Discover with Versa Cloud ERP how to do SKU rationalization by mastering core processes from identifying underperforming SKUs to phasing out obsolete inventory and realigning warehouse operations for maximum operational and financial impact.
What is SKU Rationalization?
Navigating hundreds or even thousands of distinct product variants across sizes, scents, flavors, and colors can quickly become burdensome – bloated inventories lead to rising overhead costs, inefficient operations, and consumer confusion. But how exactly can you systematically cut through the complexity to curate an optimized product catalog aligned with business growth and profitability goals?
This process is known as SKU rationalization.
So how to do SKU rationalization? In essence, it involves strategically consolidating, eliminating, or optimizing stock-keeping units (SKUs) – distinct item configurations assigned unique codes in inventory systems. By analyzing granular sales velocities, profit margins, storage expenses, and more for every SKU, businesses can surgically identify low-value contributors diluting the bottom line.
Phase outs and catalog consolidation then realign inventories to the most profitable, in-demand product variations. The end result? Companies that undergo rigorous SKU rationalization boost margins by as much as 25% while accelerating cycle times, increasing turns, and driving greater operational efficiencies.
This comprehensive guide details a step-by-step playbook for how to do SKU rationalization across core processes like data-driven evaluation, stakeholder alignment, change management, and inventory sell-through strategies.
Signs You Need SKU Rationalization
- High rates of excess and obsolete inventory: This indicates certain products aren’t resonating with consumers. Rationalization can align supply with actual demand.
- Increasing storage costs: If inventory fees are weighing heavily on budgets, reducing the SKU count can save on needed capacity.
- Low inventory turnover for several SKUs: Slow rates of turnover suggest poor product-market fit and lost opportunities for revenue.
- Decline in sales: A flat or downward trajectory in revenue may signal a diluted brand identity from carrying too many SKU variants.
Benefits of SKU Rationalization
- Fewer SKUs lead to reduced costs: Carrying excess inventory strains budgets with storage, labor, and other fees. SKU optimization saves on operational costs associated with housing and managing catalogue items.
- Increased efficiency in operations and planning: With focused product lines mapped to consumer demand, processes involving forecasting, inventory, logistics, and merchandising can by streamlined.
- Higher profit margins: Eliminating underperforming SKUs allows you to emphasize products with stronger returns. This leads to an overall lift in profit margins over time.
- Enhanced customer experience: Customers can feel overwhelmed by choice. Curating your catalog helps them better identify products that suit their needs.
The Impact of Omnichannel Retail on SKU Rationalization
Omnichannel retail introduces some unique complexities when approaching SKU rationalization:
- Channel-specific bestsellers: The top products in-store may differ greatly from your eCommerce site. The rationalization strategy should incorporate insight across diverse channels.
- Higher overall SKU count: Offering endless aisle options online often increases total inventory. This further raises the need for vigilant data analysis.
- Difficulty consolidating processes: Disparate systems across channels like ordering, fulfillment, and inventory tracking can silo data and impede decision-making.
Despite added intricacies, omnichannel success ultimately hinges on carrying the right mix of products tailored to customer demand within each channel.
Essential Data Points for SKU Rationalization
- Sales velocity: How many units are sold over a set period of time. Highlights fast-moving vs stagnant SKUs.
- Average profit margin: Calculates profitability of each SKU to identify low and high performers.
- Inventory turnover: The number of times inventory is sold and replaced over a given timeframe. Assesses capital efficiency.
- Stockout events: Instances where consumer demand exceeds inventory count. Shows potential opportunities.
- Channel-specific metrics: Sales, inventory levels, and other model performance metrics for each channel. Provides channel-specific insight.
Leveraging Sales Forecasting for Better SKU Decisions
Accurate sales forecasting allows businesses to predict future demand more precisely. This supports SKU decisions in the following ways:
- Anticipate bestselling products to stock adequate inventory
- Identify declining products set to lose relevance
- Assess risks associated with introducing new products or phasing out others
- Allocate resources and plan operations for forecasted sales levels across SKUs
- Course correct strategies that may fall short or capitalize on momentum
Ultimately, sales forecasting gives you an informed outlook on ideal SKU assortment based on predictive analytics rather than rearview data.
Metrics That Matter: ABC Analysis Explained
ABC analysis is an inventory categorization technique that divides SKUs into three groups based on Pareto’s principle:
A – Top sellers representing ~80% of annual consumption value
B – Moderate movers accounting for ~15% of value
C – Low performers comprising just ~5% value
The method stratifies SKUs by consumption value allowing businesses to tailor inventory management strategies based on priority tier – from tight oversight on A products to phase-outs for C.
Identifying Slow-Moving Inventory
Slow-moving inventory fails to meet minimum sales velocities or turnover rates over prolonged periods. Warning signs include:
- Sales consistently near zero for several months
- High levels of excess stock with limited sell-through
- Shelf life expires before products move
- Manual markdowns to spur interest
These issues highlight declining or sporadic demand unfit for routine replenishment.
Cannibalization vs. Complementarity: Analyzing SKU Relationships
Cannibalization occurs when similar SKUs directly compete, effectively stealing market share from each other. Complementary items enhance sales for related products.
Analyze relationships by:
- Comparing sales trends before and after new product launches
- Identifying relative market share between comparable SKUs
- Assessing changes in purchase rates for accompanying products
This reveals interdependencies helping consolidate redundant SKUs or uphold complementary ones.
Seasonal Trends and Their Impact on SKU Rationalization
For categories with seasonal cycles like apparel, lawn, and Christmas goods – temporary sales spikes can mask issues with underlying demand.
Look at performance outside peak periods to evaluate true product-market fit beyond seasonal trends. This prevents reactive rationalization that underestimates or overlooks historically bestselling SKUs.
Customer Feedback and Its Role in SKU Decision-Making
Analyzing ratings, reviews, surveys, buyer inquiries, service records, and other sources of customer feedback allows you to make data-driven SKU decisions aligned with actual demand.
Key insights include:
- Preferred colors, sizes, scents, or other product attributes
- Desired usage occasions
- Price sensitivity thresholds
- Quality concerns signaling underperforming items
Incorporating customer perspectives into the rationalization process ensures you meet buyer needs even as assortments shrink.
Beyond Sales Figures: Considering Profit Margins for Each SKU
While sales velocity spotlights the fastest-moving SKUs, profit margin differentiates high monetary contributors.
To calculate:
Profit Margin = (Sale Price – Cost of Goods Sold) / Sale Price
Comparing margins for SKUs with similar turnover rates further identifies low and high performers from a profit perspective – helping inform consolidation strategies.
The Hidden Costs of Inventory
Common carrying costs include:
- Warehouse fees for space, labor, utilities
- Inventory tracking and management
- Insurance
- Interest on inventory value
- Shrinkage, damage, obsolescence
Factoring in these indirect costs not reflected in sales data provides a holistic perspective on the business impact of maintaining excess SKUs.
Lead Time and Supplier Considerations for Discontinued SKUs
When phasing out SKUs, account for:
Lead Times: The lag between ordering and receiving inventory from suppliers. Abruptly halting orders for discontinued products risks stockouts during sell-off periods.
Supplier Policies: Many require minimum order quantities and capacities to fulfill demand. Consult with partners early when rationalizing items.
Inventory Replenishment Cycles: Routine restock timelines range from weeks to months depending on sourcing arrangements. Align phase-outs with replenishment schedules.
Exit Fees or Penalties: Some suppliers charge fees to stop orders or remove molds/tooling for custom products being eliminated.
Building lead time contingencies into phase-out plans ensures supply continuity during transitions while minimizing supplier disruptions.
When to Consolidate vs. Eliminate: Exploring Product Variations
Consolidation makes most sense for SKUs with shared traits like:
- Interchangeable use cases
- Near identical attributes besides size/color/scent
- Overlapping customer segments
In these instances, merging select variations into a single representative SKU cuts complexity without forfeiting sales.
Meanwhile eliminating SKUs removes them outright once discontinued. This approach is best for:
- Redundant or inferior goods
- Test products that failed
- Items with regulatory compliance issues
The decision between consolidation and elimination depends on the underlying issues driving rationalization for each SKU.
Strategies for Selling Off Discontinued Inventory
To profitably liquidate eliminated SKUs, businesses can leverage:
- Clearance sales: Offer discounted pricing
- Call center upsells: Cross-sell remaining inventory
- Bundling: Package less popular items with faster sellers
- Dropshipping: Sell via eCommerce without taking on additional inventory
Elevate Inventory Management with Versa Cloud ERP
Versa Cloud ERP consolidates real-time visibility into sales, inventory, fulfillment, and financial metrics across your entire supply chain onto a single cloud-based platform. Leveraging Versa’s robust reporting, you can seamlessly categorize and compare SKUs based on historical trends, future demand forecasts, profitability, and more to make data-backed decisions.
Versa also facilitates seamless communication and coordination across warehouses, 3PLs, sales channels, and other teams to execute SKU transitions. With holistic supply chain integration, Versa customers have consolidated product portfolios significantly while actually improving sales – showcasing the power of data-fueled rationalization. By pairing world-class inventory management and analytics with flexible omnichannel order fulfillment, Versa Cloud ERP provides the missing puzzle piece for organizations to realize the full benefits of SKU rationalization.
Schedule a free customized demo tailored to your specific needs to learn more about streamlining your operations with Versa.
