In 2004, entrepreneur Chris Anderson authored the revolutionary principle of the “long tail,” describing a retailing strategy based on selling a large variety of products at a lower sales volume, which is at the very heart of today’s retail business, led by Amazon. However, as a direct result of diversifying product portfolio to satisfy infinite consumer preferences, retailers now have far too many SKUs to sell.
On average, leading retailers sold up to 40 different types of toilet paper prior to the pandemic. The supply shortages in the early months of COVID-19 prompted them to drop that variety count to single digits. In the last 12 months, as customers experimented less and switched to more familiar or “traditional” items, there has been a historic demand drop in stockpiled long-tail products that retailers had previously banked on moving.
Today, with nearly all industries facing supply chain disruptions as customer demand narrows and inventories pile, “trimming the tail” has become the need of the hour. Retailers such as Bed Bath & Beyond, Nordstrom and Coach have been slashing product SKUs at a frenetic pace over the last six months in a concerted effort to improve cash flow.
However, reacting to current supply chain disruptions by temporarily slashing SKUs is not a solution that builds long-term resiliency and drives profitable growth. In fact, the pandemic has concealed for many that COVID-19 was only one of several extraordinary forces causing supply-side and demand-side shocks. GEP recently commissioned The Economist to survey 400 U.S. and European C-suite leaders and found most companies expect supply chain disruptions to continue, with geopolitical risks, highly fluctuating consumer demand, regulatory changes and cyberattacks the biggest concern moving forward.
To build a post-pandemic cost structure, retailers need to be far more deliberate and effective at selling more of less to improve liquidity and drive sustainable competitive advantage. To do it successfully, we recommend retailers follow these five strategic imperatives:
- Prioritize SKUs differently than last year. Create a product tree through categorization of products based on analysis of key metrics, specifically the cost of manufacturing, cost of raw materials, and sales. This tree should classify each SKU into:
– Growth: Products that demonstrate a steady increase in terms of consumer demand and are potentially long-term revenue generators.
– Core: Products that define the brand (i.e., the SKUs that make the greatest contribution to profits).
– Tail: Products that can be shelved for now and revisited when the demand is favorable.
- Consolidate, consolidate, consolidate. Minimize and consolidate in every possible way across the organization, be it in volumes, suppliers, procurement processes, or manufacturing methodologies to leverage economies of scale.
- Leverage this work for better terms from suppliers. Secure volume discounts by culling variety and volume of suppliers. Keeping costs low means better ways to manage inventory and distribution in real time, and safeguards cash and investments.
- Improve cross-category visibility. Create processes and policies that increase collaboration and visibility across departments to minimize deviations and help mitigate the risk of relapsing into SKU proliferation.
- Utilize data-driven demand sensing. Today, forecasts are often built on spreadsheets, based on historical sales date and adapted somewhat over time — often called “variance to plan.” Instead, use machine learning and artificial intelligence-driven demand forecasting to react quickly and be demand-led. Software-based “situation rooms” provide retailers with visibility into key suppliers and customers to ensure purchasing occurs only when there is both demand and capacity.
By flipping Anderson’s retailing strategy on its head, retailers become more agile, resilient and responsive for the new world order.
Prabhav Pattapurati is a Senior Consultant at GEP, enabling global companies in chemicals, healthcare, retail and FMCG sectors to achieve their business goals through procurement, operations and digital transformation