Is your warehouse overflowing? Are you struggling to keep track of every product you have in stock?
It’s time to take control of your inventory with SKU rationalization. This strategic process involves eliminating underperforming SKUs from your product offerings. By identifying and eliminating those slow-moving or redundant products, you unlock a host of benefits, from reduced inventory costs and increased profitability to improved operational efficiency.
In this comprehensive guide, we’ll delve into the ins and outs of SKU rationalization and provide you with steps needed to master this practice.
Understanding SKU rationalization
SKU rationalization is the strategic process where businesses analyze their product portfolio to identify underperforming or redundant items. Think of it as spring cleaning for your inventory: You’re identifying what doesn’t contribute to your bottom line. Eliminating those underperformers streamlines operations, frees up valuable warehouse space, and lets you focus on the products that drive success.
While it’s especially critical for industries with rapidly changing trends or perishable goods, even companies with stable product lines benefit from regular SKU analysis. Any business benefits from evaluating the performance of each product, as it reveals opportunities to optimize inventory to better meet customer demand.
Above all, companies selling products that are prone to obsolescence, like clothing or technology, need to regularly assess products to prevent the accumulation of dead stock — inventory that can no longer be sold due to changes in trends, technology, or expiration dates. A consumer electronics retailer, for example, must frequently complete the SKU rationalization process to remove outdated smartphones, gaming systems, computers, or other goods that are outdated and no longer desirable to consumers.
Benefits of product rationalization
Streamlining your product line through SKU rationalization can boost profitability and efficiency. Let’s explore how focusing on your top-performing products can revolutionize your business:
Fewer overhead costs
Controlling inventory costs is crucial if you want your business to be profitable. When you nix the low-demand items in your warehouse, you lower inventory management costs. Plus, with fewer products sitting in your warehouse, you’ll experience less waste when products become obsolete and less spoilage if they become ruined over a long period of time.
Fewer SKUs = greater profits
Contrary to popular belief, a streamlined product catalog can be a powerful profit booster. By strategically reducing the number of SKUs, businesses can refine marketing campaigns to draw attention to the best products. As mentioned above, fewer SKUs also leads to lower inventory costs, as less money is tied up in unsold goods and storage expenses. And, with less variety to manage, picking and packing operations become simpler and quicker, saving every employee time.
Creating a stronger brand identity
Focusing on the newest and most advanced products in your industry can earn you a reputation as a cutting-edge brand. But don’t neglect any tried-and-true products that customers rave about and repurchase.
By strategically removing underperforming items from your core offerings, you create space for newer, more in-demand products that better align with evolving customer preferences. This demonstrates your commitment to innovation and staying ahead of the curve, showing that your brand is a leader in the market.
Improved efficiency
A smaller product range simplifies everything from production and inventory management to order fulfillment and shipping. This streamlined approach improves the customer experience by enabling faster turnaround times and more accurate order processing.
Integrated POS solutions, such as barcode scanners and inventory management software, further these benefits by automating tasks, providing real-time inventory visibility, and storing data for future reference.
How to implement a SKU rationalization process
Implementing a successful SKU rationalization process requires a systematic approach. Let’s break down the key steps to guide you through this transformative journey.
1. Define objectives
By setting clear objectives, you create a framework for evaluating each SKU, ensuring the rationalization process aligns with your business strategy. This clarity guarantees that every decision you make is purposeful and contributes to your desired outcomes.
Your objectives might be quantitative, such as reducing inventory costs or increasing profit margins, or qualitative, like improving customer satisfaction or strengthening your brand image. Make sure you’re evaluating goods with these objectives in mind.
2. Develop criteria
Establish specific criteria for deciding which SKUs to retain, discontinue, or consolidate. This could involve setting minimum sales thresholds, profit margins, or inventory turnover rates. The criteria should align with your objectives and business strategy. For example, you could conduct an ABC analysis and choose to cut any products that fall into the “C” category or calculate the value of your existing inventory.
3. Gather and analyze data
Collect available data on all your SKUs, including sales, current inventory levels, product cost, and customer demand. Thoroughly evaluate each SKU based on historical data and future projections. You can start by analyzing key metrics, such as sales volume, profit margins, and turnover rates, to assess current performance. Then, incorporate demand planning techniques to forecast future sales and identify potential trends or shifts in customer preferences.
By comparing data with projections, you pinpoint underperforming SKUs that aren’t meeting established targets and might be candidates for elimination or modification.
4. Classify SKUs
Categorize your SKUs into groups based on their performance and the criteria you set. Consider factors like product mix, profitability, and cannibalization potential (where one product’s sales detract from another’s). This classification highlights which SKUs to focus on for potential removal, modification, or further investment.
5. Consult stakeholders
Engage with stakeholders from various departments, such as sales and marketing, to gather their insights and feedback on both the proposed SKU rationalization plan and the specific SKUs identified for potential removal or modification. Their input is crucial for ensuring alignment with the overall business strategy and addressing any concerns or challenges that might arise during implementation.
6. Implement changes
Execute the rationalization plan by discontinuing, consolidating, or retaining SKUs according to the developed criteria. Communicate these changes to relevant teams and customers, and clearly explain the reasons behind the decisions and the expected benefits.
7. Monitor and review
Continuously track the impact of SKU rationalization on your business performance. Sales data, inventory levels, and customer feedback can identify areas for further improvement.
Proven SKU reduction tips
The following steps help you manage inventory and discontinue underperforming SKUs before you invest too much in them.
Keep apprised of sales numbers
When you’re in the process of rationalizing your SKUs, the most important thing to analyze is your sales history. Try to identify the products that cost your company more in inventory management expenses than you profit from them and phase them out of production or reordering.
Offload discontinued items while earning immediate revenue
Now that you’ve completed the SKU rationalization process, you probably have a few products you’ve decided not to produce or stock anymore. Put these discontinued items on sale to get them off the shelves fast. By making moves to sell them quickly, you’ll push these discontinued items out of your warehouse faster and reduce overhead costs.
Take control of your inventory and watch your business thrive with Fishbowl
Fishbowl’s powerful inventory management solutions are here to help you streamline your operations. Simplify your SKU rationalization process, reduce costs, and enhance efficiency with Fishbowl’s comprehensive tools. Don’t let excess inventory hold your business back.