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The “build it and they will come” mentality is taking a negative toll on companies, particularly as they struggle to identify underperforming products and simplify their portfolio. In the past, SKU (Stock Keeping Unit) proliferation was a viable path to growth as companies focused on expanding their product offering to customers.
Now, as efficiency, sustainability, and cost optimization continue to be top priorities among organization leaders, companies are turning to SKU rationalization to help companies better control product portfolios and improve their bottom line.
What Is SKU Rationalization?
In the past, SKU proliferation was the answer to ever-changing consumer demands, market shifts, and globalization. For example, the average grocery store in 1970 carried about 7,000 SKUs compared to a modern-day market, which typically has over 40,000 SKUs. And while the number of SKUs exploded exponentially, the methods of managing them didn’t evolve. A lack of SKU management tools and processes has made it difficult for companies to manage their growing number of SKUs in a profitable way, which has led executives to search for alternative ways to drive growth and cost savings.
Now, many companies are turning to SKU rationalization, which is a method used to reduce the number of SKUs or underlying component parts based on underperformance, duplication, or obsolete product statuses. As it turns out, some SKU proliferation is, in fact, accidental and often the result of companies not having adequate systems to manage product specifications beyond the Bill of Materials level.
As a result, many organizations end up experiencing greater inventory and holding costs, all of which can stack up additional time and inefficiencies.
For example, a packaging company we work with found they had hundreds of packaging types within inches of one another that could be consolidated to save money. This was because each time a packaging engineer went to create a new package, there was no visibility into what already existed today, thereby creating more and more similar SKUs by accident. This is not only inefficient but costly. Maintaining inventory in storage, for example, can eat up as much as 40 percent of a given product’s profits each year.
Why does SKU rationalization matter?
Despite excellent product sales, high inventory costs can make a large chunk of your profits disappear.
SKU Rationalization is a preemptive measure to streamline your product catalog and improve decision-making around an inventory management system. Retailers and wholesalers can utilize SKU rationalization to eliminate underperforming products, retain good ones, and add new products that are most likely to sell.
Benefits of SKU rationalization
Reduces cost
SKU rationalization can help with inventory cost control, especially in warehouse management, where storage space comes at a premium. By eliminating crippled and dead stock contributing to carrying costs, businesses can focus on high-performing products and position themselves to meet customer demand. Through consistent use of SKU rationalization, businesses can reduce overheads like storage costs year on year and drive profitability while meeting customer expectations
Drives revenue
According to a widespread belief in the business community, 20% of your products account for 80% of the profits. When you focus on selling high-demand SKUs and get rid of the underperforming side of your inventory, you can actually increase your revenue without increasing your warehousing cost. Moreover, with fewer choices, customers can make a buying decision faster than otherwise. With a slight adjustment in your inventory, you can make room for products that sell like hotcakes.
Improves inventory optimization
As a product-based ecommerce business, optimizing your resources is key to successful and sustainable operations. And holding onto low-performing SKUs may not be the best utilization of your space and other valuable resources. By implementing SKU rationalization, you can streamline production, avoid stock-outs, and reduce lead times, which means your bestsellers will never be off the market. With fewer SKUs to manufacture and sell, you can even reduce the time and effort required for inventory tracking.
Improved product lifecycle management
Product lifecycle management involves keeping track of the product’s journey, from its design and manufacturing to sales, distribution, and withdrawal from the market. SKU optimization allows you to review the product lifecycle from a bigger lens while simplifying your replenishment duties since fewer products are needed to reorder. You can also gain deeper insights into the product’s type, brand, or category and make informed decisions at granular levels.
Builds brand identity
SKU rationalization can help fine-tune your marketing approach and build a strong reputation based on your bestselling products. After carefully culling your inventory, you will be left with a product lineup that aligns with your customers’ needs. Eventually, your business will emerge as a go-to source for killer products that perfectly bridge demand-supply gaps in the market.
How to rationalize your SKUs: 5 steps to follow
If you do not know how to approach SKU rationalization, you are not alone and definitely not falling behind. With a few simple steps, you will be well on your way to optimizing your inventory and pushing your revenue through the roof.
1. Consider your target market
Knowing what your target audience needs is the first crucial step in any business. No matter how great your product is, you don’t keep it in your inventory if your customers don't want it.
There are several ways you can determine your target audience – their pain points, preferences, and other traits influencing their purchasing behavior.
- Conduct an online/physical survey.
- Look into your competition.
- Spend some time on user forums to know your prospects’ pain points.
Incorporating these insights into your SKU rationalization process ensures your product lineup strikes a chord with your target audience.
2. Perform a detailed SKU analysis
A quick glance at your sales figures can tell a lot about your SKUs’ performance. However, there are certain factors you should consider when evaluating your SKUs.
- How much space do they take up in your warehouse?
- Do they have a stable or volatile demand?
- What is the return on investment for each SKU?
- For how long does your product sit on the shelf?
- How much labor costs does your product incur for handling and transportation?
Evaluating your SKUs on these parameters will give you a clear picture of their performance and ROI.
3. Consider other variables that could affect the results
External factors and variables can influence your SKU’s performance metrics. Forecasting these variables can be tricky. For instance, you might witness a temporary surge in a product’s demand after running promotions or generous discounts. The artificial demand is a result of additional marketing efforts; the product in itself may not hold the appeal it is played up to be.
Product cannibalization is another variable that could impact your product’s sales. Product cannibalization is described as a scenario where a newly launched product overshadows an existing product and causes a drop in its sales.
It is also recommended to keep an eye on your competitor’s activities, as their new product launches or heavy discounts might steal your potential customers.
4. Start organizing your product catalog
Grouping your SKUs into categories will help you review them easily and in real time. Prepare an Excel sheet with three columns:
- Keep: This will include top-performing SKUs you want to keep in your inventory.
- Remove: This will include SKUs you want to get rid of because of poor sales or low ROI.
- Review: This will include SKUs you are not sure about and need more data to make a decision.
5. Review the results
The final step is to review the outcomes of your SKU rationalization. If you have managed to reduce dead stock and operational costs without affecting the revenue, that means you have successfully optimized your inventory.
Why SKU Proliferation is a Problem
Customer demand for product variety has resulted in an explosion of new SKUs – and a constantly growing product catalog for brands to manage. However, it’s a struggle to manage the consumer demand for variety and order fulfillment, along with the potential for market cannibalization. Furthermore, these executives are typically managing other challenges related to the cost of goods and margin issues related to labor costs, carrying costs, cash flow, and the challenge of getting enough shelf space from retailers.
The reality is that many components of products can be reused, but the challenge is most product development professionals don’t have visibility at the spec-level of existing products. Finding the right product mix while optimizing for SKU counts is nearly impossible without this level of data.
The key to developing an SKU rationalization process is having the right data for decision-making when it comes to supply chain management.
How Big Brands Are Using SKU Analysis
Brands across industries are prioritizing SKU rationalization in efforts to innovate the supply chain. For example, CPG company Procter & Gamble consolidated and eliminated around 100 brands over the past two years to focus on its top 80-90 product lines. Their findings concluded that the brands they shed contributed about 6% of the company’s total profit.
Unilever told a similar story in that the variety of UK and Ireland SKUs accounted for 20% of their inventory but only about 5% of sales.
Toy company Mattel recently announced a commitment to reduce SKUs by 30% before the end of 2020, particularly in their Barbie and Hot Wheels color options. And just last year, the company’s two-year supply chain simplification strategy saved the company about $797 million by inspecting and mapping its supply chain on a granular level.
Kraft Heinz has also announced its intentions to review each SKU for sales volume and profitability and eliminate those that do not meet expectations. The ultimate goal is to confidently determine which SKUs you can and can’t do without in order to increase cash flow and maximize on-hand resources.
How to Implement an Iterative SKU Rationalization Program with Specright
Avoiding the high costs of SKU proliferation requires more than just looking at bottom-line sales data. Today, most companies execute SKU rationalization by compiling spreadsheets and performing detailed analyses on a one-time basis to understand the causes of SKU proliferation.
By implementing specification management, companies can continuously consolidate SKUs and prevent future proliferation. By gaining DNA-level insights into their products and SKUs, companies can link raw materials, packaging specs, and other supply chain data to help eliminate net-new proliferation and organically reduce their overall number of SKUs.
Specright is helping accelerate SKU rationalization efforts by providing a scalable, intelligent Specification Management platform with built-in SKU consolidation capabilities.
Learn more about Specright and Specification Data Management software by downloading our executive briefing on how Specright simplifies SKU inventory with confidence.
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