Understanding SKU Growth: How Increasing Inventory Affects Costs & Management
June 8, 2016 10 min read
Being an e-commerce multi-channel seller creates natural inventory growth over time. How? By not having the requirement to decrease inventory in order to accommodate the physical limitations of brick and mortar storefronts. While sales likely increase, it is important to understand the costs and implications of holding on to obsolete and non-moving inventory, and how those costs affect your overall returns and profits. This is especially important for limited lifecycle SKUs, such as those that are no longer in demand resulting from changes in technology, models, or preference. Holding on to this inventory results in slow moving stock that takes up storage, decreases the efficiency of material handling, and increases operating costs, so it is important that you understand the associated costs and make decisions accordingly.
What Causes SKU Growth
SKU growth is often natural, with the steady introduction of new products, but there are a number of other reasons to see changes in SKU volume. One of the largest concerns is that many e-commerce customers demand greater product availability, more options, and more styles, which causes you to carry larger amounts of inventory, and for longer. In some cases, this can be crucial to meeting delivery and order promises to consumers.
In many other cases, items that you carry can become obsolete as new technology or models supersede them. Product lifecycle management is essential here for managing the full lifecycle or products, and scaling back stock and manufacture towards the end of the lifecycle. In fact, the lack of a quality product lifecycle management system is one of the leading causes behind SKU proliferation.
The Disadvantages of a Growing Inventory
Increasing inventory can be a good thing in the case of fast moving stock, but this very often is not the case. Instead, outdated, slow-moving SKUs often proliferate, which can cause a strain on the entire system. Companies with too many SKUs will run out of physical space in storage centers, will have more difficulty working with stock, will spend more money finding, sorting, and shipping stock, will tie up capital in dead and obsolete inventory, could have tax issues relating to the extra inventory, and even have issues with timely shipping and customer service. Finally, a larger SKU inventory can create a strain on management, which can increase costs and decrease efficiency.
If your capital is tied up in obsolete inventory, have a large volume of that inventory, or the amount of inventory in your warehouse makes it difficult to appropriately sort and handle it, it is definitely time to reduce your inventory. Unchecked SKU growth can affect a great deal of costs, but the the following include some of the most common:
→ Storage Space (cost of leasing, percentage of storage utilized, length of time spent in warehouse, cost of labor, extra hours to sort through/around stock, storage media, equipment costs, etc)
→ Capital tied up in obsolete stock (percentage of capital that could be used towards a new investment)\
→ Labor used for management, warehouse management, picking, shipping, etc.
→ Packing, Shipping, etc.
→ Website prominence
→ Management costs/time
Depending on what you are selling, and on the number of platforms you are selling on, your costs can vary a great deal. That's why it's important to understand SKU profitability, so that you can appropriately calculate costs and expenses.
Controlling SKU Growth
A quality SKU management strategy is integral in any e-commerce business, and this primarily means integrating management across multi-channel platforms, creating a system of organization, and sharing or using the same data across every channel. This approach allows you to see the broad spectrum of sales across all of your platforms, calculate which SKUs are adding value and which are costing you money, and then make strategic decisions to cut underperforming or obsolete SKUs from your inventory.
While some amount of growth is always good, you can consider the following objectives:
→ SKUs should be value added, or provide a return for most of the year
→ You should have the freedom to add new SKUs to expand into new markets or into new technologies without overburdening customer service, warehousing, or overtly increasing costs.
→ Underperforming SKUs should be moved into a minimum stock level, where you stock just enough to meet demand.
It is also important to understand product lifecycle. While there are a number of product lifecycle analytics programs, you want to divide your products based on where they are in their product lifecycle.
Beginning of Life – BOL products are new (developments, designs, processes, etc.) with a potential for a high demand and high growth. Your main concern should be how to market these to maximize sales.
Middle of Life – MOL products have typically reached a peak phase and will not likely grow in sales, but can remain steady for some time. Associated costs include new styles and options, long-term customer support, warranty management, etc.
End of Life – EOL products are at the end of their lifecycle, have been superseded by a new model, or are not selling anymore. Your main concerns should be markdown or sales strategies, or determining how to discontinue them.
While cutting SKUs can be difficult, most businesses find that the 80/20 rule is the easiest way select SKUs for deletion. The 80/20 or Pareto Principle says that 20% of your products make 80% of your profits. While this can vary from 10/90 to 30/70 depending on your business, you will find that a small percentage of your SKUs turn around the vast majority of the profit. In many e-commerce warehouses, stock levels do not appropriately reflect this disparity, and a disproportionate amount of inventory and capital is tied up in slow-moving, low-performing stock.
Introducing Better SKU Management
The best way to improve your SKU profitability is to manage growth, cut underperforming SKUs, make the decisions to mark down and write off obsolete inventory, and clear out space that will allow you to grow without disproportionately increasing costs.
Regular SKU Analysis
Integrating regular SKU analysis into your inventory management is crucial to reducing costs. Sales data over a 3-6-month period can help you see SKUs movement and turns, storage requirements, capacity, seasonal requirements, financial impact, and much more. For example, simply knowing how much of your storage an item impacts allows you to make better decisions about what to do with that SKU in the future.
SKU rationalization is the process of using analytics to decide whether to retain, add, or delete an SKU. This process uses your existing sales data to track the value, potential value, profitability, warehousing costs, but requires analytics that tie into all of your channels and integrate warehousing and finance to create a complete picture of your actual costs and earnings. SKU rationalization requires that you:
→ Integrate a life cycle management process, so that you understand when and why products are selling.
→ Understand and integrate data from target markets
→ Track marketing data to ensure that slow-moving SKUs are receiving appropriate exposure and marketing attention
→ Consider marketplace availability
→ Consider all costs for each SKU, per month or sales cycle
→ Approach rationalization as part of your inventory management
SKU rationalization requires quality information and integrated multi-channel analytics. However, it will allow you to make the right decisions for your SKUs based on sales and cost data.
Integrating better SKU management, using rationalization, and understanding the costs and hidden costs of each SKU is crucial to maintaining profitability in an e-commerce store. Because SKU growth is inevitable in any growing business, rationalizing and periodically analyzing existing inventory, making cuts, and making room for new growth, are essential to continued profitability.
However if you require further insight into your SKU management, Skubana's powerful analytics tool can delve into your SKUs individually and provide accurate data on your profitability and sales velocity. Never oversell, and prepare your inventory for peak seasons while understanding your products' trends. Try Skubana free for 14 days, or feel free to contact us at email@example.com with any questions!
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Written By Chad Rubin