A fifth of your catalogue is funded by the rest of it.
Most plants run far more SKUs than their margin can support, and the standard cost sheet hides which ones. Once setup, changeover, handling and the true cost of complexity are loaded, a predictable share of the catalogue turns out to be destroying value, not making it. The question is never whether you have loss-making SKUs. It is which ones, and what to do about each.
Cost and Profitability Consulting · 150+ models since 2010 · TDABC
When SKUs are fully costed with TDABC, 20 to 30 percent destroy value, 10 to 20 percent of product-and-customer combinations carry negative margin, and on average 5 to 15 percent of revenue sits in hidden losses. A standard cost margin cannot show this because it spreads setup, changeover and handling evenly. Ranking every SKU on its true, capacity-loaded cost reveals which products fund the plant and which quietly drain it.
A distorted cost makes a distorted ranking.
When a single allocation base distorts product cost by 30 to 50 percent, every margin built on it is wrong, and so is the league table you sort them into. The SKUs at the top of the standard ranking are often the simple, high-volume ones that the average over-costs; the apparent laggards are often complex specials the average under-costs. Act on that ranking and you promote the wrong products and starve the right ones.
The picture also decays. When BOM and routing are reconciled only once a year, run sizes and mix drift, producing 15 to 25 percent distortion by mid-year. Even a ranking that was right in January is stale by summer.
EVERY SKU, RANKED BY TRUE PROFIT
Illustrative. Rank SKUs by economic value, not standard margin, and the curve is steep: the top fifth build well past total profit, while a long tail gives much of it back.
Economic value per SKU, not standard margin.
The honest measure is economic value per SKU: true, capacity-loaded cost (setup and changeover included) against price, ranked across the whole catalogue. The result is a whale curve at SKU level, and the transversal pattern holds, the top 20 percent of SKUs typically generate 150 to 300 percent of profit while a long tail destroys it. An aluminium producer built exactly this kind of multi-dimensional model, costing by product, customer and geography rather than a single average, which is what makes the ranking defensible rather than another opinion.
Not a guillotine. A set of deliberate moves.
Reprice
Many loss-makers simply carry a price set against a wrong cost. Re-pricing to true cost fixes a large share before anything is cut.
Set minimum runs
Where the loss is run-size driven, a minimum order spreads setup over enough units to pay, and keeps the SKU alive.
Re-engineer or migrate
Re-engineer the costly steps, or migrate the customer to a profitable equivalent that meets the same need without the complexity.
Then discontinue
Some loss-makers are strategic; they win the account or fill capacity. Discontinue only what survives none of the above, with the number behind the call.
Frequently asked questions
- How many SKUs are usually unprofitable?
- When SKUs are fully costed with TDABC, 20 to 30 percent typically destroy value, 10 to 20 percent of product-and-customer combinations carry negative margin, and on average 5 to 15 percent of revenue sits in hidden losses. A standard cost margin cannot show this because it spreads setup, changeover and handling evenly.
- Why can't a standard margin rank SKUs?
- A single allocation base distorts product cost by 30 to 50 percent, so the standard margin ranking is the wrong ranking. The right unit of analysis is economic value per SKU: true, capacity-loaded cost against price, ranked across the whole catalogue, which produces a whale curve at SKU level.
- Should you discontinue loss-making SKUs?
- Not automatically. Some loss-makers are strategic, winning an account or filling capacity. The action set is to reprice, set minimum runs, re-engineer the costly steps, or migrate the customer to a profitable equivalent before discontinuing. The ranking exists to make each call deliberate and defensible.
Find which SKUs quietly carry the plant.
The Profit Check takes five minutes and no data upload. It shows where your catalogue is most likely concentrated, and what the tail is costing you.