SKU Rationalization: What You Need to Know

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Those in the retail industry know that there are many benchmarks to assess to effectively manage your supply chain and ensure that your business is operating smoothly. One of the most important things that retailers often overlook is SKU rationalization. Retailers who want to manage their inventory as successfully as possible should understand SKU rationalization and the ways in which it can benefit their business.

About SKU rationalization

A SKU, or stockkeeping unit,  refers to an individual product that a business sells. SKU rationalization is the process of optimizing a company’s inventory by looking at data, such as historical sales and the cost of production and stocking versus the benefit of selling. This type of rationalization helps companies make informed decisions about which inventory to hold and which to dispose of or give away.

Benefits of SKU rationalization

While it might seem logical to hold on to all of the inventory you produce, in reality, it helps to pare down inventory and make smart, strategic decisions about which products you should keep and which you should discontinue. SKU rationalization offers several benefits:

  • Cuts inventory costs and ensures that you’re not spending to produce, store, or keep something that won’t generate income for your company
  • Helps you produce more accurate forecasts, since you can hone in on fewer products
  • Simplifies and streamlines your business by limiting the number of suppliers, equipment, workers, and storage space needed to a manageable amount

Risks of not using SKU rationalization

If you choose not to use SKU rationalization, you may be dealing with an overly complicated business operation. Having too many products, or too much inventory, can also mean that you have:

  • Too much data coming in to analyze effectively
  • Too many workers to manage
  • Too many suppliers to deal with
  • Too much storage space and equipment for goods that won’t ultimately bring money into your company

If you don’t use this type of rationalization, you may be filling your sales floor with products that make up a small percentage of sales. By using this rationalization it allows you to optimize your inventory so that you only feature goods that have a high turnover or consistently sell well.

Tackling SKU rationalization

There is no uniform way to do SKU rationalization. However, there are some key steps in the process:

  1. Pick an inventory category to review.
  2. Consider the audience for those products, and make a list of the most popular or best-selling products for those customers.
  3. Once you’ve identified your top products, make a list of all of the other SKUs that you sell to that audience, and review it.
    Consider whether any of those products have drawbacks, like low demand, large size, lengthy setup time, low turnover, supply challenges, etc.
  4. Once you’ve identified SKUs that come with particular challenges, consider eliminating those that seem unnecessary.

In the end, you want to be left with a list of SKUs that sell well, are easy to produce, can be stocked easily, and that have demonstrated consistent demand over time.