What Is SKU Rationalization and How Does It Maximizes Business Performance?
As a business owner, you may feel your top priority is to please your customers and expand your customer base. While the success of your business does hinge on your customers, a narrow focus on expanding products can lead to an influx of SKU numbers (stock keeping unit numbers) and a mess of inventory that can actually harm your bottom line.
Even after you expand your product line, you may find that most of your sales are associated with only a few SKUs. You may also find that your storage fees increase exponentially to keep up with the inventory you must carry to bring your new products to market. SKU rationalization is one of the best ways to edit your products, streamlining your inventory and order processes, which can actually expand your business and allow you to avoid dreaded stockouts.
What Is SKU Rationalization?
When you add products and goods to what you offer your customers, you’re forced to also add SKU numbers to the mix. This increase in SKU numbers is called SKU proliferation, and if you engage in too much of it, you could be in trouble.
SKU rationalization is the process of analyzing your current products and eliminating SKUs that aren’t performing or are redundant within your product line. By editing the number of products you offer and rationalizing your SKUs, you can make balanced inventory management easier to achieve. Rationalizing your SKUs is one of the best ways to keep your products organized and your order processes streamlined.
EXAMPLE OF SKU RATIONALIZATION
It’s important for all businesses that offer multiple products to engage in SKU rationalization. However, this exercise is most important for businesses that sell products that can become obsolete, such as clothing or technology-related items. For example, a consumer electronics retailer must complete the SKU rationalization process frequently to remove smartphones, gaming systems, computers, and tablets that are outdated and no longer desirable for consumers.
Benefits of Product Rationalization
There are several benefits to editing your products and SKUs.
FEWER SKUS = GREATER PROFITS
While it may sound hard to believe, the fewer SKUs you have and the fewer products you offer can actually result in higher profits. Customers sometimes enjoy not having too many choices and if a product isn’t netting substantial profit, it may be time to get rid of it.
For example, retail giant Walmart uses tons of data to analyze its SKUs and product offerings regularly. The retailer pulls products from production and from the shelves if they don’t seem to be performing. In 2015, it removed 15% of its store displays and about 2,500 items from the shelves.
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. Don’t neglect your tried-and-true products that your repeat customers rave about and purchase repeatedly, but also don’t be afraid to pull items from the shelves that aren’t in demand. When you have too many items on the shelves that simply aren’t performing, it can diminish your brand perception and make it seem like you’re floundering in the market and disconnected from customer needs.
FEWER OVERHEAD COSTS
Inventory cost control is crucial if you want your business to be profitable. When you nix the low-demand items in your warehouse, you can easily lower your inventory management costs. 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. Your warehouse inventory is also costing you money in storage and space, so downsizing the number of SKUs you carry can cut these costs.
With fewer SKUs, you can also streamline your production since there are fewer components to assemble and products to manufacture. With fewer products for sale, your shipment processes are also easier to follow. You can pinpoint the most effective way to deliver these few products to customers and retailers inexpensively. With integrated POS hardware solutions, you can further streamline these processes and keep track of your products throughout the production process all the way through sales and fulfillment.
Proven SKU Reduction Methods
The following examples illustrate proven methods for reducing the number of discounted items you sell and your inventory management costs.
KEEP APPRISED OF SALES NUMBERS
When you’re in the process of rationalizing your SKUs, perhaps the most important data to analyze are your sales numbers. Consider tossing the products that sit on the shelves for too long or that sell in low quantities. In many cases, these products can cost you more than the profit you make from them. Try to identify the products that cost your company more in inventory management expenses than the profit you make from them and phase them out of production.
SALES: REDUCE 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. You can put these discontinued items on sale to get them off the shelves fast. Items at discounted prices usually sell quickly, so you’ll earn immediate revenue when you slash the prices. By ensuring they sell quickly, you’ll also reduce your overhead costs and get these discontinued items out of your warehouse as soon as possible.
While offering multiple products may seem like the best way to make money, SKU rationalization is important for lowering your inventory management costs. By performing a strategic SKU rationalization on your current product line, you can lower your overhead and storage costs to increase profit.