So consider Home Depot, which carries I believe more than a hundred thousand SKUs in its giant stores. Those thoughts as a prelude to some recent musings I have had on how supply chain generally and Amazon specifically are impacting long tail thinking and execution. The "80/20" principle would no longer hold. These two things together mean that (a) there would be still more products in the tail, making it longer and (b) the tail would also grow fatter (more sales per SKUs in the tail), because customers could buy products that more precisely meet their needs and find more of these products through search technologies, as shown in the second graphic below.Īll of that meaning that long tail SKUs together increasingly really add up to something meaningful, and could be increasingly profitable individually and collectively when sold through ecommerce. So, a SKU that sells less than once a week in each store might sell quite a few each week if demand is consolidated across the country. Second the internet and direct-to-customer shipping allows the seller to aggregate demand across the entire market. First, there are much fewer constraints in storing products in comparatively cheap distribution center space versus a retail shelf. This all changes in an ecommerce world, Anderson noted. I've seen data many times on the incredible percent of products at large retail outlets that move just one time per week or less on average.īut the products sit there on the shelf nonetheless, causing many forecasting and replenishment challenges as well (e.g., slow movers still get replenished in full case quantities). Second, there are many costs associated with that distribution model, from shipping to the retail DC by the manufacturer and then to the store by the retailer, and in terms of inventory carrying costs. Only so many SKUs in a category will be stocked and displayed. That is key for two reasons.įirst, the retail channel presents a true constraint in terms of physical shelf space. Pre-internet – let's say roughly before 2000 – consumer products were sold almost exclusively through retail channels of all sorts. What made Anderson's insight take on this unique and useful was his view how all this was changing as a result of the Internet. Hence often never-ending debates in companies about which SKUs should be pruned from the product portfolio, and analysis tools such as gross margin return on inventory (GMROI) to weed out unprofitable products.Īnd that pruning effort – especially important historically as new SKUs tend to be furiously added by marketing at most companies – often faces resistance in some sales and marketing quarters, amid fear of either (a) losing market share generally and/or (b) concern B2B customers especially will drop or reduce the line if the seller doesn't stock a full assortment, including the very slow movers. I have even seen a few cases where it is almost closer to where the top 20% of SKUs represent closer to 90% of the units sold. Many years ago I did some data analysis for new distribution center projects, and it is almost like an iron law that 80% or so of sales at the unit level will come from something like 20% of the SKUs, and the reverse. Now, there is nothing new in that thinking. A relatively few number of SKUs generate a large amount of the revenue, with medium and then slow movers adding less and less to sales, so that the full graph of the numbers can be said to have a head (large volume SKUs), transforming into a tail-looking portion of the curve that trails off through the very slowest moving SKU.
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