked in Others ) have been growing their share at the expense of groceries. Wal-Mart and other discounters have succeeded in encouraging more frequent visits by expanding their food selections. Sales declines ahead Household care is projected to experience a decline in constant value terms between 20 and Due to the maturity of the household care industry in the US, and the high level of household penetration for these products, it will be difficult to increase volume sales in the forecast period. Value sales and unit prices are also forecast to decline, as more consumers are expected to migrate to value-priced retailers such as Wal-Mart Stores and dollar stores. As a result, manufacturers will find it difficult to raise prices between 20 and Surface care and air care are expected to show very slight gains over the forecast period. Within surface care, consumers concern about germs and bacteria should aid sales of antiseptics/disinfectants in the next few years. Due to maturity, electric air fresheners sales are projected to grow at a lower rate than that experienced between 2001 and 20.

3 Luxury claims aim to reinvigorate the European laundry market 2 Although the Western European laundry care segment was worth nearly US$31 billion in 20, representing over 47% of total household care products' revenue, value growth in developed markets has been under increasing pressure. Euro slowdown This slowdown has been due to unfavourable demographics in many of the major European markets, as well as further penetration of discounters and the use of laundry products as loss-leaders by key supermarket chains. In order to try and boost value growth, manufacturers have unleashed a number of product innovations, all of which promote the idea of luxury. There is an increasing focus on fragrance, as well as the appearance of indulgent products and those claiming aromatherapy benefits. Henkel launched 'Persil with a touch of Vernel' in early 20, featuring essential oils and stimulating aromatherapy fragrances. In the UK, Unilever launched a new luxury fabric softener, Comfort Crème, which is aimed at those women who want a 'pleasure-seeking' experience. Success or failure? Although the development of more luxurious products was intended to boost sales, by using the UK as an example, it is possible to see that things do not always work out as intended. Despite manufacturers launching a number of new 'indulgent' and 'lifestyle' products, the market continues to decline in value, with Euromonitor International's latest figures showing a further 1.5% decline in 20. However, a number of other European markets did see growth in 20 as consumers were persuaded to experiment with novelty. France, for example, went from a decline of 4% in 20 to growth of 1% in 20, partly due to rises in the marketing support offered to products such as P&G's Ariel. The German market also saw signs of recovery, moving from a decline of 6% in 20 to growth of 3% in 20, with sales revenue being boosted by price increases, but also by a willingness amongst consumers to try out new more expensive products. This changing consumer attitude helped to boost shares of the market's two leading players, Ariel and Persil, both premium brands. Positive signs set to continue? Brands are also likely to increase the pace, at which they introduce new fragrances into the market. This allows them to keep their product fresh in consumers' minds and encourages consumers to stay loyal instead of experimenting with other brands. Additionally, Product Managers need to work with retailers to ensure that brands are not offered at a steep discount or as part of two-for-one promotions in order to attract consumers into the store. This is a problem that has affected sales of alcoholic drinks and tissue products, in particular, where prices have been continually marked down and consumers have now come to expect low prices.

4 RECKITT BENCKISER 3 is not a household name, but as one of the world's biggest makers of household cleaningproducts it has become the star of a staid industry. As the company announced results for 2007, analysts and investors expected impressive growth in sales and profits, and a preview of new products with peculiar names. Sales were up 7% to 5.3 billion ($10.4 billion) and profits up 15% to 9m. The firm will soon launch Vanish Oxi-Action Magnet, a stain remover in a sachet, and an improved version of Cillit Bang Multi Power Lime & Grime and Degreaser. Exhibit 2 : 2007 Competitor Sales The company s CEO, attributes success to its innovative and entrepreneurial culture. Up to 40% of Reckitt's sales come from products that are less than three years old. Innovation is not driven by high expenditure on research and development, but by the company's insights into consumer habits. For 2008 the company has set a target of 7% sales growth and 10% profit growth, by continuing a push into consumer health care. It is thought that consumer-goods firms are far better than drugs companies at retailing, and are therefore well suited to selling over-the-counter (OTC) drugs in supermarkets and chemists. Reckitt's spending on marketing is equivalent to a hefty 12% of sales, but no plan cuts are planned. Rising commodity prices will result in higher prices for consumers in some cases, though this may not affect sales, since the products are necessities and represent a small fraction of total household spending. Product Proliferation at Clorox 4 Companies want to grow, even in challenging, changing and tough markets, and one of their most common growth strategies is to create new products. These may increase revenues, but of course they do not guarantee profits. The previous sections have clearly underlined the product proliferation and renewal tendency in the consumer products industry, generating financial performance pressure on leading companies in the industry. Unfortunately, product proliferation often reduces margins, drives inventory increases, reduces manufacturing and sourcing volumes and can trigger service challenges. One company found that the bottom 40% of its products generated less than 3% of revenue, and the bottom 25% of its products were highly unprofitable. As a result companies need to consider their product mix and consider rationalizing their product mix or SKU s to increase profitability and service effectiveness. In that spirit, Clorox, found that it needed to address the problem of underperforming products. Between 1998 and 2001 its SKU count had increased by 50% while the company s net profit

5 margin dropped from 9.6% to 7.9% between 2000 and It found that 30 percent of the company s stock keeping units (SKUs) were falling short of sales volume and profit goals. Visible effects included: Sales staff anxious to make bonus and hit target, constantly asking for more product and more specials for important customers. Supply chain staff concerned with out of stock and inventory mix and customer service challenges to fulfill the ever-growing product range. Clorox responded to these common tensions and concerns by developing a formal process for evaluating SKU performance and making decisions about which products to cut, and at the same time to address internal alignment issues. Here s how the process works: As part of the annual business-planning process, yearly reduction goals are established for underperforming SKUs, and a glide path (with specific goals for each month) is put in place for reaching the goals. A cross-functional SKU management process team, sponsored by the CFO and led by the director of supply chain planning, meets monthly to track progress, spotlight businesses that are off target, discuss process improvements, and resolve policy issues. The team includes director- or VP-level representatives from sales, marketing, finance, and product supply. This team uses a dashboard to evaluate the performance of all SKUs against annual sales volume and profit hurdles. The dashboard also rates the performance of each business according to the proportion of SKUs that meet goals. Businesses are graded green if they are exceeding targets, yellow if they are within 5% of targets, and red if they are more than 5% below targets. Red businesses are required to specify tactics for bringing their proportion of lagging products in line with goals. The executive teams of red businesses have to identify underperforming SKUs that will be eliminated and describe the strategy for eliminating them. Like any business tactic, product rationalization should be approached cautiously. Many companies have attempted to address the issue of underperforming products by ruthlessly cutting the product portfolio. The risk is that a company cuts too deeply into its revenue streams and discovers it has discontinued products that key customers care for, damaging important relationships. Clorox frequently reviews product lines with customers to make sure that it s cutting the correct SKUs. Today, more than 90% of Clorox s SKUs meet volume and profit targets. Retail sales per SKU have grown by more than 25%, and net customer sales per SKU have almost doubled over the past four years. Clorox now leads its peers in retail sales per SKU in the majority of its categories. Any company can create an SKU dashboard. But the effort will only work if it becomes embedded in the company s strategy. See examples below of Clorox SKU dashboard (Exhibits 3 & 4)

6 Class to work in table groups chosen to represent: supply chain, sales & marketing. Case questions: 1. What are the reasons for and against SKU rationalization from the perspective of supply chain and sales & marketing? 2. What are possible implications and learning points from this case for supply chain executives, CEO s and the senior executive team?

7 Exhibit 3: SKU Management Dashboard Category Name Category Owner Aggregate Company Performance BOM SKU s, DMH EOM SKU s. DMH BOM SKU s, DNMH EOM SKU s Total, DNMH EOM SKU s Total Glidepath for SKU s DNMH Target (DMH + Allowance) Gap vs Target Unfav/(Fav) SKU s Excluded EOM % SKU s DMH BOM SKU s, DMH EOM SKU s, DMH BOM SKU s, DNMH EOM SKU s Total, DNMH EOM SKU s Total Glidepath for SKU s DNMH Target (DMH + Allowance) Gap vs Target Unfav/(Fav) SKU s Excluded EOM % SKU s DMH Green<=Tgt, Yellow<5% of Tgt, Red > 5% Tgt Gap vs Target % FY20XX Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Upper Action Limit Glidepath Key: BOM = Beginning of Month; EOM = End of Month; DMH = Product Type 1; DNMH = Product Type 2

8 Laundry General Manager Total Clorox Clorox CFO Exhibit 4: SKU Management Dashboard Example ILLUSTRATIVE ONLY FY20 Jul- Aug- Sep- Oct- Nov- Dec- Jan- Feb- Mar- Apr- May - Jun- BOM SKU s, DMH EOM SKU s. DMH BOM SKU s, DNMH EOM SKU s Total, DNMH EOM SKU s Total Glidepath for SKU s DNMH Target (DMH + Allowance) Gap vs Target Unfav/(Fav) (2) SKU s Excluded EOM % SKU s DMH 95% 95% 95% 91% 97% BOM SKU s, DMH EOM SKU s, DMH BOM SKU s, DNMH EOM SKU s Total, DNMH EOM SKU s Total Glidepath for SKU s DNMH Target (DMH + Allowance) Gap vs Target Unfav/(Fav) (29) (23) (16) (9) 5 SKU s Excluded EOM % SKU s DMH 87% 87% 87% 87% 87% Green<=Tgt, Yellow<5% of Tgt, Red > 5% Tgt Gap vs Target % -2% -2% -1% -1% 0% Upper Action Limit Glidepath Key: BOM = Beginning of Month; EOM = End of Month; DMH = Product Type 1; DNMH = Product Type 2

9 1 2 Adrian Atterby; Industry Analyst Household Care Products: adrian.atterby@euromonitor.com 17 Sep The Economist February 16 th 2008 pg 76 4 Growing by Cutting SKUs at Clorox by Remko van Hoek and Kevin Pegels HBR April 20