In the fast-paced world of consumer goods manufacturing, companies constantly face pressure to diversify their product offerings to meet evolving customer preferences. However, this expansion often leads to an unexpected challenge: Stock Keeping Unit (SKU) proliferation. Before manufacturers can address this complex issue, they must first recognize its presence and understand its implications. This recognition phase is critical for implementing effective solutions that balance product variety with operational efficiency.
What is SKU Proliferation?
SKU proliferation occurs when a company’s product portfolio expands beyond what can be efficiently managed and profitably maintained. Each unique product variant, whether differing by size, color, flavor, or packaging, requires its own SKU. While offering variety can attract customers and capture market share, unchecked growth in SKU count creates operational complexity that erodes profitability and strains resources. You might also enjoy reading about Assembly Line Operations: How to Recognize Takt Time and Balancing Issues for Improved Efficiency.
Consider a regional beverage manufacturer that started with five core products in 2018. By 2023, responding to market demands and competitive pressures, they expanded to 47 active SKUs across multiple product lines, flavors, and package sizes. While revenue increased by 35 percent, their operational costs surged by 62 percent, and their profit margins actually declined from 18 percent to 11 percent during the same period. You might also enjoy reading about What is the Recognize Phase in Lean Six Sigma? A Complete Guide for Beginners.
The Importance of the Recognize Phase
The recognize phase represents the crucial first step in addressing SKU proliferation. Without proper recognition of the problem, manufacturers continue investing resources into maintaining products that drain profitability. This phase involves identifying symptoms, quantifying the impact, and acknowledging that the current product portfolio strategy requires intervention.
Many organizations struggle with recognition because they lack visibility into the true costs associated with maintaining numerous SKUs. The challenge often hides beneath surface-level metrics that appear positive, such as growing revenue or expanding market presence, while the underlying profitability issues remain obscured.
Key Indicators of SKU Proliferation Challenges
Declining Profit Margins Despite Revenue Growth
One of the most significant warning signs is the disconnect between revenue growth and profit margins. When a consumer goods manufacturer experiences increasing sales volume but shrinking margins, SKU proliferation may be the culprit. For example, a personal care products company reported the following data over three years:
Year 2020:
- Active SKUs: 125
- Revenue: $45 million
- Operating margin: 16.5 percent
- Inventory turnover: 8.2 times annually
Year 2021:
- Active SKUs: 178
- Revenue: $52 million
- Operating margin: 14.1 percent
- Inventory turnover: 6.8 times annually
Year 2022:
- Active SKUs: 243
- Revenue: $58 million
- Operating margin: 11.3 percent
- Inventory turnover: 5.1 times annually
This pattern demonstrates clear SKU proliferation symptoms. Despite revenue increasing by nearly 29 percent over three years, operating margins dropped by 5.2 percentage points, and inventory turnover slowed significantly, indicating excess stock and reduced efficiency.
Increased Inventory Holding Costs
As SKU counts rise, so do inventory carrying costs. More products mean more warehouse space, additional handling requirements, increased risk of obsolescence, and greater working capital tied up in stock. Manufacturers may notice their warehouses reaching capacity despite implementing space optimization initiatives, or they may observe rising storage costs without corresponding increases in sales volume.
Production Complexity and Changeover Time
Manufacturing facilities experience longer changeover times between production runs when dealing with numerous SKUs. A snack food manufacturer discovered that their average changeover time increased from 45 minutes to 127 minutes over four years as their SKU count tripled. This translated to approximately 340 lost production hours monthly, equivalent to over $285,000 in opportunity costs annually.
Supply Chain Strain
SKU proliferation creates forecasting challenges, increases minimum order quantities across more components, and complicates supplier relationships. Organizations may notice increased stockouts of fast-moving items while simultaneously holding excess inventory of slow-moving products. This imbalance signals that the product portfolio has grown beyond the supply chain’s optimal management capacity.
Quantifying the Hidden Costs
During the recognition phase, manufacturers must move beyond obvious metrics to uncover hidden costs associated with SKU proliferation. These costs often include:
Quality Control Expenses: Each additional SKU requires quality testing, compliance documentation, and inspection protocols. A food manufacturer with 200 SKUs might spend three times more on quality assurance compared to a competitor with 75 SKUs generating similar revenue.
Marketing and Sales Resources: Sales teams must learn about more products, marketing materials multiply, and promotional campaigns become fragmented. The dilution of focus often means that resources spread too thin fail to effectively promote any single product.
Product Development Distraction: Companies caught in SKU proliferation cycles often focus on line extensions rather than genuine innovation. Their product development teams spend time creating variants rather than developing breakthrough products that could drive significant growth.
Real-World Recognition Example
A mid-sized household cleaning products manufacturer provides an illustrative case study. The company had grown from 32 SKUs in 2015 to 156 SKUs by 2021. Management celebrated their expanded market presence, but operational teams reported increasing frustrations.
The recognition phase began when the CFO noticed that despite a 48 percent revenue increase, EBITDA margins had compressed from 22 percent to 14 percent. A cross-functional team conducted an analysis revealing that:
- 68 of their 156 SKUs (44 percent) generated only 8 percent of total revenue
- The bottom 100 SKUs collectively operated at a loss when fully loaded costs were applied
- Their top 25 SKUs generated 71 percent of revenue and 94 percent of profit
- Forecast accuracy for products outside the top 50 SKUs averaged only 42 percent
- Obsolete inventory write-offs had increased by 340 percent over five years
This data-driven recognition enabled leadership to acknowledge the proliferation challenge and commit to addressing it through structured improvement methodologies.
Tools and Techniques for Recognition
Pareto Analysis
The classic 80/20 rule often applies dramatically to SKU performance. Conducting Pareto analysis helps visualize which products drive value and which consume resources disproportionately. In many consumer goods companies, 20 percent of SKUs generate 80 percent or more of profits.
Profitability Mapping
True product profitability requires activity-based costing that allocates expenses accurately across the portfolio. This analysis often reveals that products appearing profitable under standard costing actually destroy value when indirect costs are properly assigned.
Complexity Assessment
Evaluating operational complexity helps quantify the burden of managing numerous SKUs. Metrics such as average changeover time, forecast accuracy by product, inventory days on hand, and production scheduling efficiency all provide insights into complexity costs.
Common Recognition Barriers
Several organizational factors can delay or prevent proper recognition of SKU proliferation challenges. Sales teams may resist portfolio rationalization, fearing customer dissatisfaction or lost revenue. Product managers often champion their specific products, creating internal politics around portfolio decisions. Accounting systems may lack the sophistication to reveal true product profitability, allowing unprofitable SKUs to hide within aggregated financial reports.
Additionally, the sunk cost fallacy affects decision-making. Companies hesitate to discontinue products after investing in development, tooling, and market introduction, even when ongoing maintenance costs exceed contribution margins.
Moving Forward from Recognition
Once SKU proliferation is properly recognized and quantified, organizations can progress to subsequent phases of addressing the challenge: analyzing root causes, improving processes, and controlling future portfolio growth. However, without the foundation established during recognition, improvement efforts lack the data-driven justification and organizational commitment needed for success.
The recognize phase transforms vague concerns about complexity into concrete, actionable insights. It replaces assumptions with data and creates the burning platform necessary for change. For consumer goods manufacturers, this recognition represents the critical first step toward optimizing their product portfolios for both market competitiveness and operational excellence.
Take Action Today
Understanding and addressing SKU proliferation requires structured problem-solving methodologies and analytical tools. Lean Six Sigma provides the framework, techniques, and mindset necessary to recognize, analyze, and resolve complex operational challenges like SKU proliferation.
Through Lean Six Sigma training, you will learn to apply data-driven decision-making, identify waste in all forms, and implement sustainable improvements that drive bottom-line results. Whether you are struggling with SKU proliferation specifically or facing other operational efficiency challenges, these proven methodologies equip you with skills that deliver measurable business impact.
Do not let SKU proliferation continue eroding your profitability and operational efficiency. Enrol in Lean Six Sigma Training Today and gain the expertise needed to recognize challenges early, analyze them thoroughly, and implement solutions that transform your operations. The investment in developing these capabilities pays dividends across your entire organization, creating competitive advantages that extend far beyond product portfolio management.
