Background and Challenge
L.E.K. Consulting's client, a leading industrial and mining explosives company with more than $1 billion in global revenue, asked us to analyze its SKU performance and develop recommendations to improve product profitability.
Over time, the company had seen a proliferation of its SKUs, causing unnecessary production costs and decreased profitability per SKU.
Approach and Recommendations
Database and opportunity sizing:
- Estimated profitability by product, including validation of cost methodology
- Identified underperforming SKUs (adjusting for indirect costs, capital cost)
- Estimated opportunity size and need for further analysis
Product portfolio rationalization:
- Determined which products need revised pricing, elimination, redesign or cost reduction
- Collaborated with commercial team to understand potential customer and product pull through impacts
- We identified more than $1 million in immediately actionable profitability improvements for approximately 1-2% gross margin improvements
- We also found potential for several million dollars in near-term profitability increases that required SKU re-pricing, elimination or small organizational changes
- We demonstrated that SKU rationalization would have a small impact on the existing customer base
- We also found that the top 25% of customers accounted for approximately 90% of total gross margin in their respective channels, leading to better customer prioritization
- Finally, we defined a number of implementation initiatives so the client could continue to investigate new opportunities and execute on recommended changes