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SKU Rationalization 101: What Is It & How To Get It Right

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One of the leading ways to maximize your cashflow and boost your inventory management is by implementing a SKU rationalization process. Using SKU rationalization, your business can better understand and optimize its current stock levels, as well as readily improve the entire customer experience. The truth is, SKU rationalization has the power to impact nearly every part of your supply chain and business performance — from product purchasing and storage, to sales and marketing, and beyond. That’s why SKU rationalization is such a meaningful concept to not only familiarize yourself with, but to put into practice to help your brand succeed.

 

What is a stock keeping unit (SKU)? 

A stock keeping unit (SKU, for short) is a unique, alphanumeric code that’s used on an internal basis to track and organize inventory items. Each SKU provides details on a product’s defining characteristics, like its price, brand, style, and so on. With that said, every variant of a product is assigned its own SKU code — meaning a single shirt, for example, could have dozens of different barcodes that define its range of colors and sizes. 

And stock keeping units actually take things a step further, by placing information in order from most to least important. For that reason, SKUs are not a universal identifier, and can instead be customized to represent whatever your vendors or customers ask about most frequently.

What is SKU rationalization?

Woman showing inventory on laptop to warehouse manager-1

The term SKU rationalization refers to the process of examining your existing products and eliminating any SKUs that are underperforming or unneeded within your catalog. Sometimes called SKU optimization or product rationalization, this process essentially determines if an item should be retained or removed from your inventory (as a means to reduce inventory costs). 

That’s because SKU rationalization measures the profitability of a product, by analyzing relevant stats like historical sales data and storage space fees. These metrics indicate whether a product is better off being discontinued or maintained with a few adjustments in place. Many times, rationalizing your SKUs and/or editing your product lines will bring your inventory management into balance and improve your operational efficiency at the same time. 

Benefits of SKU rationalization
 Warehouse manager checking inventory

The benefits of using SKU rationalization are wide-reaching, to be sure. In addition to reducing overhead costs and driving revenue, this process also has the ability to: improve your inventory optimization, better your product lifecycle management, and build up your brand’s identity so you can fully set yourself apart from any future competitors.

Reduces cost

Simply put, inventory cost control is directly linked to the success and sustainability of your business. Thankfully, when SKU rationalization is performed correctly (and consistently), it can reduce overhead expenses and help you save money in both the short and long-term. By making a conscious effort to downsize and get rid of low-demand items, you can really cut down on your total inventory costs (especially carrying or holding costs). And with less products taking up pricey shelf space, there will inevitably be less spoilage and waste at your warehouse, too.

Drives revenue 

It may seem counterintuitive, but the reality is, selling fewer SKUs can drive revenue in a big way. When you know which products are your bestsellers versus which have permanent residency at your warehouse, you make changes that’ll benefit your bottom line. What’s more, customers often respond favorably to fewer product choices — so if you have a number of SKUs that aren’t bringing in substantial profits, it may be time to bid them farewell. This way, you’ll also have room to develop new products or expand the categories that are selling well. 

Improves inventory optimization 

Time, space, and energy are some of your most treasured resources as a product-based brand, and yet, each of these will be squandered if you’re not properly optimizing your inventory. If you neglect to rationalize your SKUs, it has the potential to create costly, complicated, and inefficient operations for your brand. On the flip side, however, implementing SKU rationalization can streamline your production (since there are less items to manufacture), improve product availability and avoid stockouts, and even enhance your inventory tracking methods.

 

Better product lifecycle management 

Product lifecycle management involves overseeing a product from its initial inception, all the way through its design, manufacturing, sales, and eventual retirement. By leveraging SKU rationalization, you can upgrade this entire process in some notable ways. Not only does SKU optimization allow business owners to review the product lifecycle from a much deeper, more detailed scope — broken down by type, brand, category, or family — but it also serves to simplify your replenishment duties (since there’s a reduction in items to reorder).

Builds brand identity 

Without a doubt, SKU rationalization leads to better, more focused marketing strategies, thanks to the vast inventory data that’s reviewed during the process itself. With this knowledge in tow, and with a more fine-tuned approach to your marketing efforts, businesses can also work to develop their brand identity. Integrating SKU rationalization into your inventory management is the best way to capitalize on your most popular product offerings, as well as to build a reputation for carrying a diverse product mix that continually delights your customers. 

4 steps to implement a SKU rationalization process

analyzing business performance

Step 1: Identify customer demand

Before you can begin with any kind of inventory analysis, you’ll first need to conduct market research to identify customer demand. Whether you conduct surveys, host focus groups, or collect post-purchase feedback is up to you — but regardless of which technique you choose, you’ll want to get to the root of customers’ preferences so you can meet the needs of your target audience. After all, the products you’re selling should strike a chord with your customer base, so hearing from them directly is a prime way to understand what's working (and what isn’t).

Step 2: Analyze SKUs and sales data 

Once you’ve identified some principal trends and tendencies within customer demand, you can move on to analyzing your SKU counts and sales data. Performing an in-depth SKU analysis will help shed light on things like high returns rates, low inventory turnover, long lead times, and more. And the easiest way to conduct this level of analysis is by partnering with a modern inventory management software, like Skubana

The Skubana platform delivers robust reports on units sold for all your sales channels, in addition to real-time inventory updates across each channel for consistent, reliable results. With all this comprehensive information at your fingertips, you’ll be well on your way to uncovering the inventory insights that’ll contribute to the success and longevity of your brand. 

Step 3: Organize product catalog based on findings

Speaking of valuable insights, the next step in the SKU rationalization process is to organize your product catalog based on relevant findings (i.e. your market research and SKU analysis). At this point, it might be helpful for you to group each of your SKUs into different categories or subsections. For example, you might label certain SKUs as keep, others as remove, and those you’re still unsure about as review (to remind yourself to circle back later on). This classification system is sure to offer some much needed clarity to the optimization process as a whole. 

Step 4: Use data to drive decision making

The final step in SKU rationalization is using your inventory data to drive your decision making, be that purchasing, restocking, or reordering more goods. With the help of your established categories (keep, remove, review), you can start making modifications to particular products, such as discounted prices on dead stock items and others you plan to discontinue. A reduction in price is a great way to help these products vacate your warehousing facility and minimize your excessive carrying costs — while bringing in a bit of revenue from those final sales, too.

 

Frequently Asked Questions

  • What is SKU optimization?
    The term SKU optimization describes the process of examining your existing products and eliminating any SKUs that are underperforming or unneeded within your catalog. This process essentially determines whether an item should be retained or removed from your inventory, as a means to reduce inventory costs and bring your inventory management into balance. 
  • Is product rationalization the same as SKU rationalization?
    Product rationalization and SKU rationalization are one in the same, as both terms refer to the process of measuring the profitability of a product. This is done by conducting a careful analysis of consumer demand and historical sales data, which then indicates if a product is better off being discontinued or maintained with a few adjustments in place. 
  • What percentage of SKUs are used?
    A general guideline for SKU usage is called the 80/20 rule, which states that just 20% of your SKU catalog accounts for 80% of your total sales. With those numbers in mind, it’s easy to see how much room there is for improvement within SKU management. Processes like SKU rationalization can help you identify slow-moving items that are tying up valuable capital.
  • How do I optimize SKUs?
    To properly optimize your SKUs, you can follow a simple four-step process: (1) identify customer demand through market research, (2) analyze your current SKUs and archived sales data, (3) organize your product catalog based on this analysis, and (4) use your inventory data to drive better decision making and to cut costs across the board.
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