Teaching Note. Clorox Case Study

Transcription

1 Teaching Note Clorox Case Study The purpose of this case is to contrast functional perspectives on product range, variety, inventory and service levels. This leads to discussions on incentives, policy, strategy and communication / team working between sales and supply chain in particular. Typically sales tends to want to avoid SKU rationalization for reasons of not removing things it can sell and sales tends to fear not hitting revenue numbers due to SKU rationalization. Whereas supply chain tends to want to rationalize SKU s because it is left dealing with slow moving product and inventory as well as increasing operational complexity resulting from product proliferation, leading to delivery failure risks. Product proliferation is often explained by a desire to grow sales by offering more things to sell and serve customers with but can result in the opposite of that when it distracts sales by making the catalogue too long and limits service capabilities by stuffing the distribution channel with too much product and complexity. Further to that, SKU rationalization is often regarded as a cost cutting or short term inventory fix; the approach adopted at Clorox reveals that inventory and cost issues are symptoms of a more deeply rooted internal alignment challenge. Approaching this problem cross functionally can enable the improvement of service as well as migrate the discussion away from just short term supply chain glitches towards company growth. Exhibit: Downward product proliferation spiral Sales increase targets Missed sales numbers More product to sell Service challenges Some failing product Distribution pipeline stuffed with product Suggested pre-reading: The challenge of internal misalignment, van Hoek R I & Mitchell A J; International Journal of Logistics: research and Applications, Vol. 9, No 3, Sept 2006 pp

2 Results Outcome and outline case answers The highlights of the Clorox approach include: The Clorox executive committee reviews a product and SKU dashboard as part of its ongoing global dashboard review. Product performance is evaluated against so called hurdle rates (are we selling enough to justify keeping the product?) and sets reduction goals in time (Clorox calls this glide paths) for product not clearing the hurdle rate The business is judged upon sticking to the glide path (taking emotion out of the equation due to its fact-base and metric focus) The supply chain is asked to help the business stay on the glide path The glide path concept avoids cutting SKU s too quickly and rigorously without giving SKU s a change to proof themselves or the sales force to manage customer expectations before the cut is made There are also frequent product line reviews with customers focused on what is meaningful and what is not Clorox achieved a 30% product line rationalization, coupled with continued growth, improving return on products and improved customer service levels The approach is simple, does not put supply chain solely in the hot seat but in stead turns it into a cross functional effort, balancing sales and supply chain perspectives The approach does not block innovation as the glide path allows SKU s time to grow and selected hurdle rates can be adjusted to reflect innovation targets, while endless attempts to generate sales volume on products are avoided as well (eventually every SKU needs to cross the hurdle rate or it will be removed) The approach supports growth through focus on productive SKU s and Clears the distribution pipeline and warehouses from slow to non moving SKU s and thereby removes distraction in sales and distribution and frees up response capacity in distribution Basic Principles of SKU Management at Clorox include: Be simple and easy to understand and administer Drive meaningful improvement over time Support growth of high performing SKU s Ensures tension against low performing SKU s Be flexible enough to meet SBU specific business dynamics Be fact-based and metric-driven Involve participative target setting, with commitment and accountability from the business.

3 Clorox SKU Management Rules Rule Type Establish specific hurdles Establish ownership of results Establish specific annual targets and quarterly glide paths Establish a specific 'Final Decision Maker' for approving SKU targets Sample Rule Language "A SKU must meet either the volume or the incremental profit hurdle to be considered a 'Good' SKU. Hurdle rates are defined for large brands and small brands set for annual volume and for annual incremental profit. "Business unit leaders and their teams are accountable for SKU performance by category. Supply chain planning managers within each category own the management process and drive the organization towards meeting the targets." "As part of the annual business planning process, categories set their proposed 'Bad SKU' targets and glide path as well as identifying action plans for each 'Bad' SKU. The Steering Committee will approve these by May 31." "All SKU targets are approved by a SKU Steering Committee, which is led by the Director of Supply Chain Planning and chaired by the CFO" Today, more than 90 percent of Clorox s SKU s meet volume and profit hurdles, up from 70 percent five years ago. Retail sales per SKU have grown by more than 25 percent, and net customer sales per SKU have doubled over the past 4 years. Clorox now leads its peers in retail sales per SKU in the majority of its categories.

4 Question 1: Pros & Cons of SKU rationalization Teaching suggestion: split up the room in a sales and a supply chain camp and have both sides answer question 1 from their respective functional perspective. Consider reminding teams that the Sales function is typically incentivised on revenue whilst Supply Chain tends to primarily be incentivised on delivery service. The discussion should bring out the cross functional tension between the two functions Negatives include: risk of disappointing important customers risk of cutting of future innovation leading to winning products risk of some revenue reduction emotional impact on the company Positives include: continuous pruning of less productive SKU s creates capacity for growth and responsiveness reducing complexity cuts inventory, working capital and material handling costs leading to increased profitability higher SKU productivity vs. the competition enables outselling competition increased volume per SKU allows the company to more effectively serve customers free up operational capacity to serve, make and handle products that are performing reduced fixed assets greater forecasting accuracy, less change-over in manufacturing, increased economies of scale, less storage locations and product items to maintain larger order quantities for suppliers and the ability to rationalize the supply base simplify the sales process and easier offering to customers reduced inventory of slow movers ability for sales and marketing to focus on best products Additionally, the following considerations for the SKU Management Business Case at Clorox include: Continuous pruning of less productive SKU s creates capacity for growth Reducing complexity cuts costs everywhere Higher SKU productivity vs. the competition enables us to outsell our competition Increasing volume/sku allows the company to more effectively service customers Fewer, higher volume SKUs enable more effective forecasting and inventory management, which ultimately improves ROIC A lighter load of highly productive SKU s allows more rapid execution

5 Question 2: Implications and lessons Implications for the CEO: In the next customer meeting, ask the customer what product they do not want in stead of what else your company can do for them Do not get too deeply involved, keep it scientific and limit engagement to signaling the importance of the topic Implications for the senior executive team: Stop creating product for the sake of growing the company, do it for innovative reasons or based upon specific customer requests but stop pulling the product lever for the sake of it Do not leave the supply chain organization in charge of SKU rationalization, let supply chain flag business units and offer help only Take emotion out of the equation; audit product against hurdle rates and set glide paths for those products that do not clear the hurdle Assign a spotlight; let the controlling or auditing group create the dashboard and keep it going to avoid loss of attention span SKU management should never be an initiative, sustain the effort by auditing the dashboard and glide path at least monthly, this avoids a common pitfall for many companies that quickly cut a lot of SKU s but do not change process and tend to find a SKU tail reappear almost as quickly as it was cut Do not go overboard; never cut 100% of products that do not make hurdle rates, ensure the effort does not cut off innovation and some future markets that require a little bit of time to develop but do keep checking Implications for the supply chain executives working with the executive team: Use the customer as an ally; key customers will be happy to help make tough product choices where it is hard to deselect product or where there is internal resistance Get on the calendar; SKU efforts fail if the right questions are asked at the wrong time, make sure all efforts are linked to the core business workflow otherwise they are going to be perceived as extra work on top of the already busy calendar Leave it to the business; do not impose the issue or try managing by controlling, in stead offer getting the business on the glide-path, but let the numbers drive the agenda Not all SKU s are bad; some innovation efforts are important for future growth, even if it means these SKU s might temporarily under-perform. Hence a certain percentage of the SKU count may be below thresholds, the acceptable percentage is dependent on the nature of the business Never say no; supply chain teams are often perceived as being best at saying no in stead of helping the business succeed See also 2007 Clorox Annual Report with feature on Product Supply & Demand which explicitly mentions the contribution by Supply Chain to cost reduction, improved product availability, innovation and product launches. Additionally the company reports continued sales growth, improved operating profit and cash from operations. This is clear testimony to Supply Chain s contribution to overall company growth and how SKU rationalization risks can be turned into company opportunities.