Efficient product rationalization within a single product portfolio

Abstract

Product proliferation is a problem seen in many large consumer packaged goods (CPG) companies. Effectively managing the supply chain when the product portfolio is constantly growing is a complex task for management. Without proper assessment of the product portfolio, companies can easily run into the danger of adding products that only result in reducing profits. One approach to effectively manage the product portfolio is stock keeping unit (SKU) rationalization or product rationalization. SKU rationalization is an overall performance assessment on the company's product portfolio and focuses on reducing the inventory cost by eliminating underperforming products. However, there is no universal performance measure for wholesalers and retailers to use. The definition of an underperforming product may vary depending on management's goals and performance metric used. Although finding a suitable performance measure is challenging, successful implementation of weeding out underperforming products will improve inventory policies and the company's supply chain operations will run efficiently at a reduced cost, thus increasing profits. In this study, we explore the feasibility of using the performance metric gross margin return on inventory investment (GMROI) as the objective function and develop two product rationalization models: (1) Overall GMROI and (2) Individual GMROI. The models maximize GMROI metrics at reduced inventory investment levels and portfolio size, while ensuring certain inventory turnover level. The nonlinear fractional overall GMROI model is solved by Dinkelbach's Algorithm. While we are able to solve the overall GMROI model for the global optimal, its recommended solutions may not be practical. On the other hand, the individual linear (0-1) integer GMROI model provided good solutions in terms of gross margin and inventory turnover. The models were tested using the portfolio of 1120 products of a CPG company.