How to Improve SKU Management

Beer Business Finance

Financial Intel for Beer Distributors

“The more inventory a company has, the less likely they have what they need.” Taiichi Ohno

Inventory is the life blood of a wholesaler. Brands and products help define your identity as a business. However, if not properly managed, these same brands can bury you in expenses.

Purchasing inventory is the single biggest outlay of cash that your company incurs each year. In a $50 million company, more than $35 million is spent on inventory.

That is big dough. It’s also a big opportunity to enhance company financial performance by improving your portfolio management and SKU review process.

Managing inventory is a mixture of art and science. It’s a blend of subjective and objective information. There are the numbers (the objective information, the science) and then there’s your gut (the subjective information, the art) The idea is to combine the two and make the best decisions possible for your inventory portfolio and your bottom line.

The New SKU Management Course and this article will provide guidance and strategy on how to manage your inventory portfolio, monitor your key metrics and trim your un-profitable SKUs so that you can improve profit and cash flow.

The road to better SKU Management is just ahead. Let’s go.

SKU Management: Overview

  1. SKU Landscape – Then and Now
  2. Total inventory carrying costs, quantify the problem, fixed + variable, template to capture your costs
  3. The Inventory Scoreboard, Key Metrics
  4. SKU Management Fundamentals: Philosophy + Process
  5. How to identify under-performing SKUs and Fix, Sell or Close

SKU Management: Then and Now

It used to be a lot simpler. Just a few decades ago, beer wholesalers carried 100 SKUs on average. Today, the average is well over 1,000. A ten-fold increase in a short period of time.

In addition to SKU count growth, the number of craft breweries has increased five-fold in the last ten years from 1,500 to over 7,000.

The growth in both areas has created a phenomenon called SKU ‘intensity’ – the increase in package types per brand. In the past, a beer brand might be available in half-barrels and 4/6 pack bottles.

Today, beer is being packaged in 12oz cans, 16oz cans, 6packs, 12packs, 15packs, and so on. You might have five or ten different packages for the same beer. Now, that’s intense.

Non-beer SKUs are also being added to the mix: Wine, Non-Alcohol, and snacks for example. These fill up the delivery truck and can help get you more profitable stops. They also fill up the warehouse and create additional challenges to manage the inventory.

How did this happen?

You know how it happened…

Consumers demand a wide variety of choices. They want what’s new and what’s different.In order to keep up with ‘new and different’ you have to carry new breweries, new packages, and new styles.

New and different drives the growth of SKU’s in your portfolio. The simpler times of consumer brand loyalty is on a hiatus.

Distributors and retailers scrambling to meet the demands, sometimes managing by FOMO – Fear of Missing Out on the next big thing. As a result, distributors take on more brands, the SKU count goes up, and your cash flow goes down.

Distributor Evolution

In response to all this change, distributors have needed to evolve.

Specialized sales teams have been added to focus on craft. Sophisticated warehouse and inventory systems have been installed to keep track of all the new SKUs. And higher skills and new training for employees has been needed to keep pace with these new systems.

Change is nothing new for distributors, and the evolution of the business has been constant. The SKU challenge is just one more in a series of changes.

SKU Carrying Costs

So, let’s get into the nitty gritty: What is the cost to your business of these SKU increases?

In other words, how much more does it cost if you have 500 SKUs or 1,000? How about 1,500 SKUs or 5,000?

To answer the question, we’ll begin an assessment and calculation of Cost to Carry. This metric captures all costs that are included in managing, maintaining and holding your inventory.

Interestingly, studies show that 65% of companies don’t calculate carrying costs. If you don’t know your costs it is difficult to manage and improve them.

The main purpose of calculating your Cost to Carry is to identify controllable costs, and use this information as a basis for making decisions on managing breweries, brands and SKUs.

SKU Carrying Costs: Rules of Thumb

The average cost to carry inventory is 25% of inventory value. The number varies greatly from company to company, with percentages ranging from 18 to 75%.

The calculation works like this:

Add up all the expenses to manage, maintain and hold your inventory, then divide by the average on-hand inventory value.

Total Costs to Carry $500,000 divided by Inventory Value of $2,000,000 = 25%

SKU Carrying Costs: What’s Included

Below is a listing of costs that are typically included in the calculation:

  • Rent / Lease expense
  • Utilities
  • Wages: Operations Team
  • Wages: Admin Team
  • Breakage, Out of Code, Shrinkage
  • Destruction Costs
  • Insurance
  • Depreciation
  • Cost of capital (interest)
  • Transportation / Handling
  • Taxes

SKU Carrying Cost Template

To create your schedule of carrying costs, follow the steps below:

  1. List out costs associated with holding inventory. Use the list above, add/subtract based on the specifics of your beer business.
  2. Identify the basis for the cost – those factors that drive the cost. For example, hours and labor rates drive the wages, and square footage drives lease costs.
  3. Quantify the total annual cost for each item.
  4. Identify fixed costs and variable costs. Fixed costs are those that stay the same if you have 100 SKUs or 1,000.Variable costs will increase or decrease depending on the amount of inventory.
  5. Highlight those costs you can control/reduce.
  6. Calculate and input your average on-hand inventory value.

SKU Carrying Costs: Hard Costs vs Soft Costs

The items above are the Hard Costs, the actual dollars, spent on carrying inventory. There are soft costs to consider as well.

Soft Costs:

  • Opportunity costs: ‘the loss of potential gain when one alternative is chosen over another’. We have finite resources, so when dollars are invested in one brand or one SKU they aren’t available to invest in something else (other brands, other business opportunities, etc.)
  • Focus costs: The sales team can only handle so much, overload, distraction, and confusion costs money. Too many SKU’s and brands can become too much to focus on.

Soft costs are difficult to quantify, and don’t show up clearly on the income statement. But they do affect the price you pay to manage inventory.

SKU Inventory Metrics

Management of inventory can become a game of don’t run out, but don’t have too much on hand. Set proper expectations and use numbers to measure those expectations.

SKU Inventory Metrics help quantify what good inventory management looks like.

The Four Key Metrics of Inventory Management

  1. Days on Hand. Measures “Don’t have too much.”
  2. Out of Stocks. Measures “Don’t run out.”
  3. Out of Code. Watch and manage code dates.
  4. Inventory Variances. Count and safeguard your inventory.

Sign up for the New SKU Management course to get the presentation video, full Guide book, and spreadsheet templates. Your cash flow will thank you.

Yours in SKU Management,