SKU Rationalization: What Is It and Why Is It Needed?

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SKU rationalization enables organizations better control of product portfolios and improves their bottom line. In the past, SKU (Stock Keeping Units) proliferation was a viable path to growth as companies focused on expanding their product offerings.  While this approach appealed to the consumers’ desire for novelty, the growth in items has also caused an increase in storage costs as well as demand planning challenges as companies struggle to identify underperforming products and simplify their portfolio. As efficiency, sustainability, and cost optimization continue to be top priorities among leaders, organizations are turning to SKU rationalization as the solution, a method used to reduce the number of SKUs based on underperformance or duplication.  

The Need for SKU Rationalization? 

To compete for consumer attention and vie for shelf space, companies have been proliferating SKUs by producing new and greater varieties of existing product lines. 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. While the number of SKUs has increased exponentially, managing them did not evolve at the same rate. The lack of SKU management tools and processes has made it difficult for organizations to manage their product lines profitably. 

SKU proliferation itself may result from organizations not having adequate systems to manage product specifications. As a result, many organizations end up experiencing greater inventory and holding costs, stacking up additional time and inefficiencies.  For example, Unilever found that SKU variance in their UK and Ireland operations accounted for 20% of their inventory but only contributed 5% to their sales.  Unilever has since made it a goal to reduce SKUs by 20%, a complex job for a company with 50,000 SKUs distributed globally. 

Although SKU rationalization is most used among manufacturers and retailers with many brands, products, and variations in their inventory, it has become a trend across all industries and sizes. 

Benefits of SKU rationalization 

SKU rationalization pares down inventory and enables organizations to make educated, strategic decisions about which SKUs should stay or be discontinued.  SKU rationalization offers several benefits: 

  • Reduces inventory costs and ensures you are not spending to produce, store, and keep something that will not generate income for your business. 
  • Increases forecast accuracy by eliminating the variability risk of producing multiple similar products. 
  • Simplifies and streamlines your business by limiting the number of suppliers, equipment, workers, and storage space needed to an easily manageable amount. 

To succeed with SKU rationalization initiatives, companies should adopt software with cloud-based, real-time connections that unify sales, operations, and financial data with demand planning.  End-to-end integrations not only save time but also reduce error as manual spreadsheet processes are eliminated.  Using predictive Sales & Operations Planning (S&OP) software, like Vanguard Predictive Planning™, demand planners can monitor fluctuations in demand for each SKU and its product group.  This approach creates a scalable and ongoing approach for SKU rationalization and better predicts opportunities for consolidation. 

The bottom line: By determining which SKUs you can live without based on your sales analysis data and monitoring SKU rationalization with a predictive S&OP solution, you can increase your cash flow and keep your resources focused on products that perform best.