In Fall of 2016, Cicero conducted an extensive strategy project for a multinational distribution company specializing in animal health products. The team worked with a breakeven business unit with goals of increasing operating margin by 2.5% while increasing revenue 50% over three years. The BU was facing a variety of operation and logistical challenges, including having a large SKU set and minimal control over the addition of new SKUs.
By strategically reducing SKU count by 44%, Cicero increased the client’s net operating margin by 29%.
The team hypothesized that the client could narrow their SKU set by eliminating unprofitable products without greatly affecting the business unit’s top line. Cicero gathered detailed data on every SKU in the product set, managing for high levels of seasonality, and calculated item-level profitability. Cicero worked with internal stakeholders to pair the results of this analysis with market knowledge and ultimately recommend a set of products for elimination from the product set.
As some unprofitable products are necessary to maintain relevance within an industry, Cicero also developed and implemented geographic and customer-type restrictions to further reduce costs associated with these unprofitable SKUs.
The client implemented Cicero’s recommendations and eliminated over 4,500 unprofitable SKUs, increasing net margin by 29% with only a 5% reduction in total revenue.
The client is now implementing the same approach across multiple business units to increase company-wide profitability on a larger scale.
Project Results and Impact
|Total SKU Count||Profitable SKUs||Unprofitable||Highly Unprofitable||Products with less than $1,000 in total sales||Revenue||Gross Margin||Net Profit Effect*|
* Gross margin less freight cost