Understanding Order Fulfillment – The Downsides of High SKU Counts
Understanding Order Fulfillment: The Downsides of High SKU Counts
E-commerce sellers frequently maintain high SKU counts in an effort to either increase the average number of items per order, attract a more diverse set of customers, and/or as a byproduct of a never-ending search to identify outstanding new products. For those pursuing traditional drop shipping strategies, a SKU-heavy approach usually makes sense as there is little to no marginal cost associated with listing additional SKUs (assuming, of course, that all SKUs come from the same source and can be aggregated without substantial cost when ordered together); however, for firms which maintain inventory (either because they must or because they chose to do so), SKU-heavy approaches are problematic for several reasons:
They demand more working capital;
They oftentimes increase operational costs (which can easily offset bulk price discounts);
They complicate not only the supply chain, but also the sales, marketing, and service functions of a business.
With few (if any) exceptions, resource-constrained sellers who either need or choose to hold inventory are more likely to survive—and, thereby, have a legitimate chance to thrive—by pursuing leaner SKU count strategies.
SKU Count and Working Capital Management
Though working capital management is important for firms of all kinds, it is especially so for those which are resource-constrained as inadequately thought-out decisions under conditions of illiquidity can readily wreck a business. By their very nature, higher SKU count strategies necessitate the purchase of larger amounts of inventory—some or even much of which is likely to move relatively more slowly (if at all). The end result: reduced inventory turnover, an extended cash conversion cycle, and less liquidity. It is a fair rule of thumb to assume that each incremental addition of a SKU will have an incrementally deleterious effect on a seller’s working capital position—with the opposite holding true for each incremental reduction.
SKU Count and Increased Operating Costs
Purchasing in bulk does have its advantages with volume discounts being the most obvious; however, well-priced inventory that fails to turn quickly can easily lead to increased operating costs which offset—or more than offset—the savings. Sellers utilizing third-party order fulfillment providers, for instance, will be charged for higher levels of storage which can quickly add up over the course of several months (especially if long-term storage fees apply). Further, higher SKU counts are almost always coupled with more substantial pick and pack fees as a larger footprint impedes efficiency on the part of the order fulfillment provider. Lastly, if SKUs are being sourced from an array of suppliers, receiving costs tend to increase as vendors may not all be able (or willing) to meet necessary inbound standards.
SKU Count and Complexity
Across-the-board, higher SKU counts increase the complexity of not only the supply chain, but also of the sales, marketing, and service functions of a business. Beginning with the supply chain, high SKU counts complicate inventory planning, storage layouts, and the order fulfillment process. In fact, for those sellers looking to outsource to a third-party order fulfillment provider, high SKU counts are likely to severely limit the number of firms willing to take on the business. From a sales and marketing perspective, there is evidence that higher SKU counts lead to selection confusion, lost sales due to product stock outs (especially when customers can easily substitute another vendor’s products), and confusing and/or poor brand experiences. Finally, the customer support needs of a large SKU count operation are substantially greater due to the higher prevalence of picking errors, stock outs, and returns and/or exchanges.
There are legitimate reasons to increase SKU counts and some sellers may justifiably need to consider embracing variety in order to drive higher revenues; however, many (perhaps, most) e-commerce sellers tend to be better off going in the opposite direction.