What is SKU Rationalization?
SKU (stock keeping unit) rationalization is the process by which companies reduce their number of SKUs by consolidating duplicate or similar SKUs or specifications across their product lines, improving inventory management and enabling benefits such as inventory costs savings, operational efficiencies, and improved profitability.
While the term isn’t new, the impact of SKU proliferation on supply chains has started to take a toll as business leaders look for new ways to drive efficiencies and cost optimizations, and improve their bottom line.
As a result, many are turning to SKU optimization but aren’t sure where to start.
Why SKU Proliferation is a Problem
Customer demand for product variety has resulted in an explosion of SKUs – and a constantly growing product catalog for brands to manage. But it’s a struggle to manage the consumer demand for variety along with the potential for market cannibalization. Furthermore, these executives are typically managing other challenges related to 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, 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 a SKU rationalization process is having the right data for decision-making when it comes to supply chain management.
SKU Rationalization Starts with Specifications
Many procurement executives leading the charge on decision-making related to SKU rationalization initiatives typically assemble teams and spreadsheets for a months-long numbers crunching exercise.
They are chasing data like historical sales data, holding costs, lead times, and other metrics to understand how sales channels are performing.
With a spec-first approach to SKU rationalization, procurement and marketing executives can holistically evaluate products at the component level – for example, maybe they can consolidate raw materials across product lines and perform product rationalization at the spec-level. This enables them to maintain a marketing strategy that relies on a higher number of total SKUs, but re-uses similar items that don’t differentiate the product. This type of SKU analysis is only possible when you digitize specifications – raw materials, packaging, formulas, ingredients.
But once these manual SKU rationalizations are complete, the results are temporary as new products and specifications are constantly being created and updated, further putting pressure on supply chains. To enable optimization and improve profitability by creating a scalable, ongoing approach to SKU rationalization, organizations must deal with the root cause of the problem: a lack of specification management.
To learn more about how to implement a successful and ongoing SKU rationalization program, download our Executive Briefing.