Teaching Note

Clorox Case Study

The purpose of this case is to contrast functional perspectives on product range, variety,
inventory and service levels. This leads to discussions on incentives, policy, strategy and
communication / team working between sales and supply chain in particular. Typically sales
tends to want to avoid SKU rationalization for reasons of not removing things it can sell and
sales tends to fear not hitting revenue numbers due to SKU rationalization. Whereas supply
chain tends to want to rationalize SKU’s because it is left dealing with slow moving product and
inventory as well as increasing operational complexity resulting from product proliferation,
leading to delivery failure risks. Product proliferation is often explained by a desire to grow
sales by offering more things to sell and serve customers with but can result in the opposite of
that when it distracts sales by making the catalogue too long and limits service capabilities by
stuffing the distribution channel with too much product and complexity.

Further to that, SKU rationalization is often regarded as a cost cutting or short term inventory
fix; the approach adopted at Clorox reveals that inventory and cost issues are symptoms of a
more deeply rooted internal alignment challenge. Approaching this problem cross functionally
can enable the improvement of service as well as migrate the discussion away from just short
term supply chain glitches towards company growth.

Exhibit: Downward product proliferation spiral

Sales increase targets

Missed sales numbers More product to sell

Service challenges Some failing product

Distribution pipeline stuffed

with product

Suggested pre-reading:
The challenge of internal misalignment, van Hoek R I & Mitchell A J; International Journal
of Logistics: research and Applications, Vol. 9, No 3, Sept 2006 pp 269 – 281
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 Outcome and outline case answers
Results

The highlights of the Clorox approach include:

The Clorox executive committee reviews a product and SKU dashboard as part of its
ongoing global dashboard review. Product performance is evaluated against so called
hurdle rates (are we selling enough to justify keeping the product?) and sets
reduction goals in time (Clorox calls this glide paths) for product not clearing the
hurdle rate
The business is judged upon sticking to the glide path (taking emotion out of the
equation due to its fact-base and metric focus)
The supply chain is asked to help the business stay on the glide path
The glide path concept avoids cutting SKU’s too quickly and rigorously without
giving SKU’s a change to proof themselves or the sales force to manage customer
expectations before the cut is made
There are also frequent product line reviews with customers focused on what is
meaningful and what is not
Clorox achieved a 30% product line rationalization, coupled with continued growth,
improving return on products and improved customer service levels
The approach is simple, does not put supply chain solely in the “hot seat” but in
stead turns it into a cross functional effort, balancing sales and supply chain
perspectives
The approach does not block innovation as the glide path allows SKU’s time to grow
and selected hurdle rates can be adjusted to reflect innovation targets, while endless
attempts to generate sales volume on products are avoided as well (eventually every
SKU needs to cross the hurdle rate or it will be removed)
The approach supports growth through focus on productive SKU’s and
Clears the distribution pipeline and warehouses from slow to non moving SKU’s and
thereby removes distraction in sales and distribution and frees up response capacity
in distribution

Basic Principles of SKU Management at Clorox include:

Be simple and easy to understand and administer

Drive meaningful improvement over time
Support growth of high performing SKU’s
Ensures tension against low performing SKU’s
Be flexible enough to meet SBU specific business dynamics
Be fact-based and metric-driven
Involve participative target setting, with commitment and accountability from the
business.
Clorox SKU Management Rules

Rule Type Sample Rule Language

Establish specific hurdles "A SKU must meet either the volume or the incremental
profit hurdle to be considered a 'Good' SKU. Hurdle
rates are defined for large brands and small brands set
for annual volume and for annual incremental profit.”
Establish ownership of results "Business unit leaders and their teams are accountable
for SKU performance by category. Supply chain
planning managers within each category own the
management process and drive the organization towards
meeting the targets."
Establish specific annual targets and "As part of the annual business planning process,
quarterly glide paths categories set their proposed 'Bad SKU' targets and glide
path as well as identifying action plans for each 'Bad'
SKU. The Steering Committee will approve these by
May 31."
Establish a specific 'Final Decision "All SKU targets are approved by a SKU Steering
Maker' for approving SKU targets Committee, which is led by the Director of Supply Chain
Planning and chaired by the CFO"

Today, more than 90 percent of Clorox’s SKU’s meet volume and profit hurdles, up from 70
percent five years ago. Retail sales per SKU have grown by more than 25 percent, and net
customer sales per SKU have doubled over the past 4 years. Clorox now leads its peers in retail
sales per SKU in the majority of its categories.
Question 1: Pros & Cons of SKU rationalization

Teaching suggestion: split up the room in a sales and a supply chain camp and have both sides
answer question 1 from their respective functional perspective. Consider reminding teams that
the Sales function is typically incentivised on revenue whilst Supply Chain tends to primarily be
incentivised on delivery service. The discussion should bring out the cross functional tension
between the two functions

Negatives include:

risk of disappointing important customers

risk of cutting of future innovation leading to winning products
risk of some revenue reduction
emotional impact on the company

Positives include:

continuous pruning of less productive SKU’s creates capacity for growth and
responsiveness
reducing complexity cuts inventory, working capital and material handling costs
leading to increased profitability
higher SKU productivity vs. the competition enables outselling competition
increased volume per SKU allows the company to more effectively serve customers
free up operational capacity to serve, make and handle products that are performing
reduced fixed assets
greater forecasting accuracy, less change-over in manufacturing, increased
economies of scale, less storage locations and product items to maintain
larger order quantities for suppliers and the ability to rationalize the supply base
simplify the sales process and easier offering to customers
reduced inventory of slow movers
ability for sales and marketing to focus on best products

Additionally, the following considerations for the SKU Management Business Case at
Clorox include:

Continuous pruning of less productive SKU’s creates capacity for growth

Reducing complexity cuts costs everywhere
Higher SKU productivity vs. the competition enables us to outsell our competition
Increasing volume/SKU allows the company to more effectively service customers
Fewer, higher volume SKUs enable more effective forecasting and inventory
management, which ultimately improves ROIC
A “lighter load” of highly productive SKU’s allows more rapid execution
Question 2: Implications and lessons

Implications for the CEO:

In the next customer meeting, ask the customer what product they do not want in
stead of what else your company can do for them
Do not get too deeply involved, keep it scientific and limit engagement to signaling
the importance of the topic

Implications for the senior executive team:

Stop creating product for the sake of growing the company, do it for innovative
reasons or based upon specific customer requests but stop pulling the product lever
for the sake of it
Do not leave the supply chain organization in charge of SKU rationalization, let
supply chain flag business units and offer help only
Take emotion out of the equation; audit product against hurdle rates and set glide
paths for those products that do not clear the hurdle
Assign a spotlight; let the controlling or auditing group create the dashboard and
keep it going to avoid loss of attention span
SKU management should never be an initiative, sustain the effort by auditing the
dashboard and glide path at least monthly, this avoids a common pitfall for many
companies that quickly cut a lot of SKU’s but do not change process and tend to find
a SKU tail reappear almost as quickly as it was cut
Do not go overboard; never cut 100% of products that do not make hurdle rates,
ensure the effort does not cut off innovation and some future markets that require a
little bit of time to develop but do keep checking

Implications for the supply chain executives working with the executive team:
Use the customer as an ally; key customers will be happy to help make tough product
choices where it is hard to deselect product or where there is internal resistance
Get on the calendar; SKU efforts fail if the right questions are asked at the wrong
time, make sure all efforts are linked to the core business workflow otherwise they
are going to be perceived as extra work on top of the already busy calendar
Leave it to the business; do not impose the issue or try managing by controlling, in
stead offer getting the business on the glide-path, but let the numbers drive the
agenda
Not all SKU’s are bad; some innovation efforts are important for future growth, even
if it means these SKU’s might temporarily under-perform. Hence a certain
percentage of the SKU count may be below thresholds, the acceptable percentage is
dependent on the nature of the business
Never say no; supply chain teams are often perceived as being best at saying no in
stead of helping the business succeed

See also 2007 Clorox Annual Report with feature on Product Supply & Demand which
explicitly mentions the contribution by Supply Chain to cost reduction, improved product
availability, innovation and product launches. Additionally – the company reports continued
sales growth, improved operating profit and cash from operations. This is clear testimony to
Supply Chain’s contribution to overall company growth and how SKU rationalization risks can
be turned into company opportunities.