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Eight twentyruleblog030612

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Bert Shlensky
Bert Shlensky

The 80-20 rule states that 80% of sales typically come from 20% of products. While companies try to increase variety to serve more customers, this often does not increase profits and creates unnecessary complexity. Streamlining product lines by consolidating styles and reducing SKUs can increase sales by improving inventory levels of best sellers and reducing customer confusion. Focusing efforts on a core selection of high performing products and simplifying decisions for customers is generally a better business strategy than proliferating offerings.

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EightyTwenty Rule Rocks Operations experts have long promoted that 80% of sales come from 20% of the products. However, suppliers continue to create more styles, colors, sizes, and models to presumably serve more customers and their varying needs. There is even a book that promotes the concept of The Long Tail theorizing that the internet provides an opportunity to offer consumers almost unlimited variety and flexibility. The flexibility rule is a myth. The 80-20 rule truly runs business,marketing, and our personal lives. A Harvard Business Review article analyzed numerous business examples and found that products seldom increased profits by increasing offerings. We waste time, money, inventory dollars, and frequently add confusion by adding complexity. The tough economy has produced a great opportunity to reduce proliferation of products that just arent selling. The selection of brands, products, and colors in cosmetics is simply overwhelming--confusing the customer more than anything. It took a crisis for GM to realize that most of their efforts were going into duplicating Buick, Pontiac, and Oldsmobile products, models, dealers, and advertising to basically sell the same car. Much of the success Costco has experienced is by focusing on the best price for the things that sell rather than proliferating SKUs. There are various ways to reduce SKUsand increase sales. All of these strategies center on the premise of havingkey items in-stock while maintaining low inventory levels on low-volume items. While this applies to most organizations, it is not applicable to businesses that are based on serving diverse needs like parts suppliers or retailers featuring selection or niche markets. Some examples are below: As the head of a leading moderate price dress shirt company, we were looking to streamline our supply chain. We implemented a strategyto halve our SKUs by consolidating sleeve lengths. For example we used to make separate 33 and 34 inch sleeve lengths and consolidated them into a 33/34 length which was actually a 34 inch length. The results were spectacular. Returns went down because people didnt really know their size and were buying them too small. Sales went
up because the retailers were better stocked. Retailers also used some of the inventory reduction to buy more styles and colors--further increasing sales. Nordstroms has taken this one step further by consolidating their entire on-line and in-store inventory in one system. The stores stock all the key items,sizes, and colors, but they allow customers to order online or from other stores with 1-2 day delivery if they are out of stock of any item they might want. The highest priority is to be in stock on what sells most frequently and then to feature those items. This means better merchandising by size, color, price, and features. Many times this can improve sales by reducing consumer confusion and simplifying the decision process. The best solution to mostsales problems may simply be to get rid of many of the poor efforts and capitalize on the best existing products. Providing excellence in what we do best is simply a better strategy than diverting our time, money, and energy in projects that wont work.

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Eight twentyruleblog030612

  • 1. EightyTwenty Rule Rocks Operations experts have long promoted that 80% of sales come from 20% of the products. However, suppliers continue to create more styles, colors, sizes, and models to presumably serve more customers and their varying needs. There is even a book that promotes the concept of The Long Tail theorizing that the internet provides an opportunity to offer consumers almost unlimited variety and flexibility. The flexibility rule is a myth. The 80-20 rule truly runs business,marketing, and our personal lives. A Harvard Business Review article analyzed numerous business examples and found that products seldom increased profits by increasing offerings. We waste time, money, inventory dollars, and frequently add confusion by adding complexity. The tough economy has produced a great opportunity to reduce proliferation of products that just arent selling. The selection of brands, products, and colors in cosmetics is simply overwhelming--confusing the customer more than anything. It took a crisis for GM to realize that most of their efforts were going into duplicating Buick, Pontiac, and Oldsmobile products, models, dealers, and advertising to basically sell the same car. Much of the success Costco has experienced is by focusing on the best price for the things that sell rather than proliferating SKUs. There are various ways to reduce SKUsand increase sales. All of these strategies center on the premise of havingkey items in-stock while maintaining low inventory levels on low-volume items. While this applies to most organizations, it is not applicable to businesses that are based on serving diverse needs like parts suppliers or retailers featuring selection or niche markets. Some examples are below: As the head of a leading moderate price dress shirt company, we were looking to streamline our supply chain. We implemented a strategyto halve our SKUs by consolidating sleeve lengths. For example we used to make separate 33 and 34 inch sleeve lengths and consolidated them into a 33/34 length which was actually a 34 inch length. The results were spectacular. Returns went down because people didnt really know their size and were buying them too small. Sales went
  • 2. up because the retailers were better stocked. Retailers also used some of the inventory reduction to buy more styles and colors--further increasing sales. Nordstroms has taken this one step further by consolidating their entire on-line and in-store inventory in one system. The stores stock all the key items,sizes, and colors, but they allow customers to order online or from other stores with 1-2 day delivery if they are out of stock of any item they might want. The highest priority is to be in stock on what sells most frequently and then to feature those items. This means better merchandising by size, color, price, and features. Many times this can improve sales by reducing consumer confusion and simplifying the decision process. The best solution to mostsales problems may simply be to get rid of many of the poor efforts and capitalize on the best existing products. Providing excellence in what we do best is simply a better strategy than diverting our time, money, and energy in projects that wont work.