How Microsoft tamed the SKU explosion.

Until this summer, the inventory and sales numbers at Microsoft told a familiar story: More than 5,000 SKUs ("stock keeping units") appeared on various price lists, but only 60% of these were generating any sales activity at all. Worse, a whopping 95% of Microsoft's revenues came from just 15% of its orderable SKUs. The runaway SKU count was tying up inventory dollars, messing up forecasts, and causing endless errors in customer purchase orders.

"It was a pretty eye-opening situation," Microsoft analyst Kristin Weeber recently told an OpCon audience. "And it was getting worse. We found that the number of orderable SKUs had actually doubled in the last few years."

Much of the problem, says Weeber, turned out to be a lack of consistent, company-wide guidelines for packaging and configuring new product offerings. "Every product group had its own policies for creating new SKUs," she says. So Microsoft set up a "SKU Reduction Task Force" that established a set of rules that now apply to every U.S. retail product group:

* Eliminate multiple disk formats: The task force found "a significant decline in demand" for SKUs that contain 5-1/4" and dual media, says Weeber. So the task force ruled that Microsoft's standard package will now contain just 3-1/2" disks, along with a coupon that allows customers to special order sets of alternate disks.

* Eliminate separate upgrade configurations: The task force also eliminated a confusing distinction between regular version upgrades and competitive upgrades, which differed only in pricing. Microsoft now distributes only one retail upgrade SKU, which contains a rebate coupon that customers can fill out if they qualify for a lower price. And for low-cost titles, the task force eliminated separate upgrade SKUs altogether.

* Standardize multiple-license configurations: A less-visible source of SKU proliferation, the task force found, was the lack of guidelines for multi-copy licenses that were often sold through direct channels. The new SKU guidelines dump Microsoft's academic 10- and 20-packs, along with retail 100-license configurations. At the same time, multi-license contracts have been made platform independent, so large customers no longer have to buy specific quantities of Windows, NT, and Macintosh versions of a multi-licensed title. "We cut a hundred SKUs instantly with this decision," Weeber reports.

* Establish minimum revenue bars: Another key SKU reform, says Weeber, was the creation of a formal "approved product type list" for each product group--in effect, a business plan that defines what kind of SKUs the group may create, and how much revenue each SKU should generate. To stay on the list, each SKU must produce a minimum level of revenue--which the task force tracks on a quarterly basis--or else get a waiver from a Microsoft vice president. To make sure these rules are followed, Weeber adds, product groups with non-compliant SKUs will be charged a flat penalty fee. "We want all of our SKUs to justify their existence," she says.

Kristin Weeber, marketing manager, Microsoft Corp., One Microsoft Way, Redmond, Wash. 98052; 206/936-6547.